2007 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

10-24-2007

In Re: Seven Fields

Precedential or Non-Precedential: Non-Precedential

Docket No. 06-3658

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

 

No. 06-3658

 

IN RE: SEVEN FIELDS DEVELOPMENT CORPORATION,

Debtor

MARY GERUSCHAT; DOLORES SPENEY; ANTOINETTE 

MOROCCO; and DONNA M. BUXTON,

Appellants

v.

ERNST YOUNG LLP; CHARLES MODISPACHER

 

On Appeal from the United States District Court

for the Western District of Pennsylvania

(D.C. Civ. No. 05-1527)

District Judge: Honorable Gary L. Lancaster

 

Argued June 28, 2007

BEFORE: SMITH and GREENBERG, Circuit Judges, 

and POLLAK, District Judge*

(Filed: October 24, 2007)

 

Vincent A. Coppola (argued)

Pribanic & Pribanic

513 Court Place

 

*The Honorable Louis H. Pollak, Senior Judge of the United States

District Court for the Eastern District of Pennsylvania, sitting by

designation.
2

First Floor

Pittsburgh, PA 15219

 Attorneys for Appellants

William H. Schorling (argued)

Samuel W. Braver

Stanley J. Parker

Christopher P. Schueller

Buchanan Ingersoll & Rooney

301 Grant Street

One Oxford Centre, 20th Floor

Pittsburgh, PA 15219

 Attorneys for Appellees

 

OPINION OF THE COURT

 

GREENBERG, Circuit Judge.

I. INTRODUCTION

This matter comes on before the court on an appeal by Mary

Geruschat, Dolores Speney, Antoinette Morocco, and Donna M.

Buxton (“appellants”) from the district court’s memorandum order

dated July 14, 2006, which adopted as its own and affirmed the

bankruptcy court’s opinion and order dated September 2, 2005, in

which the bankruptcy court (1) asserted its jurisdiction to resolve a

state-law malpractice, negligence, and fraud suit that appellants,

creditors in a consolidated Chapter 11 bankruptcy proceeding, brought

in a state court against the accountants who performed work during

the bankruptcy, Ernst & Young LLP and its employee, Charles

Modispacher (together “Ernst & Young”), (2) refused to remand

appellants’ case to the state court from which Ernst & Young removed

it, and (3) dismissed the complaint on its merits. This appeal,

however, primarily is about jurisdiction, both our jurisdiction to

review the bankruptcy and district courts’ decisions not to abstain

from exercising jurisdiction and not to remand the matter to the state

court, and, depending on the extent, if any, that we have jurisdiction

to review those courts’ decisions, whether the district court properly

found that the bankruptcy court had subject matter jurisdiction and the
3

final adjudicative authority to resolve the state-law actions. 

As we will discuss in detail later, appellants initially filed their

suit in a state court, but Ernst & Young removed the case to a federal

court, i.e., a bankruptcy court. Appellants then sought an order

remanding the case to the state court on the grounds that (a) there

were procedural irregularities in the removal process, (b) the

bankruptcy court did not have subject matter jurisdiction over the

dispute, and (c) even if the bankruptcy court did have jurisdiction, it

should have abstained permissively or was required to abstain

mandatorily from exercising its jurisdiction. The bankruptcy court

disagreed with appellants, exercised jurisdiction, and dismissed the

case on its merits. On appellants’ appeal, the district court affirmed

the bankruptcy court’s order and, though to a degree writing

separately, adopted the bankruptcy court’s opinion and order as its

own. 

This appeal followed. But appellants challenge only the

decisions regarding the procedural irregularities in the removal

process, the bankruptcy court’s finding that it had jurisdiction and

final adjudicative authority, and its decision not to abstain from

exercising that jurisdiction. Thus, we are not reviewing the

disposition of the malpractice, negligence, and fraud dispute on the

merits. Inasmuch as we conclude that we lack jurisdiction to review a

substantial portion of the issues appellants raise on this appeal, and

that the bankruptcy and district courts did not err in the rulings over

which we have appellate jurisdiction, we will affirm the July 14, 2006

memorandum order of the district court and, accordingly, in effect,

will affirm the bankruptcy court’s opinion and order dated September

2, 2005. 

II. FACTS AND PROCEDURAL HISTORY

The case has grown out of the activities of Earned Capital

Corporation, Managed Properties, Inc., Canterbury Village, Inc., and

Eastern Arabian, Inc. (collectively “Debtors”), corporations engaged

in developing real property. To raise capital, the Debtors sold

investment shares in the property, and, in return, promised the

investors an annual return. 

The Debtors’ plan involved the development of 600 acres in
As a matter of convenience we will use the name Ernst & Young 1

when referring to Arthur Young & Company. 

4

the Borough of Seven Fields, Butler County, Pennsylvania, with

townhouses and recreational facilities. Unfortunately for the Debtors,

however, their plan did not go as expected. Thus, they became

delinquent in making the payments they promised to the investors,

leading the Debtors to oversell shares to maintain the promised

payments. The Debtors could not continue this Ponzi-type scheme

indefinitely, and, consequently, on June 3, 1986, they filed separate

voluntary petitions under Chapter 11 of the Bankruptcy Code in the

Bankruptcy Court for the Western District of Pennsylvania. That

court consolidated the Chapter 11 proceedings on June 5, 1986, in a

case entitled In re Earned Capital Corporation, No. 86-21474. 

Prior to the time that the Debtors filed their bankruptcy

petitions, they had employed the accounting firm of Arthur Young &

Company (a predecessor of Ernst & Young) to review their financial

records and prepare the financial schedules needed for the bankruptcy. 

On June 12, 1986, the bankruptcy court approved the appointment of 

Ernst & Young. Ernst & Young determined that the Debtors were 1

insolvent and that they owed the vast majority of their obligations

(totaling over $60,000,000) to the approximately 2,500 investors. An

Official Committee of Unsecured Creditors (“Committee”), selected

from among the investors, represented the investors in the bankruptcy

case. The Committee and the Debtors filed competing plans of

reorganization, both calling for consolidation of the Debtors’ assets

and liabilities into one surviving reorganized corporation.

The bankruptcy court found the Debtors to be insolvent and

confirmed an Amended Plan of Reorganization (“Amended Plan”) on

October 21, 1987. According to appellants, the court based this

disposition on information that Ernst & Young provided the court and

the Debtors’ creditors. Under the Amended Plan, the Debtors were

merged into a successor entity, Seven Fields Development

Corporation (“Seven Fields”), and their assets, the principal one of

which was the Butler County real estate, became assets of Seven

Fields. Under the Amended Plan, all of the secured and trade

creditors’ claims were to be paid in full or in accordance with

agreements otherwise negotiated, but the investor class of unsecured

creditors was to receive common stock in Seven Fields at a par value

equal to 5% of their allowed claims with the remaining 95% classified

as unsecured, nondischargeable debt. Under the Amended Plan, “[a]ll
5

activities of [Seven Fields] shall seek to achieve the goal of full

payment to [the investors/stockholders],” app. at 33, and assets were

to “be managed, improved, developed and sold, etc. where

appropriate, to the end that all creditors will eventually achieve

maximum returns,” id. at 22. The investors voted overwhelmingly in

favor of the plan, 2,179 to 87, on an individual basis, and, in claims

terms, $62,639,067 to $13,758,972. After confirmation, Seven Fields

liquidated its assets, substantially through the sale of the Butler

County real estate, and made distributions to the investors. Seven

Fields, however, did not pay the allowed claims of the investors in full

through this liquidation. 

On September 29, 2004, appellants, on behalf of themselves

and others similarly situated as shareholders of Seven Fields, filed a

complaint against Ernst & Young in the Court of Common Pleas of

Butler County, alleging professional negligence (Count I), fraud and

deceit (Count II), and negligent misrepresentation (Count III). 

Because, as will be seen, the precise allegations in the complaint are

significant in determining a central issue on appeal, i.e., the

jurisdiction of the bankruptcy court over appellants’ state-law causes

of action, we recite the relevant allegations verbatim:

2. Prior to the formation of Seven Fields . . . ,

the predecessor entities were involved in a bankruptcy

in which [Ernst & Young] acted as accountants and

performed services on behalf of, inter alia, the

[appellants] and other members of the class – during

and after the bankruptcy.

3. As a result of the work performed by [Ernst

& Young], all of the predecessor entities were

represented by [Ernst & Young] to be insolvent, the

predecessor entities were consolidated and a successor

corporation, Seven Fields . . . , acceded to ownership of

the assets of the predecessor entities which included a

substantial tract of land in Butler County,

Pennsylvania.

4. In addition to declaring the predecessor

entities insolvent, [Ernst & Young] advised the United

States Bankruptcy Court, the [appellant] class and

others, that even after the reorganization and

bankruptcy and in spite of the fact that Seven Fields . .
The complaint uses the words “received by” but we believe that 2

appellants intended to mean “given by” or “received from.”

6

. owned a substantial tract of land in Butler County,

Pennsylvania, [Ernst & Young] represented to the

[appellant] class members and others that the new

company had a debt of about $280 million to the group

of investors.

5. The foregoing had been represented

previously and throughout the bankruptcy by [Ernst &

Young] to the United States Bankruptcy Court, the

investor class and others.

6. [Appellants] and the remaining class

members had all invested varying sums of money in

one or more of the predecessor entities including

Earned Capital, Inc. and upon being advised by [Ernst

& Young] that the company was $280 million in debt,

[appellants] and the remaining class members were

horrified in that [Ernst & Young], in effect, represented

that [appellants] and the remaining class members had

either lost all of their money or were going to lose a

substantial portion of the money.

7. As a result of the advice received by[2]

[Ernst & Young], an effort to develop the property and

other assets was made which included sales of assets at

prices below their market value and a general

development scheme was put together by the successor

corporation and its officers, which instead of

emphasizing the highest use of the properties to which

the new corporation had title, was instead calculated to

generate cash as quickly as possible in an effort to both

‘repay’ [appellants] and other class members ‘their

loss’ and in a further effort to reassure [appellants] and

other class members that some money would be

returned. 

8. As a result of the state of mind and

perception on the part of the new corporation,

[appellants] and other class members, the property was

developed and/or sold in a manner which caused all of
Ernst & Young raised other defenses that we need not describe. 3

7

the investors to suffer losses on the investment

previously made and to fail to realize even a return of

the full amount of their investment.

App. at 43-44. 

On November 5, 2004, Ernst & Young filed a notice of

removal of the Butler County case with the clerk of the bankruptcy

court, removing the case to the United States Bankruptcy Court for the

Western District of Pennsylvania under Rule 9027(a) of the Federal

Rules of Bankruptcy Procedure and 28 U.S.C. §§ 1452 and 1334. 

Then, Ernst & Young filed a motion to dismiss appellants’ complaint

on November 11, 2004, arguing that even though their claims “are in

the nature of a shareholder derivative suit,” appellants failed to assert

the claims on behalf of Seven Fields and had not made any demand on

Seven Fields as required under Federal Rule of Civil Procedure 23.1. 

