A Trustee Isn’t Confined to Suing in the District Where the Bankruptcy Is Pending

As long as a lawsuit is related to a bankruptcy case or would augment the estate, the debtor or trustee is not limited to suing in the district where the bankruptcy case is pending, for reasons explained in an opinion by District Judge Brandon S. Long of New Orleans. 

The choice of fora could be valuable for a trustee looking for a favorable forum when there will be a jury trial.

In his August 21 opinion, Judge Long reported how the debtor operated 750 oil and gas wells, mostly in Louisiana. Four creditors filed an involuntary chapter 7 petition in the Eastern District of Louisiana, prompting the debtor to file a voluntary chapter 11 petition in Houston a few days later.

The Louisiana bankruptcy judge transferred the involuntary case to Houston, having found that venue was proper in either state. The debtor sold all of the assets, and the chapter 11 case was converted to chapter 7.

The chapter 7 trustee filed a lawsuit in Judge Long’s court that the trustee called a civil action and an adversary proceeding. The trustee was suing 26 defendants in a 47-count complaint. The trustee served the defendants by mail. The complaint asserted subject matter jurisdiction under 28 U.S.C. § 1334, the statute granting jurisdiction in “all cases under title 11” and in “all civil proceedings arising under title 11, or arising in or related to cases under title 11.”

The debtor’s headquarters was in Louisiana until shortly before the chapter 11 filing in Houston. Several defendants claimed they resided in Texas, but the remainder were from Louisiana. The corporate defendants were incorporated in Texas, Louisiana and Delaware.

The complaint raised claims for avoidance of transfers under the Bankruptcy Code and state law, along with claims for breach of fiduciary duty and related theories.

The defendants filed motions to dismiss under Rules 12(b)(1) and 12(b)(2). None of the defendants moved to dismiss for insufficiency of service of process.

Section 1334(b)

Judge Long first dealt with the defendants’ motion to dismiss under Rule 12(b)(1) for “lack of subject matter jurisdiction” and the trustee’s assertion of subject matter jurisdiction under Section 1334(b), which grants “original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.”

A good deal of Judge Long’s opinion dealt with the confusion created by Section 1334(e)(1), which grants “exclusive jurisdiction . . . of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate.”

In the Fifth Circuit, Judge Long said that the law was settled by In re Wood, 825 F.2d 90 (5th Cir. 1987). There, the circuit said that a proceeding “arises under” title 11 when it “involve[s] a cause of action created or determined by a statutory provision of title 11.” Id. at 96. A case is “related to” when “the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Id. at 93.

The circuit went on to say that the two categories “operate conjunctively to define the scope of jurisdiction,” so that “it is necessary only to determine whether a matter is at least ‘related to’ the bankruptcy.” Id.

Judge Long held that the case before him “satisfies the first definition and comfortably satisfies the second” because the trustee was suing “those he says drained the debtors of the assets that would otherwise have paid their creditors.” He observed that 17 counts seek avoidance of fraudulent transfers or preferences and the remainder “are at least related to the bankruptcy.”

For claims under state fraudulent transfer statutes, Judge Long found jurisdiction because “[r]ecovery on any of them would enlarge the fund available to creditors, and . . . could conceivably affect the estate being administered.”

Because “the § 1334(b) categories operate conjunctively, the Court need go no further,” Judge Long said in finding subject matter jurisdiction.

Section 1334(e)(1)

Some of the defendants contended that the Louisiana court had no jurisdiction because Section 1334(e)(1) gave the Texas court exclusive jurisdiction over claims belonging to the estate.

Judge Long responded, “Although § 1334(e)(1) confers exclusive jurisdiction over property, § 1334(b) confers jurisdiction over ‘all civil proceedings,’ and that jurisdiction is ‘original but not exclusive.’” 

“The two provisions operate on different objects,” Judge Long said. He went on to quote the Fifth Circuit by saying that Section 1334(e)(1) functions “to ‘divest[] any other court of the authority to take jurisdiction over the res being administered by the trustee for the benefit of unsecured creditors[.]’”

Again quoting the Fifth Circuit, Judge Long explained the interrelationship between the two subsections:

Section 1334(b), not subsection (e)(1), is the provision that “provides federal jurisdiction over civil proceedings that may affect the rights of a debtor or the administration of the bankruptcy estate.”

Holding there was jurisdiction under Section 1334(b), Judge Long denied the defendants’ motion based on a misinterpretation of Section 1334(e)(1).

Personal Jurisdiction

Judge Long turned to the motion under Rule 12(b)(2) and the defendants’ contention there was no personal jurisdiction. As he explained, some of the defendants took the position “that they lack the continuous and systematic contacts that general jurisdiction requires and the suit-related contacts that specific jurisdiction requires.”

To explain why “that is not the governing inquiry,” Judge Long referred to Bankruptcy Rule 1001(a), which provides that the Bankruptcy Rules govern “the procedure in cases under the Bankruptcy Code, Title 11 of the United States Code.” He then referred to Bankruptcy Rule 7004(d), which provides that a “summons and complaint . . . may be served anywhere within the United States.”

Next, Judge Long quoted Bankruptcy Rule 7004(f), which provides, 

If exercising jurisdiction is consistent with the United States Constitution and laws, serving a summons or filing a waiver of service under this Rule 7004 or the applicable provisions of Fed. R. Civ. P. 4 establishes personal jurisdiction over a defendant: (1) in a bankruptcy case; or (2) in a civil proceeding arising under the Code, or arising in or related to a case under the Code.

“Put plainly,” Judge Long interpreted the rule to mean that “in a civil proceeding arising under title 11, or arising in or related to a case under title 11, Bankruptcy Rule 7004(d) authorizes service of process anywhere within the United States, and Rule 7004(f) makes such service effective to establish personal jurisdiction over the defendant served so long as ‘exercising jurisdiction is consistent with the United States Constitution and laws[.]’”

Because he had already held that the suit was related to a title 11 case, Judge Long said that the only remaining question was whether service was “consistent with the United States Constitution and laws.”

Judge Long cited binding precedent from Double Eagle Energy Services, L.L.C. v. MarkWest Utica EMG, LLC, 936 F.3d 260 (5th Cir. 2019), where the Fifth Circuit said that “Bankruptcy Rule 7004 permits nationwide service of process without limitation to the reach of the forum state’s courts.” Id. at 264.

Because the defendants were all U.S. residents, Judge Long quoted other Fifth Circuit authority saying there was enough contact with the U.S. so “that hauling them into federal court ‘does not offend traditional notions of fair play and substantial justice.’”

Judge Long held that “contacts with the United States under the Fifth Amendment govern, and contacts with the particular state in which the court sits do not.” Because any defendant “who resides in the United States has sufficient minimum contacts that require them to answer in a federal court does not offend traditional notions of fair play and substantial justice,” he denied the motion to dismiss for lack of personal jurisdiction.

In sum, Judge Long denied the motions to dismiss under Rules 12(b)(1) and 12(b)(2).