On August 4, Judge Mary F. Walrath issued an opinion in the Eclipse Aviation bankruptcy that discusses the scope of the Court’s subject matter jurisdiction. This issue – the subject matter jurisdiction of the bankruptcy courts – comes up less frequently in decisions than issues such as plan confirmation, relief from stay or avoidance actions (to name a few). Often, the subject matter jurisdiction of a proceeding is simply not in dispute. This reason alone is why Judge Walrath’s decision is worth review: it provides a brief but thorough look at how the Court decides whether it has jurisdiction over a particular matter.
The procedural context of the Eclipse Aviation decision is interesting in itself. The Plaintiff, a purchaser of aircraft from the Debtor, filed a motion to dismiss the Complaint it had previously filed as an adversary action. Plaintiff originally filed the Complaint seeking declaratory relief that it possessed certain property interests in undelivered aircraft that were in the Debtor’s possession. During the course of the bankruptcy, Debtor was unable to consummate a sale of its assets and the case quickly converted to a chapter 7 liquidation. Once a chapter 7 trustee (the “Trustee”) was appointed, the Trustee sought to sell the estate assets including the planes that Plaintiff claimed an interest in.
The Trustee soon sold the planes that were the subject of the Plaintiff’s adversary action. During the sale process, the Plaintiff filed an objection to the Trustee’s sale. Through its objection, Plaintiff obtained certain concessions from the buyer of the airplanes. Based on these concessions, the Plaintiff sought to dismiss the adversary action without prejudice for lack of subject matter jurisdiction.
The Plaintiff sought to dismiss its adversary action, arguing that the Court no longer had jurisdiction over the adversary proceeding because the sale of the aircraft was complete. In deciding the issue of jurisdiction, the Court began by distinguishing between “core” and “non-core” proceedings. Citing In re Guild and Gallery Plus, Inc., 72 F.3d 1171, 1178 (3d Cir. 1996), core proceedings are defined as “all proceedings that invoke a substantive right provided by title 11 or could arise only in the context of a bankruptcy case.” In contrast, non-core proceedings are related to a case under title 11. In re Resorts Int’l, Inc., 372 F.3d 154, 162 (3d Cir. 2004).
The question then arises, what does it mean for a case to be “related to” a case under title 11? Citing In re Pacor, 743 F.2d 984, 994 (3d Cir. 1984), Judge Walrath explained that related to jurisdiction allows a bankruptcy court the power to hear cases that do not fall under title 11provided there is some relationship, or “nexus,” between the related civil proceeding and the title 11 case. Under Pacor, an action is related to the bankruptcy “if the outcome could alter the debtor’s rights, liabilities, options, or freedom from action … and which in any way impacts upon the handling of the administration of the bankruptcy estate.” Id.
Turning first to the Plaintiff’s claims arising under section 363 of the Bankruptcy Code, the Court agreed with the Plaintiff that those claims became moot upon entry of the sale order. Because the sale was final, the claims under 363 could not serve as a basis for the Court to exercise subject matter jurisdiction. Next, the Court looked at Plaintiff’s claims under section 541 of the Bankruptcy Code (alleging that the aircraft was property of the Plaintiff). Here, the Plaintiff argued that the sale order conveyed to the buyer all of estate’s right, title and interest. According to Plaintiff, the estate had no further interest in the aircraft and therefore the Court had no jurisdiction for these claims.
On the issue of jurisdiction to hear the 541 claim, the Court disagreed with the Plaintiff and found that it did have subject matter jurisdiction. Plaintiff argued that the 541 claims related to property that was no longer property of the estate following approval of the sale. However, the Court held that it has exclusive jurisdiction to determine whether or not the aircraft at the center of the adversary action were property of the estate at the time of the sale. The Court also found that the buyer of the aircraft assumed certain liabilities of the bankruptcy estate and should therefore be allowed to “utilize the rights, claims, and/or defenses of the bankruptcy estate that it also acquired.” See Opinion at pp. 18-19. Finally, the Court found that it had “related to” jurisdiction because the bankruptcy estate “is not completely insulated from the outcome” of the Plaintiff’s claims. Opinion at p. 19.
Click here to read a copy of Judge Walrath’s decision in Eclipse Aviation.