App. at 56-57. Additionally, Ernst & Young argued that the doctrines

of res judicata, collateral estoppel, and judicial estoppel required

dismissal of the complaint because the claims “necessarily require

[the court] to disturb a valid, final and binding reorganization plan and

confirmation order, as well as [the court’s] order approving [its] fees.” 

Id. at 57.3

Appellants responded with a motion requesting that the

bankruptcy court remand the case to the Butler County Court of

Common Pleas pursuant to 28 U.S.C. § 1452(b) and Federal Rule of

Bankruptcy 9027(d), or, in the alternative, abstain from exercising

jurisdiction under 28 U.S.C. §§ 1334(c)(1) and (c)(2). In this motion,

appellants argued that the notice of removal was procedurally

deficient in that Ernst & Young erroneously filed it with the clerk of

the bankruptcy court and not the clerk of the district court, and that the

bankruptcy court did not have subject matter jurisdiction. Appellants,

in the alternative, also asserted that if the bankruptcy court did have

jurisdiction, it should have abstained permissively or was required to

abstain mandatorily from exercising its jurisdiction over the state-law

causes of action. Moreover, appellants filed a “Motion to Strike

Defendants’ Notice of Removal,” arguing that Ernst & Young was not

permitted to remove the state-court case as the underlying bankruptcy

case on which removal was predicated had been marked “closed” and

Ernst & Young did not move to reopen the case before filing the

notice of removal. 
8

On September 2, 2005, the bankruptcy court issued an opinion

and order in which it sua sponte reopened the underlying bankruptcy

case and denied appellants’ motions to remand and strike the notice of

removal, thus asserting its subject matter jurisdiction to rule on the

merits of the case. In re Earned Capital Corp., 331 B.R. 208 (Bankr.

W.D. Pa. 2005). On the merits, the bankruptcy court granted Ernst &

Young’s motion to dismiss for failure to state a claim because

“[appellants’] claims are shareholder derivative claims that can only

be presented by [appellants] through a shareholder derivative suit,”

and appellants failed to make a demand on “the board of directors or

comparable authority” under Federal Rule of Civil Procedure 23.1 for

them to bring the action against Ernst & Young. Id. at 222-24. The

court also found that it should dismiss the complaint on the grounds

of res judicata, collateral estoppel, and judicial estoppel inasmuch as

the bankruptcy court already had declared the Debtors insolvent in the

confirmation proceedings and had awarded fees to Ernst &

Young–litigation in which the Committee, which represented the

interests of the investors, fully participated. Id. at 224-28. Appellants

appealed from the opinion and order of the bankruptcy court to the

district court under 28 U.S.C. § 158(a), which, in turn, on July 14,

2006, affirmed the order of the bankruptcy court and adopted the

bankruptcy court’s opinion and order as its own. Geruschat v. Ernst

& Young LLP, 346 B.R. 123 (W.D. Pa. 2006). 

On August 7, 2006, appellants timely filed a notice of appeal,

contesting the district court’s affirmance of the bankruptcy court’s

order (1) granting Ernst & Young’s motion to dismiss their case, (2)

denying appellants’ motion to strike Ernst & Young’s notice of

removal, (3) denying appellants’ motion to remand the case to the

state court, and (4) reopening the underlying bankruptcy case. 

However, when we examined appellants’ brief, we observed that it

was devoid of any discussion relating to the merits of the case insofar

as the district court affirmed the bankruptcy court’s opinion and order

granting Ernst & Young’s motion to dismiss. It thus appeared that

between the time appellants filed their notice of appeal and the time

that they filed their brief, they decided not to appeal the bankruptcy

and district courts’ disposition of the case on the merits and, instead,

challenged only the resolution of jurisdictional issues in the

bankruptcy proceedings. At oral argument, appellants confirmed that

they had made a deliberate decision to forego their appeal insofar as it

relates to the merits of the dispute. Accordingly, the only issues

appellants raise before us relate to removal procedure, subject matter

jurisdiction, the bankruptcy court’s adjudicative authority over the
9

state-law claims, and absention. In particular, appellants present the

issues before us as follows:

1. Does a bankruptcy court have subject matter

jurisdiction to adjudicate a case removed from

state court where the underlying bankruptcy

case on which removal is predicated was closed

many years before removal and where the

removing party did not seek to open the earlier

bankruptcy case for cause pursuant to 11

U.S.C. § 350(b) prior to removal of the state

court case?

2. May a party within this Circuit remove a case

directly to the bankruptcy court under 28

U.S.C. § 1452(a) without a prior referral from

the district court?

3. Did the requisite ‘close nexus’ exist under

Resorts Int’l, Inc. Litig. Trust v. Price

Waterhouse [, 372 F.3d 154 (3d Cir. 2004),] to

confer subject matter jurisdiction in the district

court over [appellants’] state law claims where

such claims affected neither the bankruptcy

estate nor the debtor, and where success on the

merits of such claims would have no impact on

the property of the estate or distribution to any

creditor?

4. Did [appellants’] state law malpractice action

constitute a ‘non-core’ proceeding under 28

U.S.C. § 157 thus depriving the bankruptcy

court of original jurisdiction to enter final

orders and further requiring the district court to

abstain from jurisdiction under 28 U.S.C. §

1334(c)(2)?

5. Did the bankruptcy court commit clear error of

law when it assumed that the status of

[appellants’] complaint as a ‘core proceeding’

was dispositive of the issue of discretionary

abstention under § 1334(c)(1)?
In appellants’ opening brief they limit their discussion of our 4

jurisdiction to the following sentence: “The United States Court of

Appeals for the Third Circuit currently has jurisdiction over this matter

pursuant to 28 U.S.C. § 1291 as an appeal from a final decision and

order of the district court.” Appellants’ br. at 1. In Ernst & Young’s

brief it does not mention our jurisdiction, thus implying that it initially

agreed with appellants on this point. Nevertheless, we have a “special

obligation to satisfy [ourselves] of [our] own jurisdiction” even if the

parties agree that we have jurisdiction. Korytnyuk v. Ashcroft, 396 F.3d

272, 279-80 (3d Cir. 2005). As will be seen, an inquiry into our

jurisdiction is more complicated than the parties apparently originally

believed.

10

Appellants’ br. at 2. We have divided those issues into three

categories: (1) removal procedure errors (issues 1 and 2); (2)

jurisdiction (issues 3 and 4); and (3) abstention (issues 4 and 5). 

III. JURISDICTION AND STANDARD OF REVIEW

Appellants’ central issue in this case implicates the question of

whether the bankruptcy court had jurisdiction under 28 U.S.C. §§ 157

and 1334. There is no question that the district court had jurisdiction

over the appeal of the bankruptcy court’s September 2, 2005 opinion

and order under 28 U.S.C. § 158(a). 

But before we reach the question of whether the bankruptcy

court had jurisdiction and the other issues appellants raise, we first

must ensure that we have jurisdiction to review this case under 28

U.S.C. §§ 1291 and 158(d). See Emerald Investors Trust v. Gaunt

Parsippany Partners, 492 F.3d 192, 193-94 (3d Cir. 2007) (“As

always, after we are satisfied of our own jurisdiction, the threshold,

and, indeed, as it turns out, the only issue on this appeal is whether the

district court had subject matter jurisdiction.”) (footnote omitted). 

The parties initially did not question our jurisdiction. Prior to 4

argument, however, we observed that there might be a problem with

respect to our jurisdiction. Thus, at our direction, our clerk sent a

notice to the parties requesting that they “be prepared to briefly

discuss whether 28 U.S.C. § 1334(d) precludes us from reviewing

both the Bankruptcy Court’s decision to abstain under § 1334(c)(1)

and the District Court’s affirmance of this decision, because

discretionary abstention does not appear to be subject to appeal
Unfortunately our letter was exactly wrong because the 5

bankruptcy court did not abstain. As it happens we are confident that the

attorneys realized that we had erred and were not misled.

It is possible that we could grant relief to appellants without 6

ordering that the bankruptcy and district courts remand the case to the

state court but inasmuch as we do not find that they erred in any respect

we need not set forth what that possible relief might be.

11

pursuant to § 1334(d).” At oral argument, we expressed an 5

additional concern with respect to our jurisdiction to review certain

aspects of the case under 28 U.S.C. § 1452(b), the bankruptcy

removal statute, which bars a court of appeals’ review of decisions to

remand or not to remand made on the basis of “any equitable ground.” 

Accordingly, we asked the parties to submit supplemental memoranda

addressing jurisdictional issues. Having given the parties an

opportunity to address the questions relating to our jurisdiction, and

having received those memoranda and heard their oral arguments, the

issues with respect to our jurisdiction are now ripe for our disposition.

The essence of this appeal is that the bankruptcy or district

court should have remanded the case to the state court because (1)

Ernst & Young’s notice of removal was procedurally defective, (2) the

federal courts lacked subject matter jurisdiction over the state-law

causes of action, (3) the bankruptcy court lacked final adjudicative

authority, and (4) the federal courts should have abstained

permissively or were required to abstain mandatorily from asserting

their jurisdiction. There are three statutory provisions potentially 6

affecting our jurisdiction to review the orders in which the bankruptcy

and district courts declined to remand the case, assumed jurisdiction,

and did not abstain from asserting jurisdiction: 28 U.S.C. § 1447(d)

(general removal/remand); 28 U.S.C. § 1452(b) (bankruptcy

removal/remand); and 28 U.S.C. § 1334(c) and (d) (bankruptcy

abstention and limitation of appeals of orders with respect to

abstention). 

Section 1447(d) is the general statutory provision governing

the reviewability of orders remanding cases removed from state

courts. Section 1447(d) states “[a]n order remanding a case to the

State court from which it was removed is not reviewable on appeal or

otherwise [except in certain civil rights cases].” Though the Supreme

Court has concluded that section 1447(d) applies regardless of

whether a party has removed a case pursuant to the general removal
12

provision, 28 U.S.C. § 1441(a), or the bankruptcy removal provision,

28 U.S.C. § 1452, see Things Remembered, Inc. v. Petrarca, 516 U.S.

124, 128, 116 S.Ct. 494, 497 (1995), section 1447(d) is inapplicable

here as in this case we are not dealing with an order remanding the

case. After all, the bankruptcy court denied appellants’ motions

seeking to remand the case and the district court affirmed the denial. 

See City & County of San Francisco v. PG&E Corp., 433 F.3d 1115,

1122 (9th Cir.) (holding that section 1447(d) does not apply to

decisions not to remand a case), cert. denied, 127 S.Ct. 208 (2006); In

re Bissonnet Invs. LLC, 320 F.3d 520, 525 (5th Cir. 2003) (same). 

Indeed, we regularly entertain appeals following final judgments in

which appellants contend that the district court erred in denying a

motion to remand. 

In contrast, under the removal statute applicable specifically to

bankruptcy cases, 

[t]he court to which such claim or cause of action is

removed may remand such claim or cause of action on

any equitable ground. An order entered under this

subsection remanding a claim or cause of action, or a

decision to not remand, is not reviewable by appeal or

otherwise by the court of appeals under section 158(d),

1291, or 1292 of this title or by the Supreme Court of

the United States under section 1254 of this title. 

28 U.S.C. § 1452(b) (emphasis added). Thus, section 1452(b), in

addition to barring review of decisions to remand, precludes appellate

review of decisions “to not remand,” the type of order involved in this

case. 

