Bankruptcy Court Subject Matter Jurisdiction

The IT Group and Insilco opinions are important to not only subject matter jurisdiction motion practice, but also in the plan process for Chapter 11 debtors. Debtors, creditors' committees and other parties in interest standing to gain by prosecution of the estate's non-bankruptcy causes of action will need to determine how best to proceed in light of these opinions. While Insilco does warn that parties cannot simply write their own jurisdictional ticket or otherwise confer jurisdiction where it does not exist, the opinion may be read to suggest certain actions can be taken to bolster a finding of jurisdiction. See Insilco, 330 B.R. at 518, 524-25. For example, 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 IT Group plan did, in fact, specifically identify 'any claims for acts or omissions of [the IT Group's] ' present and former officers, directors, insiders and accountants' as assets assigned to the Litigation Trust. 2005 WL 3050611 at *6. Indeed, this was a fact on which the District Court relied to find subject matter jurisdiction. Id. Due to the importance of providing for such causes of action in the plan, debtors and creditors' committees may need to heighten the level of analysis of, all potential claims prior to proposing a plan rather than simply generically providing for claims and leaving the analysis to a post-confirmation trust.

On the litigation side, one possibility is to file suit in a non-bankruptcy court of appropriate jurisdiction. Another potential solution is to file the non-bankruptcy causes of action in the bankruptcy court prior to plan confirmation, where the bankruptcy court might still be willing, under appropriate circumstances, to exercise 'related to' jurisdiction. See Resorts Int'l, 372 F.3d at 165 (holding that 'the scope of bankruptcy court jurisdiction diminishes with plan confirmation' and thus, by negative implication, is more expansive pre-confirmation). A bankruptcy court's 'non-core 'related to' jurisdiction is the broadest of the potential paths to bankruptcy jurisdiction.' Id. at 163. Prior to plan confirmation, the test in the Third Circuit is whether 'the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.' Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984). Even if the litigation is not completed prior to plan confirmation, it is possible that the Bankruptcy Court would not dismiss a suit over which it had jurisdiction pre-confirmation because once a court has acquired jurisdiction, it is not deprived of jurisdiction by subsequent events. See, eg, Nishimoto v. Federman-Bachrach & Assoc., 903 F.2d 871, 876 (9th Cir. 1990). Insilco and IT Group did not address this theory. Because Resorts International and Insilco focus on the diminished subject matter jurisdiction that a bankruptcy court retains post-confirmation, one might argue that these opinions may have little effect on a bankruptcy court's jurisdiction over litigation commenced pre-confirmation.

Indeed, in the IT Group case, the litigation had actually been commenced prior to plan confirmation by the creditors committee, and the type of litigation involved was assigned, by stipulation of the parties and pursuant to the plan, to the litigation trust formed as part of the plan. 2005 WL 3050611 at * 5. Thus, the court could have rested its opinion on this ground, but it did not. While the IT Group court did cite to the Pacor 'any conceivable effect' test for pre-confirmation 'related to' jurisdiction, it proceeded to analyze its subject matter jurisdiction pursuant to the Resorts International post-confirmation 'close nexus' test. IT Group, 2005 WL 3050611 at * 6. Therefore, it is not clear whether the IT Group court considered the consequences of the suit having been filed pre-confirmation.

Conclusion

It should also be considered that, although they do not lose jurisdiction, district courts confronted with the dismissal of a federal claim and left with only the 'pendent' state law claims over which they would not have had jurisdiction, often exercise their discretion by abstaining from exercising jurisdiction over the remaining claims. See eg, Gotay et al., v. Dickinson et al., 375 F.3d 99, 105 (1st Cir. 2004). It is possible that a bankruptcy court would also exercise its discretion in this manner and abstain post-confirmation from exercising jurisdiction over the types of claims at issue in Resorts International and Insilco even if they were commenced pre-confirmation. Future litigation presumably will determine how this issue is decided by the courts, perhaps on a case-by-case basis depending on facts such as the stage of the litigation at the time of the plan confirmation.

Daniel J. DeFranceschi and Russell C. Silberglied are directors of, and Chun Jang is an associate with, Richards, Layton & Finger, P.A. in Wilmington, DE. The views expressed herein are those of the authors and not necessarily of Richards, Layton & Finger, P.A., nor its clients.

Part Two of a Two-Part Article

In the January, 2006, issue of The Bankruptcy Strategist, we discussed the impact of two recent bankruptcy opinions out of the Delaware Court: IT Litigation Trust v. D'Aniella et al. (In re: IT Group, Inc. et al.) and Shandler v. DLJ Merchant Banking, Inc., et al. (In re Insilco Technologies, Inc.). We included a brief update in the February, 2006 issue after the Delaware courts weighed in on the subject for the third time in only 3 months. Now we discuss, in depth, the possible implications of Insilco and IT Group on plan structuring.

