Proof-of-Claim Nexus Authorizes Bankruptcy Courts’ Final Adjudication of State-Law Claims; Clerical Filing Errors Do Not Defeat § 1334(b) Jurisdiction; Rule 37 Default Sanctions Upheld

Introduction

In Smith v. MedLegal Solutions, No. 24-50494 (5th Cir. Apr. 2, 2025) (per curiam) (unpublished), the Fifth Circuit affirmed a bankruptcy court’s contempt order and default judgment entered against debtor Douglas Kevin Smith in an adversary proceeding brought by MedLegal Solutions, Inc., doing business as Atticus Medical Billing, Inc. The dispute stems from a Lien Advance Agreement (LAA) between MedLegal and Salubrio, L.L.C., a medical provider solely owned and controlled by Smith. After MedLegal advanced approximately $2 million to Salubrio under the LAA, it pursued arbitration and later, when Smith filed personal bankruptcy, an adversary proceeding to liquidate its claims, obtain a nondischargeability determination, and pierce the corporate veil under alter-ego/sham-to-perpetuate-a-fraud theories.

On appeal, Smith pressed four principal arguments: (A) the bankruptcy court lacked subject-matter jurisdiction due to a typographical error in MedLegal’s complaint; (B) MedLegal lacked Article III standing; (C) the lower courts ignored “fraud-on-the-court”; and (D) the bankruptcy court unconstitutionally entered final judgment on state-law tort claims (which he characterized as “non-core”). The Fifth Circuit rejected each argument and affirmed.

The opinion is most notable for three clarifications: (1) a clerical error in an adversary complaint’s case number does not defeat subject-matter jurisdiction or eliminate a live case or controversy when the complaint is filed in the correct bankruptcy proceeding and later corrected; (2) when a creditor files a proof of claim, the bankruptcy court may finally adjudicate unliquidated state-law claims if resolving those claims is necessary to adjudicate the proof of claim; and (3) persistent, willful discovery noncompliance can warrant the harsh sanction of default under Federal Rule of Civil Procedure 37, together with contempt and fee-shifting.

Summary of the Opinion

Subject-matter jurisdiction: The bankruptcy court had “related to” jurisdiction under 28 U.S.C. § 1334(b) because MedLegal’s adversary claims sought to liquidate a debt and obtain a nondischargeability ruling—outcomes that could conceivably affect the administration of Smith’s estate. A typographical error in the adversary complaint’s case number did not negate jurisdiction or the existence of a live case or controversy, especially since the complaint was filed in the correct proceeding and corrected thereafter.
Standing: MedLegal established injury-in-fact, causation, and redressability. Evidence—including Smith’s own 2019 arbitration deposition—showed a contractual relationship under which MedLegal advanced funds later diverted, causing monetary harm that would be redressed by a judgment imposing Smith’s personal liability.
Alleged fraud-on-the-court: The Fifth Circuit agreed that Smith’s assertions were conclusory and unsupported by evidence; they did not warrant disturbing the judgment or the contempt findings.
Core authority to enter final judgment: Because MedLegal filed a proof of claim and the state-law claims were necessary to adjudicate that claim, the bankruptcy court could enter final judgment on those claims. Any Seventh Amendment jury-trial argument was waived because Smith failed to include it in his statement of issues on appeal to the district court.
Sanctions and default: The bankruptcy court’s contempt order and default judgment under Rule 37(b) and (d) were proper in light of Smith’s repeated, willful refusals to make disclosures, respond to discovery, and appear for deposition, despite multiple court orders and extended deadlines. The district court’s affirmance was itself affirmed.

