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providers based on the debtor's misconduct51 or based on the insurance providers' own, independent misconduct. To the extent that the claimants asserted claims based on the insurance providers' misconduct (and to the extent that applicable state law imposed duties on the insurance providers), the Second Circuit concluded that the bankruptcy court lacked subject matter jurisdiction to dispose of those claims. To enjoin those claims, concluded the Second Circuit, amounted to non-debtor releases in violation of section 524(g)(4)(A)(ii).
* Geruschat v. Ernst Young LLP (In re Seven Fields Dev. Corp.), 505 F.3d 237 (3d Cir. Oct. 2007) (Greenberg, J.)
Do not waste time unnecessarily distinguishing between core and non-core proceedings or discovering the "close nexus." Just a short time after issuing the Shenango opinion, the Third Circuit returned to teach us more about bankruptcy jurisdiction in the post-confirmation context. In this case, the Third Circuit explained that the traditional two-pronged approach52 is not always the most efficient test and can cause a great deal of confusion. Instead, the court of appeals explained that this two-step analysis can be short-circuited if the bankruptcy court finds there to be subject matter jurisdiction based on the "arising in" or "arising under" umbrellas. The court of appeals said it quite succinctly: "[A] finding that the case 'aris[es] in' the bankruptcy would 'kill two birds with one stone' inasmuch as such a finding conclusively would establish both subject matter jurisdiction and the bankruptcy court's authority to enter final orders." In this case, the court affirmed the bankruptcy court's conclusion that this particular malpractice action was a core proceeding and, more specifically, a proceeding "arising in" the bankruptcy because: (1) the accounting firm was retained by the estate and policed by the bankruptcy court; (2) the alleged misconduct occurred during the bankruptcy; (3) the bankruptcy judge relied upon the accounting firm's representations in confirming the plan and approving the firm's fees; and (4) representatives of the reorganized debtor relied upon the accounting firm to their detriment in selling off assets to pay the debtor's claims. The court, therefore, affirmed the bankruptcy court's conclusion that the matter was core and should be dismissed on the merits.53
The court then went on to explain that the "close nexus" test of Resort International should not apply where subject matter jurisdiction exists under one of the two narrower umbrellas of "arising under" or "arising in." Instead, the test should be applied only when jurisdiction exists under the broadest hook of "related to." The court further explained in dicta that the "close nexus" test applies to disputes which are filed post-confirmation, regardless of
51 The court of appeals noted that the bankruptcy court's clarifying order stood on sound jurisdictional ground to the extent the it approved the settlement of claims based on the debtor's misconduct.
52 (1) Does federal subject matter jurisdiction exist (arising under, arising in, or related to); and (2) does the bankruptcy court have authority to issue final orders (core versus non-core)?
53 The Third Circuit did not review the merits beyond whether the matter was a core proceeding because the appellants did not raise the issue on appeal. The bankruptcy court dismissed the action on the merits because the representatives of the reorganized debtor failed to follow proper procedures for bringing a derivative action, and the court further found the action to be barred by res judicata, collateral estoppel, and judicial estoppel.