But section 1452(b) makes clear that a decision to remand or

not to remand a case is unreviewable by a court of appeals only when

the district court relies on “any equitable ground” as the basis for its

decision. While the statute does not define “equitable ground,” we

have recognized that “equitable” as used in section 1452(b) is not to

be understood as distinguishing equitable from legal grounds in a

traditional sense, but, instead, “equitable” “signals that which is

reasonable, fair, or appropriate.” Allied Signal Recovery Trust v.

Allied Signal, Inc., 298 F.3d 263, 268 (3d Cir. 2002) (quoting Things

Remembered, 516 U.S. at 133, 116 S.Ct. at 499 (Ginsburg, J.,

concurring)). 
As we discussed above, section 1447(d) is inapplicable here as

7

it only bars review of orders to remand, not orders not to remand. 

13

Accordingly, we first must decide which, if any, of the

categories of issues appellants raise contesting the bankruptcy and

district courts’ decisions not to remand the state-law causes of action

are insulated from appellate review by section 1452(b). Additionally,

we also must determine whether 28 U.S.C. § 1334, the bankruptcy

abstention provision, insulates from our review the decisions relating

to abstention. 

A. Removal Procedure Errors

We have no doubt that the bankruptcy court’s “decision to not

remand” the case in the face of appellants’ procedural arguments that

Ernst & Young did not seek to reopen the bankruptcy case before

filing its notice of removal and that Ernst & Young improperly filed

the notice of removal directly with the bankruptcy clerk was based on

the bankruptcy court’s determination that there were not “equitable

ground[s],” i.e., “reasonable, fair, or appropriate” grounds, for the

remand, a decision that we cannot review. The Supreme Court in

Things Remembered faced very similar circumstances. In that case,

the issue was “whether a federal court of appeals may review a district

court order remanding a bankruptcy court case to state court on

grounds of untimely removal.” Things Remembered, 516 U.S. at 125,

116 S.Ct. at 496. The Court decided that the general statutory

provision governing the reviewability of remand orders, 28 U.S.C. §

1447(d), barred appellate review of the remand order. See Things 7

Remembered, 516 U.S. at 127-28, 116 S.Ct. at 496-97. While the

majority opinion did not discuss the possibility that the bankruptcy

remand provision of section 1452(b) similarly would bar review,

Justice Ginsburg in her concurring opinion, joined by Justice Stevens,

concluded that section 1452(b) independently would bar review of the

order remanding the case by reason of untimely removal, finding that

the basis for remand was on an “equitable ground.” Id. at 131-34, 116

S.Ct. at 498-500 (Ginsburg, J., concurring).

Surely, if a remand based on untimely removal is predicated

on an “equitable ground,” the decision not to remand based on the

procedural defects raised here also addresses a proposed remand on

equitable grounds, and thus we are precluded from reviewing it. We

recognize that the issue in Things Remembered was whether a

decision to remand was unreviewable and the issue here is whether a
In any event, even if we had jurisdiction to consider the question 8

of whether Ernst & Young filed the notice of removal with the

appropriate clerk, appellants’ argument would fail. Federal Rule of

Bankruptcy Procedure 9027(a)(1) permits the filing of a notice of

removal with the “clerk,” a term that Rule 9001(3) defines as

“bankruptcy clerk,” and 28 U.S.C. § 1452(a) permits removal to the

“district court,” an entity of which the bankruptcy court is a unit. 28

U.S.C. § 151; see In re Gianakas, 56 B.R. 747, 750 (N.D. Ill. 1985). We

also point out that the Western District of Pennsylvania has a general

order referring all bankruptcy cases and proceedings filed in the district

to the bankruptcy judges. See Order of Reference of Bankruptcy Cases

and Proceedings Nunc Pro Tunc (Oct. 16, 1984), available at

http://www.pawb.uscourts.gov/pdfs/ OrderOfReference.pdf. Moreover,

even if we concluded that the notice of removal should have been filed

with the district court and that the filing error compels us to reverse, our

ruling would be meaningless. In this regard we take note of 28 U.S.C.

14

decision not to remand is unreviewable, and, although we can

distinguish the cases on that basis, this difference is not material here

as bankruptcy remand section 1452(b) tells us that appellate courts

should treat decisions to remand or not remand alike in ascertaining

their own jurisdiction.

Appellants do not specifically discuss in their supplemental

memorandum whether we are barred from reviewing the issue raised

relating to Ernst & Young’s filing of the notice of removal with the

bankruptcy clerk and not the district court clerk. Nevertheless, we are

treating appellants’ discussion relating to our obligation to review

their challenges to the bankruptcy court’s subject matter jurisdiction

as incorporating this aspect of their appeal. However, we do not

categorize this filing issue as relating to the bankruptcy court’s subject

matter jurisdiction, a holding that would be very significant with

respect to our jurisdiction for, as we next discuss, section 1452(b)

does not preclude a court of appeals from reviewing a challenge to a

bankruptcy or district court’s subject matter jurisdiction. Rather,

Ernst & Young’s error, if there was an error, was merely an error

relating to removal procedure in the nature of a “claim-processing”

issue as the Supreme Court used that term in Bowles v. Russell, 127

S.Ct. 2360, 2364 (2007). It had nothing to do with the “delineat[ion

of] the classes of cases (subject matter jurisdiction) . . . falling within

a court’s adjudicatory authority.” Kontrick v. Ryan, 540 U.S. 443,

455, 124 S.Ct. 906, 915 (2004). Thus, section 1452(b) precludes us

from reviewing the alleged procedural error here. 

8
§ 1631 which provides that when a civil action is filed with a district

court (of which the bankruptcy court is a unit) with a want of jurisdiction

the court shall in the interest of justice transfer the case to a court in

which it could have been filed originally. Thus, if the bankruptcy clerk

thought that the removal should have been to the district court, he almost

certainly would have sent the removal notice to that court which then

would have referred it back to the bankruptcy court pursuant to the

general referral order. Accordingly, if we reversed on the filing point,

vacated the bankruptcy and district courts’ orders, and remanded the

matter to the bankruptcy court to enter an order not inconsistent with our

opinion, we do not doubt that rather than dismissing the case, the

bankruptcy court would transfer it to the district court which then would

refer it back to the bankruptcy court following which all the vacated

orders of the bankruptcy court, and, if appellants again appealed, the

district court’s memorandum order of July 14, 2006, would be reinstated.

It is obvious why we look to the substance of the court’s order

9

and not the party’s captioning of its motion in determining the

applicability of section 1452. If we were to look at the form of the

party’s motion, we would encourage attempts to circumvent the broad

bar precluding our review of remand orders under section 1452. This

case provides a great example. Appellants caption their motion as a

“Motion to Strike Defendants’ Notice of Removal.” However, ordinarily

when a party files a motion to strike under the Federal Rules of Civil

Procedure it files the motion under Federal Rule of Civil Procedure

12(f), which permits a party to seek to have “stricken from any pleading

any insufficient defense or any redundant, immaterial, impertinent or

scandalous matter.” But appellants did not file their motion to strike for

any such purpose. In the circumstances the appropriate motion here

would have been a “motion to remand” under 28 U.S.C. § 1447(c),

which provides for “[a] motion to remand the case on the basis of any

defect other than lack of subject matter jurisdiction,” or a motion under

15

Appellants argue that section 1452(b) does not bar our review

of issues attributable to Ernst & Young’s failure to seek to reopen the

bankruptcy case before filing its notice of removal, as they raised the

issue with the bankruptcy judge “in a motion to strike defendant’s

notice of removal, and not by means of a motion to remand.” 

Appellants’ Suppl. Mem. at 2. We do not find this argument to be

substantial. Inasmuch as section 1452 precludes our review of

“decision[s] to not remand,” we look to the substance of the

bankruptcy court’s decision and not the form of the party’s motion in

determining the applicability of section 1452. It is clear that the 9
28 U.S.C. § 1452, which provides for remand of removed claims relating

to bankruptcy cases on “any equitable ground.” We also point out that

we are not aware of any rule or other authority authorizing a motion to

strike a notice of removal, though we are aware that parties sometimes

characterize motions seeking certain relief other than those under Rule

12(f) as motions to strike.

Although we do not have jurisdiction to review this issue, we 10

point out that it was within the bankruptcy judge’s discretion to reopen

the bankruptcy case sua sponte so that “matters that have a significant

connection with the administration ofthe case can be addressed.” Earned

Capital, 331 B.R. at 217; see 11 U.S.C. § 350 (providing for the

reopening of a bankruptcy case “for other cause”); 11 U.S.C. § 105(a)

(permitting court to act sua sponte); Donaldson v. Bernstein, 104 F.3d

547, 551-52 (3d Cir. 1997) (rejecting contention that the bankruptcy

court lacked jurisdiction on the ground that it was acting in a closed case

when the court sua sponte reopened the case “for other cause”). 

16

bankruptcy court’s decision in which it denied “Plaintiffs’ Motion to

Strike Defendants’ Notice of Removal,” and the district court’s

affirmance thereof, are “decision[s] to not remand” inasmuch as they

deny appellants’ request to remand the matter to the state court

because of the alleged procedural defect. We add that appellants

themselves acknowledge this point for they requested in their

proposed order attached to their motion that the court order recite that

“Defendants’ Notice of Removal is hereby stricken, and this case is

remanded to the Court of Common Pleas of Butler County,

Pennsylvania.” App. at 145.10

B. Bankruptcy Court Jurisdiction and Adjudicative

Authority

We agree with appellants that the decisions of the bankruptcy

and district courts not to remand the case on the basis that the

bankruptcy court lacked jurisdiction and their argument that the

bankruptcy court did not have the authority to exercise final

adjudicative authority, while “not per se reviewable” under section

1452(b), nevertheless are subject to appellate review. See Things

Remembered, 516 U.S. at 132 n.1, 116 S.Ct. at 499 n.1 (Ginsburg, J.,

concurring); see also City & County of San Francisco, 433 F.3d at

1121 (“This is a question of subject matter jurisdiction that does not

implicate the jurisdictional limitations of section 1452(b).”); In re

V&M Mgmt., Inc., 321 F.3d 6, 7 (1st Cir. 2003) (“Because
The 2005 Amendments in Pub. L. 109-8, § 1219, struck out 11

“made under this subsection” and inserted “made under subsection (c)”

and substituted “Subsection (c) and this subsection” for “This

subsection” in the last sentence of section 1334(d) dealing with stays.

But we are satisfied that the 2005 Amendments did not make substantive

changes in section 1334 material here.

17

[appellant’s] argument attacks the lower court’s subject matter

jurisdiction, we not only have jurisdiction to review but are obligated

to do so.”); Owens-Ill., Inc. v. Rapid Am. Corp. (In re Celotex Corp.),

124 F.3d 619, 625 (4th Cir. 1997) (“[W]e hold that § 1452(b) . . . does

not preclude us from reviewing the district court’s decision denying

[the] motion to remand to the extent that [the] motion rested on the

district court allegedly lacking subject matter jurisdiction.”). We

reach our conclusion because courts of appeals on appeals from

bankruptcy and district courts must ensure that those courts do not

exceed the authority that Article III of the Constitution and Congress

has granted them. Section 1452 cannot detract from this obligation

and we are of the view that a bankruptcy judge absent consent of the

parties does not have jurisdiction to enter a final order in a non-core

matter. 28 U.S.C. § 157(c). Of course, there is no question that the

district court had jurisdiction to entertain the appeal from the

bankruptcy court. See 28 U.S.C. § 158(a).

