Opinions of the United
2007 Decisions States Court of Appeals
for the Third Circuit
10-24-2007
In Re: Seven Fields
Precedential or Non-Precedential: Precedential
Docket No. 06-3658
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 06-3658
IN RE: SEVEN FIELDS DEVELOPMENT CORPORATION,
Debtor
MARY GERUSCHAT; DOLORES SPENEY; ANTOINETTE
MOROCCO; and DONNA M. BUXTON,
Appellants
v.
ERNST YOUNG LLP; CHARLES MODISPACHER
On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. Civ. No. 05-1527)
District Judge: Honorable Gary L. Lancaster
Argued June 28, 2007
BEFORE: SMITH and GREENBERG, Circuit Judges,
and POLLAK, District Judge*
(Filed: October 24, 2007)
Vincent A. Coppola (argued)
Pribanic & Pribanic
513 Court Place
*The Honorable Louis H. Pollak, Senior Judge of the United States
District Court for the Eastern District of Pennsylvania, sitting by
designation.
First Floor
Pittsburgh, PA 15219
Attorneys for Appellants
William H. Schorling (argued)
Samuel W. Braver
Stanley J. Parker
Christopher P. Schueller
Buchanan Ingersoll & Rooney
301 Grant Street
One Oxford Centre, 20th Floor
Pittsburgh, PA 15219
Attorneys for Appellees
OPINION OF THE COURT
GREENBERG, Circuit Judge.
I. INTRODUCTION
This matter comes on before the court on an appeal by Mary
Geruschat, Dolores Speney, Antoinette Morocco, and Donna M.
Buxton (“appellants”) from the district court’s memorandum order
dated July 14, 2006, which adopted as its own and affirmed the
bankruptcy court’s opinion and order dated September 2, 2005, in
which the bankruptcy court (1) asserted its jurisdiction to resolve a
state-law malpractice, negligence, and fraud suit that appellants,
creditors in a consolidated Chapter 11 bankruptcy proceeding, brought
in a state court against the accountants who performed work during
the bankruptcy, Ernst & Young LLP and its employee, Charles
Modispacher (together “Ernst & Young”), (2) refused to remand
appellants’ case to the state court from which Ernst & Young removed
it, and (3) dismissed the complaint on its merits. This appeal,
however, primarily is about jurisdiction, both our jurisdiction to
review the bankruptcy and district courts’ decisions not to abstain
from exercising jurisdiction and not to remand the matter to the state
court, and, depending on the extent, if any, that we have jurisdiction
to review those courts’ decisions, whether the district court properly
found that the bankruptcy court had subject matter jurisdiction and the
2
final adjudicative authority to resolve the state-law actions.
As we will discuss in detail later, appellants initially filed their
suit in a state court, but Ernst & Young removed the case to a federal
court, i.e., a bankruptcy court. Appellants then sought an order
remanding the case to the state court on the grounds that (a) there
were procedural irregularities in the removal process, (b) the
bankruptcy court did not have subject matter jurisdiction over the
dispute, and (c) even if the bankruptcy court did have jurisdiction, it
should have abstained permissively or was required to abstain
mandatorily from exercising its jurisdiction. The bankruptcy court
disagreed with appellants, exercised jurisdiction, and dismissed the
case on its merits. On appellants’ appeal, the district court affirmed
the bankruptcy court’s order and, though to a degree writing
separately, adopted the bankruptcy court’s opinion and order as its
own.
This appeal followed. But appellants challenge only the
decisions regarding the procedural irregularities in the removal
process, the bankruptcy court’s finding that it had jurisdiction and
final adjudicative authority, and its decision not to abstain from
exercising that jurisdiction. Thus, we are not reviewing the
disposition of the malpractice, negligence, and fraud dispute on the
merits. Inasmuch as we conclude that we lack jurisdiction to review a
substantial portion of the issues appellants raise on this appeal, and
that the bankruptcy and district courts did not err in the rulings over
which we have appellate jurisdiction, we will affirm the July 14, 2006
memorandum order of the district court and, accordingly, in effect,
will affirm the bankruptcy court’s opinion and order dated September
2, 2005.
II. FACTS AND PROCEDURAL HISTORY
The case has grown out of the activities of Earned Capital
Corporation, Managed Properties, Inc., Canterbury Village, Inc., and
Eastern Arabian, Inc. (collectively “Debtors”), corporations engaged
in developing real property. To raise capital, the Debtors sold
investment shares in the property, and, in return, promised the
investors an annual return.
The Debtors’ plan involved the development of 600 acres in
3
the Borough of Seven Fields, Butler County, Pennsylvania, with
townhouses and recreational facilities. Unfortunately for the Debtors,
however, their plan did not go as expected. Thus, they became
delinquent in making the payments they promised to the investors,
leading the Debtors to oversell shares to maintain the promised
payments. The Debtors could not continue this Ponzi-type scheme
indefinitely, and, consequently, on June 3, 1986, they filed separate
voluntary petitions under Chapter 11 of the Bankruptcy Code in the
Bankruptcy Court for the Western District of Pennsylvania. That
court consolidated the Chapter 11 proceedings on June 5, 1986, in a
case entitled In re Earned Capital Corporation, No. 86-21474.
Prior to the time that the Debtors filed their bankruptcy
petitions, they had employed the accounting firm of Arthur Young &
Company (a predecessor of Ernst & Young) to review their financial
records and prepare the financial schedules needed for the bankruptcy.
On June 12, 1986, the bankruptcy court approved the appointment of
Ernst & Young.1 Ernst & Young determined that the Debtors were
insolvent and that they owed the vast majority of their obligations
(totaling over $60,000,000) to the approximately 2,500 investors. An
Official Committee of Unsecured Creditors (“Committee”), selected
from among the investors, represented the investors in the bankruptcy
case. The Committee and the Debtors filed competing plans of
reorganization, both calling for consolidation of the Debtors’ assets
and liabilities into one surviving reorganized corporation.
The bankruptcy court found the Debtors to be insolvent and
confirmed an Amended Plan of Reorganization (“Amended Plan”) on
October 21, 1987. According to appellants, the court based this
disposition on information that Ernst & Young provided the court and
the Debtors’ creditors. Under the Amended Plan, the Debtors were
merged into a successor entity, Seven Fields Development
Corporation (“Seven Fields”), and their assets, the principal one of
which was the Butler County real estate, became assets of Seven
Fields. Under the Amended Plan, all of the secured and trade
creditors’ claims were to be paid in full or in accordance with
agreements otherwise negotiated, but the investor class of unsecured
creditors was to receive common stock in Seven Fields at a par value
equal to 5% of their allowed claims with the remaining 95% classified
as unsecured, nondischargeable debt. Under the Amended Plan, “[a]ll
1
As a matter of convenience we will use the name Ernst & Young
when referring to Arthur Young & Company.
4
activities of [Seven Fields] shall seek to achieve the goal of full
payment to [the investors/stockholders],” app. at 33, and assets were
to “be managed, improved, developed and sold, etc. where
appropriate, to the end that all creditors will eventually achieve
maximum returns,” id. at 22. The investors voted overwhelmingly in
favor of the plan, 2,179 to 87, on an individual basis, and, in claims
terms, $62,639,067 to $13,758,972. After confirmation, Seven Fields
liquidated its assets, substantially through the sale of the Butler
County real estate, and made distributions to the investors. Seven
Fields, however, did not pay the allowed claims of the investors in full
through this liquidation.
On September 29, 2004, appellants, on behalf of themselves
and others similarly situated as shareholders of Seven Fields, filed a
complaint against Ernst & Young in the Court of Common Pleas of
Butler County, alleging professional negligence (Count I), fraud and
deceit (Count II), and negligent misrepresentation (Count III).
Because, as will be seen, the precise allegations in the complaint are
significant in determining a central issue on appeal, i.e., the
jurisdiction of the bankruptcy court over appellants’ state-law causes
of action, we recite the relevant allegations verbatim:
2. Prior to the formation of Seven Fields . . . ,
the predecessor entities were involved in a bankruptcy
in which [Ernst & Young] acted as accountants and
performed services on behalf of, inter alia, the
[appellants] and other members of the class – during
and after the bankruptcy.
3. As a result of the work performed by [Ernst
& Young], all of the predecessor entities were
represented by [Ernst & Young] to be insolvent, the
predecessor entities were consolidated and a successor
corporation, Seven Fields . . . , acceded to ownership of
the assets of the predecessor entities which included a
substantial tract of land in Butler County,
Pennsylvania.
4. In addition to declaring the predecessor
entities insolvent, [Ernst & Young] advised the United
States Bankruptcy Court, the [appellant] class and
others, that even after the reorganization and
bankruptcy and in spite of the fact that Seven Fields . .
5
. owned a substantial tract of land in Butler County,
Pennsylvania, [Ernst & Young] represented to the
[appellant] class members and others that the new
company had a debt of about $280 million to the group
of investors.
5. The foregoing had been represented
previously and throughout the bankruptcy by [Ernst &
Young] to the United States Bankruptcy Court, the
investor class and others.
6. [Appellants] and the remaining class
members had all invested varying sums of money in
one or more of the predecessor entities including
Earned Capital, Inc. and upon being advised by [Ernst
& Young] that the company was $280 million in debt,
[appellants] and the remaining class members were
horrified in that [Ernst & Young], in effect, represented
that [appellants] and the remaining class members had
either lost all of their money or were going to lose a
substantial portion of the money.
7. As a result of the advice received by[2]
[Ernst & Young], an effort to develop the property and
other assets was made which included sales of assets at
prices below their market value and a general
development scheme was put together by the successor
corporation and its officers, which instead of
emphasizing the highest use of the properties to which
the new corporation had title, was instead calculated to
generate cash as quickly as possible in an effort to both
‘repay’ [appellants] and other class members ‘their
loss’ and in a further effort to reassure [appellants] and
other class members that some money would be
returned.
8. As a result of the state of mind and
perception on the part of the new corporation,
[appellants] and other class members, the property was
developed and/or sold in a manner which caused all of
2
The complaint uses the words “received by” but we believe that
appellants intended to mean “given by” or “received from.”
6
the investors to suffer losses on the investment
previously made and to fail to realize even a return of
the full amount of their investment.
App. at 43-44.
On November 5, 2004, Ernst & Young filed a notice of
removal of the Butler County case with the clerk of the bankruptcy
court, removing the case to the United States Bankruptcy Court for the
Western District of Pennsylvania under Rule 9027(a) of the Federal
Rules of Bankruptcy Procedure and 28 U.S.C. §§ 1452 and 1334.
Then, Ernst & Young filed a motion to dismiss appellants’ complaint
on November 11, 2004, arguing that even though their claims “are in
the nature of a shareholder derivative suit,” appellants failed to assert
the claims on behalf of Seven Fields and had not made any demand on
Seven Fields as required under Federal Rule of Civil Procedure 23.1.
App. at 56-57. Additionally, Ernst & Young argued that the doctrines
of res judicata, collateral estoppel, and judicial estoppel required
dismissal of the complaint because the claims “necessarily require
[the court] to disturb a valid, final and binding reorganization plan and
confirmation order, as well as [the court’s] order approving [its] fees.”
