US Supreme Court’s Sleight of Hand in Bankruptcy Jurisdiction

by Latham & Watkins LLP
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With all attention focused on Executive Benefits, the Daimler decision could represent the real sea change in jurisdiction over non-core actions.

Introduction -

Recently, much of the bankruptcy bar was focused on the US Supreme Court and a pending decision in Executive Benefits Insurance Agency v. Arkison, which raised an important jurisdictional issue regarding whether parties may consent to bankruptcy court jurisdiction over non-core claims. However, the Supreme Court frustrated the bar’s expectations, sidestepping the issue. Then while attention was riveted on Executive Benefits, the Supreme Court handed down its decision in Daimler AG v. Bauman, addressing the parameters of personal jurisdiction. Daimler, decided on January 14, 2014, received no attention in the bankruptcy press, but could have far-reaching implications for bankruptcy courts’ ability to adjudicate claims against defendants not located in the United States and perhaps even against US defendants located outside of the state where a bankruptcy case is pending. In particular, after Daimler, a plaintiff seeking to bring an action against a foreign defendant, and maybe even an out-of-state defendant — including to recover fraudulent conveyances and preferences — may need to meet a high standard to show that a bankruptcy court may exercise personal jurisdiction over the foreign defendant. Indeed, debtors may be forced to pursue such actions in the forum where the defendant is located rather than in the court where the debtor’s bankruptcy case is pending.

Background -

In general, service of process in a bankruptcy case is governed by Federal Rule of Bankruptcy Procedure 7004(b), which allows for service of process by mailing to a defendant anywhere in the United States. Under Rule 7004(f), service of process consistent with Rule 7004(b) “is sufficient to confer personal jurisdiction over any defendant in a civil proceeding related to a case under the Bankruptcy Code so long as the exercise of jurisdiction is consistent with the constitution and laws of the United States.” District and circuit courts have held that personal jurisdiction may be determined based on a defendant’s US contacts when a plaintiff’s claim stems from a federal statute that authorizes nationwide service of process. In particular, prior to Daimler, the relevant inquiry for assessing whether a defendant is subject to personal jurisdiction has been whether the defendant has minimum contacts with the United States as a whole. “Where the relevant forum is the United States as a whole, rather than a particular state, service of process on the defendant anywhere in the United States confers jurisdiction over the defendant without regard to the defendant’s particular contacts with the state where the court is located or the burden imposed on the defendant in litigating in that forum.”

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