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The breadth and extent of a bankruptcy court’s jurisdiction has been litigation fodder since the Supreme Court issued its landmark decision in Stern v. Marshall, 131 S.Ct. 2594 (2011). The Stern court held that, to enter final judgment, a bankruptcy court must have both statutory authority and constitutional authority. Id. at 2609. Under Stern, the Supreme Court recognized that a bankruptcy court’s statutory jurisdiction emanates from 28 U.S.C. §157, which empowers bankruptcy courts to enter final judgments in “core” proceedings “arising in” and “arising under” Title 11 of the United States Code (the “Bankruptcy Code”).  Id. at 2608-09.

With respect to “non-core” claims, Section 157 limits the authority of bankruptcy courts and permits only the submission of proposed findings of fact and conclusions of law to the district court. The Stern court held, however, that the statutory authority of bankruptcy courts is further constrained by the Constitution, which precludes bankruptcy courts from performing the duties or assuming the rights and powers of courts created under Article III of the Constitution, thus creating so-called “Stern claims.” Stern claims are “core” claims that do not “arise in” or “arise under” the Bankruptcy Code, such as a state law counterclaim. Id. at 2618.

Following Stern, the Supreme Court has affirmed the bankruptcy court’s authority to enter final judgments where the parties consent to the court’s jurisdiction (Wellness International Network Ltd. V. Sharif, 135 S.Ct. 1932 (2015)) and has affirmed the bankruptcy court’s ability to hear and make proposed findings of fact and conclusions of law with respect to Stern claims. (Executive Benefits Insurance Agency v Arkinson, 134 S.Ct. 2165 (2014)). In the wake of Stern, Wellness International and Executive Benefits, practitioners continue to test the limits of the bankruptcy court’s jurisdiction and lower courts continue to refine the parameters of the bankruptcy court’s authority.

In 2018, the Third Circuit applied Stern and its progeny in three cases, holding: (1) a bankruptcy court lacking constitutional jurisdiction to hear a proceeding also lacks jurisdiction to transfer that proceeding pursuant to 28 U.S.C. §1631; (2) the Rooker-Feldman doctrine does not strip a bankruptcy court of authority to decide a fraudulent transfer claim; (3) the doctrine of implied consent to the jurisdiction of the bankruptcy court is alive and well.

IMMC Corp. v. Erickson

In IMMC Corp. v. Erickson, 909 F.3d 589 (3d Cir. 2018), the Third Circuit considered whether the bankruptcy court had authority, under 28 U.S.C. §1631, to transfer a post-confirmation adversary proceeding despite the court’s lack of jurisdiction. There, the liquidating trustee filed a post-confirmation adversary proceeding, asserting claims of breach of fiduciary duty against the debtor’s former officers and directors. The Bankruptcy Court for the District of Delaware found it had no jurisdiction over the case because the claim was “non-core” and the court’s post-confirmation jurisdiction was limited to matters with a close nexus to the plan of reorganization. The liquidating trustee then moved to transfer the proceeding to the district court under 28 U.S.C. §1631, which permits a “court,” as defined in 28 U.S.C. §610, to transfer an action over which such court lacks jurisdiction to a court of competent jurisdiction.

The Third Circuit avoided determining whether a bankruptcy court is a “court” under 28 U.S.C. § 610, and instead focused on the bankruptcy court’s lack of jurisdiction over the adversary proceeding. Applying Executive Benefit and Northern Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50, 60 (1982), the court found constitutional authority of the bankruptcy court lacking based on the finding that the matter was neither a “core” proceeding nor “related to” the plan of reorganization. IMMC Corp. at 595-96. The Third Circuit then determined that the intent of Section 1631 is to remedy lack of statutory jurisdiction only. Id. at 596. Thus, any transfer of the proceeding by the bankruptcy court under Section 1631 could not remedy lack of constitutional authority and would, therefore, have been ultra vires.

Given the limits on bankruptcy court jurisdiction following Stern, and the limits on post-confirmation bankruptcy court jurisdiction, practitioners should carefully consider the appropriate venue for post-confirmation litigation to avoid protracted jurisdiction-related litigation.

Philadelphia Entertainment & Dev. Partners v. Dep’t of Revenue

The Third Circuit’s decision in Phila. Entm’t & Dev. Partners v. Dep’t of Revenue, 879 F.3d 492 (3d Cir. 2018), affirms the authority of bankruptcy courts to adjudicate avoidance claims, notwithstanding Stern and other limiting doctrines such as Rooker-Feldman. In the Philadelphia Entertainment case, the Third Circuit focused on the fourth prong of the Rooker-Feldman test (discussed below), affirmed a narrow application of the doctrine, and concluded that the trustee’s fraudulent conveyance complaint arising from the debtor’s loss, via administrative proceeding, of a Pennsylvania slot machine license, was not barred.

