In Beskrone v. Int’l Educ. Corp., Adv. No. 17-50523 (CSS) (Bankr. D. Del. July 2, 2018), the Bankruptcy Court for the District of Delaware held that a chapter 7 trustee’s adversary proceeding to recover alleged prepetition accounts receivable fell under the Court’s “related to” jurisdiction. Pursuant to 28 U.S.C. §§ 1334 and 157(a), bankruptcy courts have jurisdiction over the following types of matters: cases under title 11 of the United States Code, i.e., the Bankruptcy Code; proceedings arising under title 11; proceedings arising in a case under title 11; and proceedings related to a case under title 11. In Beskrone, the Court assessed its jurisdiction under this last prong.
In this case, PennySaver USA Publishing, LLC and affiliated entities (the “Debtors”) filed voluntary petitions for relief under chapter 7 of title 11 of the United States Code and Don A. Beskrone was appointed to serve as the chapter 7 trustee of the Debtors’ bankruptcy estates (the “Trustee”). Before the close of the Debtors’ cases, the Trustee filed a single-count complaint against International Education Corporation (“IEC”), who had entered into a prepetition agreement with PennySaver for advertising services. Id. at 3. The Trustee sought to collect payments allegedly requested by PennySaver that IEC did not pay in full. Id. at 3-4. IEC moved to dismiss the Trustee’s complaint for lack of subject-matter jurisdiction. Although IEC made both facial and factual challenges to the Court’s jurisdiction over the Trustee’s claim, the Court held that it should hold IEC’s factual challenges for a later proceeding and evaluate only IEC’s “facial” challenge. Id. at 7. In a “facial” challenge to a court’s jurisdiction, a court accepts as true all factual allegations in the plaintiff’s complaint and only examines the pleadings to determine if jurisdiction exists.
In Beskrone, the Court held that it did have subject-matter jurisdiction. Principally, the Court reasoned that in assessing whether it had “related to” jurisdiction over the Trustee’s claim, the test articulated by the Third Circuit in Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1985) still provided useful guidance. In Pacor, the Third Circuit reasoned that a bankruptcy court had “related to” jurisdiction over a matter if the “outcome of [the] proceeding could conceivably have any effect on the estate being administered in bankruptcy.” 743 F.2d at 994. The Court noted that the Pacor test is satisfied if a proceeding “may impact . . . debtor’s rights, liabilities, options, or freedom of action or the handling and administration of the bankrupt estate.” Op. at 9-10. As applied to the Trustee’s claim against IEC, the Court held that the claim satisfied the Pacor test. The claim was an action held by the debtor pre-petition, and thus was property of the estate, and the Trustee’s recovery under his claim might increase funds available to the body of the Debtors’ creditors. Id. at 10.
IEC argued that if the only conceivable effect on the Debtors’ bankruptcy estates was a greater dividend for creditors, that finding jurisdiction over such an action would overly extend “related to” jurisdiction in chapter 7 liquidations. Id. at 11. In support thereof, IEC cited cases applying jurisdictional analyses in post-confirmation proceedings. The Court acknowledged that a proceeding’s effect on a bankruptcy case may be different in a reorganization versus a liquidation, and pre-confirmation versus post-confirmation, but ultimately dismissed IEC’s argument.
First, the Court noted that the notion that the nature of a bankruptcy filing could create different scopes of jurisdiction has been criticized, and that the nature of a chapter 7 liquidation “does not upend the logic of Pacor.” Id. at 13. The Court reasoned that the Trustee’s action to recover accounts receivable would directly benefit the Debtors’ estates, and that there was nothing noteworthy about the Trustee’s claim that implicated characteristics “unique to a chapter 7 liquidation.” Id. at 14. Second, the Court rejected IEC’s contention that the Trustee’s claim should be dismissed for lack of jurisdiction because the matter did not satisfy the test established by the Third Circuit in Binder v. Price Waterhouse & Co., LLP (In re Resorts Int’l, Inc.), 372 F.3d 154 (3d Cir. 2004) for determining jurisdiction over post-confirmation proceedings in chapter 11 cases. In Resorts Int’l, the Third Circuit reasoned that a bankruptcy court has “related to” jurisdiction over certain post-confirmation proceedings that “affect an integral aspect of the bankruptcy process – there must be a close nexus to the bankruptcy plan or proceeding.” Op. at 14-15 (citing Resorts Int’l). But, as the Court noted, post-confirmation proceedings diminish connections to the bankruptcy estate when the parties “have purposefully and by agreement removed a debtor from court oversight.” Id. at 15. In contrast, pre-closing chapter 7 liquidations, such as the Debtors, are “less attenuated to the estate.” Id. at 16. Lastly, the Court found IEC’s argument that there are similarities between chapter 7 and chapter 11 liquidations that make the application of the jurisdictional standard set forth in Resorts Int’l proper, to be unpersuasive.
Ultimately, the Court denied IEC’s motion to dismiss for lack of subject-matter jurisdiction and found that the Trustee’s proceeding to recover prepetition accounts receivable fell within the Court’s “related to” jurisdiction.