Bankruptcy – Jurisdiction – Severance pay

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Where two former senior executives of a bankrupt medical center filed against the purchaser of the debtor’s assets post-confirmation claims for severance payments, those claims should have been dismissed for lack of jurisdiction.

“[I]n order for Appellants’ severance claims to fall within 28 U.S.C. section1334’s statutory grant of jurisdiction, the claims must ‘arise under,’ ‘arise in,’ or ‘relate to’ a case under title 11. …

“The bankruptcy court never determined whether it had ‘arising under,’ ‘arising in,’ or ‘related to’ jurisdiction over Appellants’ claims. Instead, the court concluded that it had jurisdiction solely on the basis of the retention of jurisdiction provisions in the Sale Order and the Plan. This approach was erroneous.

“Bankruptcy courts — like all federal courts — may retain jurisdiction to interpret and enforce their prior orders. … However, a bankruptcy court may not ‘retain’ jurisdiction it never had — i.e., over matters that do not fall within section1334’s statutory grant. …

“Appellants insist, however, that their claims against Steward [Family Hospital, Inc.] ‘arise in’ a bankruptcy case because the [Asset Purchase Agreement (APA)] was approved by the bankruptcy court in the Sale Order pursuant to 11 U.S.C. sectionsection363 and 365, and, invoking language from one of our prior cases, such an order may ‘only be issued by a bankruptcy court.’ … Thus, Appellants contend, their state law claims ‘arise in’ Debtors’ bankruptcy case because, ‘but for’ Debtors’ Chapter 11 case and the Sale Order approving the sale of Debtors’ assets to Steward in the APA, their claims for severance pay would not exist.

“This argument misapprehends the relevant law. … [T]here is no ‘but for’ test for ‘arising in’ jurisdiction as Appellants suggest. That is, ‘the fact that a matter would not have arisen had there not been a bankruptcy case does not ipso facto mean that the proceeding qualifies as an ‘arising in’ proceeding.’ … Instead, the fundamental question is whether the proceeding by its nature, not its particular factual circumstance, could arise only in the context of a bankruptcy case. … In other words, it is not enough that Appellants’ claims arose in the context of a bankruptcy case or even that those claims exist only because Debtors (Appellants’ former employer) declared bankruptcy; rather, ‘arising in’ jurisdiction exists only if Appellants’ claims are the type of claims that can only exist in a bankruptcy case.

“… [T]he bankruptcy court’s mere approval of Debtors’ sale of assets to Steward did not automatically create jurisdiction over all future contract disputes somehow related to the APA. … Appellants here have failed to identify any provision of the Sale Order itself or any related questions of bankruptcy law underlying their claims that would require interpretation by the bankruptcy court. Indeed, the bankruptcy court’s own analysis of Appellants’ claims was based entirely on the terms of the APA and state contract law. The court mentioned the Sale Order only in reference to the retention-of-jurisdiction provision.

“Therefore, a court deciding Appellants’ claims on the merits would only need to perform a state law breach of contract analysis. As the district court explained, Appellants’ claims ‘look like ones that could have arisen entirely outside the bankruptcy context. They are essentially employment disputes that could arise in any asset sale, regardless of whether the sale involved a bankruptcy proceeding.’ Appellants’ claims are therefore not merely ‘framed as state law claims,’ but are claims which may be decided solely under Massachusetts law. …

“In short, Appellants’ claims do not fit into the narrow category of matters that ‘have no existence outside of the bankruptcy,’ … or that ‘could only arise in the context of a bankruptcy.’ … Hence, the bankruptcy court did not possess ‘arising in’ jurisdiction over Appellants’ claims.”

Gupta, et al. v. Quincy Medical Center (Lawyers Weekly No. 01-140-17) (18 pages) (Lipez, J.) Appealed from a decision by Zobel, J., in the U.S. District Court for the District of Massachusetts. Leah L. Miraldi, with whom Bruce W. Gladstone, Cameron & Mittleman, Charles R. Bennett Jr. and Murphy & King were on brief, for the plaintiffs-appellants; Jonathan W. Young, with whom Scott R. Magee and Locke Lord were on brief, for the defendant-appellee (Docket No. 15-1183) (June 2, 2017).

Click here for the full-text opinion.