Tenth Circuit: Bankruptcy Court Did Not Relinquish Its Jurisdiction by Granting Relief from Automatic Stay | Jones Day

Ever since Congress amended the Bankruptcy Code in 1984 to remedy the U.S. Supreme Court’s 1982 ruling declaring the jurisdictional groundwork of title 11 unconstitutional, there have been lingering questions regarding the scope of a bankruptcy court’s jurisdiction to rule on the many matters and proceedings that must typically be resolved in a bankruptcy case. One of those questions—namely, whether the bankruptcy court retains jurisdiction over claims and assets with respect to which the court has granted relief from the Bankruptcy Code’s “automatic stay”—was addressed by the U.S. Court of Appeals for the Tenth Circuit in In Summit Inv. Mgmt. LLC v. Connolly (In re Fog Cap Retail Invs.), 2024 WL 659559 (10th Cir. Feb. 16, 2024). The Tenth Circuit affirmed lower court rulings concluding that a bankruptcy court does not relinquish its “related to” jurisdiction by granting a motion for relief from the automatic stay to permit the continuation of state court litigation against a debtor over environmental remediation liabilities.

Bankruptcy Court Jurisdiction

Bankruptcy courts, like all federal courts, are courts of limited jurisdiction. In re Hamilton, 282 B.R. 22, 25 (Bankr. W.D. Okla. 2002). Indeed, “[t]he jurisdiction of bankruptcy courts, like that of other federal courts, is grounded in, and limited by statute.” Celotex Corp. v. Edwards, 514 U.S. 300, 307 (1995).

Specifically, pursuant to 28 U.S.C. § 1334(a), federal district courts have “original and exclusive jurisdiction” of all “cases” under the Bankruptcy Code. District courts also have “original but not exclusive jurisdiction of all civil proceedings arising under” the Bankruptcy Code, “or arising in or related to cases” under the Bankruptcy Code. 28 U.S.C. § 1334(b). District courts may (and do), however, refer these cases and proceedings to the bankruptcy courts in their districts, which are constituted as “units” of the district courts. 28 U.S.C. § 157(a).

A federal district court in which a bankruptcy case is commenced or pending also has exclusive jurisdiction over all of the debtor’s property, wherever located, “property of the estate” (as defined in section 541(a) of the Bankruptcy Code), and all claims or causes of action involving the retention of bankruptcy professionals. 28 U.S.C. § 1334(e).

A bankruptcy “case” is the umbrella under which all of the proceedings that follow the filing of a bankruptcy petition take place. The filing of a voluntary or involuntary petition for relief commences a bankruptcy case. After an order for relief is entered (on the petition date, in a voluntary case, and after a trial on the petition, in an involuntary case), the bankruptcy case may involve many civil proceedings, whether denominated administrative matters, controversies, adversary proceedings, contested matters, suits, actions, or disputes.

Matters “arising under” and “arising in” bankruptcy cases are generally referred to as “core” proceedings. In re Southmark Corp., 163 F.3d 925, 930 (5th Cir. 1999). Twenty-eight U.S.C. § 157(b)(2) contains a non-exclusive catalog of “core” proceedings, including, among other things, matters concerning the administration of the bankruptcy estate; the allowance, disallowance, or estimation of claims; counterclaims by the estate against persons filing claims against the estate; orders to turn over property of the estate; motions to modify or terminate the automatic stay; and proceedings to avoid and recover preferential or fraudulent transfers. 

A matter “arises under” the Bankruptcy Code “if it invokes a substantive right provided by title 11,” Southmark, 163 F.3d at 930. In other words, when a cause of action is created by title 11, that civil proceeding is one “arising under” the Bankruptcy Code. See generally Collier on Bankruptcy ¶ 3.01[3][e][i] (16th ed. 2024).

Similarly, claims that “arise in” a bankruptcy case are claims that by their nature, rather than their particular factual circumstances, could arise only in the context of a bankruptcy case. Stoe v. Flaherty, 436 F.3d 209, 218 (3rd Cir. 2006).

