A federal appeals court has vacated the dismissal of an investment management company's lawsuit over its creditors' violation of an automatic stay in its bankruptcy proceedings.

The U.S. Court of Appeals for the Third Circuit on Tuesday granted debtor Healthcare Real Estate Partners' request to revive its adversary proceeding filed under 11 U.S.C. Section 362(k) seeking damages for violation of the automatic stay.

According to an opinion from Judge Morton Greenberg of the U.S. Court of Appeals for the Third Circuit, in dismissing Healthcare's Section 362(k) action, the bankruptcy court, and subsequently the Delaware district court, held the bankruptcy court lacked jurisdiction over the Section 362(k) claims because when it dismissed the petition, it retained jurisdiction only over the Section 303(i) claims. Additionally, even if it could preside over the Section 362(k) claims, the court was able to limit the claims Healthcare could bring following the dismissal of the petition.

The Third Circuit disagreed on both points, Greenberg said.

"The bankruptcy court had jurisdiction over Healthcare's § 362(k) adversary action even if a Section 362(k) proceeding is not a core proceeding because a Section 362(k) action no matter when instituted is a case under Title 11," Greenberg said. "As such, the district court erred in finding that the bankruptcy court did not have jurisdiction over Healthcare's Section 362(k) action."

Greenberg continued, "Of course, our conclusion that Section 362(k) creates a private cause of action leads us to conclude that the bankruptcy court and the district court erred in holding the bankruptcy court had the authority to limit what claims Healthcare could bring in the bankruptcy court after the dismissal of the bankruptcy petition. As a rule, federal courts must hear matters within their jurisdiction."

The judge added, "Even if we view the bankruptcy court's reasoning as essentially being based on claim preclusion, on the theory that because Healthcare did not assert its Section 362(k) claims in the bankruptcy case while those proceedings were pending it cannot raise the claims in a later case, that observation would not lead us to uphold the dismissal of the Section 362(k) action. After all, federal claim preclusion requires '(1) a final judgment on the merits in a prior suit involving (2) the same parties or their privies and (3) a subsequent suit based on the same cause of action,'" citing the Third Circuit's 2008 ruling in In re Mullarkey.

Robert P. Goe of Goe & Forsythe in Irvine, California, represents Healthcare and did not respond to a request for comment.

Stuart M. Brown of DLA Piper in Wilmington represents the creditors and did not respond to a request for comment.