Fifth Circuit Judge Jerry E. Smith wrote an erudite opinion on the finer points of post-confirmation and “related to” jurisdiction. Most notably, though, his opinion explores the finer points regarding abstention. It’s a “must read” for jurisdiction buffs.
Procedurally and factually, a case can’t be more complicated. The following exposition glosses over 10 pages of minutia to give our readers a sense of the facts from 100,000 feet.
The leading character in the drama was a non-debtor operator of leased power plants. The power plant operator’s parent was a huge power producer in chapter 11 in Houston.
The antagonist was a bank that issued $130 million in letters of credit in favor of the non-debtor subsidiary. The subsidiary paid $130 million cash for the bank to issue the LCs. In other words, the bank was fully covered, or so it thought.
Indeed, the bank was fully covered until someone made a mistake. Through an error in a complex transaction, the bank opened itself up to tens of millions of dollars of liability in excess of $130 million. Disputes arose when the bank was called on the unexpected liability.
The result was a settlement engrafted onto the parent’s chapter 11 plan that was confirmed in Houston but not consummated entirely. The settlement exonerated the parent-debtor from liability on the unexpected liability.
However, the bank sued the non-debtor subsidiary and third parties in state court in New York. Claiming that the state court lawsuit was related to the Houston bankruptcy, the non-debtor subsidiary withdrew the suit to federal district court in New York based on “related to” jurisdiction.
The bank filed a motion to remand to state court. The district judge in New York sought an opinion from Chief Bankruptcy Judge David R. Jones of Houston on the question of whether the suit could have an effect on the parent’s chapter 11 case to justify bankruptcy jurisdiction.
Bankruptcy Judge Jones found a “huge potential effect” on the bankruptcy, prompting the district judge in New York to deny the motion to remand and transfer venue to Houston.
Back in Houston, the district court referred the lawsuit to Bankruptcy Judge Jones for report and recommendation. Ultimately, the Houston district judge accepted the report and recommendation by Bankruptcy Judge Jones and entered a take-nothing judgment. In other words, the bank was stuck with liability in excess of $130 million.
The bank appealed to the Fifth Circuit, to no avail. Of interest to our readers, we will focus on the discussions of jurisdiction and abstention in Circuit Judge Smith’s July 29 opinion.
Jurisdiction
The bank claimed that the judgment was a nullity because there was no federal jurisdiction since the dispute involved only non-debtor third parties and the scope of “related to” jurisdiction narrows after confirmation.
The outcome turned on the contours of “related to” jurisdiction under 29 U.S.C § 1334(b).
Following Fifth Circuit precedent in Craig’s Stores, Zale and Enron, Judge Smith said that the pivotal question was whether the suit pertained to the implementation or execution of the parent’s chapter 11 plan. He said that the case was “at the limit of related-to jurisdiction” and was “closer than our usual related-to fare.”
Judge Smith said that “related to” jurisdiction was not foreclosed just because the dispute was between third parties who were neither debtors nor creditors in the parent’s chapter 11 case.
In the settlement that was part of the parent’s plan, the non-debtor subsidiary had pledged to maintain large cash reserves as comfort for the owners of the power plants it operated. If it were denuded of cash by the bank’s lawsuit, the settlement would bust and the parent couldn’t consummate the confirmed plan.
Judge Smith found “related to” jurisdiction because he saw a nexus between the lawsuit and the implementation and execution of the parent’s plan.
Judge Smith was careful to say that his holding would not sweep every lawsuit against a debtor’s subsidiary into bankruptcy court. Rather, he held that
post-confirmation jurisdiction is proper only where the dispute pertains to the plan’s implementation or execution. Few disputes between non-debtors qualify . . . . To fall within our post-confirmation jurisdiction, a dispute typically must implicate a specific plan’s provision or the parties’ bankruptcy-law rights or responsibilities.
Because there was jurisdiction, “removal was proper,” Judge Smith said.
Abstention
Judge Smith next ruled that 28 U.S.C. § 1334(c)(2) did not require abstention.
“[I]n a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section,” the subsection says, “the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.” [Emphasis added.]
Among the four requisites of abstention, the appeal turned on whether there would not have been federal jurisdiction were there no “related to” jurisdiction. In other words, would there have been diversity or federal question jurisdiction? Clearly, there was no federal question jurisdiction, so diversity jurisdiction was decisive.
The non-debtor subsidiary said there was diversity jurisdiction between it and the bank, but the bank said there was no diversity jurisdiction because there was no complete diversity considering the other defendants in New York.
Judge Smith said “it’s true” that diversity jurisdiction would not allow removal of the bank’s claims against all of the defendants in New York, but “that’s not what Section 1334(c)(2) asks.” The bankruptcy removal statute, 28 U.S.C. § 1452(a), allows removal of “any claim or cause of action.”
The abstention statute, he said,
commands abstention only where “an action” regarding the claims before the federal district court “could not have been commenced” in a federal court absent bankruptcy jurisdiction. In other words, federal courts must abstain only if “the claim” in the federal court “has no independent basis for federal jurisdiction.”
Judge Smith was saying that abstention turns on the claims removed to bankruptcy court under “related to” jurisdiction, not the lawsuit filed in state court. He distinguished bankruptcy removal, which permits removal of a “claim,” from the general removal statute, 28 U.S.C. § 1446(a), which allows removal of a “civil action.”
Judge Smith said that the subsidiary brought only state-law claims “against it” into federal court.
Because an action based only on those “claims” could have been brought in federal court under diversity jurisdiction, Judge Smith held that “abstention was not required.”
Finding no abuse of discretion, Judge Smith upheld denial of the motion to abstain. In the next 15 pages, he upheld dismissal of the bank’s claims on the merits and affirmed the judgment of the district court.
Fifth Circuit Judge Jerry E. Smith wrote an erudite opinion on the finer points of post-confirmation and “related to” jurisdiction. Most notably, though, his opinion explores the finer points regarding abstention. It’s a “must read” for jurisdiction buffs.
Procedurally and factually, a case can’t be more complicated. The following exposition glosses over 10 pages of minutia to give our readers a sense of the facts from 100,000 feet.
The leading character in the drama was a non-debtor operator of leased power plants. The power plant operator’s parent was a huge power producer in chapter 11 in Houston.
The antagonist was a bank that issued $130 million in letters of credit in favor of the non-debtor subsidiary. The subsidiary paid $130 million cash for the bank to issue the LCs. In other words, the bank was fully covered, or so it thought.