Why the Opinions Are Important

The IT Group and Insilco opinions are important to not only subject matter jurisdiction motion practice, but also in the plan process for Chapter 11 debtors. Debtors, creditors' committees and other parties in interest standing to gain by prosecution of the estate's non-bankruptcy causes of action will need to determine how best to proceed in light of these opinions. While Insilco does warn that parties cannot simply write their own jurisdictional ticket or otherwise confer jurisdiction where it does not exist, the opinion may be read to suggest certain actions can be taken to bolster a finding of jurisdiction. See Insilco, 330 B.R. at 518, 524-25. For example, 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 IT Group plan did, in fact, specifically identify 'any claims for acts or omissions of [the IT Group's] ' present and former officers, directors, insiders and accountants' as assets assigned to the Litigation Trust. 2005 WL 3050611 at *6. Indeed, this was a fact on which the District Court relied to find subject matter jurisdiction. Id. Due to the importance of providing for such causes of action in the plan, debtors and creditors' committees may need to heighten the level of analysis of, all potential claims prior to proposing a plan rather than simply generically providing for claims and leaving the analysis to a post-confirmation trust.

On the litigation side, one possibility is to file suit in a non-bankruptcy court of appropriate jurisdiction. Another potential solution is to file the non-bankruptcy causes of action in the bankruptcy court prior to plan confirmation, where the bankruptcy court might still be willing, under appropriate circumstances, to exercise 'related to' jurisdiction. See Resorts Int'l, 372 F.3d at 165 (holding that 'the scope of bankruptcy court jurisdiction diminishes with plan confirmation' and thus, by negative implication, is more expansive pre-confirmation). A bankruptcy court's 'non-core 'related to' jurisdiction is the broadest of the potential paths to bankruptcy jurisdiction.' Id. at 163. Prior to plan confirmation, the test in the Third Circuit is whether 'the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.' Pacor, Inc. v. Higgins , 743 F.2d 984, 994 (3d Cir. 1984). Even if the litigation is not completed prior to plan confirmation, it is possible that the Bankruptcy Court would not dismiss a suit over which it had jurisdiction pre-confirmation because once a court has acquired jurisdiction, it is not deprived of jurisdiction by subsequent events. See, eg , Nishimoto v. Federman-Bachrach & Assoc., 903 F.2d 871, 876 (9th Cir. 1990). Insilco and IT Group did not address this theory. Because Resorts International and Insilco focus on the diminished subject matter jurisdiction that a bankruptcy court retains post-confirmation, one might argue that these opinions may have little effect on a bankruptcy court's jurisdiction over litigation commenced pre-confirmation.

Indeed, in the IT Group case, the litigation had actually been commenced prior to plan confirmation by the creditors committee, and the type of litigation involved was assigned, by stipulation of the parties and pursuant to the plan, to the litigation trust formed as part of the plan. 2005 WL 3050611 at * 5. Thus, the court could have rested its opinion on this ground, but it did not. While the IT Group court did cite to the Pacor 'any conceivable effect' test for pre-confirmation 'related to' jurisdiction, it proceeded to analyze its subject matter jurisdiction pursuant to the Resorts International post-confirmation 'close nexus' test. IT Group, 2005 WL 3050611 at * 6. Therefore, it is not clear whether the IT Group court considered the consequences of the suit having been filed pre-confirmation.

Conclusion

It should also be considered that, although they do not lose jurisdiction, district courts confronted with the dismissal of a federal claim and left with only the 'pendent' state law claims over which they would not have had jurisdiction, often exercise their discretion by abstaining from exercising jurisdiction over the remaining claims. See eg, Gotay et al., v. Dickinson et al., 375 F.3d 99, 105 (1st Cir. 2004). It is possible that a bankruptcy court would also exercise its discretion in this manner and abstain post-confirmation from exercising jurisdiction over the types of claims at issue in Resorts International and Insilco even if they were commenced pre-confirmation. Future litigation presumably will determine how this issue is decided by the courts, perhaps on a case-by-case basis depending on facts such as the stage of the litigation at the time of the plan confirmation.

Daniel J. DeFranceschi and Russell C. Silberglied are directors of, and Chun Jang is an associate with, Richards, Layton & Finger, P.A. in Wilmington, DE. The views expressed herein are those of the authors and not necessarily of Richards, Layton & Finger, P.A., nor its clients.