Analysis

Precedents Cited and Their Role

Standard of review: The court reiterated that, when a district court sits as an appellate court in a bankruptcy case, the court of appeals reviews the bankruptcy court’s findings and conclusions under the same standards the district court applied. See In re Highland Capital Management, L.P., 57 F.4th 494, 499 (5th Cir. 2023) (quoting In re ASARCO, L.L.C., 650 F.3d 593, 600 (5th Cir. 2011)). Legal issues and mixed questions are reviewed de novo; factual findings are reviewed for clear error. See Dean v. Seidel (In re Dean), 18 F.4th 842, 844 (5th Cir. 2021).
Subject-matter jurisdiction in bankruptcy: The Fifth Circuit applied the “conceivable effect” test for “related to” jurisdiction under § 1334(b), citing In re GenOn Mid-Atlantic Development, L.L.C., 42 F.4th 523, 534 (5th Cir. 2022), and quoted language explaining that matters altering a debtor’s rights or affecting estate administration fall within related-to jurisdiction, citing In re KSRP, Ltd., 809 F.3d 263, 266 (5th Cir. 2015). While reminding that related-to jurisdiction is not limitless, see Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995), the court emphasized that bankruptcy courts may enter judgments on debts deemed nondischargeable. See In re Morrison, 555 F.3d 473, 479–80 (5th Cir. 2009).
Article III standing: The court invoked the familiar framework from Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992), as summarized in Susan B. Anthony List v. Driehaus, 573 U.S. 149 (2014). MedLegal’s monetary loss constituted an injury-in-fact; Smith’s conduct provided causation; and a personal judgment would redress the injury.
Bankruptcy courts’ constitutional authority over state-law claims: Relying on In re Moore, 739 F.3d 724, 728 (5th Cir. 2014), the court confirmed that once a creditor files a proof of claim, resolution of the creditor’s state-law claim that is necessary to adjudicate the proof of claim may be finally decided by the bankruptcy court. The Fifth Circuit reviewed the core/non-core characterization de novo, citing In re National Gypsum Co., 118 F.3d 1056, 1062 (5th Cir. 1997).
Waiver in bankruptcy appeals: The court noted that issues not identified in the appellant’s statement of issues are generally waived on appeal, citing Fed. R. Bankr. P. 8009 and the Fifth Circuit’s discussion in In re Highland Capital Management, L.P., 57 F.4th at 499–500. Smith’s Seventh Amendment challenge was therefore not considered.
Threshold jurisdiction reminder: The court invoked Steel Co. v. Citizens for a Better Environment, 523 U.S. 83 (1998), to underscore the necessity of jurisdiction before proceeding—used here to frame and then dispose of Smith’s (meritless) jurisdictional objection premised on a typo.

Legal Reasoning

A. Subject-Matter Jurisdiction Under § 1334(b) Despite a Clerical Error

Smith’s theory that a typographical error in MedLegal’s adversary complaint (an incorrect bankruptcy case number) eliminated a “case or controversy” or stripped the bankruptcy court of jurisdiction was rejected as a non-starter. The bankruptcy court’s jurisdiction is assessed under 28 U.S.C. § 1334(b), which confers original (nonexclusive) jurisdiction over proceedings arising under title 11, arising in a case under title 11, or related to a case under title 11. Applying the “conceivable effect” test, the Fifth Circuit concluded that claims to liquidate a debt against the debtor and to declare the debt nondischargeable plainly relate to the bankruptcy case: a judgment could alter the debtor’s liabilities and influence estate administration.

The court also emphasized pragmatic reality: the complaint was filed in the correct bankruptcy proceeding and the error was promptly corrected in later filings. A caption typo did not negate Article III’s case-or-controversy requirement or divest the court of statutory jurisdiction under § 1334(b). The holding reflects a function-over-form approach consistent with Celotex’s caution that related-to jurisdiction is broad but not limitless, and with Morrison’s confirmation that bankruptcy courts may determine the amount of nondischargeable debt.

B. Standing: Monetary Injury, Causation, and Redressability

MedLegal established Article III standing. The court accepted the district court’s analysis: MedLegal suffered a concrete monetary injury through diversion of funds advanced under the LAA; the injury was fairly traceable to Smith’s conduct (supported by Smith’s own arbitration deposition in 2019 acknowledging the contractual relationship and the acceptance of checks from MedLegal/Atticus); and imposing Smith’s personal liability would redress the injury. The court’s reliance on deposition admissions underscores that standing can be established with material from related proceedings, and that a plaintiff-creditor’s injury-in-fact need not await the merits determination of alter-ego or nondischargeability theories.