C. Abstention

The question of whether we have jurisdiction to review the

district court’s affirmance of the bankruptcy court’s decision not to

abstain under 28 U.S.C. § 1334(c)(2) (mandatory abstention) and

section 1334(c)(1) (permissive abstention) is a two-step process. 

First, we must decide which version of section 1334 we are to apply in

this case. This selection is significant as Congress adopted

amendments to section 1334 altering courts of appeals’ jurisdiction in

1984 (“the 1984 Amendments”), 1990 (“the 1990 Amendments”), and

1994 (“the 1994 Amendments”). Congress enacted the current

version of section 1334 in the 1994 Amendments, though it further

amended section 1334 in technical non-substantive respects in 2005.11

Second, once we decide which version of section 1334 applies, we

must construe the statute to determine the extent of and limitations on

a court of appeals’ jurisdiction over abstention decisions. 

Under the current version of section 1334(d),
18

[a]ny decision to abstain or not to abstain made under

subsection (c) (other than a decision not to abstain in a

proceeding described in subsection (c)(2) [mandatory

abstention]) is not reviewable by appeal or otherwise

by the court of appeals under section 158(d), 1291, or

1292 of this title . . . . Subsection (c) and this

subsection shall not be construed to limit the

applicability of the stay . . . .

Thus, we have recognized that, as section 1334(d) now stands,

“appeals of decisions not to exercise mandatory abstention pursuant to

§ 1334(c)(2) are explicitly permitted,” Stoe v. Flaherty, 436 F.3d 209,

212 (3d Cir. 2006), yet appeals of decisions involving permissive

abstention, whether or not the court abstains, are barred, see Allied

Signal, 298 F.3d at 269. Moreover, under section 1334(d) a decision

mandatorily abstaining is not appealable.

Inasmuch as appellants appeal the denial of their motion for

mandatory abstention, it might be thought that they would contend

that the current version of section 1334 is applicable here. Yet they

contend that section 1334(d) in its current form does not control this

case, a position they predicate on the circumstance that the Debtors

filed their bankruptcy petitions in 1986, well before Congress enacted

the current version of section 1334 through the 1994 Amendments

and even well before Congress enacted the 1990 Amendments. 

Appellants’ Suppl. Mem. at 3-4. Actually it is understandable that

they take this position as they argue that the bankruptcy court should

have abstained both mandatorily and permissively, and currently, as

we have indicated, appeals of orders denying permissive abstention

unquestionably are not allowed. 

The appellants rely on the 1984 Amendments, i.e., the version

the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.

L. No. 98-353, 98 Stat. 333, enacted on July 10, 1984, because that

version provided that “[a]ny decision to abstain made under this

subsection is not reviewable by appeal or otherwise.” See Christo v.

Padgett, 223 F.3d 1324, 1331 (11th Cir. 2000). But the 1984

Amendments did not limit appeals of decisions not to abstain. 

Accordingly, if we were to look to the 1984 Amendments for our rule

of decision, the bankruptcy court’s decision not to abstain mandatorily

or permissively would be subject to our review and we could review

all of appellants’ abstention arguments. 
Ernst & Young does contend that “alternatively” to the 1990 12

Amendments being applicable “the 1994 Amendments apply” to

appellants’ case, Appellees’ Suppl. Memo at 9, and that under “both the

1990 and 1994 amended versions of 28 U.S.C. § 1334, [we are] without

jurisdiction to review [the bankruptcy judge’s] decision not to remand

and not to abstain.” Id. at 10. We understand, however, that Ernst &

Young primarily relies on the version of section 1334 as amended by the

1990 Amendments.

19

Ernst & Young, on the other hand, urges us to look to the

version of section 1334(c)(2) enacted in the Judicial Improvements

Act of 1990, Pub. L. No. 101-650, 104 Stat. 5089, 5113, i.e., the 1990

Amendments, which provided that “[a]ny decision to abstain or not to

abstain under this subsection is not reviewable by appeal or otherwise

by the court of appeals . . . .” Appellees’ Suppl. Mem. at 3-4. Ernst &

Young contends that under the 1990 Amendments we are prohibited

from reviewing decisions not to abstain either mandatorily or

permissively. Id. at 4-5. Thus, appellants and Ernst & Young take

polar opposite approaches with respect to our jurisdiction to hear the

appeal with respect to abstention.

We have examined the question of which version of section

1334 is applicable, and have concluded that section 1334(d), as

amended in 1994, and which, with the minor non-substantive 2005

Amendments, i.e., the current law, controls this case even though

neither party contends that the 1994 Amendments are applicable. We

reach this conclusion because Congress enacted the 1994

Amendments long before appellants initiated their action in the state

court.

12

In considering whether the 1994 Amendments, and thus

current law, are applicable we point out that Congress made it clear

that the 1994 Amendments, with certain exceptions not relevant here,

“shall not apply with respect to cases commenced under title 11 of the

United States Code before the date of the enactment of this Act

[October 22, 1994].” Bankruptcy Reform Act of 1994, Pub. L. No.

103-394, § 702(b) (Application of Amendments), 108 Stat. 4106,

4150; see also 28 U.S.C. § 1334 (Historical and Statutory Notes,

Effective and Applicability Provisions) (stating that the 1994

Amendments do “not apply with respect to cases commenced under

Title 11 of the United States Code before Oct. 22, 1994”); In re

Middlesex Power Equip. & Marine, Inc., 292 F.3d 61, 67 n.5 (1st Cir.

2000); Christo, 223 F.3d at 1332. While there has been some
20

discussion in other courts of appeals as to whether a “case[]

commenced under title 11” refers to the bankruptcy case or the civil

case which was removed, see id., a distinction that is critical here as

the Debtors filed their petitions in 1986 and appellants instituted this

action in 2004, we need not concern ourselves at length with this

question regarding application of the 1994 Amendments for we

already have determined that “cases under Title 11” as used in section

1334(a) refers “merely to the bankruptcy petition itself,” as opposed to

“proceeding[s],” which refers “to the steps within the ‘case’ and to

any subaction within the case that may raise a disputed or litigated

matter.” In re Combustion Eng’g, Inc., 391 F.3d 190, 226 n.38 (3d

Cir. 2004). We do not see why “cases” should have a different

meaning in the words “cases commenced under title 11” in Pub. L.

No. 103-394 § 702(b), with respect to the effective date of the 1994

Amendments. Thus, as the 1994 Amendments do not apply to cases,

i.e., the bankruptcy case itself, commenced under title 11 before

October 22, 1994, they do apply in this proceeding which was

instituted after October 22, 1994, and, rather than being a case within

the meaning of Pub. L. No. 103-394, § 702(b), is a “subaction” within

the bankruptcy case initiated long after that date.

 It might be thought from the foregoing analysis that we would

conclude that we do not have jurisdiction over this appeal with respect

to the bankruptcy court’s refusal to abstain permissively but do have

jurisdiction over its refusal to abstain mandatorily as appeals of

decisions not to abstain in proceedings commenced after October 22,

1994, are permitted when mandatory abstention has been refused. 

Indeed, at first glance it would seem that nothing could be clearer as

section 1334(d) provides that only “a decision not to abstain in a

proceeding described in subsection (c)(2)” i.e., mandatory abstention,

is reviewable.

Yet there is a special situation here. As we point out below in

dealing with the distinction between “related to,” i.e., non-core

jurisdiction, and “arising under title 11 or arising in a case under title

11,” i.e., core jurisdiction, in determining whether the bankruptcy

court had final adjudicative power, in this case the bankruptcy court

was applying “arising in” jurisdiction. Moreover, section 1334(c)(2)

in providing for mandatory abstention applies only to “a proceeding

based upon a State law cause of action related to a case under title 11

but not arising under title 11 or arising in a case under title 11.” 

Consequently, it necessarily follows from our holding that this is an

“arising in” case, that there was no possible basis for the bankruptcy
Even though our opinion has the effect of rejecting appellants’

13

mandatory abstention contentions on their merits, we are not assuming

jurisdiction contrary to the holding in Steel Co. v. Citizens for a Better

Environment, 523 U.S. 83, 93-102, 118 S.Ct. 1003, 1012-16 (1998), in

determining that this is a core case. In this regard we point out that we

have jurisdiction to decide whether this case is core or non-core as

appellants challenge the bankruptcy court’s exercise of final adjudicative

power, and a resolution of that question requires that we determine if the

case is core or non-core. The determination of that issue has an

incidental effect on the jurisdictional question of whether we have

authority to hear appellants’ arguments with respect to mandatory

abstention and thus has the collateral effect of rejecting appellants’

mandatory abstention claims on their merits.

21

and district courts to abstain mandatorily under the 1994 Amendments

or at any time since their enactment. See In re Gober, 100 F.3d 1195,

1206 (5th Cir. 1996) (“Mandatory abstention applies only to non-core

proceedings -- that is, proceedings ‘related to a case under title 11, but

not arising under title 11, or arising in a case under title 11.’”). Thus,

we are not dealing with a decision denying mandatory abstention as

no matter how appellants entitled their application for abstention they

did not make a motion for abstention coming within section

1334(c)(2). Consequently, notwithstanding appellants’ efforts to

13

characterize this case as involving mandatory abstention, it is only a

permissive abstention case and we do not have jurisdiction over the

appeal of the denial of abstention.

We realize that our result differs from that of the Court of

Appeals for the Fifth Circuit In re Southmark Corp., 163 F.3d 925

(5th Cir. 1999), a case on which appellants rely. In that case, the court

apparently believed that it should look to the filing date of the

bankruptcy petition when determining which version of section 1334

applied. See id. at 929. Thus, the court applied the 1984

Amendments in a case in which the Chapter 11 bankruptcy petition

was filed in 1989, even though the civil action before the court of

appeals was filed in a state court and removed to a federal court in

1995, after the enactment of both the 1990 Amendments and the 1994

Amendments and prior to the matter being before the court of appeals

in 1999. Id. at 927-29. The court did not discuss the implications of

the 1990 Amendments but seemed to think that inasmuch as

“Southmark’s case,” evidently meaning its Chapter 11 filing,

“predates [the 1994] Amendments and was filed when decisions not

to abstain were reviewable on appeal,” id. at 929, it had jurisdiction. 
As we explain below we do follow Southmark in other respects. 14

Although we reject Ernst & Young’s contention that the 1990 15

Amendments control this case we are satisfied that its contention that

those amendments would bar, if applicable, any appeal of an abstention

decision abstaining or not abstaining on mandatory or permissive

grounds is correct. Moreover, we are satisfied that those amendments

were in effect until Congress enacted the 1994 Amendments and if

Congress had not adopted the 1994 Amendments the 1990 Amendments

would control this case. The principal argument with respect to the 1990

Amendments centers on the point that their restriction on appealability

of abstention decisions was contained in section 1334(c)(2) dealing with

22

The court’s reference to the appealability of decisions not to abstain

must have been to the 1984 Amendments as they precluded only

appeals of decisions to abstain.