Id. at 57.3
Appellants responded with a motion requesting that the
bankruptcy court remand the case to the Butler County Court of
Common Pleas pursuant to 28 U.S.C. § 1452(b) and Federal Rule of
Bankruptcy 9027(d), or, in the alternative, abstain from exercising
jurisdiction under 28 U.S.C. §§ 1334(c)(1) and (c)(2). In this motion,
appellants argued that the notice of removal was procedurally
deficient in that Ernst & Young erroneously filed it with the clerk of
the bankruptcy court and not the clerk of the district court, and that the
bankruptcy court did not have subject matter jurisdiction. Appellants,
in the alternative, also asserted that if the bankruptcy court did have
jurisdiction, it should have abstained permissively or was required to
abstain mandatorily from exercising its jurisdiction over the state-law
causes of action. Moreover, appellants filed a “Motion to Strike
Defendants’ Notice of Removal,” arguing that Ernst & Young was not
permitted to remove the state-court case as the underlying bankruptcy
case on which removal was predicated had been marked “closed” and
Ernst & Young did not move to reopen the case before filing the
notice of removal.
3
Ernst & Young raised other defenses that we need not describe.
7
On September 2, 2005, the bankruptcy court issued an opinion
and order in which it sua sponte reopened the underlying bankruptcy
case and denied appellants’ motions to remand and strike the notice of
removal, thus asserting its subject matter jurisdiction to rule on the
merits of the case. In re Earned Capital Corp., 331 B.R. 208 (Bankr.
W.D. Pa. 2005). On the merits, the bankruptcy court granted Ernst &
Young’s motion to dismiss for failure to state a claim because
“[appellants’] claims are shareholder derivative claims that can only
be presented by [appellants] through a shareholder derivative suit,”
and appellants failed to make a demand on “the board of directors or
comparable authority” under Federal Rule of Civil Procedure 23.1 for
them to bring the action against Ernst & Young. Id. at 222-24. The
court also found that it should dismiss the complaint on the grounds
of res judicata, collateral estoppel, and judicial estoppel inasmuch as
the bankruptcy court already had declared the Debtors insolvent in the
confirmation proceedings and had awarded fees to Ernst &
Young–litigation in which the Committee, which represented the
interests of the investors, fully participated. Id. at 224-28. Appellants
appealed from the opinion and order of the bankruptcy court to the
district court under 28 U.S.C. § 158(a), which, in turn, on July 14,
2006, affirmed the order of the bankruptcy court and adopted the
bankruptcy court’s opinion and order as its own. Geruschat v. Ernst
& Young LLP, 346 B.R. 123 (W.D. Pa. 2006).
On August 7, 2006, appellants timely filed a notice of appeal,
contesting the district court’s affirmance of the bankruptcy court’s
order (1) granting Ernst & Young’s motion to dismiss their case, (2)
denying appellants’ motion to strike Ernst & Young’s notice of
removal, (3) denying appellants’ motion to remand the case to the
state court, and (4) reopening the underlying bankruptcy case.
However, when we examined appellants’ brief, we observed that it
was devoid of any discussion relating to the merits of the case insofar
as the district court affirmed the bankruptcy court’s opinion and order
granting Ernst & Young’s motion to dismiss. It thus appeared that
between the time appellants filed their notice of appeal and the time
that they filed their brief, they decided not to appeal the bankruptcy
and district courts’ disposition of the case on the merits and, instead,
challenged only the resolution of jurisdictional issues in the
bankruptcy proceedings. At oral argument, appellants confirmed that
they had made a deliberate decision to forego their appeal insofar as it
relates to the merits of the dispute. Accordingly, the only issues
appellants raise before us relate to removal procedure, subject matter
jurisdiction, the bankruptcy court’s adjudicative authority over the
8
state-law claims, and absention. In particular, appellants present the
issues before us as follows:
1. Does a bankruptcy court have subject matter
jurisdiction to adjudicate a case removed from
state court where the underlying bankruptcy
case on which removal is predicated was closed
many years before removal and where the
removing party did not seek to open the earlier
bankruptcy case for cause pursuant to 11
U.S.C. § 350(b) prior to removal of the state
court case?
2. May a party within this Circuit remove a case
directly to the bankruptcy court under 28
U.S.C. § 1452(a) without a prior referral from
the district court?
3. Did the requisite ‘close nexus’ exist under
Resorts Int’l, Inc. Litig. Trust v. Price
Waterhouse [, 372 F.3d 154 (3d Cir. 2004),] to
confer subject matter jurisdiction in the district
court over [appellants’] state law claims where
such claims affected neither the bankruptcy
estate nor the debtor, and where success on the
merits of such claims would have no impact on
the property of the estate or distribution to any
creditor?
4. Did [appellants’] state law malpractice action
constitute a ‘non-core’ proceeding under 28
U.S.C. § 157 thus depriving the bankruptcy
court of original jurisdiction to enter final
orders and further requiring the district court to
abstain from jurisdiction under 28 U.S.C. §
1334(c)(2)?
5. Did the bankruptcy court commit clear error of
law when it assumed that the status of
[appellants’] complaint as a ‘core proceeding’
was dispositive of the issue of discretionary
abstention under § 1334(c)(1)?
9
Appellants’ br. at 2. We have divided those issues into three
categories: (1) removal procedure errors (issues 1 and 2); (2)
jurisdiction (issues 3 and 4); and (3) abstention (issues 4 and 5).
III. JURISDICTION AND STANDARD OF REVIEW
Appellants’ central issue in this case implicates the question of
whether the bankruptcy court had jurisdiction under 28 U.S.C. §§ 157
and 1334. There is no question that the district court had jurisdiction
over the appeal of the bankruptcy court’s September 2, 2005 opinion
and order under 28 U.S.C. § 158(a).
But before we reach the question of whether the bankruptcy
court had jurisdiction and the other issues appellants raise, we first
must ensure that we have jurisdiction to review this case under 28
U.S.C. §§ 1291 and 158(d). See Emerald Investors Trust v. Gaunt
Parsippany Partners, 492 F.3d 192, 193-94 (3d Cir. 2007) (“As
always, after we are satisfied of our own jurisdiction, the threshold,
and, indeed, as it turns out, the only issue on this appeal is whether the
district court had subject matter jurisdiction.”) (footnote omitted).
The parties initially did not question our jurisdiction.4 Prior to
argument, however, we observed that there might be a problem with
respect to our jurisdiction. Thus, at our direction, our clerk sent a
notice to the parties requesting that they “be prepared to briefly
discuss whether 28 U.S.C. § 1334(d) precludes us from reviewing
both the Bankruptcy Court’s decision to abstain under § 1334(c)(1)
and the District Court’s affirmance of this decision, because
discretionary abstention does not appear to be subject to appeal
4
In appellants’ opening brief they limit their discussion of our
jurisdiction to the following sentence: “The United States Court of
Appeals for the Third Circuit currently has jurisdiction over this matter
pursuant to 28 U.S.C. § 1291 as an appeal from a final decision and
order of the district court.” Appellants’ br. at 1. In Ernst & Young’s
brief it does not mention our jurisdiction, thus implying that it initially
agreed with appellants on this point. Nevertheless, we have a “special
obligation to satisfy [ourselves] of [our] own jurisdiction” even if the
parties agree that we have jurisdiction. Korytnyuk v. Ashcroft, 396 F.3d
272, 279-80 (3d Cir. 2005). As will be seen, an inquiry into our
jurisdiction is more complicated than the parties apparently originally
believed.
10
pursuant to § 1334(d).”5 At oral argument, we expressed an
additional concern with respect to our jurisdiction to review certain
aspects of the case under 28 U.S.C. § 1452(b), the bankruptcy
removal statute, which bars a court of appeals’ review of decisions to
remand or not to remand made on the basis of “any equitable ground.”
Accordingly, we asked the parties to submit supplemental memoranda
addressing jurisdictional issues. Having given the parties an
opportunity to address the questions relating to our jurisdiction, and
having received those memoranda and heard their oral arguments, the
issues with respect to our jurisdiction are now ripe for our disposition.
The essence of this appeal is that the bankruptcy or district
court should have remanded the case to the state court because (1)
Ernst & Young’s notice of removal was procedurally defective, (2) the
federal courts lacked subject matter jurisdiction over the state-law
causes of action, (3) the bankruptcy court lacked final adjudicative
authority, and (4) the federal courts should have abstained
permissively or were required to abstain mandatorily from asserting
their jurisdiction.6 There are three statutory provisions potentially
affecting our jurisdiction to review the orders in which the bankruptcy
and district courts declined to remand the case, assumed jurisdiction,
and did not abstain from asserting jurisdiction: 28 U.S.C. § 1447(d)
(general removal/remand); 28 U.S.C. § 1452(b) (bankruptcy
removal/remand); and 28 U.S.C. § 1334(c) and (d) (bankruptcy
abstention and limitation of appeals of orders with respect to
abstention).
Section 1447(d) is the general statutory provision governing
the reviewability of orders remanding cases removed from state
courts. Section 1447(d) states “[a]n order remanding a case to the
State court from which it was removed is not reviewable on appeal or
otherwise [except in certain civil rights cases].” Though the Supreme
Court has concluded that section 1447(d) applies regardless of
whether a party has removed a case pursuant to the general removal
5
Unfortunately our letter was exactly wrong because the
bankruptcy court did not abstain. As it happens we are confident that the
attorneys realized that we had erred and were not misled.
6
It is possible that we could grant relief to appellants without
ordering that the bankruptcy and district courts remand the case to the
state court but inasmuch as we do not find that they erred in any respect
we need not set forth what that possible relief might be.
11
provision, 28 U.S.C. § 1441(a), or the bankruptcy removal provision,
28 U.S.C. § 1452, see Things Remembered, Inc. v. Petrarca, 516 U.S.
124, 128, 116 S.Ct. 494, 497 (1995), section 1447(d) is inapplicable
here as in this case we are not dealing with an order remanding the
case. After all, the bankruptcy court denied appellants’ motions
seeking to remand the case and the district court affirmed the denial.
See City & County of San Francisco v. PG&E Corp., 433 F.3d 1115,
1122 (9th Cir.) (holding that section 1447(d) does not apply to
decisions not to remand a case), cert. denied, 127 S.Ct. 208 (2006); In
re Bissonnet Invs. LLC, 320 F.3d 520, 525 (5th Cir. 2003) (same).
Indeed, we regularly entertain appeals following final judgments in
which appellants contend that the district court erred in denying a
motion to remand.
In contrast, under the removal statute applicable specifically to
bankruptcy cases,
[t]he court to which such claim or cause of action is
removed may remand such claim or cause of action on
any equitable ground. An order entered under this
subsection remanding a claim or cause of action, or a
decision to not remand, is not reviewable by appeal or
otherwise by the court of appeals under section 158(d),
1291, or 1292 of this title or by the Supreme Court of
the United States under section 1254 of this title.
28 U.S.C. § 1452(b) (emphasis added). Thus, section 1452(b), in
addition to barring review of decisions to remand, precludes appellate
review of decisions “to not remand,” the type of order involved in this
case.
