Judge Posner on Bankruptcy's "Clean-Up" Jurisdiction

Most bankruptcy lawyers might think that the dismissal of a bankruptcy proceeding and the revesting of the bankruptcy estate’s assets in the debtor bring an end to the bankruptcy court’s jurisdiction.

Not (necessarily) so, according to the Seventh Circuit in In re Sweports, Ltd., No. 14-2423 (7th Cir. Jan. 9, 2015), a decision written by Judge Posner in which Judges Williams and Tinder joined. There exists a form of “clean-up” jurisdiction (or “ancillary” jurisdiction, as the court acknowledged “it is commonly called”) that allows a bankruptcy court “to take care of minor loose ends,” even after the case has been dismissed.

Those “loose ends” here were part of the fees of the legal counsel (Wolf) for and the financial advisor to an Official Committee of Unsecured Creditors appointed by the U.S. Trustee. The bankruptcy judge earlier had awarded these professionals $410,000 in fees based on an interim request (much of which had not been paid), but he denied their later request for a total final fee award of an additional $880,000 in fees and expenses, filed after the case’s dismissal. The judge denied the request not on the grounds that the fees were excessive or improper but because he believed that he no longer had jurisdiction to award any amount after the case had been dismissed. His reasoning was straightforward, if not overly simplistic: no estate, no assets, no jurisdiction.

That ruling failed to recognize, as the Seventh Circuit put it, “a critical difference . . . between determining an entitlement to fees and ordering payment of fees.”

But, first, why did Wolf wait until after dismissal to file his request? The delay was the result of what he perceived to be his ethical obligations to the unsecured creditors that he represented as the committee’s counsel. Earlier the bankruptcy judge had rejected plans of reorganization proposed by the debtor (Sweports) and by the unsecured creditors. Rather than convert the case from Chapter 11 to Chapter 7 for liquidation in the bankruptcy court, the creditors asked to have the case dismissed—in other words, to try their luck in state court, where they likely thought that they could garner relief more quickly than in the scramble of Sweports’s liquidation. In any event, Wolf wanted to let his clients proceed in state court as soon as possible, so he sought the case’s dismissal. That wasn’t a bad idea. (Another option, Judge Posner explained, would have been to lift the automatic stay while Wolf’s request for fees was pending.)

Yet the upshot of all this is that the bankruptcy judge was wrong to think that he no longer had jurisdiction to consider Wolf’s request for fees. Recall the distinction that the Seventh Circuit thought so important: Wolf wasn’t asking to collect the fees. Wolf was asking for the right to be paid. Since he hadn’t done his work for Sweports, the only way he could eventually collect from Sweports was to have his entitlement to be paid for his work for the committee in the Chapter 11 declared a debt of Sweports by the bankruptcy court. That, in the Seventh Circuit’s view, did not turn on the bankruptcy estate’s continued existence or whether the assets remained within the bankruptcy court’s control. Wolf’s request was no different than “every damages suit that is resolved in favor of the plaintiff[, which] ends not with a disbursement of money but with a judgment that establishes a debt.”

Wolf was asking for a judgment. He, like his clients, would have to take the judgment and join the melee in state court to collect. The court saw no reason why the bankruptcy judge should be prevented from acting on Wolf’s request and found jurisdiction over this sort of matter implicit in 11 U.S.C. § 330(a)(1), which governs fee-and-expense awards in bankruptcy, and 28 U.S.C. § 1334(b), which provides for ancillary jurisdiction in the district courts for “all civil proceedings arising under title 11, or arising in or related to cases under title 11.” Wolf’s civil proceeding had “arisen in” and was “related to” a case under title 11.

This was a direct appeal from the bankruptcy court under 28 U.S.C. § 158(d)(2). The Seventh Circuit reversed and remanded to the bankruptcy court for further proceedings.