We cannot distinguish Southmark with respect to jurisdiction

over abstention appeals but we will not follow it as we question

whether Southmark in this respect is consistent with binding

precedents. It is well-settled that “a court is to apply the law in

14

effect at the time it renders its decision, unless doing so would result

in manifest injustice or there is statutory direction or legislative

history to the contrary.” Bradley v. Sch. Bd. of Richmond, 416 U.S.

696, 711, 94 S.Ct. 2006, 2016 (1974). We find no justification to

disregard this longstanding legal principle and establish an exception

wherein a court would look to the date that a debtor or creditor filed

the bankruptcy case rather than the proceeding directly in issue in

determining which version of section 1334 applies. Proceedings

subject to the abstention provisions are causes of action initiated

separately from the bankruptcy case itself and often arise well after

the filing of bankruptcy petition, and sometimes, as in this case, even

after the assets of the bankruptcy estate have been distributed and the

bankruptcy case closed. Overall, we cannot justify applying the law

that existed at the time the Debtors filed their bankruptcy petitions and

not the law that existed at the time that appellants filed their separate

civil action or the law as it currently stands which is materially the

same. 

In sum, with respect to our jurisdiction we find that we only

can review the bankruptcy and district courts’ decisions relating to

subject matter jurisdiction, including the authority of the bankruptcy

court to issue final orders. We do not have jurisdiction to review 15
mandatory abstention rather than, as now, separately in section 1334(d)

and thus the restriction might not apply to decisions with respect to

permissive abstention. We believe, however, that Congress intended the

restriction on appeals to apply to permissive abstention as authorized in

section 1334(c)(1) both as a matter of what might be characterized as

“mechanical” statutory construction and because we cannot understand

why Congress would have wanted to preclude appeals of decisions

denying mandatory abstention, as it undoubtedly did in the 1990

Amendments, but would have wanted to permit appeals of decisions

denying permissive abstention. In fact, if anything, one would expect

that Congress would have had the reverse intent, as it, in fact, did when

it adopted the 1994 Amendments.

23

their decisions relating to the alleged procedural defects in the

removal process and mandatory or permissive abstention. 

Consequently, inasmuch as appellants do not challenge the order

dismissing their case on the merits, now that we have set forth the

scope of our jurisdiction, the subject matter of our review is quite

limited.

D. Standard of Review

“Our review of the District Court’s ruling in its capacity as an

appellate court is plenary, and we review the bankruptcy judge’s legal

determinations de novo,” In re O’Lexa, 476 F.3d 177, 178 (3d Cir.

2007), and “its factual findings for clear error and its exercise of

discretion for abuse thereof,” In re United Healthcare Sys., Inc., 396

F.3d 247, 249 (3d Cir. 2005). Our review of the district court’s order

on jurisdiction and of the issue of whether the proceeding in the

bankruptcy court was core or non-core is de novo. See Stoe, 436 F.3d

at 212; In re Resorts Int’l, Inc., 372 F.3d 154, 160 (3d Cir. 2004). 

IV. DISCUSSION

A. The Statutory Framework of Federal Bankruptcy

Jurisdiction

As we have indicated in other litigation, “[b]ankruptcy courts

fall outside of the constitutional authority of Article III and derive

their authority from federal statutes.” Resorts, 372 F.3d at 161. 

Congress, in turn, “has vested limited authority in bankruptcy courts”
24

through 28 U.S.C. §§ 1334 and 157, sections within title 28 of the

United States Code dealing with the judiciary and judicial procedure. 

Id. For the most part, however, title 11 of the United States Code

governs bankruptcy proceedings. 

Section 1334 describes the jurisdictional boundaries of a

district court over bankruptcy cases and proceedings but, by itself,

does not vest any authority in the bankruptcy courts. Rather, section

1334(a) states that “the district courts shall have original and

exclusive jurisdiction of all cases under title 11,” and section 1334(b)

states that “the district courts shall have original but not exclusive

jurisdiction of all civil proceedings arising under title 11, or arising in

or related to cases under title 11.” District courts, however, even

though they have jurisdiction under subsections (a) or (b), are

permitted, “in the interest of justice, or in the interest of comity with

State courts or respect for State law[,] . . . [to] abstain[] from hearing a

particular proceeding arising under title 11 or arising in or related to a

case under title 11.” 28 U.S.C. § 1334(c)(1) (permissive abstention). 

Additionally, 

[u]pon timely motion of a party in a proceeding based

upon a State law claim or State law cause of action,

related to a case under title 11 but not arising under

title 11 or arising in a case under title 11, with respect

to which an action could not have been commenced in

a court of the United States absent jurisdiction under

[section 1334], the district court shall abstain from

hearing such proceeding if an action is commenced,

and can be timely adjudicated, in a State forum of

appropriate jurisdiction.

28 U.S.C. § 1334(c)(2) (mandatory abstention).

28 U.S.C. § 157, on the other hand, lists the bankruptcy cases

and proceedings that may be “referred” to the bankruptcy courts. 

Absent delegation of authority by the district court, much like the

authority in 28 U.S.C. § 636(b), which provides for the delegation of

certain judicial powers to magistrate judges, section 157 does not

permit bankruptcy judges to hear and adjudicate cases in the absence

of a reference from the district court. But under section 157(a),

“[e]ach district may provide that any or all cases under title 11 and

any or all proceedings arising under title 11 or arising in or related to a

case under title 11 shall be referred to the bankruptcy judges for the
Core proceedings as defined in section 157 include, but are not 16

limited to-- (A) matters concerning the administration of the estate; (B)

allowance or disallowance of claims against the estate or exemption

from property of the estate, and estimation of claims or interests for the

purposes of confirming a plan under chapter 11, 12, or 13 of title 11; (C)

counterclaims by the estate against persons filing claims against the

estate; (D) orders in respect to obtaining credit; (E) orders to turn over

property to the estate; (F) proceedings to determine, avoid, or recover

preferences; (G) motions to terminate, annul, or modify the automatic

stay; (H) proceedings to determine, avoid, or recover fraudulent

conveyances; (I) determinations as to the dischargeability of particular

debts; (J) objections to discharges; (K) determinations of the validity,

extent, or priority of liens; (L) confirmations of plans; (M) orders

approving the use or lease of property; (N) orders approving the sale of

property other than property resulting from claims brought by the estate

against persons who have not filed claims against the estate; (O) other

proceedings affecting the liquidation of assets of the estate or the

adjustment of the debtor-creditor or the equity security holder

relationship, except personal injury tort or wrongful death claims; and

(P) recognition of foreign proceedings and other matters under chapter

15 of title 11.

25

district.” As we have indicated, “[t]he district courts’ power to refer

is discretionary, but courts routinely refer most bankruptcy cases to

the bankruptcy court.” Resorts, 372 F.3d at 162 (internal quotation

marks omitted). 

Section 157 provides for two levels of authority that may be

invested in a bankruptcy judge depending upon into which of two

categories a case or proceeding falls. The two categories are (1) “all

cases under title 11 and all core proceedings arising under title 11, or

arising in a case under title 11,” 28 U.S.C. § 157(b)(1) (collectively

known as “core proceedings”), and (2) “a proceeding that is not a 16

core proceeding but that is otherwise related to a case under title 11,”

28 U.S.C. § 157(c)(1) (“non-core proceedings”). See Combustion

Eng’g, 391 F.3d at 225; Resorts, 372 F.3d at 162. 

The bankruptcy judge “determine[s], on the judge’s own

motion or on timely motion of a party, whether a proceeding is a core

proceeding under this subsection or is a proceeding that is otherwise

related to a case under title 11.” 28 U.S.C. § 157(b)(3). A correct

determination of whether a matter is core or non-core establishes the

bankruptcy judge’s level of authority. With respect to core
26

proceedings Congress has provided that “bankruptcy judges may hear

and determine all cases under title 11 and all core proceedings arising

under title 11, or arising in a case under title 11, referred under

subsection (a) of this section, and may enter appropriate orders or

judgments, subject to review under section 158 of this title.” 28

U.S.C. § 157(b)(1). Sections 158(a) and (b) give jurisdiction to the

district courts and the bankruptcy appellate panel (should one be

established by the judicial council of a circuit and with the consent of

all the parties) to hear appeals from final judgments, orders, and

decrees, as well as from interlocutory orders and decrees under certain

circumstances, entered by the bankruptcy courts. 

However, the determination that a case is not a core

proceeding does not mean that a bankruptcy judge lacks authority

with respect to it. Rather, 

[a] bankruptcy judge may hear a proceeding that is not

a core proceeding but that is otherwise related to a case

under title 11. In such proceeding, the bankruptcy

judge shall submit proposed findings of fact and

conclusions of law to the district court, and any final

order or judgment shall be entered by the district judge

after considering the bankruptcy judge’s proposed

findings and conclusions and after reviewing de novo

those matters to which any party has timely and

specifically objected.

28 U.S.C. § 157(c)(1). Additionally, “the district court, with the

consent of all the parties to the proceeding, may refer a proceeding

related to a case under title 11 to a bankruptcy judge to hear and

determine and to enter appropriate orders and judgments, subject to

review under section 158 of this title.” 28 U.S.C. § 157(c)(2). 

B. Resorts International

Appellants predicate a large part of their case on this appeal

challenging the bankruptcy and district courts’ jurisdiction on our

opinion in Resorts, 372 F.3d 154, so we start with a discussion of that

case. In Resorts, Resorts International and related entities entered into

Chapter 11 bankruptcy proceedings in 1989. Id. at 157. The

following year the bankruptcy court issued an order confirming their

Second Amended Joint Plan of Reorganization (“the Reorganization

Plan”). Id. at 158. 
27

Less than one month after the court confirmed the

Reorganization Plan, Resorts International and its creditors entered

into a Final Plan and Litigation Trust Agreement creating a litigation

trust in which the trustee was assigned claims Resorts International

held against Donald J. Trump and affiliated entities arising from

Trump’s 1988 leveraged buyout of the Taj Mahal Resort. Id. The

Final Plan authorized the trustee to prosecute the claims, with the

debtor to provide the first $5,000,000 spent in the litigation in the

form of an irrevocable letter of credit. Nevertheless the proceeds from

the suit were to be distributed to certain creditors who were covered

under the Final Plan. Id. at 157-58. The Final Plan also required the

trustee to retain an independent public accounting firm to provide

auditing and tax-related services for the trust, and on November 1,

1990, pursuant to this requirement, the trustee retained Price

Waterhouse for this purpose. Id. at 158. On May 28, 1991, the

trustee entered into a settlement, that the creditors subsequently

approved, with Trump in the amount of $12,000,000. Id. The

proceeds of the settlement became assets of the litigation trust. Id. 

