Bankruptcy Jurisdiction: The Time-of-Filing Rule Applies to “Related-To” Jurisdiction
Consider these facts. A debtor in bankruptcy sued two parties for breach of contract. The debtor assigned its rights and interests in the cause of action to another entity. The defendants moved to dismiss the lawsuit, arguing that the court now lacked jurisdiction over the case. They asserted that the debtor’s assignment of the cause of action destroyed the bankruptcy court’s “related to” jurisdiction. Who wins?
The Fifth Circuit Court of Appeals held that the bankruptcy court still had jurisdiction based on the time-of-filing rule. Double Eagle Energy Servs., L.L.C. v. Markwest Utica Emg, L.L.C., No. 19-30207, 2019 U.S. App. LEXIS 26548 (5th Cir. Aug. 26, 2019). This rule allows a federal court with jurisdiction when a case is filed to keep the case even when later developments extinguish jurisdiction.
It is well settled that outside of bankruptcy the time-of-filing rule arises when federal court subject matter jurisdiction is based either on federal question and diversity of citizenship. For instance, dismissal of some but not all parties after a suit is filed can end diversity jurisdiction. But the time-of-filing rule keeps the case in the court where it was filed. As the U.S. Supreme Court has stated, “it has long been the case that ‘the jurisdiction of the court depends upon the state of things at the time of the action brought.’” Grupo Dataflux v. Atlas Glob. Grp., L.P., 541 U.S. 567, 570 (2004) (quoting Mollan v. Torrance, 22 U.S. (9 Wheat.) 537 (1824)).
The question in Double Eagle Energy Services was whether the time-of-filing rule also applies to lawsuits brought in bankruptcy. The Fifth Circuit held that rule applies when a lawsuit is based on a court’s “related to” jurisdiction. “Related to” jurisdiction is present when a civil proceeding has a nexus to the bankruptcy case such that the outcome would have some impact on the bankruptcy estate.[i]
“Although courts have not considered the time-of-filing rule for cases related to bankruptcy, it applies to bankruptcy jurisdiction no less than it applies to diversity or federal question jurisdiction.” 2019 U.S. App. LEXIS 25648, at *3-4. Therefore, even though the debtor had assigned its cause of action to another entity, the time-of-filing rule meant that the bankruptcy court still had subject matter jurisdiction over the case.
In addition to the subject matter jurisdiction analysis, the Fifth Circuit noted that the time of filing impacts the analysis of personal jurisdiction in bankruptcy as well. For a court to have personal jurisdiction over a defendant, service of a summons against a defendant must be authorized, and the defendant must have minimum contacts with the forum when the case is filed. Outside of bankruptcy, authority to serve a summons is found in Federal Rule of Civil Procedure 4. It provides that a defendant must be subject to jurisdiction of the state courts where a federal case is brought. And the due process clause of the Fourteenth Amendment of the U.S. Constitution requires that the defendant have sufficient contact with the state as well.
Since Double Eagle Energy Services was a lawsuit brought in connection with a bankruptcy case, Federal Rule of Bankruptcy Procedure 7004 rather than Federal Rule of Civil Procedure applied to service of the summons. That rule permits service of process throughout the United States. And, in light of this rule, the second prong for personal jurisdiction — minimum contacts — refers to the entire United States rather than any one state. “With nationwide service, the forum is the United States. So minimum contacts with the United States (Fifth Amendment due process) suffice; minimum contacts with a particular state (Fourteenth Amendment due process) are beside the point.” 2019 U.S. App. LEXIS 25648, at *4 (emphasis in original).
The Fifth Circuit further noted that “residents of the United States . . . have enough contact with the United States that hailing them into federal court ‘does not offend traditional notions of fair play and substantial justice.’” Id. (quoting Bush v. Bachman & O’Brien, Law Firm, 11 F.3d 1255, 1258 (5th Cir. 1994)).
Finally, even while section 1334(b) jurisdiction remains notwithstanding developments after a case is filed, district courts have discretion to dismiss. Therefore, the Fifth Circuit remanded Double Eagle Energy Services to the district court to consider if, on the facts at hand, dismissal was warranted notwithstanding the continued presence of “related to” jurisdiction.