In an era when appellate courts are continually constricting the jurisdiction and powers of bankruptcy courts, the Third Circuit confirmed the ability of a bankruptcy court to continue litigation after confirmation of a chapter 11 plan so long as there was “related to” jurisdiction when the lawsuit began, even though there may no longer be an effect on the estate.
In a somewhat similar context, the First Circuit handed down an important decision in June holding that retention of jurisdiction is a necessary but not sufficient condition to exercise jurisdiction after confirmation. Gupta v. Quincy Medical Center, 858 F.3d 657 (1st Cir. June 2, 2017).
In Quincy, the confirmed plan contained a retention of jurisdiction provision encompassing the type of lawsuit that some of the debtors’ officers later initiated against the purchaser of the assets. The retention of jurisdiction provision by itself was not enough to confer jurisdiction on the bankruptcy court, the First Circuit said, because the lawsuit raised no issues of bankruptcy law, involved no questions about the interpretation of a court order, had no effect on the estate, and only required interpretation of state contract law.
In other words, retention of jurisdiction by itself was not sufficient in the absence of a jurisdictional hook at the time a lawsuit began between third parties. To read ABI’s discussion of Quincy, click here.
The case decided on July 19 by Third Circuit Judge Thomas L. Ambro was similar but sufficiently different to entail the opposite result. Because there was “related to” jurisdiction when the lawsuit began before confirmation, jurisdiction did not evaporate after confirmation, even though there might not have been an effect on the estate.
On the merits, Judge Ambro’s opinion is exceptionally important for the oil and gas industry.
The debtor was SemGroup LP, which purchased oil from producers and resold the oil to downstream purchasers. The downstream purchasers also had futures contracts with SemGroup. By contract, the downstream purchasers were allowed to offset debts and credits between the futures contracts and the oil purchases.
When SemGroup filed a chapter 11 petition, the downstream purchasers owed more to SemGroup than SemGroup owed to them. Consequently, the downstream purchasers exercised setoff and emerged from the chapter 11 case without a loss.
The producers weren’t so lucky. Judge Ambro said they “were paid only in part” by the chapter 11 process.
Before confirmation, the producers filed lawsuits alleging that their liens under state laws gave them claims against the downstream purchasers based in large part on the Uniform Commercial Code.
The lawsuits by the producers were removed to bankruptcy court. The confirmation order provided for retention of jurisdiction over the suits. After confirmation, Bankruptcy Judge Brendan L. Shannon of Delaware issued proposed findings and conclusions in what Judge Ambro called “exceptional depth and easily understood language.” The district court adopted Judge Shannon’s proposals to dismiss the producers’ suits, leading to the Third Circuit appeal.
The producers argued that the district court lost subject matter jurisdiction when the plan was confirmed because, at that point, there would be no effect on the estate.
The producers’ arguments, Judge Shannon said, “miss the mark” because related-to jurisdiction “is determined at the time of filing.” At commencement, the suit “unquestionably could have affected the bankrupt estates” because it would have resolved creditors’ competing claims to estate assets.
Judge Ambro cited existing Third Circuit authority for the proposition that confirmation “does not divest a district court of related-to jurisdiction over preconfirmation claims.”
On the merits, Judge Ambro’s decision gives comfort to downstream purchasers. Upholding the dismissal of claims based on the UCC and fraud, he said that protections under state laws “do not reach downstream parties.”
Judge Ambro ended his opinion by saying that allowing “a lien or trust [to follow] oil from their wells to the gas pump does not make sense for this type of market.” Upholding the producers’ claims, he said, “would be chaos.”