In a case involving multiple parties and proceedings, the Fifth Circuit has affirmed lower court rulings which prohibited one non-debtor from suing a second non-debtor and awarded sanctions against a party that told a state court to disregard the Bankruptcy Court's orders. In the Matter of PFO Global, Incorporated, Case No. 20-10885 (5th Cir. 2/9/22), which can be found here. While the result may sound extreme, it appears to be an unintended consequence of an agreed order entered years earlier.
While bankruptcy subject matter jurisdiction is broad, sometimes an order can just go too far as shown by the recent opinion from the U.S. District Court for the Eastern District of Virginia in Patterson v. Mahway Bergen Retail Group, Inc., 2022 U.S. Dist. LEXIS 7431 (E.D. Va. 2022).
The Three Types of Jurisdiction
Bankruptcy practitioners can usually recite the three types of bankruptcy jurisdiction in their sleep: arising in, arising under and related to. Of these, related to is the broadest. In the Fifth Circuit, related to jurisdiction is present if the matter being addressed could have a conceivable effect on the debtor or the bankruptcy estate. Thus, if the debtor owned a store at the bottom of a hill and a property owner had allowed a boulder at the top of the hill to work precariously loose, an adversary proceeding to force the other property owner to secure the boulder would have a conceivable effect on the bankruptcy estate and related to jurisdiction would be present. Why is this? If the boulder rolled down the hill, it could smash the debtor's store. On a more mundane note, there is related to jurisdiction to collect accounts receivable owed to the debtor because collecting money would make it easier to reorganize.
In the past, there were many arguments about whether bankruptcy courts had jurisdiction to grant third-party releases. The Supreme Court put this controversy to rest in United Student Aid Funds v. Espinosa, 559 U.S. 260 (2010). In that case, the Supreme Court drew a distinction between having statutory authority to take an action and having jurisdiction to do so. The Bankruptcy Code does not allow a court to grant a hardship discharge on a student loan without filing an adversary proceeding. However, there is clearly jurisdiction to do so because granting the discharge would have a conceivable effect on the debtor. What this means is that if a plan contains a provision which should not be approved, the parties have to challenge it directly as opposed to coming back years later and saying that there was no jurisdiction to approve the provision.
This action was originally brought as a habeas corpus proceeding by Edward Moses, Jr., a lawyer who calls himself the trustee of the “Atakapa Indian de Creole Nation.” This group is not a federally recognized Indian tribe, and its precise nature is unclear. See Indian Entities Recognized by and Eligible To Receive Services from the United States Bureau of Indian Affairs, 84 Fed. Reg. 1200 (Feb. 1, 2019). The initial complaint alleged the Atakapa “are being held as wards of the State through the Louisiana Governor’s Office of Indian Affairs” and “in pupilage under the United States,” and sought formal recognition as “indigenous to Louisiana.” The claims were based on a gumbo of federal and state laws, including eighteenth-century federal treaties with France and Spain, as well as sources such as the “Pactum De Singularis Caelum, [or] the Covenant of One Heaven.” The plaintiff subsequently filed something resembling an amended complaint, which sought to reclassify the action as a “libel suit” under maritime jurisdiction.
