Restructuring

Contributed by Courtney Stone
On April 25, 2016, Judge Glenn of the Bankruptcy Court for the Southern District of New York issued a memorandum in an adversary proceeding in which neither of the two non-debtor parties apparently wanted to be in the Southern District of New York.  Without addressing the merits of the underlying case, Judge Glenn ruled on the plaintiff’s motion to remand the proceeding to state court on the basis of lack of subject matter jurisdiction and the defendant’s competing motion to transfer venue to the Eastern District of Virginia.  In his decision, Judge Glenn emphasizes the breadth of bankruptcy court subject matter jurisdiction, to the point that the bankruptcy court can retain jurisdiction in certain cases to hear exclusively state law disputes between non-debtor parties even after confirmation of the related chapter 11 plan. 
Background
The dispute centered around the financing and acquisition of assets in Patriot Coal’s bankruptcy cases. Each side – Black Diamond Commercial Finance as the proposed lender and the Virginia Conservation Legacy Fund as the proposed borrower – alleged that the other breached a commitment letter for Black Diamond to provide $25 million in financing for the Virginia Conservation Legacy Fund’s acquisition of certain Patriot Coal assets as part of Patriot Coal’s then proposed chapter 11 liquidation plan. The Plan was confirmed by the Virginia Bankruptcy Court, with the confirmation order explicitly incorporating reference to the Commitment Letter.  Though the Virginia Conservation Legacy Fund did complete its purchase of the Patriot Coal assets, it did so with financing provided by another lender.
Black Diamond brought suit against the Virginia Conservation Legacy Fund in New York state court, which the Fund then removed to the Southern District of New York.  The lawsuit ended up in the SDNY Bankruptcy Court because the suit ostensibly was related to a bankruptcy case (albeit one that had occurred in Virginia).  Black Diamond filed a motion to remand the case back to New York state court, arguing that the bankruptcy court lacked subject matter jurisdiction to hear the non-debtor dispute.  The Fund filed a competing motion to transfer the case to the Eastern District of Virginia, the court in which Patriot Coal’s chapter 11 case was pending.
Subject Matter Jurisdiction
Under Section 1334(b), bankruptcy courts have subject matter jurisdiction over proceedings arising under title 11, proceedings arising in a case under title 11, and proceedings related to a case under title 11.  Judge Glenn analyzed the state claims at issue and concluded that the adversary proceeding “arises in” Patriot Coal’s bankruptcy case.  The court noted that the Fund’s asset acquisition from Patriot Coal was an integral part of the Plan, and that a successful prosecution of the Fund’s claims against Black Diamond somehow could result in additional distributions to Patriot Coal’s creditors. The court clarified that it did not matter that the non-debtor dispute involved exclusively state law claims, stating that the claims at issue were “an extension of the proceedings already before the bankruptcy court.”
The court additionally found the lawsuit “relates to” Patriot Coal’s bankruptcy cases. The court acknowledged a split in case law regarding the proper test to apply to determine whether a matter “relates to” a bankruptcy case when the matter arises after the confirmation of a chapter 11 plan. Courts generally have “related to” jurisdiction when the outcome of the proceeding “might have any ‘conceivable effect’ on [a bankruptcy] estate.” However, some courts require a “close nexus” between a post-confirmation matter and a closed bankruptcy proceeding because the reorganized debtor requires less protection under the jurisdiction of the bankruptcy court than a debtor pre-confirmation.
Here, Judge Glenn found First Circuit precedent persuasive and applied the “conceivable effect” test, noting that though the matter was post-confirmation, the Plan was a liquidation, and any recoveries on the claims or counterclaims could affect the recoveries of creditors.  Thus, broader bankruptcy court jurisdiction was still appropriate. The court noted however that jurisdiction could still be found under the more stringent “close nexus” test because the outcome of the proceeding could affect “the interpretation, implementation, consummation, or administration of the confirmed Plan.” Having concluded that the state law claims “arise in” and “relate to” Patriot Coal’s bankruptcy cases, the court found it had subject matter jurisdiction to hear the claims.
Transfer to the Virginia Bankruptcy Court
Judge Glenn then considered whether transferring the adversary proceeding to the Eastern District of Virginia would serve the interests of justice or the convenience of the parties. The court found the proceeding satisfied both standards, noting that the Virginia Bankruptcy Court was familiar with the facts and circumstances giving rise to the claims in the case and was best situated to efficiently resolve the litigation.  The court noted that transfer was also appropriate where the court is faced with competing motions to transfer and to remand – in that case, the “home” bankruptcy court should consider the remand motion after the motion to transfer has been granted.
Courtney Stone is an Associate at Weil Gotshal & Manges, LLP in Houston.