On April 15, 1997, the trustee filed an adversary proceeding in

the bankruptcy court setting forth accounting malpractice and breach

of contract claims against Price Waterhouse in which the trustee

sought disgorgement of Price Waterhouse’s fees in excess of

$500,000 paid for accounting services that it performed for the trust,

as well as damages. Id. The trustee’s “principal allegation [was] that

Price Waterhouse erroneously reported in its audit reports that certain

accrued interest on the Litigation Trust accounts belonged to the

debtor rather than the Trust,” and that the bankruptcy court relied

upon those erroneous reports in a separate suit between the trust and

Resorts International in deciding on an allocation of the interest

earned on the $5,000,000 litigation expense account created under the

Final Plan. Id. at 158-59. Resorts International, whose estate no

longer existed following the confirmation of the Reorganization Plan,

was not a party to the malpractice action. Id. at 157. 

The bankruptcy court held that it did not have jurisdiction over

the adversary proceeding which set forth state-law claims and thus

dismissed the proceedings. The trustee, however, appealed and the

district court reversed, following which the district court certified its

ruling for immediate appeal to us under 28 U.S.C. § 1292(b), and we

granted leave to appeal. Resorts, 372 F.3d at 159-60. The case then

came on before us to decide whether the bankruptcy court had

jurisdiction over the state-law claims. Id. We discussed three
Ernst & Young understandably does not argue that the 17

Reorganization Plan’s retention-of-jurisdiction provision is dispositive,

an argument that it might have predicated on Section 9.01 of the plan

which states that the bankruptcy court was to retain jurisdiction over,

among other things, all disputes connected to the Final Plan or

confirmation order and all adversary proceedings filed after the plan’s

confirmation date. Following Resorts, it is obvious that an argument

anchored solely on this retention-of-jurisdiction provision could not have

been successful. 

28

separate issues in our opinion. 

First, we held that courts will give effect to retention-ofjurisdiction provisions that reorganization plans sometimes include

only if there is bankruptcy court jurisdiction under 28 U.S.C. §§ 1334

and 157, as “neither the bankruptcy court nor the parties can write

their own jurisdictional ticket.” Resorts, 372 F.3d at 161. In other

words, in the absence of statutory federal jurisdiction, “retention of

jurisdiction provisions in a plan of reorganization or trust agreement

are fundamentally irrelevant.” Id. Of course, “if there is jurisdiction,

we will give effect to retention of jurisdiction provisions.” Id. Thus,

17

we examined the question of whether the dispute fell within the

bankruptcy court’s subject matter jurisdiction. Id. 

Second, we held that the state-law claims at issue were not

“core proceedings” under section 157(b) because the proceeding did

not invoke “a substantive right provided by title 11 or a proceeding

that, by its nature, could arise only in the context of a bankruptcy

case.” Id. at 163. We distinguished the circumstances in Resorts

from the situation before the Court of Appeals for the Fifth Circuit in

Southmark, 163 F.3d 925. In Southmark, the debtor filed a

malpractice suit against the accounting firm that provided accounting

services prior to plan confirmation. Resorts, 372 F.3d at 163. The

Southmark court held that the suit was a core proceeding because the

bankruptcy court must be able to ensure “that court-approved

managers of the debtor’s estate are performing their work

conscientiously, and cost-effectively,” and supervising courtappointed professionals “bears directly on the distribution of the

debtor’s estate” for “[i]f the estate is not marshaled and liquidated or

reorganized expeditiously, there will be far less money available to

pay creditors’ claims.” Id. (quoting Southmark, 163 F.3d at 931). 

In distinguishing Southmark we made the following
29

observations:

Unlike in Southmark, this claim arose post-plan

confirmation. It does not directly affect the debtor or

the liquidation of the estate’s assets. Furthermore, the

accounting firm’s alleged malpractice in Southmark

implicated the integrity of the entire bankruptcy

process. Southmark’s bankruptcy arose out of its

involvement in Drexel Burnham Lambert, Inc.’s illfated junk bond investment. Southmark, 163 F.3d at

927-28. Southmark sought the appointment of an

accounting firm to provide an objective, independent

assessment of potential legal claims against thirdparties. Id. Unbeknownst to Southmark, Drexel was

one of the accounting firm’s largest clients. Id. at 927-

28. According to Southmark, the accounting firm

committed malpractice by failing to satisfactorily

investigate potential claims against Drexel. Id. 

Southmark alleged the accounting firm’s breach of its

court-appointed fiduciary duty prevented the estate

from recovering from Drexel. Id. at 928. The

accounting firm’s failure to investigate Drexel

implicated the core of the bankruptcy process. Its

alleged malpractice was inseparable from the

bankruptcy context. Here, Price Waterhouse’s alleged

malpractice, erroneously reporting that certain accrued

interest belonged to one entity rather than to another

and committing other errors in auditing and tax advice,

even if true, is not a proceeding that could arise only in

the bankruptcy context. 

Resorts, 372 F.3d at 163.

Nevertheless, in Resorts we went on to indicate that it was

unnecessary to resolve whether the case was a core or non-core

proceeding for subject matter jurisdictional purposes because

“[w]hether a particular proceeding is core represents a question

wholly separate from that of subject-matter jurisdiction.” Id. (quoting

In re Marcus Hook Dev. Park, Inc., 943 F.2d 261, 266 (3d Cir. 1991)). 

It was not necessary to make a core versus non-core determination

because as long as a proceeding satisfied the jurisdictional

prerequisites to be considered a non-core “related to” proceeding, the

“broadest of the potential paths to bankruptcy jurisdiction,” it was an
We cannot take the same path as we did in Resorts because 18

appellants challenge both federal jurisdiction under section 1334 and the

bankruptcy court’s authority to issue final orders under section 157, a

question the resolution of which requires a determination of whether the

proceeding was core or non-core. The only issue before us in Resorts

was subject matter jurisdiction under section 1334.

In this case, there are essentially two procedural paths that can be

transversed in resolving a dispute over jurisdiction and the adjudicative

powers of the bankruptcy court. We can engage in a two-step analysis

in which we first inquire whether there is federal jurisdiction over a

proceeding by asking whether the case is “related to” the bankruptcy,

which is the broadest category of cases over which there is federal

jurisdiction. Then, if we find that the case passes that test, we would

decide whether the case is a core matter, in which the bankruptcy court

could issue final orders, or a non-core matter, in which the bankruptcy

court could make only recommendations to the district court. 

We, however, find this methodology inefficient in situations like

the one before us because a finding that the case “aris[es] in” the

bankruptcy would “kill two birds with one stone” inasmuch as such a

finding conclusively would establish both subject matter jurisdiction and

the bankruptcy court’s authority to enter final orders. In that situation,

there simply would be no reason to engage in the two-step inquiry we

have described. Of course, if we determined that the case does not

“aris[e] in” the bankruptcy proceedings, then, depending on which court

is exercising jurisdiction when the determination is made, the

appropriate court must determine if there is subject matter jurisdiction

under the broadest jurisdictional hook of “related to” jurisdiction. 

30

extraneous exercise to decide whether the matter was core provided

that jurisdiction, and not the bankruptcy court’s adjudicative authority,

was the sole issue before the court. See id. In other words, a

determination of whether a matter is core or non-core is unnecessary

in an inquiry of whether there is federal jurisdiction over a bankruptcy

proceeding, as both categories of cases are within federal jurisdiction

and the determination only impacts on the question of whether a

bankruptcy court has the authority to enter final judgments and orders

under section 157. See id. It was implicit in our holding in Resorts

18

that a case is “related to” a bankruptcy case even if the bankruptcy

court could exercise core jurisdiction with respect to it. In this regard,

we point out that section 157(c)(1) provides that a “bankruptcy judge

may hear a proceeding that is not a core proceeding but that is
31

otherwise related to a case under Title 11.” (Emphasis added.) It

seems clear from that language, in particular the inclusion of

“otherwise,” that Congress believed that a core case was “related to”

title 11 but that a case can be “related to” title 11 on a basis other than

being a core case. Moreover, Congress’s enumeration of core

proceedings in section 157(b)(2), in ordinary understanding, lists

matters that would be considered “related to” title 11 cases. 

Third, we went on to discuss the limits of non-core “related

to” jurisdiction. We first discussed “the seminal test for determining

the boundaries of ‘related to’ jurisdiction in [Pacor, Inc. v. Higgins,

743 F.2d 984, 994 (3d Cir. 1984)],” in which we held that federal

courts have “related to” jurisdiction to hear a proceeding if “the

outcome of that proceeding could conceivably have any effect on the

estate being administered in bankruptcy.” Resorts, 372 F.3d at 164. 

We, however, decided in Resorts that application of the Pacor test in

the “post-confirmation context” was “problematic” inasmuch as “it is

impossible for the bankrupt debtor’s estate to be affected by a postconfirmation dispute because the debtor’s estate ceases to exist once

confirmation has occurred,” as generally “the confirmation of a plan

vests all of the property of the estate in the reorganized debtor.” Id. at

165 (internal quotation marks omitted). 

In light of the circumstance that post-confirmation the debtor’s

estate will not exist, and in recognition of the need to confine

bankruptcy court jurisdiction to appropriate limits, we recognized a

new test to be applied in the “post-confirmation context” in which

“the essential inquiry” is “whether there is a close nexus to the

bankruptcy plan or proceeding sufficient to uphold bankruptcy court

jurisdiction over the matter.” Id. at 166-67. In other words, “[a]t the

post-confirmation stage, the claim must affect an integral aspect of the

bankruptcy process–there must be a close nexus to the bankruptcy

plan or proceeding.” Id. at 167. For instance, we held that “[m]atters

that affect the interpretation, implementation, consummation,

execution, or administration of the confirmed plan will typically have

the requisite close nexus.” Id. 

Applied to the facts of Resorts–where the trustee’s principal

allegation was that Price Waterhouse erroneously reported in its audit

reports that accrued interest on the litigation trust belonged to the

debtor rather than the trust–we held that the “proceeding lacks a close

nexus to the bankruptcy plan or proceeding and affects only matters

collateral to the bankruptcy process.” Id. at 169. We explained our
32

decision as follows: 

The resolution of [the] malpractice claims will not

affect the estate; it will have only incidental effect on

the reorganized debtor; it will not interfere with the

implementation of the Reorganization Plan; though it

will affect the former creditors as Litigation Trust

beneficiaries, they no longer have a close nexus to

bankruptcy plan or proceeding because they exchanged

their creditor status to attain rights to the litigation

claims; and as stated, the jurisdictional retention plans

cannot confer jurisdiction greater than that granted

under 28 U.S.C. § 1334 or 28 U.S.C. § 157.

Id. We acknowledged that “in certain circumstances, accounting

errors could have a sufficiently close nexus to the bankruptcy plan or

proceeding to warrant exercising ‘related to’ jurisdiction postconfirmation,” but, under the facts of Resorts, resolution of the claims

will not require a court to interpret or construe the Reorganization

Plan or the Trust Agreement and “[t]hough the Plan and Trust

Agreement provide the context of the case, this bare factual nexus is

insufficient to confer bankruptcy jurisdiction.” Id. at 170. 

