“And it’s too late, baby now, it’s too late, Though we really did try to make it.”

Carole King, It’s Too Late

Today’s blog is about a recent non-precedential decision from the Third Circuit, In re Winstar Communications, Inc. The decision is short and simple, and it stands as an important reminder of two important concepts for attorneys to remember:

  1. The bankruptcy court, and by extension, the district where a bankruptcy is heard, retains exclusive jurisdiction over any matters arising out of a bankruptcy proceeding, even years after the fact.
  2. Never take a statute of limitations for granted.

Facts

IDT Corporation and Winstar Holdings, LLC, purchasers of assets in a Delaware bankruptcy sale and plaintiffs in the original action, asserted that the defendants, Blackstone Advisory Partners L.P., Impala Partners LLC, and Citigroup, Inc., defrauded them in connection with the sale of assets in Winstar Communications’ bankruptcy case. The underlying action included claims on account of fraud, negligent misrepresentation, and civil conspiracy. The action was filed in New York Supreme Court in May 2007, five years after the sale.

The defendants asserted that the bankruptcy court had exclusive jurisdiction over the lawsuit under 28 U.S.C. § 1452(a) and removed the case to the United States District Court for the Southern District of New York. They successfully moved to transfer the action to Delaware on the basis that the claims arose out of the bankruptcy sale, and the lawsuit was therefore better connected to Delaware, even though the alleged wrong was committed in New York. Once in Delaware, the action was referred to the bankruptcy court.

The issue facing the parties in bankruptcy court was the statute of limitations mismatch between New York and Delaware. Applying New York’s six-year statute of limitations, the plaintiffs’ May 2007 complaint was timely filed. If, however, Delaware’s three-year statute of limitations applied, then the plaintiffs’ claims were not timely and should be dismissed. The bankruptcy court concluded that the Delaware statute of limitations applied because the case was properly transferred to Delaware pursuant to 28 U.S.C § 1406 for improper venue of the initial filing.

The Decision

A three-judge panel of the Third Circuit agreed that the Delaware statute of limitations applied to the action because the case was transferred pursuant to 28 U.S.C § 1406 rather than 28 U.S.C § 1404.

For readers not intimately familiar with the minutiae of federal jurisdiction, 28 U.S.C §1406(a) provides for a mandatory dismissal or transfer of cases filed in the wrong division or district.

Alternatively, courts also have discretion to transfer cases pursuant to 28 U.S.C. § 1404(a), which permits a court to transfer a case to a more convenient forum, even where the original venue is proper.

The distinction between the two transfer sections is important because, as all three Delaware courts affirmed, where a case transfer is a mandatory transfer pursuant to 28 U.S.C § 1406 rather than a discretionary transfer pursuant to 28 U.S.C § 1404, the statute of limitations of the transferee court applies. In the case of Winstar, the case was transferred pursuant to section 1406 because the New York court had found that the bankruptcy court had exclusive jurisdiction and the venue of the initial filing was improper. As a result, the plaintiffs’ 2007 filing was out of time, as Delaware’s statute of limitations was applicable and had expired in December 2004, three years after the allegedly fraudulent asset sale.