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Practice Pointers: Bankruptcy Court Lacks Authority to Transfer Pursuant to 28 U.S.C. § 1631 and A Post-Petition Action Satisfies “Is Commenced” Element for Purposes of Mandatory Abstention

Troisio v. Erickson (In re IMMC Corp.), No. 15-1043 (GMS), 2018 WL 259941 (D. Del. Jan. 2, 2018), aff’d by No. 18-1177, 2018 WL 6259315 (3d Cir. Nov. 28, 2018)

In this Opinion from the Delaware District Court, Judge Sleet affirmed the Bankruptcy Court’s decision denying a liquidating trustee’s motion pursuant to 28 U.S.C. § 1631 to transfer an adversary proceeding to the United States District Court for the Eastern District of Pennsylvania. Relying on plain statutory language, the District Court found that the Bankruptcy Court lacked transfer authority under 28 U.S.C. § 1631 – which limits transfer power to only the courts listed in section 610 – because a bankruptcy court is not a “court” as defined by section 610.  Section 610 does not specifically list a bankruptcy court as a “court”, but it does include the “district courts to the United States.”  According to Appellant, because bankruptcy judges are a unit of the district court, bankruptcy courts should be deemed one of the “courts” in section 610.  The court rejected this argument, noting the difference between Article I bankruptcy courts and Article III district courts.  Moreover, the Court determined that the legislative history evidenced a Congressional intent to exclude bankruptcy courts from the definition of “courts” in section 610.

[Update – On November 28, 2018, the Court of Appeals for the Third Circuit affirmed the order of the Delaware District Court but did so on different grounds.  According to the Third Circuit, the Bankruptcy Court’s finding that it lacked the constitutional jurisdiction to hear the adversary proceeding, which gave rise to the liquidating trustee’s motion to transfer under section 1631, prevented it from transferring the proceeding.  While a transfer under section 1631 is designed to remedy lack of jurisdiction, the Third Circuit determined that it can only remedy the lack of statutory jurisdiction.  Because “bankruptcy courts may exercise only the [constitutional] authority delegated to them by statute and referred to them by the standing order of the district court[,]” the Bankruptcy Court’s transfer of the proceeding would have been ultra viresSee Troisio v. Erickson (In re IMMC Corp.), No. 18-1177, 2018 WL 6259315, at **1, 6 (3d Cir. Nov. 28, 2018)]

The Official Committee of Unsecured Creditors of General Wireless Operations Inc. dba RadioShack et al. v. Sprint Solutions, Inc. (In re General Wireless Operations Inc. dba RadioShack, et al.), No. 17-50871 (BLS), 2017 WL 6033562 (Bankr. D. Del. Dec. 1, 2017)

After General Wireless Inc. (dba RadioShack) filed for bankruptcy, the Official Committee of Unsecured Creditors filed a complaint against Sprint Solutions, Inc. (“Sprint”) in Delaware Superior Court on behalf of the estate alleging claims for breach of contract and misappropriation of trade secrets.  Sprint removed the action to the Delaware District Court, from which it was automatically referred to the Bankruptcy Court.  The Committee then moved the Bankruptcy Court to mandatorily abstain.

While the mandatory abstention factors are well-settled, the parties disputed whether the post-petition Superior Court action satisfied the fourth factor – namely, whether an action “is commenced” in a state forum of appropriate jurisdiction.  Judge Shannon previously answered this question in the negative in In re Longview Power, LLC, 516 B.R. 282 (Bankr. D. Del. 2014), relying on “a substantial body of non-binding precedent holding that only a pre-petition suit met the ‘is commenced’ prong.”  Op. at *4.  Here, however, Judge Shannon acknowledges that His Honor’s decision in “Longview must . . . yield to Stoe [v. Flaherty, 436 F.3d 209 (3d Cir. 2006)],” where the Third Circuit “ruled that a suit that was filed post-petition and then removed to federal court satisfied the ‘is commenced’ prong.”  Id.  Finding that the two cases are “neither distinguishable nor reconcilable,” the Bankruptcy Court granted the Committee’s motion for mandatory abstention and remanded the action to the Delaware Superior Court.  Id.