Clams or causes of action arising under state law are not “core proceedings” because they do not invoke “a substantive right provided by title 11 or a proceeding that, by its nature, could arise only in the context of a bankruptcy case.” In re Seven Fields Dev. Corp., 505 F.3d 237, 256 (3d Cir. 2007).

A civil proceeding is “related” to a bankruptcy case when “the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1985); accord Celotex Corp. v. Edwards, 514 U.S. 300 (1995). 

In addition to statutory authority, a bankruptcy judge must have constitutional authority to hear and determine a matter. Stern v. Marshall, 564 U.S. 462 (2011). Constitutional authority exists when a matter originates under the Bankruptcy Code or, in non-core matters, where the matter is either one that falls within the “public rights exception,” (i.e., cases involving “public rights” that Congress could constitutionally assign to “legislative” courts for resolution), or where the parties have consented, either expressly or impliedly, to the bankruptcy court hearing and determining the matter. See, e.g., Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015) (parties may consent to a bankruptcy court’s jurisdiction); Richer v. Morehead, 798 F.3d 487, 490 (7th Cir. 2015) (noting that “implied consent is good enough”).

Estate Property and the Automatic Stay

“Property of the estate,” as referenced in 28 U.S.C. 1334(e), is defined in section 541(a) of the Bankruptcy Code, which provides that the filing of a bankruptcy petition creates an estate comprising an extensive list of property, “wherever located and by whomever held,” including, among other things, “all legal or equitable interests of the debtor in property” as of the petition date.

The debtor and property of its bankruptcy estate are protected by the automatic stay in section 362 of the Bankruptcy Code from creditor collection efforts during a bankruptcy case, including litigation, enforcement of judgments, and acts “to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” 

Under section 362(d), a bankruptcy court can modify or grant relief from the automatic stay upon a showing of: (i) “cause,” including the lack of “adequate protection” of an interest in property of the party seeking stay relief; (ii) the debtor’s lack of equity in property that is not necessary for an effective reorganization; (iii) a “single asset real estate” debtor’s failure within 90 days of the petition date (with certain exceptions) either to file “a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time,” or to commence monthly interest payments to any mortgagee. Under the conditions specified in section 362(e), the automatic stay terminates 30 days after a stay relief motion is filed under section 362(d), unless the court orders otherwise. The bankruptcy court “shall” also grant stay relief under section 362(f) if “necessary to prevent irreparable damage” to a third party’s interest in estate property before there is an opportunity for notice and a hearing on its stay relief motion. 

Notably, relief from the automatic stay does not remove an asset from the debtors’ estate, and the bankruptcy court retains jurisdiction over the property. See In re Brook Valley VII, J.V., 496 F.3d 892, 899 (8th Cir. 2007); In re Merriman, 616 B.R. 381, 394 (B.A.P. 9th Cir. 2020); accord Catalano v. CIR, 279 F.3d 682, 687 (9th Cir. 2002) (“an order lifting the automatic stay by itself does not release the estate’s interest in the property”); Loken-Flack, LLC v. Stoner, 2014 WL 3562792, at *7 (D. Colo. July 17, 2014) (“Although Adams Bank was granted relief from the automatic stay, the bankruptcy court’s order cannot be construed as relinquishing all jurisdiction to property pledged in the security agreement. Rather, Adams Bank was merely given permission to take whatever action it deemed necessary to foreclose and/or take possession of whatever subject property it wished.”); In re Cordry, 149 B.R. 970, 973–74 (D. Kan. 1993) (“Relief from the stay simply removes the bankruptcy restraints on a claimant’s right to pursue contractual and non-bankruptcy remedies as to the matter in question,” and a bankruptcy court’s jurisdiction over the property “is considered to be continuing until some action is taken which would necessitate the relinquishment of jurisdiction”); In re Forrest Marbury House Assocs Ltd. P’ship, 137 B.R. 554, 556 (Bankr. D.D.C. 1992) (“Until the real property was sold at foreclosure sale, the real property remained property of the estate.”); In re Fricker, 113 B.R. 856, 864 (Bankr. E.D. Pa. 1990) (“we do not believe that granting relief from the stay deprives a bankruptcy court of jurisdiction over that property”).

