Post-Confirmation Jurisdictional Shrinkage

The jurisdiction of bankruptcy courts, like that of other federal courts, is derived from and limited by statute. The statutory source of bankruptcy jurisdiction is 28 U.S.C. § 1334, which grants the district court (and by orders of referral under 28 U.S.C. § 157, the bankruptcy court) original and exclusive jurisdiction over the bankruptcy case itself, and original but not exclusive jurisdiction of all civil proceedings “arising under,” “arising in” or “related to” bankruptcy cases. There is no question (at least in the pre-confirmation context) that the jurisdictional reach of § 1334 is broad. In Celotex v. Edwards, 514 U.S. 300 (1995), the U.S. Supreme Court stated that “Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate.” Id. at 308. The majority test for “related to” jurisdiction is derived from the U.S. Court of Appeals for the Third Circuit's decision in Pacor v. Higgins, 743 F.2d 984 (3d Cir. 1984) and offers the broadest potential path to bankruptcy jurisdiction under § 1334. The Pacor test holds that the bankruptcy court has jurisdiction over any proceeding that “could conceivably have any effect on the estate being administered in bankruptcy.” Id. at 994.

Post-Confirmation, Bankruptcy Jurisdiction 'Shrinks'

Section 1334 does not expressly limit bankruptcy jurisdiction upon confirmation of a plan. Nevertheless, as the bankruptcy court recently stated in In re Ener1, Case No. 12-10299 (MG), 2016 WL 4919952, *2 (Bankr. S.D.N.Y. Sept. 15, 2016), “most courts agree that once confirmation occurs, the bankruptcy court's jurisdiction shrinks” (internal quotations omitted) (citing cases). The principal rationale stated by the cases for abating bankruptcy jurisdiction post-confirmation is that absent such abatement, bankruptcy jurisdiction could extend indefinitely. Such a result would not only “work an unwarranted expansion of the federal court but also would unfairly advantage reorganized debtors by allowing such firms to funnel virtually all litigation affecting them into a single federal forum.” Boston Reg'l Med. Ctr. v. Reynolds (In re Boston Reg'l Med. Ctr.), 410 F.3d 100, 106 (1st Cir. 2005). A related rationale is that after a business “emerges from bankruptcy and enters the marketplace in its reincarnated form, it is just like any other corporation, [and] 'it must protect its interest in the way provided by the applicable non-bankruptcy law,' without any special swaddling.” Id. (quoting Pettibone v. Easley, 935 F.2d 120, 122 (7th Cir. 1991)).

Such policy concerns might not be present, however, for liquidating plans. The U.S. Court of Appeals for the First Circuit, in Boston Reg'l Med. Ctr., has taken the view that bankruptcy jurisdiction does not shrink when a Chapter 11 plan provides for the liquidation and wind-up of the business as opposed to true reorganization. The court reasoned that in the liquidation context, the risk of endless bankruptcy jurisdiction is low because the debtor will not reenter the marketplace as a going concern. The post-confirmation debtor's “sole purpose is to wind up its affairs, convert its assets to cash, and pay creditors a pro rata dividend,” and thus “[a]ny litigation involving such a debtor … relates much more directly to a proceeding under Chapter 11.” Id. at 106-07. Accordingly, the First Circuit held that “when a debtor (or a trustee acting to the debtor's behoof) commences litigation designed to marshal the debtor's assets for the benefit of its creditors pursuant to a liquidating plan of reorganization, the compass of related to jurisdiction persists undiminished after plan confirmation.” Id.

In the Second Circuit, there appears to be some disagreement among the lower courts on the distinction between reorganizing and liquidating debtors, though a majority of the courts appear to be siding with the Boston Reg'l approach. The U.S. Court of Appeals for the Second Circuit has yet to consider the issue.