But section 1452(b) makes clear that a decision to remand or
not to remand a case is unreviewable by a court of appeals only when
the district court relies on “any equitable ground” as the basis for its
decision. While the statute does not define “equitable ground,” we
have recognized that “equitable” as used in section 1452(b) is not to
be understood as distinguishing equitable from legal grounds in a
traditional sense, but, instead, “equitable” “signals that which is
reasonable, fair, or appropriate.” Allied Signal Recovery Trust v.
Allied Signal, Inc., 298 F.3d 263, 268 (3d Cir. 2002) (quoting Things
Remembered, 516 U.S. at 133, 116 S.Ct. at 499 (Ginsburg, J.,
concurring)).
12
Accordingly, we first must decide which, if any, of the
categories of issues appellants raise contesting the bankruptcy and
district courts’ decisions not to remand the state-law causes of action
are insulated from appellate review by section 1452(b). Additionally,
we also must determine whether 28 U.S.C. § 1334, the bankruptcy
abstention provision, insulates from our review the decisions relating
to abstention.
A. Removal Procedure Errors
We have no doubt that the bankruptcy court’s “decision to not
remand” the case in the face of appellants’ procedural arguments that
Ernst & Young did not seek to reopen the bankruptcy case before
filing its notice of removal and that Ernst & Young improperly filed
the notice of removal directly with the bankruptcy clerk was based on
the bankruptcy court’s determination that there were not “equitable
ground[s],” i.e., “reasonable, fair, or appropriate” grounds, for the
remand, a decision that we cannot review. The Supreme Court in
Things Remembered faced very similar circumstances. In that case,
the issue was “whether a federal court of appeals may review a district
court order remanding a bankruptcy court case to state court on
grounds of untimely removal.” Things Remembered, 516 U.S. at 125,
116 S.Ct. at 496. The Court decided that the general statutory
provision governing the reviewability of remand orders, 28 U.S.C. §
1447(d), barred appellate review of the remand order.7 See Things
Remembered, 516 U.S. at 127-28, 116 S.Ct. at 496-97. While the
majority opinion did not discuss the possibility that the bankruptcy
remand provision of section 1452(b) similarly would bar review,
Justice Ginsburg in her concurring opinion, joined by Justice Stevens,
concluded that section 1452(b) independently would bar review of the
order remanding the case by reason of untimely removal, finding that
the basis for remand was on an “equitable ground.” Id. at 131-34, 116
S.Ct. at 498-500 (Ginsburg, J., concurring).
Surely, if a remand based on untimely removal is predicated
on an “equitable ground,” the decision not to remand based on the
procedural defects raised here also addresses a proposed remand on
equitable grounds, and thus we are precluded from reviewing it. We
recognize that the issue in Things Remembered was whether a
decision to remand was unreviewable and the issue here is whether a
7
As we discussed above, section 1447(d) is inapplicable here as
it only bars review of orders to remand, not orders not to remand.
13
decision not to remand is unreviewable, and, although we can
distinguish the cases on that basis, this difference is not material here
as bankruptcy remand section 1452(b) tells us that appellate courts
should treat decisions to remand or not remand alike in ascertaining
their own jurisdiction.
Appellants do not specifically discuss in their supplemental
memorandum whether we are barred from reviewing the issue raised
relating to Ernst & Young’s filing of the notice of removal with the
bankruptcy clerk and not the district court clerk. Nevertheless, we are
treating appellants’ discussion relating to our obligation to review
their challenges to the bankruptcy court’s subject matter jurisdiction
as incorporating this aspect of their appeal. However, we do not
categorize this filing issue as relating to the bankruptcy court’s subject
matter jurisdiction, a holding that would be very significant with
respect to our jurisdiction for, as we next discuss, section 1452(b)
does not preclude a court of appeals from reviewing a challenge to a
bankruptcy or district court’s subject matter jurisdiction. Rather,
Ernst & Young’s error, if there was an error, was merely an error
relating to removal procedure in the nature of a “claim-processing”
issue as the Supreme Court used that term in Bowles v. Russell, 127
S.Ct. 2360, 2364 (2007). It had nothing to do with the “delineat[ion
of] the classes of cases (subject matter jurisdiction) . . . falling within
a court’s adjudicatory authority.” Kontrick v. Ryan, 540 U.S. 443,
455, 124 S.Ct. 906, 915 (2004). Thus, section 1452(b) precludes us
from reviewing the alleged procedural error here.8
8
In any event, even if we had jurisdiction to consider the question
of whether Ernst & Young filed the notice of removal with the
appropriate clerk, appellants’ argument would fail. Federal Rule of
Bankruptcy Procedure 9027(a)(1) permits the filing of a notice of
removal with the “clerk,” a term that Rule 9001(3) defines as
“bankruptcy clerk,” and 28 U.S.C. § 1452(a) permits removal to the
“district court,” an entity of which the bankruptcy court is a unit. 28
U.S.C. § 151; see In re Gianakas, 56 B.R. 747, 750 (N.D. Ill. 1985). We
also point out that the Western District of Pennsylvania has a general
order referring all bankruptcy cases and proceedings filed in the district
to the bankruptcy judges. See Order of Reference of Bankruptcy Cases
and Proceedings Nunc Pro Tunc (Oct. 16, 1984), available at
http://www.pawb.uscourts.gov/pdfs/ OrderOfReference.pdf. Moreover,
even if we concluded that the notice of removal should have been filed
with the district court and that the filing error compels us to reverse, our
ruling would be meaningless. In this regard we take note of 28 U.S.C.
14
Appellants argue that section 1452(b) does not bar our review
of issues attributable to Ernst & Young’s failure to seek to reopen the
bankruptcy case before filing its notice of removal, as they raised the
issue with the bankruptcy judge “in a motion to strike defendant’s
notice of removal, and not by means of a motion to remand.”
Appellants’ Suppl. Mem. at 2. We do not find this argument to be
substantial. Inasmuch as section 1452 precludes our review of
“decision[s] to not remand,” we look to the substance of the
bankruptcy court’s decision and not the form of the party’s motion in
determining the applicability of section 1452.9 It is clear that the
§ 1631 which provides that when a civil action is filed with a district
court (of which the bankruptcy court is a unit) with a want of jurisdiction
the court shall in the interest of justice transfer the case to a court in
which it could have been filed originally. Thus, if the bankruptcy clerk
thought that the removal should have been to the district court, he almost
certainly would have sent the removal notice to that court which then
would have referred it back to the bankruptcy court pursuant to the
general referral order. Accordingly, if we reversed on the filing point,
vacated the bankruptcy and district courts’ orders, and remanded the
matter to the bankruptcy court to enter an order not inconsistent with our
opinion, we do not doubt that rather than dismissing the case, the
bankruptcy court would transfer it to the district court which then would
refer it back to the bankruptcy court following which all the vacated
orders of the bankruptcy court, and, if appellants again appealed, the
district court’s memorandum order of July 14, 2006, would be reinstated.
9
It is obvious why we look to the substance of the court’s order
and not the party’s captioning of its motion in determining the
applicability of section 1452. If we were to look at the form of the
party’s motion, we would encourage attempts to circumvent the broad
bar precluding our review of remand orders under section 1452. This
case provides a great example. Appellants caption their motion as a
“Motion to Strike Defendants’ Notice of Removal.” However, ordinarily
when a party files a motion to strike under the Federal Rules of Civil
Procedure it files the motion under Federal Rule of Civil Procedure
12(f), which permits a party to seek to have “stricken from any pleading
any insufficient defense or any redundant, immaterial, impertinent or
scandalous matter.” But appellants did not file their motion to strike for
any such purpose. In the circumstances the appropriate motion here
would have been a “motion to remand” under 28 U.S.C. § 1447(c),
which provides for “[a] motion to remand the case on the basis of any
defect other than lack of subject matter jurisdiction,” or a motion under
15
bankruptcy court’s decision in which it denied “Plaintiffs’ Motion to
Strike Defendants’ Notice of Removal,” and the district court’s
affirmance thereof, are “decision[s] to not remand” inasmuch as they
deny appellants’ request to remand the matter to the state court
because of the alleged procedural defect. We add that appellants
themselves acknowledge this point for they requested in their
proposed order attached to their motion that the court order recite that
“Defendants’ Notice of Removal is hereby stricken, and this case is
remanded to the Court of Common Pleas of Butler County,
Pennsylvania.” App. at 145.10
B. Bankruptcy Court Jurisdiction and Adjudicative
Authority
We agree with appellants that the decisions of the bankruptcy
and district courts not to remand the case on the basis that the
bankruptcy court lacked jurisdiction and their argument that the
bankruptcy court did not have the authority to exercise final
adjudicative authority, while “not per se reviewable” under section
1452(b), nevertheless are subject to appellate review. See Things
Remembered, 516 U.S. at 132 n.1, 116 S.Ct. at 499 n.1 (Ginsburg, J.,
concurring); see also City & County of San Francisco, 433 F.3d at
1121 (“This is a question of subject matter jurisdiction that does not
implicate the jurisdictional limitations of section 1452(b).”); In re
V&M Mgmt., Inc., 321 F.3d 6, 7 (1st Cir. 2003) (“Because
28 U.S.C. § 1452, which provides for remand of removed claims relating
to bankruptcy cases on “any equitable ground.” We also point out that
we are not aware of any rule or other authority authorizing a motion to
strike a notice of removal, though we are aware that parties sometimes
characterize motions seeking certain relief other than those under Rule
12(f) as motions to strike.
10
Although we do not have jurisdiction to review this issue, we
point out that it was within the bankruptcy judge’s discretion to reopen
the bankruptcy case sua sponte so that “matters that have a significant
connection with the administration of the case can be addressed.” Earned
Capital, 331 B.R. at 217; see 11 U.S.C. § 350 (providing for the
reopening of a bankruptcy case “for other cause”); 11 U.S.C. § 105(a)
(permitting court to act sua sponte); Donaldson v. Bernstein, 104 F.3d
547, 551-52 (3d Cir. 1997) (rejecting contention that the bankruptcy
court lacked jurisdiction on the ground that it was acting in a closed case
when the court sua sponte reopened the case “for other cause”).
16
[appellant’s] argument attacks the lower court’s subject matter
jurisdiction, we not only have jurisdiction to review but are obligated
to do so.”); Owens-Ill., Inc. v. Rapid Am. Corp. (In re Celotex Corp.),
124 F.3d 619, 625 (4th Cir. 1997) (“[W]e hold that § 1452(b) . . . does
not preclude us from reviewing the district court’s decision denying
[the] motion to remand to the extent that [the] motion rested on the
district court allegedly lacking subject matter jurisdiction.”). We
reach our conclusion because courts of appeals on appeals from
bankruptcy and district courts must ensure that those courts do not
exceed the authority that Article III of the Constitution and Congress
has granted them. Section 1452 cannot detract from this obligation
and we are of the view that a bankruptcy judge absent consent of the
parties does not have jurisdiction to enter a final order in a non-core
matter. 28 U.S.C. § 157(c). Of course, there is no question that the
district court had jurisdiction to entertain the appeal from the
bankruptcy court. See 28 U.S.C. § 158(a).
