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Third Circuit Says Bankruptcy Judge Lacked Power to Transfer Trustee's Claims to District Court

Minerva Studio/iStockphoto.com

The Third Circuit Court of Appeals on Wednesday ruled that a Delaware bankruptcy judge lacked the power to transfer a bankruptcy trustee's claims to a Pennsylvania federal court.

In so holding, the appeals court reaffirmed statutory limits on the jurisdiction of bankruptcy courts.

In a precedential opinion, a three-judge panel of the appeals court rejected the trustee's argument that bankruptcy courts are included in the definition of "courts" under federal law. Instead, the court held, bankruptcy courts are properly defined as "units" of district courts, and thus can only exercise the authority provided to them by federal statute or by a standing order of a district court judge.

"Cognizant of bankruptcy courts’ limited authority and our obligation to guard the limits of that authority, we cannot approve of the bankruptcy court’s exercise of jurisdiction to transfer the adversary proceeding under these circumstances," Judge Marjorie O. Rendell wrote in the 16-page opinion.

Judges Patty Shwartz and Jane R. Roth joined Rendell in the opinion.

The ruling stemmed from U.S. Bankruptcy Judge Kevin J. Carey's refusal to hear claims that IMMC Corp.'s former management team team had breached their fiduciary duties by pursuing costly litigation strategy in an unrelated suit against a competitor. IMMC, a Huntington Valley, Pennsylvania-based medical company, filed for Chapter 11 bankruptcy protection in 2008 as Immunicon Corp.

Carey, who at the time was serving as chief judge of the U.S. Bankruptcy Court for the District of Delaware, ruled that the claims fell outside the purview of his court because it was neither a core to the bankruptcy proceedings nor related to the underlying Chapter 11 case before him. The decision was later upheld by former U.S. District Judge Gregory M. Sleet.

On appeal, liquidating trustee Robert Troisio argued that Congress meant to authorize bankruptcy courts to transfer proceedings between "any two federal courts. However, Rendell said lawmakers also amended U.S. Code to classify bankruptcy judges as a unit of the district court—an act which constituted an "intentional withdraw of bankruptcy courts' transfer power."

"Our holding today simply reaffirms the well-established rule that bankruptcy courts may exercise only the authority delegated to them by statute and referred to them by the standing order of the district court," Rendell wrote. "Because the adversary proceeding in this case fell outside the bankruptcy court’s jurisdiction, the bankruptcy court properly declined to transfer the proceeding."

An attorney for Troisio did not return a call Thursday seeking comment on the ruling, and a lawyer representing IMMC's directors and officers did not respond to a request for comment.

Mara Beth Sommers, a partner with Miami law firm Bales Sommers & Klein, argued for Troisio on appeal. Clair E. Wischusen and Michael Eidel represented IMMC management.

The case, before the Third Circuit, was captioned In re: IMMC Corp.

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