C. The Decisions of the Bankruptcy and District Courts

The bankruptcy court in this case concluded that there was

federal jurisdiction because appellants’ claims “aris[e] in” the

bankruptcy case as the claims “implicate the integrity of the

bankruptcy process,” and, like the claims in Southmark, 163 F.3d 925,

“the claims of professional malpractice were based on services

provided during the bankruptcy, under the supervision of, and subject

to the approval of, the bankruptcy court.” Earned Capital, 331 B.R. at

218. The bankruptcy court determined that the “close nexus” test that

Resorts discussed did not govern this case because “Resorts is unlike

the situation here, where [appellants’] claims are claims against a

court appointed professional for work performed during the

bankruptcy case.” Id. Further, because the state-law claims are

claims “arising in” the bankruptcy case, the court determined “that

[appellants’] Complaint against [Ernst & Young] is a core

proceeding,” and thus, under 28 U.S.C. § 157(b)(1), the court had full

adjudicative power subject to appellate review by the district court. 

Id. at 218-20.
Actually, while the bankruptcy court indicated that the “close

19

nexus” test did not apply, the district court found that “the state court

action has a ‘close nexus’ to the bankruptcy proceedings.” Geruschat,

346 B.R. at 125. However, it was not necessary for the district court to

reach this conclusion inasmuch as it first held that appellants’ “state

court action arises in bankruptcy and . . . is a core matter,” and, as we

discuss, the “close nexus” test applies only when analyzing the case in

the non-core “related to” context. In any event, even appellants treat the

district court’s decision as if the court erred in not applying the “close

nexus” test. See Appellants’ br. at 26 (“It was inappropriate for the

district court not to address the ‘close nexus’ standard that this Circuit

set forth in Resorts Int’l.”). 

33

On appeal under 28 U.S.C. § 158, the district court affirmed

the bankruptcy court’s opinion and order. Specifically, with respect to

jurisdiction, it held:

We agree that [appellants’] state court action arises in

bankruptcy and that it is a core matter. [Appellants’]

claims of professional negligence were based on

services provided during the bankruptcy, under the

supervision of, and subject to the approval of, the

bankruptcy court. As such, they implicate the integrity

of the bankruptcy process. The state court action

challenges the accountants’ conclusion that the Debtor

was insolvent, a conclusion endorsed by the

bankruptcy court in its confirmation order. For these

same reasons, the state court action has a ‘close nexus’

to the bankruptcy proceedings.

Geruschat, 346 B.R. at 125.

D. Analysis

Appellants challenge two aspects of the decisions of the

bankruptcy and district courts relating to subject matter jurisdiction

and the bankruptcy court’s final adjudicative authority. First, they

argue that the courts erred in finding that the “close nexus” test was

not applicable under their rationale that the improper conduct alleged

in the state-law claims occurred during the bankruptcy proceedings.19

Appellants believe that this conclusion was incorrect as they contend

“application of the ‘close nexus’ test does not depend on when the

malpractice itself occurs. To the contrary, the ‘close nexus’ test is
Ernst & Young contends that appellants “waived their right to

20

challenge that the litigation is a core matter,” appellees’ br. at 17,

because appellants did not file a timely statement under Bankruptcy Rule

9027(e)(3). In view of our result we have no need to consider this

argument and do not do so. 

We recently concluded in In re Shenango Group Inc., No. 05- 21

4805, F.3d , 2007 WL 2505585 (3d Cir. Sept. 6, 2007), that a postconfirmation dispute over whether a reorganization plan obligated a

reorganized debtor to fund a pension plan was “related to” a bankruptcy

proceeding, and, thus, the district court properlyaffirmed the order of the

bankruptcy court in which it exercised its “related to” jurisdiction. In

that case, we found that the dispute did have a “close nexus” to the

bankruptcy under Resorts as its resolution required the court to interpret

the plan’s provision relating to the obligation of the debtor, who was a

party to the suit, to fund pension benefit increases. Id. at *3-4. Our

decision in Shenango Group does not affect this case as here the issue is

not whether the suit is “related to” the bankruptcy, but, instead, whether

it is “arising in” the bankruptcy. 

34

applicable whenever a state lawsuit is removed to federal court on the

basis of a bankruptcy case that is already closed by that point.” 

Appellants’ br. at 26. Second, appellants contend that the bankruptcy

and district courts were wrong in concluding that this state-law action

was a core proceeding under section 157(b), and thus appellants

believe the bankruptcy court did not have the authority to enter final

orders under section 157(c)(1). Id. at 28. 

20

After considering the parties’ arguments, we will affirm the

order of the district court and thus, in effect, the order of the

bankruptcy court as we conclude that the bankruptcy court had core

jurisdiction in this case. The bankruptcy and district courts were not

required to address the “close nexus” test because the test was not

applicable in this “arising in” proceeding. As we discussed in

Resorts, the “close nexus” standard only applies for the purposes of

determining whether a federal court has jurisdiction over a non-core

“related to” proceeding in the post-confirmation context. See 21

Resorts, 372 F.3d at 164-67. Appellants seem to believe that any time

a party files a case post-confirmation, the “close nexus” test is

triggered. This is plainly not the case. While courts may choose to

rely on “related to” jurisdiction because it is the broadest category of

federal bankruptcy jurisdiction when examining their own

jurisdiction, it certainly is not incumbent upon them to do so, because,
35

as occurred here, a party may argue and a court may decide that a

proceeding falls within one of the narrower categories of jurisdiction,

such as “arising in” jurisdiction, in which case “related to” jurisdiction

and the corresponding “close nexus” test are not implicated.

We further find that the courts’ conclusion that there was

“arising in” jurisdiction was correct. “[C]laims that ‘arise in’ a

bankruptcy case are claims that by their nature, not their particular

factual circumstance, could only arise in the context of a bankruptcy

case.” Stoe, 436 F.3d at 218. In Resorts, in distinguishing the

circumstances of the case from those in Southmark, we explained in

what circumstances and on what legal basis a claim of professional

malpractice for work performed during the bankruptcy could support

“arising in” core jurisdiction. See Resorts, 372 F.3d at 163. Unlike

those in Resorts, the material facts of the case before us are

indistinguishable from those in Southmark. 

First, in Resorts we distinguished the case from Southmark

because the state-law claims in Resorts “arose post-plan

confirmation.” See id. Here, however, appellants in their complaint

allege that their claims, like the claims in Southmark, arose preconfirmation inasmuch as the conduct on which they predicate the

claims occurred during the bankruptcy process. Specifically, their

complaint alleges that in reliance upon the negligent work Ernst &

Young performed during the bankruptcy, the bankruptcy court

wrongly deemed the Debtors to be insolvent and caused the

liquidation of the estate’s assets in a manner that contravened the

Amended Plan. 

Second, in our case, just as was true in Southmark, Ernst &

Young’s “alleged malpractice . . . implicated the integrity of the entire

bankruptcy process” and the “alleged malpractice was inseparable

from the bankruptcy context.” Resorts, 372 F.3d at 163. The

bankruptcy court appointed Ernst & Young to review the Debtors’

financial records and prepare the financial schedules needed for the

bankruptcy. According to appellants’ allegations in their complaint,

as a result of the work that Ernst & Young performed during the

bankruptcy proceedings and its representations to the bankruptcy

court, the bankruptcy court deemed the Debtors to be insolvent. This

conclusion led to the formation of Seven Fields, a corporation

organized, according to the Amended Plan, to “achieve the goal of full

payment” of the unsecured, nondischargeable debt due appellants. 

Certainly this aspect of the plan, based at least in part on Ernst &
On September 15, 1989, the bankruptcy court approved the 22

stipulation between Ernst & Young and Seven Fields and entered an

order stating that Ernst & Young was due $125,000 in fees in settlement

of its $210,000 claim. Earned Capital, 331 B.R. at 226-27; Supp. App.

at 55-57.

36

Young’s representations that the Debtors were insolvent, was a

significant factor in bringing about the court’s confirmation of the

plan. Yet, thereafter, according to the complaint, Ernst & Young

represented that Seven Fields had a large debt, which, according to the

complaint is not the case, and Seven Fields was compelled to sell its

properties in a manner that was not in appellants’ best economic

interests, contrary to the court-approved Amended Plan’s provisions. 

Moreover, the bankruptcy court approved the stipulation between

Seven Fields and Ernst & Young providing for the fees paid to Ernst

& Young for its accounting work during the bankruptcy proceedings.22

Supp. App. at 55-57. 

The Court of Appeals for the Fifth Circuit in Southmark

explained why this type of misconduct and relationship to the

bankruptcy court falls within the “arising in” jurisdiction of the

federal courts:

In this case, the professional malpractice claims alleged

against [the defendants] are inseparable from the

bankruptcy context. A sine qua non in restructuring

the debtor-creditor relationship is the court’s ability to

police the fiduciaries, whether trustees or debtors-inpossession and other court-appointed professionals,

who are responsible for managing the debtor’s estate in

the best interest of creditors. The bankruptcy court

must be able to assure itself and the creditors who rely

on the process that court-approved managers of the

debtor’s estate are performing their work,

conscientiously and cost-effectively. Bankruptcy Code

provisions describe the basis for compensation,

appointment and removal of court-appointed

professionals, their conflict-of-interest standards, and

the duties they must perform. See generally 11 U.S.C.

§§ 321, 322, 324, 326-331. Although standards for the

conduct of court-appointed professionals, the breach of

which may constitute bankruptcy malpractice, are not

comprehensively expressed in the statute, the Code
Of course, the parties’ consent cannot establish the bankruptcy 23

court’s jurisdiction, and if we disagreed with the parties and believed

that the court did not have jurisdiction, or even that the jurisdiction that

it did have was “related to” but not core jurisdiction, we would say so

37

need not duplicate relevant, also-applicable state law. 

It is evident that a court-appointed professional’s

dereliction of duty could transgress both explicit Code

responsibilities and applicable professional malpractice

standards. For instance, in Billing v. Ravin, Greenberg

& Zackin, P.A., 22 F.3d 1242 (3d Cir. 1994), the

professional malpractice allegations included the

attorneys’ failure to comply with court orders and to

submit a plan of reorganization to the bankruptcy

court. Award of the professionals’ fees and

enforcement of the appropriate standards of conduct

are inseparably related functions of bankruptcy courts.

Supervising the court-appointed professionals also

bears directly on the distribution of the debtor’s estate. 

If the estate is not marshaled and liquidated or

reorganized expeditiously, there will be far less money

available to pay creditors’ claims. Excessive

professional fees or fees charged for mediocre or,

worse, phantom work also cause the estate and the

creditors to suffer . . . . A malpractice claim like the

present one [against court-appointed professionals]

inevitably involves the nature of the services

performed for the debtor’s estate and the fees awarded

under superintendence of the bankruptcy court; it

cannot stand alone.

Southmark, 163 F.3d at 931. Other courts of appeals, including this

court, have reached similar conclusions. See Grausz v. Englander,

321 F.3d 467, 471 (4th Cir. 2003) (finding that legal malpractice

claim against firm for alleged misconduct in bankruptcy case is a

claim “arising in” the bankruptcy case); In re Ferrante, 51 F.3d 1473,

1476 (9th Cir. 1995) (holding that action against trustee for

misconduct in administering estate was a core proceeding concerning

the administration of the bankruptcy estate); see also Billing, 22 F.3d

at 1245, 1252-53 (while not directly addressing whether a legal

malpractice suit against bankruptcy counsel constitutes a core

proceeding as parties agreed that it does, we recognized that the 23
even in the absence of a party raising the jurisdictional issue on the

appeal.