The debtor, Philadelphia Entertainment and Development Partners (the “Debtor”) paid a $50 million licensing fee to the Commonwealth of Pennsylvania for a slot machine license. The license was revoked when the Debtor failed to maintain it properly, and the Debtor’s subsequent appeals of the revocation decision were denied. After exhausting appeals, the Debtor filed a bankruptcy petition and the trustee brought an adversary action against the Commonwealth of Pennsylvania for fraudulent conveyance, alleging that, among other things, the license revocation should be avoided. The bankruptcy court dismissed the complaint based on the Rooker-Feldman doctrine.

The Rooker-Feldman doctrine prohibits federal court appellate review of state court judgments. On appeal, the Third Circuit outlined the test for the application of the doctrine. In order for the doctrine to apply, four requirements must be met: “(1) the federal plaintiff lost in state court, (2) the plaintiff complains of injuries caused by the state-court judgment, (3) that judgment issued before the federal suit was filed, and (4) the plaintiff invites the district court to review and reject the state court judgment.” Id. at 500.

In rejecting the application of the Rooker-Feldman doctrine, the Third Circuit found that the bankruptcy court could have decided whether the revocation of the license could be avoided under the Bankruptcy Code without reviewing and rejecting the Commonwealth court’s judgment. The Third Circuit concluded that the bankruptcy court need not delve into the merits of the state court’s legal conclusion to determine the existence of the fraudulent conveyance factors, i.e. whether the Debtor had an interest in the license that was transferred within the look-back period, which transfer rendered the Debtor insolvent and for which the Debtor did not receive reasonably equivalent value. Id. at 501.

Even where legal issues overlap, or where the state and federal court would address similar questions, such as property interest, as long as the bankruptcy court could apply its own reading of the law, and is not required to reject or even review the state court order, the proceeding was not barred by Rooker Feldman. This is true even where a federal court judgment might frustrate the order of the state court, or whether compliance with the second judgment would make it impossible to comply with the first judgment.

To avoid abstention claims after Philadelphia Entertainment, practitioners pursuing fraudulent conveyance complaints in the bankruptcy courts based on transactions involving state court judgments should clearly state independent grounds for relief and be careful not to invite the bankruptcy court to “review and reject” the state court’s reasoning.

In re Tribune Media Co.

In In re Tribune Media Co., 902 F.3d 384 (3d Cir. 2018), the Third Circuit held that an individual can impliedly consent to the statutory and constitutional authority of the bankruptcy court. In this case, an individual (the “claimant”) filed a complaint with the Pennsylvania Commission on Human Relations alleging claims relating to hostile work environment and wrongful termination. When the employer, the debtor, filed for bankruptcy, the claimant filed a proof of claim in the bankruptcy case. The claimant litigated his claims in the bankruptcy court through judgment. The claimant did not raise a jurisdictional issue until his appeal, where he raised an objection for the first time, alongside claims of deprivation of due process and right to a jury trial.

Acknowledging Stern, the Third Circuit affirmed that a bankruptcy court must have statutory authority and constitutional authority to enter final judgment on a claim. Tribune Media, at 393.  The Third Circuit then held that the claimant voluntarily submitted to the bankruptcy court’s statutory authority by engaging in activities throughout the case without raising an objection. Claimant’s activities deemed voluntary submission included filing a proof of claim, filing a response and supplemental response to the debtor’s claim objection, appearing at a hearing before the court and seeking judgment. Claimant did not raise objection to jurisdiction or the bankruptcy court’s authority during the bankruptcy proceedings.

With respect to the constitutional authority of the bankruptcy court, the Third Circuit confirmed that “knowing and voluntary consent” to constitutional jurisdiction may be implied through a party’s actions. This holding is consistent with Wellness, and other reviewing courts that have found implied consent where a party: (i) raises no objection to constitutionality when joining the case, (ii) appears in the bankruptcy court without any objection, (iii) presents evidence and testimony related to the claim without raising objection, and (iv) seeks final judgment without raising objection. Id. at 395. The court recognized that a litigant cannot “sandbag” a court by remaining silent throughout the bankruptcy proceeding and only raising a jurisdictional issue at the last hour when the case begins to turn out of his favor.

Practitioners should carefully evaluate the pros and cons of submitting to the bankruptcy court’s jurisdiction and be cognizant of how participation in the bankruptcy case without objection to jurisdiction or authority may be deemed by the court as a knowing and voluntary submission to jurisdiction.

 

Julie M. Murphy is a partner with Hyland Levin in Marlton. She concentrates her practice in the areas of business reorganization, loan restructuring, loan documentation and business law.