Statutory Limits to Retained Jurisdiction – Contract May Not Be The Answer
A recent decision by the United States Court of Appeals for the First Circuit provides additional guidance with respect to jurisdictional disputes that bankruptcy professionals often see in practice. In particular, the Gupta v. Quincy Med. Ctr., 2017 U.S. App. LEXIS 9814 (1st Cir. June 2, 2017) case analyzed whether a bankruptcy court had jurisdiction to adjudicate a post-sale dispute among a purchaser of estate assets and former employees of the debtors.
In Gupta, the debtors operated the Steward Family Hospital in Quincy, Massachusetts. The debtors executed an asset purchase agreement (the “APA”) to sell the hospital to a subsidiary of Steward Health Care System (“Steward” or “Purchaser”). A day later on July 1, 2011, the debtors filed for Chapter 11 bankruptcy and submitted a 363 sale motion to approve the APA. Provisions of the APA obligated Steward to pay certain severance obligations owed to employees terminated by Steward on or after the sale closing.
The bankruptcy court entered a sale order (“Sale Order”) approving the APA on September 26, 2011, and the sale closed on October 1, 2011. The Sale Order, and the Chapter 11 plan (the “Plan”) filed six days after closing, contained typical retention-of-jurisdiction provisions. For example, the bankruptcy court retained jurisdiction in the Sale Order to, among other things, “interpret and enforce provisions” of the APA, the sale motion, and the Sale Order, and “to resolve any disputes arising under or relating to the APA.” The Plan further retained bankruptcy court jurisdiction to “[e]nter and enforce any order for the sale of property” and enforce “all orders previously entered by the bankruptcy court.” The confirmation order also incorporated the Plan’s retention-of-jurisdiction provisions.
On October 7, 2011, Steward terminated employees Apurv Gupta, M.D. and Victor Munger, effective on the sale closing. Gupta and Munger later filed motions for the allowance of administrative claims against the debtors for payment of severance. Although the bankruptcy court denied the motions for administrative claims (because debtors were not liable for the claimed severance), the bankruptcy court found that the motions should be treated as motions for an order directing Steward to pay the severance. Steward then filed objections to the motions and a non-evidentiary hearing ensued. The bankruptcy court concluded after the hearing that Steward owed Gupta and Munger severance pay under the APA. The district court on appeal held that the bankruptcy court lacked subject matter jurisdiction over the employees’ claims for severance against Steward. The employees appealed to the First Circuit, arguing that the district court was wrong to conclude that the bankruptcy court lacked statutory jurisdiction under 28 U.S.C. § 1334.
The First Circuit first analyzed § 1334’s “arise under,” “arise in,” and “relate to” jurisdictional grounds and related case law. The discussion provides a great overview and analysis of case law the statute and case law. In turning to the appeal at hand, the First Circuit recognized that the bankruptcy court did not specifically find any jurisdictional basis to render its decision in favor of the employees; the bankruptcy court rather found that it specifically retained jurisdiction in the Sale Order and the Plan. The First Circuit held that “this approach was erroneous.” While federal courts, including bankruptcy courts, may retain jurisdiction to enforce their own orders, such retention may be appropriate “only if there is jurisdiction under 28 U.S.C. § 1334.” The claims against Steward by employee appellants, therefore, must either “arise under,” “arise in,” or “relate to” the bankruptcy case in order for the bankruptcy court to give effect to its retention-of-jurisdiction provisions in the Sale Order and the Plan.
The severance claims clearly did not arise under any provision of Chapter 11 because they were state law claims for severance based on the APA. The First Circuit also found that the severance claims did not relate to the bankruptcy – a determination that Steward did or did not owe severance would have no impact on the bankruptcy estate.
The analysis gets interesting with respect to the “arise in” statutory ground. Appellants argued jurisdiction existed under this ground because “but for” the bankruptcy case, the APA, and the bankruptcy court’s entry of the Sale Order, their severance claims would not exist. As such, the matter falls within the “arise in” statutory ground because it would have no existence outside of the bankruptcy case occurring. The First Circuit held that this argument misinterprets the law. “[T]here is no ‘but for’ test for ‘arising in’ jurisdiction as Appellants suggest . . . . Instead, the fundamental question is whether the proceeding by its nature, not its particular factual circumstance, could arise only in the context of a bankruptcy case.” The First Circuit held that it is not enough for the severance claims to exist only because of the bankruptcy case – the claims must be the “type of claims that can only exist in a bankruptcy case.” Furthermore, this matter did not involve the interpretation of provisions of the Sale Order, which may have supported statutory jurisdiction to decide the scope of the Sale Order. This dispute was based on the APA, which required a breach-of-contract analysis under state law.
Accordingly, the First Circuit affirmed the district court’s ruling that the bankruptcy court lacked subject matter jurisdiction.
The lesson from this case: The question with respect to “arise in” jurisdiction under § 1334 is not whether the action would exist but forthe particular bankruptcy case. The question is whether the action would exist only in a bankruptcy case.