312-263-2200

According to In re Gustafson, 316 B.R. 753 (Bankr. S.D.Ga. 2004) the dismissal of a bankruptcy case will normally result in the dismissal of the pending adversary proceedings because federal jurisdiction in premised upon the nexus between the underlying bankruptcy case and the related proceeding.  Id. at 756.  See also, Smith v. Beal Acceptance Corp., 244 B.R. 487 (N.D.Ga. 2000) (the continued exercise of jurisdiction over the adversary proceeding is left to the sound discretion of the bankruptcy court) and In re Gustafson, 316 B.R. 753 (Bankr. S.D.Ga. 2004) (while the court has discretionary power to retain jurisdiction over pending adversary proceedings, it would not exercise that discretion to retain jurisdiction over preferences and fraudulent transfer claims, following dismissal of the underlying case)

However, the Eleventh Circuit, in In re Morris, 950 F.2d 1531, 1535 (11th Cir. 1992), held that Section 349 of the Bankruptcy Code gives the Bankruptcy Court the discretionary power, if cause is shown, to alter the normal effects of the dismissal of the bankruptcy case in order to retain subject matter jurisdiction over an adversary proceeding.  The Eleventh Circuit cited to three factors that were deemed relevant in determining whether to exercise such discretion: (1) judicial discretion; (2) fairness and convenience to the litigants; and (3) the degree of difficulty of the related legal issues involved.

In re Lindsay, 2021 WL 1140661 (11th Cir. March 25, 2021), expanded on Morris noting that because “an adversary proceeding in the bankruptcy court and the companion bankruptcy case are two distinct proceedings, [an] express retention over the adversary proceeding upon disposition of the related bankruptcy case is unnecessary.” Id. at *5.  Thus, the fact that the bankruptcy court retained jurisdiction over the adversary proceeding only after it dismissed the bankruptcy case does not divest it of jurisdiction.

The Second Circuit, in In re Millennium Seacarriers, Inc., 458 F.3d 92, 96 (2nd Cir. 2006), modified the Morris factors and in deciding whether to retain jurisdiction, a court should consider four factors; (i) judicial economy, (ii) convenience of the parties, (iii) fairness, and (iv) comity.  The Second Circuit went on to hold that the bankruptcy court did not abuse its discretion in deciding to retain jurisdiction to interpret a sale order entered pursuant to Section 363 of the Bankruptcy Code prior to dismissal of the underlying bankruptcy case.  First, the court ruled that judicial economy and convenience of the parties were both served by the bankruptcy court’s decision to interpret its own prior sale order, due to its familiarity with the facts.  Further, the court stated that fairness and comity were not affected either way.

Matthew T. Gensburg
mgensburg@gcklegal.com