38

“malpractice suit mirrors [debtors’] objections to the allowance of

attorneys’ fees,” the resolution of which are within the bankruptcy

court’s “explicit jurisdiction to award fees for bankruptcy counsel and

other supervisory powers as to bankruptcy counsel”). 

As Ernst & Young points out,

[n]othing is more important than the integrity of the

bankruptcy process . . . . [T]he integrity of the process

goes to the heart of the administration of a bankruptcy

case. Furthermore, few issues are as important in the

bankruptcy process as the bankruptcy court’s

conclusion as to the solvency of a debtor. The

solvency analysis is the cornerstone of the distribution

plan. Here, both the integrity of the bankruptcy

process and the solvency of the Debtors have been

drawn into question.

Appellees’ br. at 23 (citations omitted). In this regard, we have no

doubt that the bankruptcy and district courts correctly found that

appellants asserted their alleged malpractice claims in a core

proceeding that “aris[es] in” the bankruptcy case. 

In addition to the reasoning of Southmark, we also note that

section 157 specifically provides that core proceedings include

“matters concerning the administration of the estate” and “other

proceedings affecting the liquidation of the assets of the estate.” 28

U.S.C. § 157(b)(2)(A) and (O). Such matters are at issue here. 

Appellants allege that Ernst & Young’s negligence and

misrepresentations caused the sale of Seven Fields’s assets in a

manner that was not in their best economic interests, contrary to the

Amended Plan’s provisions requiring that Seven Fields would be

“managed, improved, developed and sold, etc. where appropriate, to

the end that all creditors will eventually achieve maximum returns.”

App. at 22. In sum, it is clear to us that a malpractice action against

an accountant for misconduct during the bankruptcy on which the

bankruptcy judge relied in confirming the plan of reorganization, and

in reliance on which the bankruptcy court approved the fees to the

accountants, and on which appellants’ representatives relied to their

detriment in selling the assets to pay their claims, in a manner that
Appellants also argue that the claims are not core proceedings 24

because they are “not based on any right created by the federal

bankruptcy law,” but, instead, are “based exclusively on rights existing

under state law.” Appellants’ br. at 30. This distinction, however, is not

determinative as section 157 provides that “[a] determination that a

proceeding is not a core proceeding shall not be made solely on the basis

that its resolution may be affected by State law.” 28 U.S.C. § 157(b)(3).

39

contravenes the terms of the reorganization plan, constitutes a core

proceeding, more specifically a proceeding “arising in” the

bankruptcy, which is subject to federal jurisdiction and the final

adjudicative authority of the bankruptcy court.

24

Because we have concluded that the bankruptcy and district

courts correctly found “arising in” core jurisdiction so that the “close

nexus” test did not apply, we need not resolve the issue appellants

raise relating to the applicability of the “close nexus” test in the

“related to” post-confirmation context. We, however, will take this

opportunity to address the division among courts in this circuit with

respect to this issue that has developed in the wake of Resorts. 

Appellants raise the question of whether in cases in which the

bankruptcy and district courts can be exercising only “related to”

jurisdiction, the Resorts “close nexus” test applies whenever the

complaint is filed post-confirmation or must the conduct also occur

post-confirmation to trigger the test? In other words, in analyzing a

court’s “related-to” jurisdiction, is pre-confirmation conduct alleged

in a complaint that is filed post-confirmation evaluated under the

Pacor test or the Resorts “close nexus” test?

Appellants believe that “application of the ‘close nexus’ test

does not depend on when the malpractice itself occurs.” Rather, in

their view, the crucial inquiry is whether the bankruptcy case is closed

at the time the claim is removed to it. Appellants’ br. at 26. 

Accordingly, appellants contend that the test applies whenever there is

a post-confirmation action filed, presumably even an original

proceeding as distinguished from a removed case which is the

situation here. Ernst & Young, on the other hand, argues that the

“close nexus” test under Resorts applies only when “the alleged

wrongdoing took place post-confirmation.” Appellees’ br. at 15. 

Bankruptcy and district courts within this circuit have rendered

inconsistent opinions on this point since Resorts. Compare In re

EXDS, Inc., 352 B.R. 731, 735 (Bankr. D. Del. 2006), and In re LGI,

Inc., 322 B.R. 95, 102-03 (Bankr. D.N.J. 2005), in which the courts
The district court held that the third-party complaint was 25

“related to” the bankruptcy so it did not remand that aspect of the case

to the state court.

40

stated the test in terms of when the cause of action arose or the

conduct occurred, with Jazz Photo Corp. v. Dreier LLP, No. Civ. A.

05-5198DRD, 2005 WL 3542468, at *5-6 (D.N.J. Dec 23, 2005), and

In re LaRoche Indus., Inc., 312 B.R. 249, 257 (Bankr. D. Del. 2004),

in which the courts stated the test in terms of when the cause of action

was filed. This division in results makes it important for us to address

the issue.

We start this point with a further discussion of Pacor, 743 F.2d

984, the case that set forth the test used to determine whether a

proceeding is “related to” a bankruptcy that was applied in all

circumstances until we established the limitations on the test in the

“post-confirmation context” in Resorts. In Pacor, John and Louise

Higgins brought a suit in a state court against Pacor, a chemical

supplies distributor, for injuries allegedly caused by exposure to

asbestos contained in Pacor’s products. Id. at 986. Pacor filed a

third-party complaint in the state court against the asbestos

manufacturer, Johns-Manville. Id. Johns-Manville subsequently filed

Chapter 11 bankruptcy proceedings in the Southern District of New

York. Id. Pacor then sought to remove the state court case to the

bankruptcy court in the Eastern District of Pennsylvania. The Eastern

District bankruptcy court remanded the entire state-court case to the

state court. On Pacor’s appeal, the district court affirmed with respect

to the Higgins’s case against Pacor as it held that it was not “related

to” the Mansville bankruptcy. Pacor then appealed to us. Id. In 25

affirming the district court’s order affirming the bankruptcy court, we

articulated what became the seminal test for determining whether a

civil proceeding is “related to” a bankruptcy:

The usual articulation of the test for determining

whether a civil proceeding is related to bankruptcy is

whether the outcome of that proceeding could

conceivably have any effect on the estate being

administered in bankruptcy . . . . An action is related

to bankruptcy if the outcome could alter the debtor’s

rights, liabilities, options, or freedom of action (either

positively or negatively) and which in any way impacts

upon the handling and administration of the bankrupt

estate.
41

Id. at 994 (internal citations omitted).

Then came Resorts. We reiterate that Resorts involved a

claim for professional malpractice and breach of contract brought

against Price Waterhouse for accounting services performed for a

litigation trust formed after the bankruptcy court issued an order

confirming the Reorganization Plan. Resorts, 372 F.3d at 156-57. 

Almost seven years after the bankruptcy court confirmed the plan, the

litigation trust brought suit against Price Waterhouse on account of its

post-confirmation services. Id. at 159. We held that the traditional

test in Pacor, a case involving claims brought pre-confirmation, was

“problematic” in the “post-confirmation context” inasmuch as “it is

impossible for the bankrupt debtor’s estate to be affected by a postconfirmation dispute because the debtor’s estate ceases to exist once

confirmation has occurred.” Id. at 165. Thus, because confirmation

of a plan in which all property of the estate is vested in the

reorganized debtor eliminates the existence of the estate, there never

will be jurisdiction over a post-confirmation dispute under a literal

interpretation of the Pacor test. Id. 

In an attempt to balance Congress’s intent to grant bankruptcy

courts “comprehensive jurisdiction so that they could deal efficiently

and expeditiously with matters connected with the bankruptcy estate”

with the jurisdictional limitations on non-Article III bankruptcy

courts, id. at 163-64 (internal quotation marks omitted), we developed

the test to be applied “[a]t the post-confirmation stage”:

As stated, the jurisdiction of the non-Article III

bankruptcy courts is limited after confirmation of a

plan. But where there is a close nexus to the

bankruptcy plan or proceeding, as when a matter

affects the interpretation, implementation,

consummation, execution, or administration of a

confirmed plan or incorporated litigation trust

agreement, retention of post-confirmation bankruptcy

court jurisdiction is normally appropriate. 

Id. at 168-69. 

After our present consideration of Resorts, we are satisfied

that the “close nexus” test is applicable to “related to” jurisdiction

over any claim or cause of action filed post-confirmation, regardless

of when the conduct giving rise to the claim or cause of action
We emphasize that this distinction and application of the 26

respective tests applies only when the parties seek to establish

jurisdiction on the grounds that the cause of action is “related to” the

bankruptcy, the broadest jurisdictional hook. We decided in Resorts that

in such situations the court must impose limits in the post-confirmation

context. In contrast, cases that “aris[e] in” the bankruptcy case must

42

occurred. We reach this conclusion because in Resorts, though we

were dealing with post-confirmation rather than pre-confirmation

conduct, we focused on the point of time in which the cause of action

was instituted: whether it was filed in the “post-confirmation stage,”

i.e., the “post-confirmation context.” Furthermore, we did not

indicate that the test should be confined to situations in which the

conduct giving rise to the complaint occurred post-confirmation. 

Moreover, since Resorts, we have stated that we use the test to

determine whether “‘related to’ jurisdiction . . . exist[s] at the postconfirmation stage,” Stoe, 436 F.3d at 216 n.3 (emphasis added). 

Most recently in In re Shenango Group Inc., No. 05-4805, F.3d ,

2007 WL 2505585, at *3-4 (3d Cir. Sept. 6, 2007), we applied the

Resorts “close nexus” test in a “related to” jurisdictional inquiry over

a “post-confirmation dispute.” Additionally, we note that the Court of

Appeals for the Ninth Circuit, which adopted the “close nexus” test

that we described in Resorts, has stated that the test applies when “the

proceeding arises post-confirmation” and applied the “close nexus”

test with respect to claims raised post-confirmation involving preconfirmation conduct. See In re Pegasus Gold Corp., 394 F.3d 1189,

1193-94 (9th Cir. 2005). 

Importantly, limiting the “close nexus” test to cases involving

only post-confirmation conduct would be inconsistent with our

reasoning to depart from Pacor in Resorts. In Resorts, we indicated

that our central reason to depart from the Pacor test in the postconfirmation context was that there no longer is an estate that can be

affected so application of the Pacor test was “problematic.” See

Resorts, 372 F.3d at 164-65. The time when the conduct raised in the

post-confirmation complaint occurred is of no consequence in this

analysis as regardless of whether the conduct was post-confirmation

or pre-confirmation, there would not be an estate at the postconfirmation stage. For these reasons, we conclude that with respect

to “related to” jurisdiction, the Pacor test applies in all disputes raised

pre-confirmation and the “close nexus” test applies in all disputes

raised post-confirmation, regardless of when the conduct alleged in

the complaint occurred.26
satisfy a stringent standard in which the matter must have an intimate

connection to the bankruptcy proceedings, and thus the stage at which

the complaint is filed is not determinative.

43

V. CONCLUSION

For the foregoing reasons, we will affirm the district court’s

memorandum order of July 14, 2006, affirming the bankruptcy court’s

order of September 2, 2005, dismissing appellants’ complaint.