The Tenth Circuit considered this question in Fog Cap Retail. 

Fog Cap Retail

Fog Cap Retail Investments (the “debtor”) was formed in 2002 to hold commercial leasehold interests for investment purposes. The debtor was owned by SBN FCCG, LLC (“SBNF”). SBNF and two affiliates—Summit Investment Management (“Summit”) and SBN Edge LLC (“SBN Edge” and collectively with SBNF and Summit, the “related parties”)—were also creditors. 

The debtor’s leasehold interests included a lease of commercial property in Oklahoma (the “property”) owned by Stratford Holding, LLC (“Stratford”). The property was previously leased by Foot Locker Retail, Inc. (“Foot Locker”), which operated a shoe store from the premises. After subletting the property to a dry cleaning business, Foot Locker assigned the lease to the debtor, which assumed all of the obligations to Stratford under the lease. 

Six years after assuming the lease, the debtor evicted the dry cleaning business and the property sat vacant for several years until the debtor surrendered its leasehold interest to Stratford. The property, however, was contaminated with hazardous dry-cleaning chemicals, prompting the State of Oklahoma to commence an environmental enforcement action against Stratford and the former dry-cleaning tenant. 

Stratford sued both Foot Locker and the debtor in federal district court to recover its remediation liabilities under state and federal environmental laws, as well as related damages (the “Oklahoma litigation”). That litigation was stayed when the debtor filed for chapter 11 protection in the District of Colorado in 2016. Stratford and Foot Locker moved for relief from the automatic stay to continue with the Oklahoma litigation and liquidate their claims against the debtor. The bankruptcy court granted the motion. The court later converted the debtor’s chapter 11 case to a chapter 7 liquidation.

Because the Oklahoma litigation was not progressing, the chapter 7 trustee later sought bankruptcy court approval to enter into separate settlement agreements with the related parties, Foot Locker, and Stratford regarding the treatment of their claims against the debtor based on the Oklahoma litigation and the remediation liabilities. Under the proposed settlement agreements: (i) the related parties stipulated that their claims against the debtor were contingent and unliquidated claims for contribution that would be estimated at $0.00; (ii) Foot Locker agreed to subordinate its claim to all allowed claims and costs of administration, except for the related parties’ claims, and to the estimation of its claim at $0.00; and (iii) Stratford agreed that its allowed claim would be reduced from $20 million to $6.5 million, its claim arising from future remediation costs would be disallowed, and its deposit as part of a prepetition failed asset purchase agreement would be refunded. In his motion to approve the settlement agreements, the trustee also sought authority to make an interim distribution to creditors.

The related parties objected to the trustee’s motion seeking approval of the settlements with Foot Locker and Stratford as well as the interim distributions. The bankruptcy court, however, approved the settlements as well as the interim distributions as being in the best interests of the debtor’s estate.

The related parties appealed to the district court, arguing, among other things, that, having granted relief from the automatic stay to continue the Oklahoma litigation, the bankruptcy court erred by: (i) exercising jurisdiction over the claims that were being litigated in the Oklahoma litigation; and (ii) exercising jurisdiction over certain federal and state environmental remediation claims as well as other non-core claims. The trustee countered that the bankruptcy court had jurisdiction over the settlement motion because it “related to” the bankruptcy case, and resolution in the Oklahoma litigation of all the claims covered by the settlements would not be possible because many of the claimants were not parties in the litigation.

