Even though resolution of a dispute might affect a distribution under a confirmed plan, the bankruptcy court lacked subject matter jurisdiction to adjudicate an offset that the reorganized debtor raised in objecting to allowance of a claim in a chapter 11 case.
A company fired its chief executive without cause before initiating a chapter 11 reorganization, which culminated in a confirmed plan in 2012 and the debtor’s continued operation of the business. After confirmation, the former CEO allegedly breached a non-competition agreement in his employment contract.
The former CEO had filed an $800,000 claim in the bankruptcy case for contractual severance and vacation pay.
In litigation over the proof of claim under the employment contract, the debtor raised the breach of the non-competition clause as an offset to any allowed claim. In an opinion on Sept. 15, Bankruptcy Judge Martin Glenn of New York City dismissed the non-competition dispute for lack of subject matter jurisdiction.
Judge Glenn was not writing on a clean slate. He had decided a similar case in 2011, called Park Avenue Radiologists, where he dismissed for lack of jurisdiction.
Judge Glenn began his analysis by noting that the parties had consented to his entering a final order. He said that consent could not confer subject matter jurisdiction where there is none. Consent, he said, only relates to the exercise of judicial powers. He also said that dismissal for lack of jurisdiction would have resulted even if the non-competition claim had been raised in a separate adversary proceeding, not just in the claims allowance process.
Since bankruptcy jurisdiction under 28 U.S.C. Section 1334 shrinks after confirmation, Judge Glenn followed the line of cases holding there must be a “close nexus” to the bankruptcy case. Had the case entailed a liquidating chapter 11 plan, not a bona fide reorganization, he said he would have followed the First Circuit by employing the more easily met “conceivable effect” test for jurisdiction.
Quoting a 2005 decision by Bankruptcy Judge Stuart M. Bernstein, Judge Glenn also said that the “‘distinction between core and non-core jurisdiction may not be particularly relevant after confirmation.’”
There is a two-part test for post-confirmation jurisdiction under the close nexus test, Judge Glenn said. First, the dispute must affect implementation or interpretation of the plan, and second, the plan must have provided for the retention of jurisdiction.
Although the second test was satisfied, Judge Glenn said that the plan’s retention of jurisdiction clause cannot create jurisdiction. It only allows a court to adjudicate a dispute once the close nexus test has been met.
In the case before him, there was no close nexus because the reorganized debtor had been operating for four years. No matter the outcome of the claim objection, the plan was fully funded and would not be affected, Judge Glenn said.