No Bankruptcy Court Jurisdiction to Hear Dispute From Sale

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By Daniel Gill

A bankruptcy court lacked jurisdiction to hear a complaint from an asset sale contract, despite its order approving the transaction and that the plan of reorganization purported to retain jurisdiction to hear such disputes, the First Circuit held ( Gupta v. Quincy Med. Ctr., Inc. , 2017 BL 186361, 1st Cir., No. 15-1183, 6/2/17 ).

The opinion by Judge Kermit V. Lipez makes clear that a mere “retention of jurisdiction” provision in an order is ineffective if the court doesn’t have jurisdiction conferred directly by an applicable law.

The day before Quincy Medical Center Inc. and several related companies filed a Chapter 11 case on July 1, 2011, the companies signed an Asset Purchase Agreement to sell substantially all of their assets to Steward Family Hospital Inc. The companies filed bankruptcy to have the sale agreement approved by the court as part of its reorganization.

The asset purchase agreement provided for the continued employment of the debtors’ former employees. It also said if they were terminated, Steward will be liable for severance or retention payments or other payments due.

The bankruptcy court approved the sale on Sept. 26, 2011, and the sale closed on Oct. 1.

Six days later, Apurv Gupta and Victor Munger were notified that their employment was being terminated by Steward. Gupta and Munger filed motions in the bankruptcy court seeking an order requiring Steward to pay severance claims. The court granted the motions.

`Retention of Jurisdiction’ Not Enough

On appeal, the district court and then the First Circuit found that the bankruptcy court lacked jurisdiction to make that call, even though both the order approving the sale and the order confirming the debtors’ plan of reorganization provided that the bankruptcy court would retain jurisdiction to hear disputes on the sale or the plan.

Although it’s typical for such orders to have a “retention of jurisdiction” clause, “the routine inclusion of retention-of jurisdiction provisions ... may be given effect only if there is jurisdiction” under applicable statutes, the court said.

The court examined whether such independent jurisdiction applied here and found that it did not. The claims arose under a state law interpretation of the sale contract and had no effect on the administration of the bankruptcy case, the court said. The claims did not arise in, arise under, or relate to the bankruptcy proceeding, it said.

Chief Judge Jeffrey R. Howard and retired U.S. Supreme Court Associate Justice David H. Souter (sitting by designation) joined in the opinion by the U.S. Court of Appeals for the First Circuit.

Leah L. Miraldi, Providence, R.I., represented Gupta and Munger. Steward was represented by Jonathan W. Young, Boston.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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