The 'Close Nexus' Test

Putting aside the Boston Reg'l liquidation exception, which appears to have divided the courts, most, including the Courts of Appeal for the Third, First, Fourth, Ninth and Second Circuits, agree that confirmation results in jurisdictional shrinkage, and have embraced what is referred to as the “close nexus” test in an effort to delineate the diminished jurisdictional boundaries. This test requires that a proceeding have a close nexus to the bankruptcy plan or proceeding sufficient to uphold bankruptcy jurisdiction over the matter. The leading decision on application of the “close nexus” test is the Third Circuit's decision of Binder v. Pricewaterhouse & Co. (In re Resorts Int'l), 372 F.3d 154 (3d Cir. 2004), which may serve as a helpful guide and starting point for a litigant considering this issue. The purpose of the “close nexus” test, as enunciated in Resorts and its progeny, is to ensure the post-confirmation claim or dispute presented to the bankruptcy court affects an integral aspect of the bankruptcy plan or proceeding.

Case law demonstrates that the close nexus inquiry is necessarily fact-intensive. It requires a careful examination of how the post-confirmation matter relates to the provisions of the bankruptcy plan. As set forth by the Second Circuit in In re Johns-Manville, 7 F.3d 32, 34 (2d Cir. 1993), the bankruptcy court's post-confirmation jurisdiction is “defined by reference to the [p]lan.” Courts generally agree that “matters that affect the interpretation, implementation, consummation, execution, or administration of the confirmed plan will typically have the requisite close nexus” because under those circumstances “bankruptcy court jurisdiction would not raise the specter of 'unending jurisdiction.'” Resorts, 372 F.3d at 167. What it takes to satisfy that standard is not, however, always clear. For example, courts have held that the generalized retention of jurisdiction provisions that appear in many plans, which typically purport to reserve the bankruptcy court's jurisdiction over all broadly defined “Claims” and “Causes of Action” that belong to the estate, do not supply the requisite close nexus to uphold post-confirmation jurisdiction. Courts also have found a lack of post-confirmation jurisdiction when the sole basis for its assertion is the prospect that the outcome of the lawsuit could increase recoveries for the debtor's creditors.

A recent decision out of the Third Circuit illustrates both of the above-mentioned points. Gavin Solmonese v. Shyamsundar (In re AmCad Holdings), Adv. No. 15-51979, 2016 WL 3412289 (Bankr. D. Del. June 14, 2016) involved a fairly simple and ubiquitous fact pattern. The bankruptcy court confirmed a plan of liquidation, which assigned all the estate's assets, including causes of action, to a liquidation trust. The trustee of the trust, in turn, commenced a lawsuit in the bankruptcy court against certain former officers and directors of the debtor, asserting, among other things, state law claims for breach of fiduciary duty. The court granted the defendants' motion to dismiss the breach of fiduciary duty claims for lack of post-confirmation subject matter jurisdiction. The trustee's reliance on the broad reservation of jurisdiction provision in the plan, and the fact that any lawsuit recovery would benefit the trust beneficiaries (i.e., the debtor's former creditors), was unavailing. See id. at *2.

Interestingly, by contrast, other cases out of the Third Circuit and the AmCad Holdings court's reasoning suggest that post-confirmation jurisdiction potentially may extend to a cause of action that is specifically identified and described in the plan. The specific description provides evidence of a close nexus to the plan, and ameliorates the concern over unending jurisdiction. See, e.g., BWI Liquidating v. City of Rialto (In re BWI Liquidating), 437 B.R. 160, 166 (Bankr. D. Del. 2010). Thus, despite the oft-cited admonition that the parties cannot write their own jurisdictional ticket, see, e.g., Resorts, 372 F.3d at 161, at least in some instances, it seems, careful drafting of a Chapter 11 plan may do just that in the context of post-confirmation subject matter jurisdiction.

Bankruptcy practitioners and litigants considering a bankruptcy court's post-confirmation jurisdiction should take into account, among other things: 1) what the courts in the applicable jurisdiction are requiring; 2) how and to what extent the post-confirmation matter relates to the bankruptcy plan or bankruptcy proceeding; and 3) subject matter jurisdiction is a threshold question that can neither be waived by the parties nor created where no jurisdiction otherwise exists.

***** John H. Drucker is a member of Cole Schotz in the firm's bankruptcy and corporate restructuring group. Mark Tsukerman and Myles R. MacDonald are associates in the group. This article also appeared in The New York Law Journal, an ALM sibling publication of this newsletter.