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Bankruptcy Court Rejects Challenge to Subject Matter Jurisdiction Based on Stern v. Marshall, In re Resorts Int’l, Inc. and Jury Trial Demand

On February 7, 2012, Judge Peter J. Walsh of the United States Bankruptcy Court for the District of Delaware (the “Court”) issued an opinion denying a motion to dismiss for lack of subject matter jurisdiction filed in an adversary proceeding captioned The Liquidating Trustee of the MPC Liquidating Trust v. Granite Financial Solutions, Inc., d/b/a Granite Data Solutions, Adv. Pro. No. 10-54299.

Defendant asserted three arguments in support of its argument that the Bankruptcy Court lacked subject matter jurisdiction. First, Defendant, relying heavily on the Supreme Court’s recent decision in Stern v. Marshal, 131 S.Ct. 2594 (2011), argued that the Court’s “entry of judgment would be an unconditional exercise of ‘judicial power’” because the plaintiff’s claims were state law claims that existed outside the context of bankruptcy. Second, Defendant argued that the bankruptcy court did not have “related to” jurisdiction over this post-confirmation action under the standard established in the Third Circuit’s opinion in In re Resorts Int’l, Inc., 372 F.3d 154 (3d Cir. 2004). Last but not least, Defendant asserted that its jury trial demand divested the Court of its jurisdiction over the adversary proceeding. In sum, the Court rejected all three arguments and denied the motion to dismiss.

Rejecting the Defendant’s first argument, the Court held that Defendant’s reliance on Stern was misplaced. The Supreme Court’s holding in Stern v. Marshall was a narrow one that only addressed whether a bankruptcy court had the statutory authority to issue a final judgment on a state law related counterclaim and whether conferring that authority on the bankruptcy court was constitutional. The issue addressed in Stern was entirely different from the question of whether a bankruptcy judge has jurisdiction to hear a matter without entering a final judgment. Because the Defendant was challenging the Court’s ability to hear the matter, not whether it could enter final judgment, the holding in Stern was inapplicable.

The Court next addressed the Defendant’s argument that, under the Third Circuit’s decision in Inre Resort Int’l, the Court did not have jurisdiction over a post-confirmation dispute. In Resorts, the Third Circuit held that the adversary action in question “lack[ed] a close nexus to the bankruptcy plan or proceeding and affect[ed] only matters collateral to the bankruptcy process.” Comparing Resorts to the instant matter, the Court noted a key factual distinction between the two adversary proceedings. In Resorts, the action was commenced after confirmation of the plan as opposed to this adversary proceeding where the action was initially filed by the Debtors prior to confirmation. Finding this difference in timing significant, the Court rejected the Defendant’s application of the Resorts “close nexus” test and instead applied the “conceivable effect” test set forth in Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1984) (overruled on other grounds). The Court held that this adversary proceeding met the Pacor test because the prosecution of this (and other) adversary proceedings was clearly contemplated in the Plan, Trust Agreement and Confirmation Order. Additionally, the Court noted that even if the more stringent Resorts “close nexus” test did apply, the Court would have jurisdiction because unlike the malpractice action in Resorts, this action was intended to be a means of implementation of the Plan.

The Defendant’s jury trial argument fared no better than its first two arguments. The Court held that Defendant’s entitlement to a jury trial had no bearing on the Court’s subject matter jurisdiction and was irrelevant at this stage of the proceeding and that the proper mechanism to raise the jury trial issue was through a motion to withdraw the reference. The Court also noted that even where a defendant is entitled to a jury trial, the District Court’s practice is to keep the proceeding with the Bankruptcy Court until it is ready for trial.

A copy of the bankruptcy court’s opinion is available here.