Update on Bankruptcy Court Subject Matter Jurisdiction

Analysis

Last month, we suggested that “the result in Insilco might have been different if the plan and disclosure statement specifically identified these state law claims against the defendants as an asset to be liquidated and distributed to creditors, thereby providing notice to creditors and the court of its significance to implementing the plan”. The AstroPower court agreed and found this factor to be dispositive, just as the IT Group court relied on such disclosure as a factor in favor of a finding of jurisdiction. In doing so, the AstroPower court did not address the Insilco court's observation that “parties cannot write their own jurisdictional ticket and a confirmation order cannot confer jurisdiction upon a bankruptcy court unless jurisdiction exists pursuant to 28 U.S.C. ' 1334 or 28 U.S.C. ' 157.” Insilco, 330 B.R. at 519 (internal quotation omitted).

It should be noted that one could read AstroPower as dicta because the court ultimately dismissed on other grounds all counts to which the deficiency of subject matter jurisdiction was alleged. Nevertheless, the court's detailed analysis is likely to be viewed as persuasive.

Last month, we reported on two recent Delaware cases that came to opposite conclusions as to whether a bankruptcy court has subject matter jurisdiction over state law claims asserted by a post-confirmation litigation trust: IT Litigation Trust v. D'Aniello, et al. (In re: IT Group, Inc., et al.), ___ B.R. ___, 2005 WL 3050611 (D. Del. Nov. 15, 2005) (IT Group) held that the court had subject matter jurisdiction over such claims, while Shandler v. DLJ Merchant Banking, Inc., et al. (In re Insilco Technologies, Inc.), 330 B.R. 512 (Bankr. D. Del. 2005) (Insilco) held that it did not.

Update

After the article went to press, the Delaware courts weighed in on the subject for the third time in only 3 months. See AstroPower Liquidating Trust v. Xantrex Technology, Inc. et al (In re AstroPower Liquidating Trust), Chapter 11, Adv. No. 06-50876 (Bankr. D. Del. Dec. 22, 2005) (AstroPower). In AstroPower, Chief Judge Walrath held that the court had subject matter jurisdiction over pre-petition claims of breach of contract, breach of fiduciary duty and breach of agency relationship, even though such claims were commenced for the first time post-confirmation by a liquidation trust. The court distinguished Insilco on the ground that, unlike in that case, the plan and confirmation Order specifically identified this very lawsuit as a claim that was being transferred to the liquidation trust. Slip op. at 26. Thus, the court held that “where, as here, the Plan specifically describes an action over which the court had 'related to' jurisdiction pre-confirmation and expressly provides for the retention of such jurisdiction to liquidate that claim for the benefit of creditors, there is a sufficiently close nexus with the bankruptcy proceeding to support jurisdiction post-confirmation.” Slip op. at 27.

Analysis

Last month, we suggested that “the result in Insilco might have been different if the plan and disclosure statement specifically identified these state law claims against the defendants as an asset to be liquidated and distributed to creditors, thereby providing notice to creditors and the court of its significance to implementing the plan”. The AstroPower court agreed and found this factor to be dispositive, just as the IT Group court relied on such disclosure as a factor in favor of a finding of jurisdiction. In doing so, the AstroPower court did not address the Insilco court's observation that “parties cannot write their own jurisdictional ticket and a confirmation order cannot confer jurisdiction upon a bankruptcy court unless jurisdiction exists pursuant to 28 U.S.C. ' 1334 or 28 U.S.C. ' 157.” Insilco, 330 B.R. at 519 (internal quotation omitted).

It should be noted that one could read AstroPower as dicta because the court ultimately dismissed on other grounds all counts to which the deficiency of subject matter jurisdiction was alleged. Nevertheless, the court's detailed analysis is likely to be viewed as persuasive.