The district court affirmed the bankruptcy court’s orders approving the settlements, ruling, among other things, that: (i) “if the bankruptcy court grants relief from the stay with respect to certain property or claims, … the bankruptcy court retains jurisdiction over those matters, although its jurisdiction is concurrent with that of other courts of competent jurisdiction”; and (ii) the bankruptcy court had jurisdiction over the settlements because they could conceivably have an effect on the estate and were therefore “related to” the bankruptcy case. Finally, the district court rejected as unfounded the related parties’ argument that the bankruptcy court effectively reimposed the automatic stay by authorizing the settlement without applying the standard for issuing an injunction. See In re Fog Cap Retail Invs., LLC, 2022 WL 3443685, at *7 (D. Colo. Aug. 17, 2022), aff’d, 2024 WL 659559 (10th Cir. Feb. 16, 2024). The related parties appealed to the Tenth Circuit.

The Tenth Circuit’s Ruling

A three-judge panel of the Tenth Circuit affirmed.

Writing for the panel, U.S. Circuit Judge Paul J. Kelly, Jr. explained that the automatic stay “partially strips the concurrent jurisdiction of other courts,” but the bankruptcy court’s exclusive jurisdiction only extends as far as section 362 of the Bankruptcy Code permits. Fog Cap, 2024 WL 659559, at *3. Thus, Judge Kelly reasoned, the language of section 362 instructs whether a bankruptcy court forfeits its jurisdiction upon granting relief from the stay.

Examining the plain language of the relevant subsections of section 362—i.e., subsections 362(d), (e), and (f)—Judge Kelly concluded that these provisions “say nothing about the bankruptcy court relinquishing jurisdiction” by granting relief from the automatic stay. Accordingly, the Tenth Circuit panel held that when stay relief is granted, “the bankruptcy court retains jurisdiction over those matters, although its jurisdiction is concurrent with that of other courts of competent jurisdiction.” Id. (quoting Chao v. Hosp. Staffing Servs., Inc., 270 F.3d 374, 383 (6th Cir. 2001)).

According to the Tenth Circuit panel, all of the decisions relied on by the related parties were distinguishable because, among other things, the bankruptcy court in this case was not adjudicating the merits of the claims being settled and the court in the Oklahoma litigation had not taken any action after relief from the stay that would have divested the bankruptcy court of jurisdiction over the claims. Id. at *4. The panel accordingly concluded that the bankruptcy court retained “related to” jurisdiction over the claims, such that it could grant the settlement motion because it affected the administration of the bankruptcy estate. 

The Tenth Circuit panel rejected the argument that the bankruptcy court improperly resolved state and federal law environmental remediation claims that it did not have subject matter jurisdiction to adjudicate. According to Judge Kelly, the Foot Locker and Stratford settlements did not involve such claims but, rather, merely established their allowed amounts, and in no way resolved or capped the debtor’s liability under state and federal environmental laws, which would still be determined in the Oklahoma litigation. Id. at *5. Because nothing in the settlements decided any aspect of the claims or restricted the related parties’ ability to defend against them, the Tenth Circuit panel concluded that the bankruptcy court did not err in approving them. 

Outlook

Although the Fifth Circuit did not break new ground with its ruling in Fog Cap concerning the scope of a bankruptcy court’s “related to” jurisdiction in cases over claims or assets where the court has granted relief from the automatic stay, the decision is notable for a number of reasons. Most significantly, the Fifth Circuit reaffirmed the well-established principle that a bankruptcy court’s exclusive jurisdiction over property of a bankruptcy estate is not relinquished at the moment the court modifies the stay. That jurisdiction becomes concurrent until such time that it is extinguished by subsequent actions or events, such as the issuance of a judgment by another court of competent jurisdiction or the sale of property. Notably, the Fifth Circuit concluded that the plain language of section 362 of the Bankruptcy Code does not divest a bankruptcy court of jurisdiction once the court modifies the automatic stay. Another takeaway from Fog Capital is that the bankruptcy court’s approval of a settlement does not constitute an adjudication of the underlying claims.

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