Success Fee Dispute Arising Post-Effective Date Is a Core Bankruptcy Matter When Its Resolution Requires Interpretation of Plan Injunction

A plan sponsor’s financial advisor sues the plan sponsor and reorganized debtor for payment of a success fee arising from a purported financing transaction that allegedly closed post-effective date. In what forum should the suit be resolved? According to a recent decision from the Third Circuit, the suit is squarely within the jurisdiction of the bankruptcy court when such claims and issues require interpretation and enforcement of a plan injunction. [1]

Bankruptcy Proceedings

In July 2016, ESML Holdings Inc. and Essar Steel Minnesota LLC (together, the debtors) filed voluntary chapter 11 petitions in the U.S. Bankruptcy Court for the District of Delaware. [2] During the chapter 11 Cases, Chippewa Capital Partners, LLC sought to acquire the debtors. Chippewa’s affiliate, ERP Iron Ore, retained B. Riley & Co., LLC (k/n/a B. Riley FBR, Inc. and referred to herein as “B. Riley”) as financial advisor to assist ERP and its affiliates (including Chippewa) with the acquisition. [3]

The parties’ engagement agreement provided, among other things, that B. Riley would receive a success fee upon the consummation of certain financing transactions. [4] Chippewa and the debtors implemented the acquisition through a chapter 11 plan whereby Chippewa served as plan sponsor and funded the debtors’ exit from chapter 11. [5] The bankruptcy court entered an order confirming the plan. [6] The plan and confirmation order implemented (1) a discharge of all claims against the debtors arising before the effective date of the plan, and (2) an injunction precluding the holders of such claims from bringing causes of action against the debtors and Chippewa. [7]

The effective date occurred on Dec. 22, 2017, and the debtors emerged as Mesabi Metallics Company LLC (the “reorganized debtor”). [8] However, on Dec. 21, 2017 — one day before the effective date — Chippewa, ERP and B. Riley amended the engagement agreement, purportedly binding the reorganized debtor (prior to its existence) to the obligations under the engagement agreement. [9]

Success Fee Dispute and Related Proceedings

Following the effective date, B. Riley asserted that Chippewa and the reorganized debtor closed a financing transaction that was subject to the terms of the engagement agreement, and subsequently sought payment of a success fee. [10] When Chippewa and the reorganized debtor refused to pay the success fee, [11] B. Riley filed two collection actions — (1) a lawsuit in the U.S. District Court for the District of Minnesota and (2) an arbitration suit with the Financial Industry Regulatory Authority. Chippewa and the reorganized debtor filed an adversary complaint with the bankruptcy court, alleging, among other things, that the success fee had been discharged by the plan and confirmation order and that B. Riley was in contempt of that order. [12] For its part, B. Riley argued that its claims arose after the effective date and were not discharged. [13]

After hearing oral argument, the bankruptcy court applied the “close nexus” test, determined that it lacked jurisdiction over the matter, and dismissed the adversary proceeding. [14] The parties appealed to the U.S. District Court for the District of Delaware, which certified the jurisdictional issue to the Third Circuit Court of Appeals. [15]

The Third Circuit’s Analysis

The Third Circuit held that the adversary proceeding was a quintessentially “core” matter of a type enumerated in 28 U.S.C. § 157(b)(2) and rejected the application of the “close nexus” test, which it deemed inapplicable to “core” proceedings. [16] The Third Circuit focused its analysis on the relief requested in the adversary proceeding, which required the bankruptcy court to interpret and potentially enforce the confirmation order and plan injunction. [17] The Third Circuit also noted that a last-minute amendment to the engagement Agreement hinted at an attempt to “circumvent the bankruptcy process,” which also gave rise to core jurisdiction. [18]

In addition to concluding that the adversary proceeding raised issues of “core” jurisdiction, the Third Circuit also determined, under the U.S. Supreme Court’s decision in Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151 (2009), that the bankruptcy court’s authority to interpret and enforce its own confirmation order provided an independent basis upon which to hear and determine the issues raised in the adversary proceeding. [19] The Third Circuit rejected arguments that the application of Travelers would “threaten unending jurisdiction,” commenting that bankruptcy courts are capable of both distinguishing cases involving dissimilar facts and permissively abstaining from hearing a case, if appropriate. [20]

Conclusion and Takeaways

While a bankruptcy court’s jurisdiction narrows post-confirmation, disputes involving enforcement or interpretation of a confirmation order or plan are “core” proceedings squarely within a bankruptcy court’s jurisdiction. This may be the case even where, as here, the alleged transaction giving rise to purported claims occurs post-effective date, and the counterparty to the dispute does not assert claims against a debtor’s estate or purport to have any other interest in a debtor’s estate. [21]