C. Abstention
The question of whether we have jurisdiction to review the
district court’s affirmance of the bankruptcy court’s decision not to
abstain under 28 U.S.C. § 1334(c)(2) (mandatory abstention) and
section 1334(c)(1) (permissive abstention) is a two-step process.
First, we must decide which version of section 1334 we are to apply in
this case. This selection is significant as Congress adopted
amendments to section 1334 altering courts of appeals’ jurisdiction in
1984 (“the 1984 Amendments”), 1990 (“the 1990 Amendments”), and
1994 (“the 1994 Amendments”). Congress enacted the current
version of section 1334 in the 1994 Amendments, though it further
amended section 1334 in technical non-substantive respects in 2005.11
Second, once we decide which version of section 1334 applies, we
must construe the statute to determine the extent of and limitations on
a court of appeals’ jurisdiction over abstention decisions.
Under the current version of section 1334(d),
11
The 2005 Amendments in Pub. L. 109-8, § 1219, struck out
“made under this subsection” and inserted “made under subsection (c)”
and substituted “Subsection (c) and this subsection” for “This
subsection” in the last sentence of section 1334(d) dealing with stays.
But we are satisfied that the 2005 Amendments did not make substantive
changes in section 1334 material here.
17
[a]ny decision to abstain or not to abstain made under
subsection (c) (other than a decision not to abstain in a
proceeding described in subsection (c)(2) [mandatory
abstention]) is not reviewable by appeal or otherwise
by the court of appeals under section 158(d), 1291, or
1292 of this title . . . . Subsection (c) and this
subsection shall not be construed to limit the
applicability of the stay . . . .
Thus, we have recognized that, as section 1334(d) now stands,
“appeals of decisions not to exercise mandatory abstention pursuant to
§ 1334(c)(2) are explicitly permitted,” Stoe v. Flaherty, 436 F.3d 209,
212 (3d Cir. 2006), yet appeals of decisions involving permissive
abstention, whether or not the court abstains, are barred, see Allied
Signal, 298 F.3d at 269. Moreover, under section 1334(d) a decision
mandatorily abstaining is not appealable.
Inasmuch as appellants appeal the denial of their motion for
mandatory abstention, it might be thought that they would contend
that the current version of section 1334 is applicable here. Yet they
contend that section 1334(d) in its current form does not control this
case, a position they predicate on the circumstance that the Debtors
filed their bankruptcy petitions in 1986, well before Congress enacted
the current version of section 1334 through the 1994 Amendments
and even well before Congress enacted the 1990 Amendments.
Appellants’ Suppl. Mem. at 3-4. Actually it is understandable that
they take this position as they argue that the bankruptcy court should
have abstained both mandatorily and permissively, and currently, as
we have indicated, appeals of orders denying permissive abstention
unquestionably are not allowed.
The appellants rely on the 1984 Amendments, i.e., the version
the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.
L. No. 98-353, 98 Stat. 333, enacted on July 10, 1984, because that
version provided that “[a]ny decision to abstain made under this
subsection is not reviewable by appeal or otherwise.” See Christo v.
Padgett, 223 F.3d 1324, 1331 (11th Cir. 2000). But the 1984
Amendments did not limit appeals of decisions not to abstain.
Accordingly, if we were to look to the 1984 Amendments for our rule
of decision, the bankruptcy court’s decision not to abstain mandatorily
or permissively would be subject to our review and we could review
all of appellants’ abstention arguments.
18
Ernst & Young, on the other hand, urges us to look to the
version of section 1334(c)(2) enacted in the Judicial Improvements
Act of 1990, Pub. L. No. 101-650, 104 Stat. 5089, 5113, i.e., the 1990
Amendments, which provided that “[a]ny decision to abstain or not to
abstain under this subsection is not reviewable by appeal or otherwise
by the court of appeals . . . .” Appellees’ Suppl. Mem. at 3-4. Ernst &
Young contends that under the 1990 Amendments we are prohibited
from reviewing decisions not to abstain either mandatorily or
permissively. Id. at 4-5. Thus, appellants and Ernst & Young take
polar opposite approaches with respect to our jurisdiction to hear the
appeal with respect to abstention.
We have examined the question of which version of section
1334 is applicable, and have concluded that section 1334(d), as
amended in 1994, and which, with the minor non-substantive 2005
Amendments, i.e., the current law, controls this case even though
neither party contends that the 1994 Amendments are applicable. We
reach this conclusion because Congress enacted the 1994
Amendments long before appellants initiated their action in the state
court.12
In considering whether the 1994 Amendments, and thus
current law, are applicable we point out that Congress made it clear
that the 1994 Amendments, with certain exceptions not relevant here,
“shall not apply with respect to cases commenced under title 11 of the
United States Code before the date of the enactment of this Act
[October 22, 1994].” Bankruptcy Reform Act of 1994, Pub. L. No.
103-394, § 702(b) (Application of Amendments), 108 Stat. 4106,
4150; see also 28 U.S.C. § 1334 (Historical and Statutory Notes,
Effective and Applicability Provisions) (stating that the 1994
Amendments do “not apply with respect to cases commenced under
Title 11 of the United States Code before Oct. 22, 1994”); In re
Middlesex Power Equip. & Marine, Inc., 292 F.3d 61, 67 n.5 (1st Cir.
2000); Christo, 223 F.3d at 1332. While there has been some
12
Ernst & Young does contend that “alternatively” to the 1990
Amendments being applicable “the 1994 Amendments apply” to
appellants’ case, Appellees’ Suppl. Memo at 9, and that under “both the
1990 and 1994 amended versions of 28 U.S.C. § 1334, [we are] without
jurisdiction to review [the bankruptcy judge’s] decision not to remand
and not to abstain.” Id. at 10. We understand, however, that Ernst &
Young primarily relies on the version of section 1334 as amended by the
1990 Amendments.
19
discussion in other courts of appeals as to whether a “case[]
commenced under title 11” refers to the bankruptcy case or the civil
case which was removed, see id., a distinction that is critical here as
the Debtors filed their petitions in 1986 and appellants instituted this
action in 2004, we need not concern ourselves at length with this
question regarding application of the 1994 Amendments for we
already have determined that “cases under Title 11” as used in section
1334(a) refers “merely to the bankruptcy petition itself,” as opposed to
“proceeding[s],” which refers “to the steps within the ‘case’ and to
any subaction within the case that may raise a disputed or litigated
matter.” In re Combustion Eng’g, Inc., 391 F.3d 190, 226 n.38 (3d
Cir. 2004). We do not see why “cases” should have a different
meaning in the words “cases commenced under title 11” in Pub. L.
No. 103-394 § 702(b), with respect to the effective date of the 1994
Amendments. Thus, as the 1994 Amendments do not apply to cases,
i.e., the bankruptcy case itself, commenced under title 11 before
October 22, 1994, they do apply in this proceeding which was
instituted after October 22, 1994, and, rather than being a case within
the meaning of Pub. L. No. 103-394, § 702(b), is a “subaction” within
the bankruptcy case initiated long after that date.
It might be thought from the foregoing analysis that we would
conclude that we do not have jurisdiction over this appeal with respect
to the bankruptcy court’s refusal to abstain permissively but do have
jurisdiction over its refusal to abstain mandatorily as appeals of
decisions not to abstain in proceedings commenced after October 22,
1994, are permitted when mandatory abstention has been refused.
Indeed, at first glance it would seem that nothing could be clearer as
section 1334(d) provides that only “a decision not to abstain in a
proceeding described in subsection (c)(2)” i.e., mandatory abstention,
is reviewable.
Yet there is a special situation here. As we point out below in
dealing with the distinction between “related to,” i.e., non-core
jurisdiction, and “arising under title 11 or arising in a case under title
11,” i.e., core jurisdiction, in determining whether the bankruptcy
court had final adjudicative power, in this case the bankruptcy court
was applying “arising in” jurisdiction. Moreover, section 1334(c)(2)
in providing for mandatory abstention applies only to “a proceeding
based upon a State law cause of action related to a case under title 11
but not arising under title 11 or arising in a case under title 11.”
Consequently, it necessarily follows from our holding that this is an
“arising in” case, that there was no possible basis for the bankruptcy
20
and district courts to abstain mandatorily under the 1994 Amendments
or at any time since their enactment. See In re Gober, 100 F.3d 1195,
1206 (5th Cir. 1996) (“Mandatory abstention applies only to non-core
proceedings -- that is, proceedings ‘related to a case under title 11, but
not arising under title 11, or arising in a case under title 11.’”). Thus,
we are not dealing with a decision denying mandatory abstention as
no matter how appellants entitled their application for abstention they
did not make a motion for abstention coming within section
1334(c)(2).13 Consequently, notwithstanding appellants’ efforts to
characterize this case as involving mandatory abstention, it is only a
permissive abstention case and we do not have jurisdiction over the
appeal of the denial of abstention.
We realize that our result differs from that of the Court of
Appeals for the Fifth Circuit In re Southmark Corp., 163 F.3d 925
(5th Cir. 1999), a case on which appellants rely. In that case, the court
apparently believed that it should look to the filing date of the
bankruptcy petition when determining which version of section 1334
applied. See id. at 929. Thus, the court applied the 1984
Amendments in a case in which the Chapter 11 bankruptcy petition
was filed in 1989, even though the civil action before the court of
appeals was filed in a state court and removed to a federal court in
1995, after the enactment of both the 1990 Amendments and the 1994
Amendments and prior to the matter being before the court of appeals
in 1999. Id. at 927-29. The court did not discuss the implications of
the 1990 Amendments but seemed to think that inasmuch as
“Southmark’s case,” evidently meaning its Chapter 11 filing,
“predates [the 1994] Amendments and was filed when decisions not
to abstain were reviewable on appeal,” id. at 929, it had jurisdiction.
13
Even though our opinion has the effect of rejecting appellants’
mandatory abstention contentions on their merits, we are not assuming
jurisdiction contrary to the holding in Steel Co. v. Citizens for a Better
Environment, 523 U.S. 83, 93-102, 118 S.Ct. 1003, 1012-16 (1998), in
determining that this is a core case. In this regard we point out that we
have jurisdiction to decide whether this case is core or non-core as
appellants challenge the bankruptcy court’s exercise of final adjudicative
power, and a resolution of that question requires that we determine if the
case is core or non-core. The determination of that issue has an
incidental effect on the jurisdictional question of whether we have
authority to hear appellants’ arguments with respect to mandatory
abstention and thus has the collateral effect of rejecting appellants’
mandatory abstention claims on their merits.
21
The court’s reference to the appealability of decisions not to abstain
must have been to the 1984 Amendments as they precluded only
appeals of decisions to abstain.
We cannot distinguish Southmark with respect to jurisdiction
over abstention appeals but we will not follow it as we question
whether Southmark in this respect is consistent with binding
precedents.14 It is well-settled that “a court is to apply the law in
effect at the time it renders its decision, unless doing so would result
in manifest injustice or there is statutory direction or legislative
history to the contrary.” Bradley v. Sch. Bd. of Richmond, 416 U.S.
