A district judge in Colorado predicted that the Tenth Circuit would follow the First Circuit by holding that “related to” jurisdiction does not narrow after confirmation when the plaintiff is a liquidating debtor (or liquidating trust) that has not returned to the marketplace.
In his September 10 opinion, District Judge R. Brooke Jackson of Denver cited the so-called Pacor test for the proposition that federal courts have “related to” jurisdiction under 28 U.S.C. § 1334(b) if the proceeding could have a “conceivable effect” on the estate in bankruptcy. Pacor Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984), overruled on other grounds by Things Remembered v. Petrarca, 516 U.S. 124 (1995)).
Judge Jackson went on to say that “most courts” hold that “related to” jurisdiction “narrows” after confirmation of a chapter 11 plan. Like Pacor, the leading case in that regard comes from the Third Circuit, where the Philadelphia-based appeals court requires a “close nexus” after confirmation to the “implementation, consummation, execution, or administration of the confirmed plan.” Binder v. Price Waterhouse & Co. LLP (In re Resorts International Inc.), 372 F.3d 154, 167 (3d Cir. 2004).
Although the Tenth Circuit has not done so formally, he said that the Second, Fourth and Ninth Circuits have adopted Resorts International.
However, the case before Judge Jackson was not an ordinary chapter 11 reorganization where the debtor corporation continued doing business after confirmation and consummation of a plan.
The debtor corporation had confirmed a liquidating chapter 11 plan in 2008 that created a liquidating trust authorized to take any actions necessary to pay creditors. After confirmation, the trust sued insiders, alleging that they had fraudulently transferred company property to themselves.
The trust settled with the insiders for a nominal amount because they represented that they had no substantial assets. The settlement agreement provided that the trust could have a $15 million nondischargeable judgment if the insiders had misrepresented their financial condition.
In 2018 (10 years after confirmation), the trust sued the insiders in district court in a complaint based on “related to” jurisdiction. The complaint alleged that the insiders had substantial assets they had not disclosed. The suit included claims for fraudulent transfer under Section 548 and state law.
The insiders moved to dismiss, contending that the court lacked “related to” jurisdiction so long after confirmation. Judge Jackson denied the motion.
When a liquidating plan is involved, Judge Jackson said that “most courts have not narrowed post-confirmation jurisdiction.” At the circuit level, he cited Boston Regional Medical Center Inc. v. Reynolds (In re Boston Reginal Medical Center Inc.), 410 F.3d 100 (1st Cir. 2005). The Boston-based appeals court said that “narrowing interpretations have been invoked only with respect to actions involving reorganizing debtors that have reentered the marketplace.” Id. at 105-106.
In the liquidations of Delphi and Lehman Brothers, Judge Jackson said that district courts in the Southern District of New York followed the First Circuit. The Lehman court found “related to” jurisdiction because the suit “could impact the amounts available to be paid to [Lehman’s] creditors.” Fried v. Lehman Brothers Real Estate Associates III LP, 496 B.R. 706, 710 (S.D.N.Y. 2013).
Judge Jackson conceded that the Ninth Circuit is an “outlier” by continuing to apply the “close nexus” test to a liquidating trust after confirmation.
Judge Jackson found Boston Regional, Lehman and Delphi to be “more persuasive.” In his case, he said the claims were “related to the ongoing bankruptcy” for several reasons.
The defendants, Judge Jackson said, allegedly had “squirreled away tens of millions of dollars” of the bankrupt company’s assets. The suit had the necessary relationship to the bankruptcy case because the liquidating trust was charged with collecting the debtor’s assets and filing lawsuits to recover property. He found the required relationship to the bankruptcy case because the “sole purpose [of the liquidating trust] is to implement and execute the confirmed Plan.”
In short, Judge Jackson found subject matter jurisdiction because the recovery in the suit “will directly impact [the debtor’s] creditors making this lawsuit more closely related to the bankruptcy.” The judge said he was not laying down a rule where bankruptcy jurisdiction would continue endlessly because the debtor was no longer in business.
A district judge in Colorado predicted that the Tenth Circuit would follow the First Circuit by holding that “related to” jurisdiction does not narrow after confirmation when the plaintiff is a liquidating debtor (or liquidating trust) that has not returned to the marketplace.
In his September 10 opinion, District Judge R. Brooke Jackson of Denver cited the so-called Pacor test for the proposition that federal courts have “related to” jurisdiction under 28 U.S.C. § 1334(b) if the proceeding could have a “conceivable effect” on the estate in bankruptcy. Pacor Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984), overruled on other grounds by Things Remembered v. Petrarca, 516 U.S. 124 (1995)).
Judge Jackson went on to say that “most courts” hold that “related to” jurisdiction “narrows” after confirmation of a chapter 11 plan. Like Pacor, the leading case in that regard comes from the Third Circuit, where the Philadelphia-based appeals court requires a “close nexus” after confirmation to the “implementation, consummation, execution, or administration of the confirmed plan.” Binder v. Price Waterhouse & Co. LLP (In re Resorts International Inc.), 372 F.3d 154, 167 (3d Cir. 2004).
Although the Tenth Circuit has not done so formally, he said that the Second, Fourth and Ninth Circuits have adopted Resorts International.
However, the case before Judge Jackson was not an ordinary chapter 11 reorganization where the debtor corporation continued doing business after confirmation and consummation of a plan.