JJ Cranston Construction Corp. v. The City of New York, ___ F. Supp.3d ___, 2022 WL 1289690 (E.D.N.Y. April 29, 2022)

The following is a case update written by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLP, analyzing a recent decision of interest:

SUMMARY

In JJ Cranston Construction Corp. v. The City of New York, ___ F. Supp.3d ___, 2022 WL 1289690 (E.D.N.Y. April 29, 2022) (“Cranston”), the United States District Court for the Eastern District of New York (the “District Court”) dismissed the debtor’s complaint without leave to amend but without prejudice because it sought damages for an alleged violation of the automatic stay and, under Second Circuit authority, the bankruptcy court had exclusive subject matter jurisdiction to address stay violations.

Cranston can be found by clicking here. 

FACTS

Arising from a 1991 bankruptcy filing, the history of this case is long and convoluted. Here we summarize the essentials.

Shortly after the City of New York (the “City”) began a tax foreclosure against the debtor’s property, the debtor filed bankruptcy in the Eastern District of New York (the “Case”). The City knew of the bankruptcy since it filed a proof of claim. The City nevertheless completed the foreclosure, took title to the property and sold it at an auction. Some years later the City evidently tried to undo what it had done, but it was too late because the auction buyer had evicted the tenants and demolished the building.

In 2020, the debtor brought an action seeking damages in the District Court (rather than the bankruptcy court) against the City for violation of the automatic stay. The City moved to dismiss for failure to state a claim and for lack of subject matter jurisdiction. Because subject matter jurisdiction is a precondition to a court’s hearing a case, the District Court considered that aspect of the motion to dismiss first. It agreed that it lacked subject matter jurisdiction, therefore bypassing the issue of failure to state a claim, and dismissed the complaint without leave to amend, but without prejudice to filing it I the appropriate court.

REASONING

In granting the motion, the District Court essentially followed a line of Second Circuit cases holding that the bankruptcy court has exclusive jurisdiction to hear proceedings alleging and seeking remedies such as damages for a stay violation, focusing on Eastern Equipment & Services Corp. v. Factory Point National Bank, Bennington,, 236 F.3d 117 (2d Cir. 2001) (per curiam) (Eastern). These cases generally rely on the notion that federal bankruptcy law preempts all other laws regarding the automatic stay and its violation, so that such claims as the debtor made cannot be brought in any other courts. The plaintiff argued that those cases all rely on 28 U.S.C. § 1334(a), which confers exclusive jurisdiction of cases under Title 11 (that is, bankruptcy cases) on the district courts, but they ignore § 1334(b), which essentially gives district courts nonexclusive jurisdiction over all proceedings within a bankruptcy case. In response, the District Court simply pointed to the weight of Second Circuit authority that the bankruptcy court has exclusive jurisdiction over stay issues.

AUTHOR’S COMMENTS

The logic of Cranston and the cases on which it relies, such as Eastern, is puzzling. Nothing in §§ 1334(a) or (b) confers exclusive jurisdiction over anything in a bankruptcy case to the bankruptcy court. Instead, bankruptcy courts are involved through 28 U.S.C. § 157(a) which allows (but does not require) district courts to “refer” any or all of their bankruptcy jurisdiction to the bankruptcy courts. Virtually all (if not all) district courts have done so by standing order or local rule. The Eastern District of New York has done that. (Standing Order dated December 5, 2012). To the extent that a bankruptcy court has exclusive jurisdiction over any aspect of a bankruptcy case, therefore, it is because of § 157(a), not because of anything in § 1334(a). Notably, the district courts can withdraw the reference of the bankruptcy case or any proceedings therein. 28 U.S.C. § 157(d). Thus, if the debtor wanted the district court to hearing the action, it should have filed it in the bankruptcy court and then moved to have it withdrawn to the District Court. In short, all of those cases, at least as written, fundamentally misunderstand the structure of bankruptcy jurisdiction. All of that said, however, the outcome of Cranston is correct. The author submits that the better analysis would have been for the Second Circuit courts and the District Court either to have analyzed the matter via §§ 1334(b) and 157(a).

Another avenue to the same result as in Cranston would have been the line (though not universal) of cases holding that a proceeding for violation of the automatic stay, like other proceedings for violation of any injunction (such as the discharge injunction), must be brought before the judge who issued the injunction (or, if that judge is unavailable for some reason, at least in the same court).

These materials were authored by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLP, a member of the ad hoc group, with editorial assistance by Meredith Jury, (bankruptcy judge, C.D. Cal. (Ret.)), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.