696, 711, 94 S.Ct. 2006, 2016 (1974). We find no justification to
disregard this longstanding legal principle and establish an exception
wherein a court would look to the date that a debtor or creditor filed
the bankruptcy case rather than the proceeding directly in issue in
determining which version of section 1334 applies. Proceedings
subject to the abstention provisions are causes of action initiated
separately from the bankruptcy case itself and often arise well after
the filing of bankruptcy petition, and sometimes, as in this case, even
after the assets of the bankruptcy estate have been distributed and the
bankruptcy case closed. Overall, we cannot justify applying the law
that existed at the time the Debtors filed their bankruptcy petitions and
not the law that existed at the time that appellants filed their separate
civil action or the law as it currently stands which is materially the
same.
In sum, with respect to our jurisdiction we find that we only
can review the bankruptcy and district courts’ decisions relating to
subject matter jurisdiction, including the authority of the bankruptcy
court to issue final orders.15 We do not have jurisdiction to review
14
As we explain below we do follow Southmark in other respects.
15
Although we reject Ernst & Young’s contention that the 1990
Amendments control this case we are satisfied that its contention that
those amendments would bar, if applicable, any appeal of an abstention
decision abstaining or not abstaining on mandatory or permissive
grounds is correct. Moreover, we are satisfied that those amendments
were in effect until Congress enacted the 1994 Amendments and if
Congress had not adopted the 1994 Amendments the 1990 Amendments
would control this case. The principal argument with respect to the 1990
Amendments centers on the point that their restriction on appealability
of abstention decisions was contained in section 1334(c)(2) dealing with
22
their decisions relating to the alleged procedural defects in the
removal process and mandatory or permissive abstention.
Consequently, inasmuch as appellants do not challenge the order
dismissing their case on the merits, now that we have set forth the
scope of our jurisdiction, the subject matter of our review is quite
limited.
D. Standard of Review
“Our review of the District Court’s ruling in its capacity as an
appellate court is plenary, and we review the bankruptcy judge’s legal
determinations de novo,” In re O’Lexa, 476 F.3d 177, 178 (3d Cir.
2007), and “its factual findings for clear error and its exercise of
discretion for abuse thereof,” In re United Healthcare Sys., Inc., 396
F.3d 247, 249 (3d Cir. 2005). Our review of the district court’s order
on jurisdiction and of the issue of whether the proceeding in the
bankruptcy court was core or non-core is de novo. See Stoe, 436 F.3d
at 212; In re Resorts Int’l, Inc., 372 F.3d 154, 160 (3d Cir. 2004).
IV. DISCUSSION
A. The Statutory Framework of Federal Bankruptcy
Jurisdiction
As we have indicated in other litigation, “[b]ankruptcy courts
fall outside of the constitutional authority of Article III and derive
their authority from federal statutes.” Resorts, 372 F.3d at 161.
Congress, in turn, “has vested limited authority in bankruptcy courts”
mandatory abstention rather than, as now, separately in section 1334(d)
and thus the restriction might not apply to decisions with respect to
permissive abstention. We believe, however, that Congress intended the
restriction on appeals to apply to permissive abstention as authorized in
section 1334(c)(1) both as a matter of what might be characterized as
“mechanical” statutory construction and because we cannot understand
why Congress would have wanted to preclude appeals of decisions
denying mandatory abstention, as it undoubtedly did in the 1990
Amendments, but would have wanted to permit appeals of decisions
denying permissive abstention. In fact, if anything, one would expect
that Congress would have had the reverse intent, as it, in fact, did when
it adopted the 1994 Amendments.
23
through 28 U.S.C. §§ 1334 and 157, sections within title 28 of the
United States Code dealing with the judiciary and judicial procedure.
Id. For the most part, however, title 11 of the United States Code
governs bankruptcy proceedings.
Section 1334 describes the jurisdictional boundaries of a
district court over bankruptcy cases and proceedings but, by itself,
does not vest any authority in the bankruptcy courts. Rather, section
1334(a) states that “the district courts shall have original and
exclusive jurisdiction of all cases under title 11,” and section 1334(b)
states that “the district courts shall have original but not exclusive
jurisdiction of all civil proceedings arising under title 11, or arising in
or related to cases under title 11.” District courts, however, even
though they have jurisdiction under subsections (a) or (b), are
permitted, “in the interest of justice, or in the interest of comity with
State courts or respect for State law[,] . . . [to] abstain[] from hearing a
particular proceeding arising under title 11 or arising in or related to a
case under title 11.” 28 U.S.C. § 1334(c)(1) (permissive abstention).
Additionally,
[u]pon timely motion of a party in a proceeding based
upon a State law claim or State law cause of action,
related to a case under title 11 but not arising under
title 11 or arising in a case under title 11, with respect
to which an action could not have been commenced in
a court of the United States absent jurisdiction under
[section 1334], the district court shall abstain from
hearing such proceeding if an action is commenced,
and can be timely adjudicated, in a State forum of
appropriate jurisdiction.
28 U.S.C. § 1334(c)(2) (mandatory abstention).
28 U.S.C. § 157, on the other hand, lists the bankruptcy cases
and proceedings that may be “referred” to the bankruptcy courts.
Absent delegation of authority by the district court, much like the
authority in 28 U.S.C. § 636(b), which provides for the delegation of
certain judicial powers to magistrate judges, section 157 does not
permit bankruptcy judges to hear and adjudicate cases in the absence
of a reference from the district court. But under section 157(a),
“[e]ach district may provide that any or all cases under title 11 and
any or all proceedings arising under title 11 or arising in or related to a
case under title 11 shall be referred to the bankruptcy judges for the
24
district.” As we have indicated, “[t]he district courts’ power to refer
is discretionary, but courts routinely refer most bankruptcy cases to
the bankruptcy court.” Resorts, 372 F.3d at 162 (internal quotation
marks omitted).
Section 157 provides for two levels of authority that may be
invested in a bankruptcy judge depending upon into which of two
categories a case or proceeding falls. The two categories are (1) “all
cases under title 11 and all core proceedings arising under title 11, or
arising in a case under title 11,” 28 U.S.C. § 157(b)(1) (collectively
known as “core proceedings”),16 and (2) “a proceeding that is not a
core proceeding but that is otherwise related to a case under title 11,”
28 U.S.C. § 157(c)(1) (“non-core proceedings”). See Combustion
Eng’g, 391 F.3d at 225; Resorts, 372 F.3d at 162.
The bankruptcy judge “determine[s], on the judge’s own
motion or on timely motion of a party, whether a proceeding is a core
proceeding under this subsection or is a proceeding that is otherwise
related to a case under title 11.” 28 U.S.C. § 157(b)(3). A correct
determination of whether a matter is core or non-core establishes the
bankruptcy judge’s level of authority. With respect to core
16
Core proceedings as defined in section 157 include, but are not
limited to-- (A) matters concerning the administration of the estate; (B)
allowance or disallowance of claims against the estate or exemption
from property of the estate, and estimation of claims or interests for the
purposes of confirming a plan under chapter 11, 12, or 13 of title 11; (C)
counterclaims by the estate against persons filing claims against the
estate; (D) orders in respect to obtaining credit; (E) orders to turn over
property to the estate; (F) proceedings to determine, avoid, or recover
preferences; (G) motions to terminate, annul, or modify the automatic
stay; (H) proceedings to determine, avoid, or recover fraudulent
conveyances; (I) determinations as to the dischargeability of particular
debts; (J) objections to discharges; (K) determinations of the validity,
extent, or priority of liens; (L) confirmations of plans; (M) orders
approving the use or lease of property; (N) orders approving the sale of
property other than property resulting from claims brought by the estate
against persons who have not filed claims against the estate; (O) other
proceedings affecting the liquidation of assets of the estate or the
adjustment of the debtor-creditor or the equity security holder
relationship, except personal injury tort or wrongful death claims; and
(P) recognition of foreign proceedings and other matters under chapter
15 of title 11.
25
proceedings Congress has provided that “bankruptcy judges may hear
and determine all cases under title 11 and all core proceedings arising
under title 11, or arising in a case under title 11, referred under
subsection (a) of this section, and may enter appropriate orders or
judgments, subject to review under section 158 of this title.” 28
U.S.C. § 157(b)(1). Sections 158(a) and (b) give jurisdiction to the
district courts and the bankruptcy appellate panel (should one be
established by the judicial council of a circuit and with the consent of
all the parties) to hear appeals from final judgments, orders, and
decrees, as well as from interlocutory orders and decrees under certain
circumstances, entered by the bankruptcy courts.
However, the determination that a case is not a core
proceeding does not mean that a bankruptcy judge lacks authority
with respect to it. Rather,
[a] bankruptcy judge may hear a proceeding that is not
a core proceeding but that is otherwise related to a case
under title 11. In such proceeding, the bankruptcy
judge shall submit proposed findings of fact and
conclusions of law to the district court, and any final
order or judgment shall be entered by the district judge
after considering the bankruptcy judge’s proposed
findings and conclusions and after reviewing de novo
those matters to which any party has timely and
specifically objected.
28 U.S.C. § 157(c)(1). Additionally, “the district court, with the
consent of all the parties to the proceeding, may refer a proceeding
related to a case under title 11 to a bankruptcy judge to hear and
determine and to enter appropriate orders and judgments, subject to
review under section 158 of this title.” 28 U.S.C. § 157(c)(2).
B. Resorts International
Appellants predicate a large part of their case on this appeal
challenging the bankruptcy and district courts’ jurisdiction on our
opinion in Resorts, 372 F.3d 154, so we start with a discussion of that
case. In Resorts, Resorts International and related entities entered into
Chapter 11 bankruptcy proceedings in 1989. Id. at 157. The
following year the bankruptcy court issued an order confirming their
Second Amended Joint Plan of Reorganization (“the Reorganization
Plan”). Id. at 158.
26
Less than one month after the court confirmed the
Reorganization Plan, Resorts International and its creditors entered
into a Final Plan and Litigation Trust Agreement creating a litigation
trust in which the trustee was assigned claims Resorts International
held against Donald J. Trump and affiliated entities arising from
Trump’s 1988 leveraged buyout of the Taj Mahal Resort. Id. The
Final Plan authorized the trustee to prosecute the claims, with the
debtor to provide the first $5,000,000 spent in the litigation in the
form of an irrevocable letter of credit. Nevertheless the proceeds from
the suit were to be distributed to certain creditors who were covered
under the Final Plan. Id. at 157-58. The Final Plan also required the
trustee to retain an independent public accounting firm to provide
auditing and tax-related services for the trust, and on November 1,
1990, pursuant to this requirement, the trustee retained Price
Waterhouse for this purpose. Id. at 158. On May 28, 1991, the
trustee entered into a settlement, that the creditors subsequently
approved, with Trump in the amount of $12,000,000. Id. The
proceeds of the settlement became assets of the litigation trust. Id.
