Third Circuit makes a fine distinction regarding bankruptcy courts as ‘courts of the U.S.’

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Case Type:
Case Status:
No. 18-1177 (3rd Circuit, Nov 28,2018) Published
The Third Circuit Court of Appeals affirmed the orders of the Bankruptcy Court and District Court, finding, in part, that the Bankruptcy Court lacked jurisdiction to transfer the trustee’s adversary proceeding under 28 U.S.C. § 1631.
Procedural context:
The debtor, IMMC Corporation (“Debtor”), filed for Chapter 11 bankruptcy in 2008. Thereafter, the Chapter 11 liquidating trustee, Robert F. Troisio (“Trustee”), commenced an adversary proceeding against the Debtor’s former officers and directors regarding their alleged breach of fiduciary duties. The Bankruptcy Court held that it lacked jurisdiction to hear the claims asserted in the Trustee’s adversary proceeding. Later, in a separate hearing, the Bankruptcy Court considered, and ultimately denied the Trustee’s request to transfer the adversary proceeding to the District Court under 28 U.S.C. § 1631. The Trustee filed a motion to withdraw the reference in District Court, and the District Court denied the motion. Thereafter, the Trustee renewed his motion to transfer the adversary proceeding in the Bankruptcy Court, and the Bankruptcy Court denied the renewed motion. The Trustee later appealed both of the Bankruptcy Court’s orders on his transfer and renewed motions, and the District Court affirmed both orders. The Trustee appealed the District Court’s decision, and the Third Circuit ultimately affirmed.
On appeal, the Trustee argued that the Bankruptcy Court erred when it found that it lacked authority to transfer his adversary proceeding under § 1631 because: (i) bankruptcy courts fall under 28 U.S.C. § 610’s definition of “courts”, and (ii) the legislative history of § 1631 and § 610 evinced Congressional intent to authorize bankruptcy courts to transfer proceedings under § 1631. In support, the Trustee, in part, relied on the Third Circuit’s prior decision in In re Schaefer Salt, 542 F.3d 90 (3d Cir. 2008), wherein the Third Circuit previously reasoned that bankruptcy courts are “units” of district courts. The Third Circuit, revisiting its decision in Schaefer Salt, held, among other things, that while bankruptcy courts may be “units” of district courts, § 610 does not expressly list bankruptcy courts or “units” of district courts. The Third Circuit further held that: (1) the instant case was distinguishable from Schaefer Salt because there was “no question” that the bankruptcy court in Schaefer Salt had jurisdiction over the debtor’s bankruptcy petitions under 28 U.S.C. § 157; (2) the Bankruptcy Court lacked jurisdiction in the instant case as the adversary proceeding was neither a “core” nor “related to” proceeding; (3) if the Bankruptcy Court had exercised jurisdiction to transfer the adversary proceeding to the District Court under § 1631, such an act would have been ultra vires, “regardless of whether bankruptcy courts fall under § 610’s definition of ‘courts’”; and, (4) transferring under § 1631 “simply cannot cure this lack of constitutional jurisdiction” in the instant case given that § 1631 is only intended to permit transfers to remedy a lack of statutory jurisdiction.
Shwartz, Roth, and Rendell, Circuit Judges

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