C. Fraud-on-the-Court Allegations: Conclusory Accusations Are Insufficient

Smith’s accusations of 18 U.S.C. § 1519 violations, forged signatures, and general attorney misconduct were rejected as unsupported, conclusory assertions. The Fifth Circuit agreed with the district court that “conclusory and speculative assertions of fact simply do not carry the day.” Absent evidence, such allegations cannot justify reversal of orders enforcing discovery or entering default. The court also disregarded insinuations about opposing counsel’s past clerkship, noting the absence of proof suggesting judicial impropriety.

D. Bankruptcy Court’s Final Judgment on State-Law Claims Was Constitutional

Smith argued that MedLegal’s state-law tort claims were “non-core” and thus beyond the bankruptcy court’s final adjudicatory authority. The Fifth Circuit applied its de novo review and reiterated the Moore principle: when a creditor files a proof of claim, and resolution of the creditor’s state-law claims is necessary to adjudicate that proof of claim, the bankruptcy court has authority to enter final judgment on those claims. Here, MedLegal’s proof of claim encompassed its unliquidated state-law claims; resolving those claims was necessary to determine the claim’s allowance and amount. Thus, entry of default judgment by the bankruptcy court did not transgress constitutional limits.

Smith’s separate Seventh Amendment jury-trial argument was not preserved because it was omitted from the statement of issues designated on appeal to the district court, and was therefore waived.

E. Sanctions and Default Under Rule 37 Were Proper

The procedural history showed repeated, willful discovery violations:

Failure to make initial disclosures by the court-ordered deadline, followed by an order compelling compliance.
Failure to respond to written discovery and failure to appear for deposition, despite a second order compelling both and extending deadlines.
Continued noncompliance leading to a motion for contempt and sanctions under Rule 37(b)(2) and (d).
A hearing on the sanctions motion, followed by entry of default judgment for actual damages of $1,480,300.89, and a later order holding Smith in contempt of four separate court orders, imposing sanctions under Rule 37(b)(2)(A)(iii) and (vi), and awarding MedLegal its fees and expenses.

The Fifth Circuit affirmed these outcomes, emphasizing the record’s demonstration of a “repeated, intentional, and willful refusal” to obey court orders. By citing the specific Rule 37 provisions authorizing striking pleadings and default, and fee-shifting for failures to attend depositions or serve answers, the opinion confirms that the bankruptcy court considered and employed escalating sanctions to address noncompliance, and that the harsh remedy of default was warranted.

Impact

1. Jurisdiction and Pleading Irregularities

The decision underscores that minor clerical defects in adversary filings—such as a wrong case number—do not defeat § 1334(b) jurisdiction or Article III justiciability when the complaint is filed in the correct case and the error is corrected. Parties should not expect typographical glitches to provide jurisdictional leverage. Substantive effects on the estate remain the touchstone for “related to” jurisdiction.

2. Bankruptcy Courts’ Final Judgment on State-Law Claims Post-Stern

By reinforcing Moore, the Fifth Circuit continues to chart a clear path through post-Stern complexities: once a creditor files a proof of claim, state-law issues necessary to adjudicate that claim can be finally resolved by the bankruptcy court. This streamlines claim allowance, avoids duplicative litigation, and discourages tactical characterization of disputes as “non-core” to force withdrawal to the district court or a jury trial, especially where the Seventh Amendment is not timely asserted.

3. Discovery Conduct in Bankruptcy Litigation

The opinion is a cautionary tale for debtors and litigants in bankruptcy adversary proceedings. Repeated disobedience of discovery orders justifies severe Rule 37 sanctions, including default judgment. Bankruptcy judges are empowered to enforce their orders promptly, and the Fifth Circuit will not rescue parties who willfully flout discovery obligations.