On April 15, 1997, the trustee filed an adversary proceeding in
the bankruptcy court setting forth accounting malpractice and breach
of contract claims against Price Waterhouse in which the trustee
sought disgorgement of Price Waterhouse’s fees in excess of
$500,000 paid for accounting services that it performed for the trust,
as well as damages. Id. The trustee’s “principal allegation [was] that
Price Waterhouse erroneously reported in its audit reports that certain
accrued interest on the Litigation Trust accounts belonged to the
debtor rather than the Trust,” and that the bankruptcy court relied
upon those erroneous reports in a separate suit between the trust and
Resorts International in deciding on an allocation of the interest
earned on the $5,000,000 litigation expense account created under the
Final Plan. Id. at 158-59. Resorts International, whose estate no
longer existed following the confirmation of the Reorganization Plan,
was not a party to the malpractice action. Id. at 157.
The bankruptcy court held that it did not have jurisdiction over
the adversary proceeding which set forth state-law claims and thus
dismissed the proceedings. The trustee, however, appealed and the
district court reversed, following which the district court certified its
ruling for immediate appeal to us under 28 U.S.C. § 1292(b), and we
granted leave to appeal. Resorts, 372 F.3d at 159-60. The case then
came on before us to decide whether the bankruptcy court had
jurisdiction over the state-law claims. Id. We discussed three
27
separate issues in our opinion.
First, we held that courts will give effect to retention-of-
jurisdiction provisions that reorganization plans sometimes include
only if there is bankruptcy court jurisdiction under 28 U.S.C. §§ 1334
and 157, as “neither the bankruptcy court nor the parties can write
their own jurisdictional ticket.” Resorts, 372 F.3d at 161. In other
words, in the absence of statutory federal jurisdiction, “retention of
jurisdiction provisions in a plan of reorganization or trust agreement
are fundamentally irrelevant.” Id. Of course, “if there is jurisdiction,
we will give effect to retention of jurisdiction provisions.”17 Id. Thus,
we examined the question of whether the dispute fell within the
bankruptcy court’s subject matter jurisdiction. Id.
Second, we held that the state-law claims at issue were not
“core proceedings” under section 157(b) because the proceeding did
not invoke “a substantive right provided by title 11 or a proceeding
that, by its nature, could arise only in the context of a bankruptcy
case.” Id. at 163. We distinguished the circumstances in Resorts
from the situation before the Court of Appeals for the Fifth Circuit in
Southmark, 163 F.3d 925. In Southmark, the debtor filed a
malpractice suit against the accounting firm that provided accounting
services prior to plan confirmation. Resorts, 372 F.3d at 163. The
Southmark court held that the suit was a core proceeding because the
bankruptcy court must be able to ensure “that court-approved
managers of the debtor’s estate are performing their work
conscientiously, and cost-effectively,” and supervising court-
appointed professionals “bears directly on the distribution of the
debtor’s estate” for “[i]f the estate is not marshaled and liquidated or
reorganized expeditiously, there will be far less money available to
pay creditors’ claims.” Id. (quoting Southmark, 163 F.3d at 931).
In distinguishing Southmark we made the following
17
Ernst & Young understandably does not argue that the
Reorganization Plan’s retention-of-jurisdiction provision is dispositive,
an argument that it might have predicated on Section 9.01 of the plan
which states that the bankruptcy court was to retain jurisdiction over,
among other things, all disputes connected to the Final Plan or
confirmation order and all adversary proceedings filed after the plan’s
confirmation date. Following Resorts, it is obvious that an argument
anchored solely on this retention-of-jurisdiction provision could not have
been successful.
28
observations:
Unlike in Southmark, this claim arose post-plan
confirmation. It does not directly affect the debtor or
the liquidation of the estate’s assets. Furthermore, the
accounting firm’s alleged malpractice in Southmark
implicated the integrity of the entire bankruptcy
process. Southmark’s bankruptcy arose out of its
involvement in Drexel Burnham Lambert, Inc.’s ill-
fated junk bond investment. Southmark, 163 F.3d at
927-28. Southmark sought the appointment of an
accounting firm to provide an objective, independent
assessment of potential legal claims against third-
parties. Id. Unbeknownst to Southmark, Drexel was
one of the accounting firm’s largest clients. Id. at 927-
28. According to Southmark, the accounting firm
committed malpractice by failing to satisfactorily
investigate potential claims against Drexel. Id.
Southmark alleged the accounting firm’s breach of its
court-appointed fiduciary duty prevented the estate
from recovering from Drexel. Id. at 928. The
accounting firm’s failure to investigate Drexel
implicated the core of the bankruptcy process. Its
alleged malpractice was inseparable from the
bankruptcy context. Here, Price Waterhouse’s alleged
malpractice, erroneously reporting that certain accrued
interest belonged to one entity rather than to another
and committing other errors in auditing and tax advice,
even if true, is not a proceeding that could arise only in
the bankruptcy context.
Resorts, 372 F.3d at 163.
Nevertheless, in Resorts we went on to indicate that it was
unnecessary to resolve whether the case was a core or non-core
proceeding for subject matter jurisdictional purposes because
“[w]hether a particular proceeding is core represents a question
wholly separate from that of subject-matter jurisdiction.” Id. (quoting
In re Marcus Hook Dev. Park, Inc., 943 F.2d 261, 266 (3d Cir. 1991)).
It was not necessary to make a core versus non-core determination
because as long as a proceeding satisfied the jurisdictional
prerequisites to be considered a non-core “related to” proceeding, the
“broadest of the potential paths to bankruptcy jurisdiction,” it was an
29
extraneous exercise to decide whether the matter was core provided
that jurisdiction, and not the bankruptcy court’s adjudicative authority,
was the sole issue before the court. See id. In other words, a
determination of whether a matter is core or non-core is unnecessary
in an inquiry of whether there is federal jurisdiction over a bankruptcy
proceeding, as both categories of cases are within federal jurisdiction
and the determination only impacts on the question of whether a
bankruptcy court has the authority to enter final judgments and orders
under section 157.18 See id. It was implicit in our holding in Resorts
that a case is “related to” a bankruptcy case even if the bankruptcy
court could exercise core jurisdiction with respect to it. In this regard,
we point out that section 157(c)(1) provides that a “bankruptcy judge
may hear a proceeding that is not a core proceeding but that is
18
We cannot take the same path as we did in Resorts because
appellants challenge both federal jurisdiction under section 1334 and the
bankruptcy court’s authority to issue final orders under section 157, a
question the resolution of which requires a determination of whether the
proceeding was core or non-core. The only issue before us in Resorts
was subject matter jurisdiction under section 1334.
In this case, there are essentially two procedural paths that can be
transversed in resolving a dispute over jurisdiction and the adjudicative
powers of the bankruptcy court. We can engage in a two-step analysis
in which we first inquire whether there is federal jurisdiction over a
proceeding by asking whether the case is “related to” the bankruptcy,
which is the broadest category of cases over which there is federal
jurisdiction. Then, if we find that the case passes that test, we would
decide whether the case is a core matter, in which the bankruptcy court
could issue final orders, or a non-core matter, in which the bankruptcy
court could make only recommendations to the district court.
We, however, find this methodology inefficient in situations like
the one before us because a finding that the case “aris[es] in” the
bankruptcy would “kill two birds with one stone” inasmuch as such a
finding conclusively would establish both subject matter jurisdiction and
the bankruptcy court’s authority to enter final orders. In that situation,
there simply would be no reason to engage in the two-step inquiry we
have described. Of course, if we determined that the case does not
“aris[e] in” the bankruptcy proceedings, then, depending on which court
is exercising jurisdiction when the determination is made, the
appropriate court must determine if there is subject matter jurisdiction
under the broadest jurisdictional hook of “related to” jurisdiction.
30
otherwise related to a case under Title 11.” (Emphasis added.) It
seems clear from that language, in particular the inclusion of
“otherwise,” that Congress believed that a core case was “related to”
title 11 but that a case can be “related to” title 11 on a basis other than
being a core case. Moreover, Congress’s enumeration of core
proceedings in section 157(b)(2), in ordinary understanding, lists
matters that would be considered “related to” title 11 cases.
Third, we went on to discuss the limits of non-core “related
to” jurisdiction. We first discussed “the seminal test for determining
the boundaries of ‘related to’ jurisdiction in [Pacor, Inc. v. Higgins,
743 F.2d 984, 994 (3d Cir. 1984)],” in which we held that federal
courts have “related to” jurisdiction to hear a proceeding if “the
outcome of that proceeding could conceivably have any effect on the
estate being administered in bankruptcy.” Resorts, 372 F.3d at 164.
We, however, decided in Resorts that application of the Pacor test in
the “post-confirmation context” was “problematic” inasmuch as “it is
impossible for the bankrupt debtor’s estate to be affected by a post-
confirmation dispute because the debtor’s estate ceases to exist once
confirmation has occurred,” as generally “the confirmation of a plan
vests all of the property of the estate in the reorganized debtor.” Id. at
165 (internal quotation marks omitted).
In light of the circumstance that post-confirmation the debtor’s
estate will not exist, and in recognition of the need to confine
bankruptcy court jurisdiction to appropriate limits, we recognized a
new test to be applied in the “post-confirmation context” in which
“the essential inquiry” is “whether there is a close nexus to the
bankruptcy plan or proceeding sufficient to uphold bankruptcy court
jurisdiction over the matter.” Id. at 166-67. In other words, “[a]t the
post-confirmation stage, the claim must affect an integral aspect of the
bankruptcy process–there must be a close nexus to the bankruptcy
plan or proceeding.” Id. at 167. For instance, we held that “[m]atters
that affect the interpretation, implementation, consummation,
execution, or administration of the confirmed plan will typically have
the requisite close nexus.” Id.
Applied to the facts of Resorts–where the trustee’s principal
allegation was that Price Waterhouse erroneously reported in its audit
reports that accrued interest on the litigation trust belonged to the
debtor rather than the trust–we held that the “proceeding lacks a close
nexus to the bankruptcy plan or proceeding and affects only matters
collateral to the bankruptcy process.” Id. at 169. We explained our
31
decision as follows:
The resolution of [the] malpractice claims will not
affect the estate; it will have only incidental effect on
the reorganized debtor; it will not interfere with the
implementation of the Reorganization Plan; though it
will affect the former creditors as Litigation Trust
beneficiaries, they no longer have a close nexus to
bankruptcy plan or proceeding because they exchanged
their creditor status to attain rights to the litigation
claims; and as stated, the jurisdictional retention plans
cannot confer jurisdiction greater than that granted
under 28 U.S.C. § 1334 or 28 U.S.C. § 157.
Id. We acknowledged that “in certain circumstances, accounting
errors could have a sufficiently close nexus to the bankruptcy plan or
proceeding to warrant exercising ‘related to’ jurisdiction post-
confirmation,” but, under the facts of Resorts, resolution of the claims
will not require a court to interpret or construe the Reorganization
Plan or the Trust Agreement and “[t]hough the Plan and Trust
Agreement provide the context of the case, this bare factual nexus is
insufficient to confer bankruptcy jurisdiction.” Id. at 170.
