Federal Court Digests: June 4, 2007

Daily Record, The (Baltimore), Jun 4, 2007

COUNSEL: Steven Bret Ramsdell, Tyler, Bartl, Gorman & Ramsdell, P.L.C., Alexandria, Va., for Appellant. Benjamin C. Ackerly, Sr., Hunton & Williams, Richmond, Va., for Appellee.

FACTS: This is an appeal by Chapter 11 debtor, Valley Historic Limited Partnership (Debtor), from the district court's determination that the bankruptcy court lacked jurisdiction over the Debtor's post- confirmation adversary proceeding against the Bank of New York (Bank), for breach of contract and for tortious interference. The 4th Circuit affirmed in part, vacated in part and remanded.

LAW: The bankruptcy court derives its jurisdiction from the district court. See 28 U.S.C. Section 157(a), (b)(1). District courts have "original and exclusive jurisdiction of all cases under title 11," and "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. Section 1334(a), (b).

The Debtor maintained that the bankruptcy court had both "arising in" and "related to" jurisdiction over its post-confirmation adversary proceeding against the Bank as well as jurisdiction to adjudicate its claims under 28 U.S.C. Section 1334(e), which gives the district court in a case under Title 11 exclusive jurisdiction over a debtor's property "as of the commencement" of the case and "of property of the estate." The 4th Circuit concluded, however, as did the district court, that the bankruptcy court did not have post- confirmation jurisdiction to adjudicate the Debtor's claims.

A proceeding or claim "arising in" Title 11 is one that is "not based on any right expressly created by Title 11, but nevertheless, would have no existence outside of the bankruptcy." Grausz v. Englander, 321 F.3d 467, 471 (4th Cir. 2003). Therefore, a "controversy arises in Title 11 when it would have no practical existence but for the bankruptcy." Id.

A claim, like the Debtor's breach of contract claim, that pre- dates the filing of the Chapter 11 case, cannot be said to have arisen within that case and whether it caused the bankruptcy is immaterial. Here, the Debtor's claims bore only a coincidental relationship to the Debtor's bankruptcy case. Because the Debtor's breach of contract claim and tortious interference claim would have existed outside of the bankruptcy, they were not within the bankruptcy court's "arising in" jurisdiction.

The Debtor also asserted that the bankruptcy court had subject matter jurisdiction because his claims were "related to" a case under Title 11. The 4th Circuit, like the majority of the other circuits, has adopted the test articulated by the 3rd Circuit in Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984), for determining "related to" jurisdiction. See A. H. Robins Co. v. Piccinin, 788 F.2d 994, 1002 n.11 (4th Cir.1986). 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." Owens-Ill., Inc. v. Rapid Am. Corp. (In re Celotex Corp.), 124 F.3d 619, 625 (4th Cir. 1997).