4. Standing Challenges in Creditor Actions

Creditors seeking to liquidate debts and establish nondischargeability frequently face standing challenges from debtors. This case demonstrates that evidence of monetary loss and the debtor’s role in causing it typically suffices for Article III standing, even before final merits determinations on alter-ego or fraud theories. Debtors should not conflate standing with the merits.

5. Appellate Practice in Bankruptcy

The court’s waiver analysis is a practical reminder: issues not included in the statement of issues under Fed. R. Bankr. P. 8009 are generally forfeited on appeal. Attempts to add issues later, or to rely on broad generalities, will fail. Appellants must scrupulously designate, preserve, and brief their issues.

Complex Concepts Simplified

Arising under, arising in, related to (§ 1334(b)):
- Arising under: Claims created by the Bankruptcy Code itself (e.g., avoidance actions).
- Arising in: Proceedings that exist only because of bankruptcy (e.g., plan confirmation).
- Related to: Civil proceedings whose outcome could conceivably affect the bankruptcy estate (e.g., liquidation of a creditor’s claim against the debtor).
Proof of claim: A creditor’s formal assertion of what it is owed in the bankruptcy. Adjudicating a proof of claim may require deciding underlying state-law liability, which the bankruptcy court can finally determine when necessary to resolve the claim.
Nondischargeability: Certain debts cannot be wiped out in bankruptcy (e.g., debts incurred by fraud). Bankruptcy courts can determine both liability and nondischargeability in the same proceeding.
Article III standing: A plaintiff must show a concrete injury, caused by the defendant, likely to be redressed by a court order. Monetary losses from unpaid or diverted advances typically qualify.
Fraud on the court: An egregious, intentional scheme that corrupts the judicial process (e.g., fabricated evidence), typically requiring clear and convincing proof. Mere accusations or speculation are insufficient.
Core vs. non-core and Stern considerations: Even if a state-law claim is “non-core,” the bankruptcy court may constitutionally enter final judgment when deciding that claim is necessary to adjudicate a filed proof of claim. Stern v. Marshall limits do not prevent final adjudication in this proof-of-claim context.
Rule 37 sanctions: Courts may sanction parties for discovery abuses, including:
- Ordering payment of expenses/fees.
- Striking pleadings.
- Entering default judgment for willful, repeated violations, especially after prior orders and lesser sanctions have failed.
Alter ego/veil piercing/sham to perpetuate fraud: Doctrines allowing courts to disregard the corporate form and hold an individual owner liable for corporate obligations when the entity is misused to commit fraud or injustice.
Waiver on appeal in bankruptcy: Issues not included in the appellant’s Rule 8009 statement of issues are generally waived and will not be entertained on appeal.

Conclusion

Smith v. MedLegal Solutions delivers several important clarifications for bankruptcy litigators:

Clerical filing errors do not defeat bankruptcy jurisdiction or the presence of a live controversy when the adversary is correctly lodged and promptly corrected.
Creditors can establish standing to pursue adversary claims with straightforward proof of monetary injury linked to the debtor’s conduct, without having to pre-try merits defenses.
Bankruptcy courts may enter final judgments on state-law claims when those determinations are necessary to adjudicate a filed proof of claim, reaffirming a practical boundary to Stern challenges.
Persistent discovery violations invite severe Rule 37 sanctions, including default, and accusations of “fraud-on-the-court” must be substantiated, not merely asserted.
Appellate success depends on meticulous issue preservation under Rule 8009; unpreserved constitutional arguments will be deemed waived.

Although unpublished, the Fifth Circuit’s opinion is a persuasive reminder that bankruptcy courts possess robust authority to manage adversary proceedings efficiently, to liquidate claims integral to the allowance process, and to enforce compliance with discovery obligations. For debtors and creditors alike, the case reinforces that substance prevails over form, that jurisdiction follows the estate-effect of the dispute, and that procedural rigor—both in discovery and in appellate practice—is indispensable.