C. The Decisions of the Bankruptcy and District Courts
The bankruptcy court in this case concluded that there was
federal jurisdiction because appellants’ claims “aris[e] in” the
bankruptcy case as the claims “implicate the integrity of the
bankruptcy process,” and, like the claims in Southmark, 163 F.3d 925,
“the claims of professional malpractice were based on services
provided during the bankruptcy, under the supervision of, and subject
to the approval of, the bankruptcy court.” Earned Capital, 331 B.R. at
218. The bankruptcy court determined that the “close nexus” test that
Resorts discussed did not govern this case because “Resorts is unlike
the situation here, where [appellants’] claims are claims against a
court appointed professional for work performed during the
bankruptcy case.” Id. Further, because the state-law claims are
claims “arising in” the bankruptcy case, the court determined “that
[appellants’] Complaint against [Ernst & Young] is a core
proceeding,” and thus, under 28 U.S.C. § 157(b)(1), the court had full
adjudicative power subject to appellate review by the district court.
Id. at 218-20.
32
On appeal under 28 U.S.C. § 158, the district court affirmed
the bankruptcy court’s opinion and order. Specifically, with respect to
jurisdiction, it held:
We agree that [appellants’] state court action arises in
bankruptcy and that it is a core matter. [Appellants’]
claims of professional negligence were based on
services provided during the bankruptcy, under the
supervision of, and subject to the approval of, the
bankruptcy court. As such, they implicate the integrity
of the bankruptcy process. The state court action
challenges the accountants’ conclusion that the Debtor
was insolvent, a conclusion endorsed by the
bankruptcy court in its confirmation order. For these
same reasons, the state court action has a ‘close nexus’
to the bankruptcy proceedings.
Geruschat, 346 B.R. at 125.
D. Analysis
Appellants challenge two aspects of the decisions of the
bankruptcy and district courts relating to subject matter jurisdiction
and the bankruptcy court’s final adjudicative authority. First, they
argue that the courts erred in finding that the “close nexus” test was
not applicable under their rationale that the improper conduct alleged
in the state-law claims occurred during the bankruptcy proceedings.19
Appellants believe that this conclusion was incorrect as they contend
“application of the ‘close nexus’ test does not depend on when the
malpractice itself occurs. To the contrary, the ‘close nexus’ test is
19
Actually, while the bankruptcy court indicated that the “close
nexus” test did not apply, the district court found that “the state court
action has a ‘close nexus’ to the bankruptcy proceedings.” Geruschat,
346 B.R. at 125. However, it was not necessary for the district court to
reach this conclusion inasmuch as it first held that appellants’ “state
court action arises in bankruptcy and . . . is a core matter,” and, as we
discuss, the “close nexus” test applies only when analyzing the case in
the non-core “related to” context. In any event, even appellants treat the
district court’s decision as if the court erred in not applying the “close
nexus” test. See Appellants’ br. at 26 (“It was inappropriate for the
district court not to address the ‘close nexus’ standard that this Circuit
set forth in Resorts Int’l.”).
33
applicable whenever a state lawsuit is removed to federal court on the
basis of a bankruptcy case that is already closed by that point.”
Appellants’ br. at 26. Second, appellants contend that the bankruptcy
and district courts were wrong in concluding that this state-law action
was a core proceeding under section 157(b), and thus appellants
believe the bankruptcy court did not have the authority to enter final
orders under section 157(c)(1). Id. at 28.20
After considering the parties’ arguments, we will affirm the
order of the district court and thus, in effect, the order of the
bankruptcy court as we conclude that the bankruptcy court had core
jurisdiction in this case. The bankruptcy and district courts were not
required to address the “close nexus” test because the test was not
applicable in this “arising in” proceeding. As we discussed in
Resorts, the “close nexus” standard only applies for the purposes of
determining whether a federal court has jurisdiction over a non-core
“related to” proceeding in the post-confirmation context.21 See
Resorts, 372 F.3d at 164-67. Appellants seem to believe that any time
a party files a case post-confirmation, the “close nexus” test is
triggered. This is plainly not the case. While courts may choose to
rely on “related to” jurisdiction because it is the broadest category of
federal bankruptcy jurisdiction when examining their own
jurisdiction, it certainly is not incumbent upon them to do so, because,
20
Ernst & Young contends that appellants “waived their right to
challenge that the litigation is a core matter,” appellees’ br. at 17,
because appellants did not file a timely statement under Bankruptcy Rule
9027(e)(3). In view of our result we have no need to consider this
argument and do not do so.
21
We recently concluded in In re Shenango Group Inc., No. 05-
4805, F.3d , 2007 WL 2505585 (3d Cir. Sept. 6, 2007), that a post-
confirmation dispute over whether a reorganization plan obligated a
reorganized debtor to fund a pension plan was “related to” a bankruptcy
proceeding, and, thus, the district court properly affirmed the order of the
bankruptcy court in which it exercised its “related to” jurisdiction. In
that case, we found that the dispute did have a “close nexus” to the
bankruptcy under Resorts as its resolution required the court to interpret
the plan’s provision relating to the obligation of the debtor, who was a
party to the suit, to fund pension benefit increases. Id. at *3-4. Our
decision in Shenango Group does not affect this case as here the issue is
not whether the suit is “related to” the bankruptcy, but, instead, whether
it is “arising in” the bankruptcy.
34
as occurred here, a party may argue and a court may decide that a
proceeding falls within one of the narrower categories of jurisdiction,
such as “arising in” jurisdiction, in which case “related to” jurisdiction
and the corresponding “close nexus” test are not implicated.
We further find that the courts’ conclusion that there was
“arising in” jurisdiction was correct. “[C]laims that ‘arise in’ a
bankruptcy case are claims that by their nature, not their particular
factual circumstance, could only arise in the context of a bankruptcy
case.” Stoe, 436 F.3d at 218. In Resorts, in distinguishing the
circumstances of the case from those in Southmark, we explained in
what circumstances and on what legal basis a claim of professional
malpractice for work performed during the bankruptcy could support
“arising in” core jurisdiction. See Resorts, 372 F.3d at 163. Unlike
those in Resorts, the material facts of the case before us are
indistinguishable from those in Southmark.
First, in Resorts we distinguished the case from Southmark
because the state-law claims in Resorts “arose post-plan
confirmation.” See id. Here, however, appellants in their complaint
allege that their claims, like the claims in Southmark, arose pre-
confirmation inasmuch as the conduct on which they predicate the
claims occurred during the bankruptcy process. Specifically, their
complaint alleges that in reliance upon the negligent work Ernst &
Young performed during the bankruptcy, the bankruptcy court
wrongly deemed the Debtors to be insolvent and caused the
liquidation of the estate’s assets in a manner that contravened the
Amended Plan.
Second, in our case, just as was true in Southmark, Ernst &
Young’s “alleged malpractice . . . implicated the integrity of the entire
bankruptcy process” and the “alleged malpractice was inseparable
from the bankruptcy context.” Resorts, 372 F.3d at 163. The
bankruptcy court appointed Ernst & Young to review the Debtors’
financial records and prepare the financial schedules needed for the
bankruptcy. According to appellants’ allegations in their complaint,
as a result of the work that Ernst & Young performed during the
bankruptcy proceedings and its representations to the bankruptcy
court, the bankruptcy court deemed the Debtors to be insolvent. This
conclusion led to the formation of Seven Fields, a corporation
organized, according to the Amended Plan, to “achieve the goal of full
payment” of the unsecured, nondischargeable debt due appellants.
Certainly this aspect of the plan, based at least in part on Ernst &
35
Young’s representations that the Debtors were insolvent, was a
significant factor in bringing about the court’s confirmation of the
plan. Yet, thereafter, according to the complaint, Ernst & Young
represented that Seven Fields had a large debt, which, according to the
complaint is not the case, and Seven Fields was compelled to sell its
properties in a manner that was not in appellants’ best economic
interests, contrary to the court-approved Amended Plan’s provisions.
Moreover, the bankruptcy court approved the stipulation between
Seven Fields and Ernst & Young providing for the fees paid to Ernst
& Young for its accounting work during the bankruptcy proceedings.22
Supp. App. at 55-57.
The Court of Appeals for the Fifth Circuit in Southmark
explained why this type of misconduct and relationship to the
bankruptcy court falls within the “arising in” jurisdiction of the
federal courts:
In this case, the professional malpractice claims alleged
against [the defendants] are inseparable from the
bankruptcy context. A sine qua non in restructuring
the debtor-creditor relationship is the court’s ability to
police the fiduciaries, whether trustees or debtors-in-
possession and other court-appointed professionals,
who are responsible for managing the debtor’s estate in
the best interest of creditors. The bankruptcy court
must be able to assure itself and the creditors who rely
on the process that court-approved managers of the
debtor’s estate are performing their work,
conscientiously and cost-effectively. Bankruptcy Code
provisions describe the basis for compensation,
appointment and removal of court-appointed
professionals, their conflict-of-interest standards, and
the duties they must perform. See generally 11 U.S.C.
§§ 321, 322, 324, 326-331. Although standards for the
conduct of court-appointed professionals, the breach of
which may constitute bankruptcy malpractice, are not
comprehensively expressed in the statute, the Code
22
On September 15, 1989, the bankruptcy court approved the
stipulation between Ernst & Young and Seven Fields and entered an
order stating that Ernst & Young was due $125,000 in fees in settlement
of its $210,000 claim. Earned Capital, 331 B.R. at 226-27; Supp. App.
at 55-57.
36
need not duplicate relevant, also-applicable state law.
It is evident that a court-appointed professional’s
dereliction of duty could transgress both explicit Code
responsibilities and applicable professional malpractice
standards. For instance, in Billing v. Ravin, Greenberg
& Zackin, P.A., 22 F.3d 1242 (3d Cir. 1994), the
professional malpractice allegations included the
attorneys’ failure to comply with court orders and to
submit a plan of reorganization to the bankruptcy
court. Award of the professionals’ fees and
enforcement of the appropriate standards of conduct
are inseparably related functions of bankruptcy courts.
Supervising the court-appointed professionals also
bears directly on the distribution of the debtor’s estate.
If the estate is not marshaled and liquidated or
reorganized expeditiously, there will be far less money
available to pay creditors’ claims. Excessive
professional fees or fees charged for mediocre or,
worse, phantom work also cause the estate and the
creditors to suffer . . . . A malpractice claim like the
present one [against court-appointed professionals]
inevitably involves the nature of the services
performed for the debtor’s estate and the fees awarded
under superintendence of the bankruptcy court; it
cannot stand alone.
Southmark, 163 F.3d at 931. Other courts of appeals, including this
court, have reached similar conclusions. See Grausz v. Englander,
321 F.3d 467, 471 (4th Cir. 2003) (finding that legal malpractice
claim against firm for alleged misconduct in bankruptcy case is a
claim “arising in” the bankruptcy case); In re Ferrante, 51 F.3d 1473,
1476 (9th Cir. 1995) (holding that action against trustee for
misconduct in administering estate was a core proceeding concerning
the administration of the bankruptcy estate); see also Billing, 22 F.3d
at 1245, 1252-53 (while not directly addressing whether a legal
malpractice suit against bankruptcy counsel constitutes a core
proceeding as parties agreed that it does,23 we recognized that the
23
Of course, the parties’ consent cannot establish the bankruptcy
court’s jurisdiction, and if we disagreed with the parties and believed
that the court did not have jurisdiction, or even that the jurisdiction that
it did have was “related to” but not core jurisdiction, we would say so
37
“malpractice suit mirrors [debtors’] objections to the allowance of
attorneys’ fees,” the resolution of which are within the bankruptcy
court’s “explicit jurisdiction to award fees for bankruptcy counsel and
other supervisory powers as to bankruptcy counsel”).
