If a post-confirmation adversary proceeding is “core” or entails interpretation of an order made during the chapter 11 case, there is always jurisdiction. According to an August 25 opinion by Third Circuit Judge Thomas L. Ambro, the close nexus test does not apply to a post-confirmation dispute that is “core.”
Under the debtor’s chapter 11 plan, the company was being acquired by a third party. Before confirmation by the bankruptcy court in Delaware, the buyer had hired a financial advisor.
The day before the plan became effective, an executive of the buyer signed an agreement to give the advisor a success fee for arranging financing after the acquisition was completed. The agreement purported to make the reorganized debtor liable for the success fee, although the buyer was not yet in control of the debtor.
The reorganized debtor closed a financing six months after the plan became effective. Were it enforceable, the reorganized debtor would be liable to the advisor for a $16 million success fee. The debtor refused to pay the success fee.
The advisor filed a lawsuit in federal district court in Minnesota against the debtor. In response, the debtor initiated an adversary proceeding in the Delaware bankruptcy court to hold the advisor in contempt of the discharge injunction and for a declaration that any liability for a success fee had been discharged.
The advisor filed a motion to dismiss the adversary proceeding in bankruptcy court. The bankruptcy judge issued a bench opinion dismissing the adversary proceeding for lack of jurisdiction. The district court authorized a direct appeal that the circuit accepted.
Policy Still Matters (in the Third Circuit)
Judge Ambro began his analysis by laying out policies behind the Bankruptcy Code. “[W]e ground our discussion in the broader context of bankruptcy jurisdiction,” he said. “The aim of the Bankruptcy Code . . . is to sort out, as much as possible, a debtor’s financial affairs in one place.”
Next, he said that the “scope” of bankruptcy jurisdiction “diminishes” after confirmation but does not disappear “entirely.” The first step in discerning jurisdiction is to divine whether the dispute is core or non-core.
Urging the circuit to uphold dismissal, the advisor contended that the post-confirmation dispute lacked a “close nexus” to the chapter 11 case, as required by the Third Circuit.
Judge Ambro explained that the close nexus test derived from In re Resorts International Inc., 372 F.3d 154 (3d Cir. 2004). There, the appeals court said there is a close nexus when a dispute after confirmation “affects the interpretation, implementation, consummation, execution, or administration of a confirmed plan . . . .”
In Resorts, the Third Circuit found no jurisdiction for a post-confirmation malpractice suit by a litigation trust against a professional retained during the course of the bankruptcy. The malpractice suit, Judge Ambro said, had no “close connection” to the plan, would not affect the estate and would only have an “incidental effect” on the reorganized debtor.
There being no close nexus, the Third Circuit held in Resorts that there was no “related to” jurisdiction.
Important though Resorts and the close nexus test may be, Judge Ambro said that test “does not extend to core proceedings.”
The dispute over the advisor’s fee was a core proceeding for several reasons. First, it was core because the bankruptcy court was being asked to decide whether the claim had been discharged. Second, purporting to bind the debtor a day before the acquisition could be seen as attempting “to circumvent the bankruptcy process” and bind the reorganized debtor, Judge Ambro said.
Third, the debtor was seeking to hold the advisor in contempt of the discharge injunction. Judge Ambro cited sister circuits for holding that civil contempt proceedings are core because they arise from the confirmation order.
Judge Ambro found a second ground for jurisdiction: The bankruptcy court was being asked to interpret its own prior orders, a principle for which he cited Travelers Indem. Co. v. Bailey, 557 U.S. 137 (2009).
Like Travelers, Judge Ambro said that the debtor was asking the bankruptcy court “to enforce the discharge and injunction provisions of its plan and confirmation order after the debtor emerged from bankruptcy.”
Judge Ambro set aside dismissal of the adversary proceeding because the bankruptcy court “plainly” had jurisdiction to interpret and enforce the discharge injunction. He said that the “close nexus test is not in play” because “the action was a core proceeding.”
Observation
Scholars will debate whether Judge Ambro’s decision enlarges the net of post-confirmation jurisdiction in the Third Circuit. What do you think?
If a post-confirmation adversary proceeding is “core” or entails interpretation of an order made during the chapter 11 case, there is always jurisdiction. According to an August 25 opinion by Third Circuit Judge Thomas L. Ambro, the close nexus test does not apply to a post-confirmation dispute that is “core.”
Under the debtor’s chapter 11 plan, the company was being acquired by a third party. Before confirmation by the bankruptcy court in Delaware, the buyer had hired a financial advisor.
The day before the plan became effective, an executive of the buyer signed an agreement to give the advisor a success fee for arranging financing after the acquisition was completed. The agreement purported to make the reorganized debtor liable for the success fee, although the buyer was not yet in control of the debtor.
The reorganized debtor closed a financing six months after the plan became effective. Were it enforceable, the reorganized debtor would be liable to the advisor for a $16 million success fee. The debtor refused to pay the success fee.