Chapter 2 Outer Limits of Jurisdiction

• Jurisdiction: United States

2. Outer Limits of Jurisdiction

What Happens after a Bankruptcy Case Has Been Dismissed?

Written by:

Thomas M. Horan

Womble Carlyle Sandridge

& Rice LLP; Wilmington, Del.

Ericka Fredricks Johnson

Womble Carlyle Sandridge

& Rice LLP; Wilmington, Del.

Given the increasing frequency of commercial chapter 11 cases wherein a debtor sells its assets under § 363 and then dismisses its case under § 1112, the question of whether a bankruptcy court possesses jurisdiction to address subject matter connected to the dismissed bankruptcy case is sure to arise more often. Debtors often file cases under chapter 11, with a sale under § 363 being the central goal of the case. Then, following the sale, the debtor may pursue a dismissal or "structured dismissal"¹ under § 1112, rather than convert the case to chapter 7 or complete administration of the case under a chapter 11 plan.

When a bankruptcy case has been closed or dismissed, there is no longer a pending bankruptcy case.² However, unlike a case that has been closed under § 1112, a case dismissed under § 349 cannot be reopened, which calls into question the bankruptcy court's ability to take any action with respect to a case that was dismissed. Accordingly, contrary to the expectation of the parties, adjudication of any such dispute may have to take place outside of bankruptcy court. Moreover, a party may remain silent on the jurisdiction issue while litigating in the bankruptcy court, only to raise subject-matter jurisdiction on appeal or to attempt to ignore an unfavorable bankruptcy court ruling altogether on the theory that the ruling of a court that lacks subject-matter jurisdiction has no stare decisis value. Thus, another danger in not considering the jurisdiction issue is that the nonprevailing party may have two bites at the proverbial apple.

These issues at the outer limit of bankruptcy jurisdiction do not fit neatly into a traditional analysis of jurisdiction because jurisdictional questions most commonly arise in cases that are open.³ However, the increasing use bankruptcy as a vehicle for an asset sale and dismissal portends more frequent questions about post-dismissal bankruptcy court jurisdiction.

A. Dismissed Case Cannot Be Reopened

No provision of the Bankruptcy Code permits a dismissed case to be reopened.⁴ Section 349 governs the effect of dismissal of a case and provides as follows:

§ 349. Effect of dismissal
(a) Unless the court, for cause, orders otherwise, the dismissal of a case under this title does not bar the discharge, in a later case under this title, of debts that were dischargeable in the case dismissed; nor does the dismissal of a case under this title prejudice the debtor with regard to the filing of a subsequent petition under this title, except as provided in section 109(g) of this title.
(b) Unless the court, for cause, orders otherwise, a dismissal of a case other than under section 742 of this title—

(1) reinstates—

(A) any proceeding or custodianship superseded under section 543 of this title;
(B) any transfer avoided under section 522, 544, 545, 547, 548, 549, or 724(a) of this title, or preserved under section 510(c)(2), 522(i)(2), or 551 of this title; and
(C) any lien voided under section 506(d) of this title;

(2) vacates any order, judgment or transfer ordered, under section 522(i)(1), 542, 550, or 553 of this title; and
(3) revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.⁵

B. Only Cases Closed under § 350 Can Be Reopened

Section 350 provides for reopening a closed case, but it applies only to cases that have been closed under that section,⁶ providing as follows:

§ 350. Closing and reopening cases
(a) After an estate is fully administered and the court has discharged the trustee, the court shall close the case.
(b) A case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor or for other cause.⁷

Section 350 is unambiguous in providing that a case may only be reopened after...