After confirmation of a chapter 11 plan, the bankruptcy court has “arising in” jurisdiction to entertain a discovery motion under Bankruptcy Rule 2004 and therefore need not apply the Third Circuit’s “close nexus” test, according to Delaware Bankruptcy Judge Laurie Selber Silverstein.
The plan created two trusts, one with claims belonging to the debtor to prosecute suits on behalf of all creditors, and a second with claims contributed by lenders who alone would benefit from recoveries on their claims. The same individual was named to serve as trustee for both trusts.
The trustee filed a motion under Bankruptcy Rule 2004 to take discovery from banks, law firms and an accounting firm in connection with a pre-bankruptcy credit agreement that allegedly harmed the estate. The targets of the investigation opposed the motion, contending that the bankruptcy court had no jurisdiction after confirmation to authorize use of Rule 2004.
Judge Silverstein determined that she had jurisdiction in her Dec. 2 opinion, but she held that the trust with the lenders’ claims could not utilize Rule 2004.
The targets relied on the Third Circuit’s Resorts International decision from 2004 requiring a “close nexus” to the chapter 11 plan for the exercise of bankruptcy jurisdiction after confirmation.
Because the trustee was utilizing Rule 2004, Judge Silverstein said there was “arising in” jurisdiction, even though the dispute was after confirmation. She cited the Third Circuit’s Seven Fields decision from 2007 for the proposition that the “close nexus” test for “related to” jurisdiction does not apply when there is “arising in” jurisdiction.
Unlike “related to” jurisdiction, Judge Silverstein said there is “no comparable constriction” on “arising in” jurisdiction after confirmation.
Next, the targets argued that there was no subject matter jurisdiction for the Rule 2004 motion because the trustee inevitably would pursue claims beyond the bankruptcy court’s jurisdiction, since they would be non-core without a close nexus to the chapter 11 case.
Judge Silverstein rejected that argument too, even though the plan did not reserve jurisdiction after confirmation to pursue lawsuits. Jurisdiction, she said, was bestowed by Rule 2004, not by the plan or a lawsuit the trustee might bring. Allowing use of Rule 2004 after confirmation, she said, did not carry a risk of “unending jurisdiction.”
Judge Silverstein granted the arm of the trustee’s motion for an investigation into claims belonging to the creditors’ trust. She denied the aspect of the motion related to the separate lenders’ trust because the lenders’ claims did not call for an investigation into the property, liabilities or financial condition of the debtor, thus did not fall within the scope of Rule 2004.
Since both trusts had the same trustee, Judge Silverstein on her own raised the question of allowing discovery on behalf of creditors generally when the trustee could use the fruits of the investigation in litigation on behalf of the lenders. “In the first instance,” she said, the potential use of information on behalf of the lenders “cannot dictate denial of the trustee’s Rule 2004 motion.”