As Ernst & Young points out,
[n]othing is more important than the integrity of the
bankruptcy process . . . . [T]he integrity of the process
goes to the heart of the administration of a bankruptcy
case. Furthermore, few issues are as important in the
bankruptcy process as the bankruptcy court’s
conclusion as to the solvency of a debtor. The
solvency analysis is the cornerstone of the distribution
plan. Here, both the integrity of the bankruptcy
process and the solvency of the Debtors have been
drawn into question.
Appellees’ br. at 23 (citations omitted). In this regard, we have no
doubt that the bankruptcy and district courts correctly found that
appellants asserted their alleged malpractice claims in a core
proceeding that “aris[es] in” the bankruptcy case.
In addition to the reasoning of Southmark, we also note that
section 157 specifically provides that core proceedings include
“matters concerning the administration of the estate” and “other
proceedings affecting the liquidation of the assets of the estate.” 28
U.S.C. § 157(b)(2)(A) and (O). Such matters are at issue here.
Appellants allege that Ernst & Young’s negligence and
misrepresentations caused the sale of Seven Fields’s assets in a
manner that was not in their best economic interests, contrary to the
Amended Plan’s provisions requiring that Seven Fields would be
“managed, improved, developed and sold, etc. where appropriate, to
the end that all creditors will eventually achieve maximum returns.”
App. at 22. In sum, it is clear to us that a malpractice action against
an accountant for misconduct during the bankruptcy on which the
bankruptcy judge relied in confirming the plan of reorganization, and
in reliance on which the bankruptcy court approved the fees to the
accountants, and on which appellants’ representatives relied to their
detriment in selling the assets to pay their claims, in a manner that
even in the absence of a party raising the jurisdictional issue on the
appeal.
38
contravenes the terms of the reorganization plan, constitutes a core
proceeding, more specifically a proceeding “arising in” the
bankruptcy, which is subject to federal jurisdiction and the final
adjudicative authority of the bankruptcy court.24
Because we have concluded that the bankruptcy and district
courts correctly found “arising in” core jurisdiction so that the “close
nexus” test did not apply, we need not resolve the issue appellants
raise relating to the applicability of the “close nexus” test in the
“related to” post-confirmation context. We, however, will take this
opportunity to address the division among courts in this circuit with
respect to this issue that has developed in the wake of Resorts.
Appellants raise the question of whether in cases in which the
bankruptcy and district courts can be exercising only “related to”
jurisdiction, the Resorts “close nexus” test applies whenever the
complaint is filed post-confirmation or must the conduct also occur
post-confirmation to trigger the test? In other words, in analyzing a
court’s “related-to” jurisdiction, is pre-confirmation conduct alleged
in a complaint that is filed post-confirmation evaluated under the
Pacor test or the Resorts “close nexus” test?
Appellants believe that “application of the ‘close nexus’ test
does not depend on when the malpractice itself occurs.” Rather, in
their view, the crucial inquiry is whether the bankruptcy case is closed
at the time the claim is removed to it. Appellants’ br. at 26.
Accordingly, appellants contend that the test applies whenever there is
a post-confirmation action filed, presumably even an original
proceeding as distinguished from a removed case which is the
situation here. Ernst & Young, on the other hand, argues that the
“close nexus” test under Resorts applies only when “the alleged
wrongdoing took place post-confirmation.” Appellees’ br. at 15.
Bankruptcy and district courts within this circuit have rendered
inconsistent opinions on this point since Resorts. Compare In re
EXDS, Inc., 352 B.R. 731, 735 (Bankr. D. Del. 2006), and In re LGI,
Inc., 322 B.R. 95, 102-03 (Bankr. D.N.J. 2005), in which the courts
24
Appellants also argue that the claims are not core proceedings
because they are “not based on any right created by the federal
bankruptcy law,” but, instead, are “based exclusively on rights existing
under state law.” Appellants’ br. at 30. This distinction, however, is not
determinative as section 157 provides that “[a] determination that a
proceeding is not a core proceeding shall not be made solely on the basis
that its resolution may be affected by State law.” 28 U.S.C. § 157(b)(3).
39
stated the test in terms of when the cause of action arose or the
conduct occurred, with Jazz Photo Corp. v. Dreier LLP, No. Civ. A.
05-5198DRD, 2005 WL 3542468, at *5-6 (D.N.J. Dec 23, 2005), and
In re LaRoche Indus., Inc., 312 B.R. 249, 257 (Bankr. D. Del. 2004),
in which the courts stated the test in terms of when the cause of action
was filed. This division in results makes it important for us to address
the issue.
We start this point with a further discussion of Pacor, 743 F.2d
984, the case that set forth the test used to determine whether a
proceeding is “related to” a bankruptcy that was applied in all
circumstances until we established the limitations on the test in the
“post-confirmation context” in Resorts. In Pacor, John and Louise
Higgins brought a suit in a state court against Pacor, a chemical
supplies distributor, for injuries allegedly caused by exposure to
asbestos contained in Pacor’s products. Id. at 986. Pacor filed a
third-party complaint in the state court against the asbestos
manufacturer, Johns-Manville. Id. Johns-Manville subsequently filed
Chapter 11 bankruptcy proceedings in the Southern District of New
York. Id. Pacor then sought to remove the state court case to the
bankruptcy court in the Eastern District of Pennsylvania. The Eastern
District bankruptcy court remanded the entire state-court case to the
state court. On Pacor’s appeal, the district court affirmed with respect
to the Higgins’s case against Pacor as it held that it was not “related
to” the Mansville bankruptcy.25 Pacor then appealed to us. Id. In
affirming the district court’s order affirming the bankruptcy court, we
articulated what became the seminal test for determining whether a
civil proceeding is “related to” a bankruptcy:
The usual articulation of the test for determining
whether a civil proceeding is related to bankruptcy is
whether the outcome of that proceeding could
conceivably have any effect on the estate being
administered in bankruptcy . . . . An action is related
to bankruptcy if the outcome could alter the debtor’s
rights, liabilities, options, or freedom of action (either
positively or negatively) and which in any way impacts
upon the handling and administration of the bankrupt
estate.
25
The district court held that the third-party complaint was
“related to” the bankruptcy so it did not remand that aspect of the case
to the state court.
40
Id. at 994 (internal citations omitted).
Then came Resorts. We reiterate that Resorts involved a
claim for professional malpractice and breach of contract brought
against Price Waterhouse for accounting services performed for a
litigation trust formed after the bankruptcy court issued an order
confirming the Reorganization Plan. Resorts, 372 F.3d at 156-57.
Almost seven years after the bankruptcy court confirmed the plan, the
litigation trust brought suit against Price Waterhouse on account of its
post-confirmation services. Id. at 159. We held that the traditional
test in Pacor, a case involving claims brought pre-confirmation, was
“problematic” in the “post-confirmation context” inasmuch as “it is
impossible for the bankrupt debtor’s estate to be affected by a post-
confirmation dispute because the debtor’s estate ceases to exist once
confirmation has occurred.” Id. at 165. Thus, because confirmation
of a plan in which all property of the estate is vested in the
reorganized debtor eliminates the existence of the estate, there never
will be jurisdiction over a post-confirmation dispute under a literal
interpretation of the Pacor test. Id.
In an attempt to balance Congress’s intent to grant bankruptcy
courts “comprehensive jurisdiction so that they could deal efficiently
and expeditiously with matters connected with the bankruptcy estate”
with the jurisdictional limitations on non-Article III bankruptcy
courts, id. at 163-64 (internal quotation marks omitted), we developed
the test to be applied “[a]t the post-confirmation stage”:
As stated, the jurisdiction of the non-Article III
bankruptcy courts is limited after confirmation of a
plan. But where there is a close nexus to the
bankruptcy plan or proceeding, as when a matter
affects the interpretation, implementation,
consummation, execution, or administration of a
confirmed plan or incorporated litigation trust
agreement, retention of post-confirmation bankruptcy
court jurisdiction is normally appropriate.
Id. at 168-69.
After our present consideration of Resorts, we are satisfied
that the “close nexus” test is applicable to “related to” jurisdiction
over any claim or cause of action filed post-confirmation, regardless
of when the conduct giving rise to the claim or cause of action
41
occurred. We reach this conclusion because in Resorts, though we
were dealing with post-confirmation rather than pre-confirmation
conduct, we focused on the point of time in which the cause of action
was instituted: whether it was filed in the “post-confirmation stage,”
i.e., the “post-confirmation context.” Furthermore, we did not
indicate that the test should be confined to situations in which the
conduct giving rise to the complaint occurred post-confirmation.
Moreover, since Resorts, we have stated that we use the test to
determine whether “‘related to’ jurisdiction . . . exist[s] at the post-
confirmation stage,” Stoe, 436 F.3d at 216 n.3 (emphasis added).
Most recently in In re Shenango Group Inc., No. 05-4805, F.3d ,
2007 WL 2505585, at *3-4 (3d Cir. Sept. 6, 2007), we applied the
Resorts “close nexus” test in a “related to” jurisdictional inquiry over
a “post-confirmation dispute.” Additionally, we note that the Court of
Appeals for the Ninth Circuit, which adopted the “close nexus” test
that we described in Resorts, has stated that the test applies when “the
proceeding arises post-confirmation” and applied the “close nexus”
test with respect to claims raised post-confirmation involving pre-
confirmation conduct. See In re Pegasus Gold Corp., 394 F.3d 1189,
1193-94 (9th Cir. 2005).
Importantly, limiting the “close nexus” test to cases involving
only post-confirmation conduct would be inconsistent with our
reasoning to depart from Pacor in Resorts. In Resorts, we indicated
that our central reason to depart from the Pacor test in the post-
confirmation context was that there no longer is an estate that can be
affected so application of the Pacor test was “problematic.” See
Resorts, 372 F.3d at 164-65. The time when the conduct raised in the
post-confirmation complaint occurred is of no consequence in this
analysis as regardless of whether the conduct was post-confirmation
or pre-confirmation, there would not be an estate at the post-
confirmation stage. For these reasons, we conclude that with respect
to “related to” jurisdiction, the Pacor test applies in all disputes raised
pre-confirmation and the “close nexus” test applies in all disputes
raised post-confirmation, regardless of when the conduct alleged in
the complaint occurred.26
26
We emphasize that this distinction and application of the
respective tests applies only when the parties seek to establish
jurisdiction on the grounds that the cause of action is “related to” the
bankruptcy, the broadest jurisdictional hook. We decided in Resorts that
in such situations the court must impose limits in the post-confirmation
context. In contrast, cases that “aris[e] in” the bankruptcy case must
42
V. CONCLUSION
For the foregoing reasons, we will affirm the district court’s
memorandum order of July 14, 2006, affirming the bankruptcy court’s
order of September 2, 2005, dismissing appellants’ complaint.
satisfy a stringent standard in which the matter must have an intimate
connection to the bankruptcy proceedings, and thus the stage at which
the complaint is filed is not determinative.
43