Restructuring

Contributed by Adam Lavine
This past June, a director named Kevin Tancharoen produced an eight-minute video appearing to be a clip from an unannounced feature length film based on the wildly popular Mortal Kombat video game.  The clip immediately went viral, racking up over 10 million hits on Youtube and driving fans of the franchise into a frenzy over Mortal Kombat’s return to the silver screen.  But there was only one problem.  No such film was ever in production.  In fact, the rights to produce derivative works based on Mortal Kombat, including the rights to produce the next Mortal Kombat film, were being litigated in the Bankruptcy Court for the District of Delaware. 
As chronicled in a New York Times article from April 15, 2011, Kevin Tancharoen never intended for his clip to be released publicly.  Rather, he created the video as part of a pitch to Warner Brothers to green light a live-action reboot of the Mortal Kombat franchise.  While Warner Brothers has since hired Kevin Tancharoen to direct a nine-part Youtube series elaborating on the story-line featured in his eight minute clip, the silver-screen future of Mortal Kombat remains uncertain – presumably as a result of the litigation surrounding the rights to produce derivative works.  Adding some clarity to the matter, however, the Bankruptcy Court for the District of Delaware recently ruled that that the battle for Mortal Kombat must be waged in the District Court.  Threshold Entertainment Inc. v. Midway Games Inc. (In re Midway Games Inc.), No. 09-51081 (KG), slip op. (Bankr. D. Del. Mar. 29, 2011).    
Midway Games Inc., the developers of the original Mortal Kombat videogame, filed for chapter 11 protection on February 12, 2009.  Shortly thereafter, Threshold Entertainment Inc. filed an adversary complaint against the Debtor asserting, among other things, an exclusive license to produce derivate works based on Mortal Kombat, including the right to produce the next Mortal Kombat film.  Notwithstanding the adversary proceeding, the Bankruptcy Court approved a 363 sale of substantially all of Midway’s assets to Warner Brothers Entertainment Inc., including intellectual property rights related to the Mortal Kombat franchise.  Once the sale closed and Warner Brothers owned the Mortal Kombat assets, Threshold moved to substitute Warner Brothers as defendant in its adversary complaint against the Debtor.  In a written opinion, however, the Bankruptcy Court dismissed the case for lack of subject matter jurisdiction.
Bankruptcy courts have jurisdiction over all “core” bankruptcy matters.  A proceeding is core if “it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.”  In re Marcus Dev. Park, Inc. 943 F.2d 261, 266 (3d Cir. 1991).  In the context of a 363 sale, proceedings requiring a bankruptcy court to interpret and give effect to its sale order have been deemed “core.” 
Bankruptcy courts also have jurisdiction over “non-core” matters so long as the matters are sufficiently “related to” the bankruptcy case.  To test for whether a case “relates to” the bankruptcy case, one asks “whether the outcome of a proceeding could conceivably have an effect on the estate being administered in bankruptcy.”  Pacor Inc. v. Higgins, (In re Pacor), 743 F.2d 984, 994 (3d Cir. 1984).
As the Midway Games case illustrates, once a sale has been completed, it is difficult for a bankruptcy court to retain subject matter jurisdiction over a dispute between a purchaser of the debtor’s assets and a third party asserting rights to those assets.  Typically, the bankruptcy court will lack “related to” jurisdiction because once the sale has been completed and the property at issue no longer comprises part of the estate, it is hard to see how litigation relating to those assets “could conceivably have an effect on the estate.”  Likewise, bankruptcy courts will generally lack “core” jurisdiction because a claim to assets that are no longer part of the debtor’s estate does not involve a “substantive right” provided by the bankruptcy code or a proceeding that could only arise in the context of a bankruptcy case.  In this way, the Midway Games case might seem like it involves little more than a straightforward application of an existing standard.  However, the case is instructive in so far as it reminds us of the limits of jurisdiction retention provisions, which are often placed in both sale orders and orders confirming a plan of reorganization. 
Included in the Midway Games sale order was a paragraph stating that the purchased assets were transferred subject to “all of the rights, claims, interests, and licenses, if any of Threshold with respect to the Purchased Assets, as pled in the Adversary Complaint.” The sale order also stated, “neither the entry of this Order, nor the closing and consummation of the transactions authorized hereunder, shall enlarge, reduce, modify, impair or affect in any way the reserved Threshold rights and claims.”  The court viewed this provision as not just a reservation of rights, but also as a jurisdiction retention provision.  After all, according to the plain language of the provision, the sale should not have affected the rights of Threshold, including Threshold’s right to pursue a claim in the Bankruptcy Court. 
Nevertheless, the Court reminded us that “where a court lacks jurisdiction over a dispute, it cannot create that jurisdiction by simply stating it has jurisdiction in a confirmation or other order.”  Thus, the Court held that notwithstanding the jurisdiction retention provision, there was no “related to” jurisdiction over the dispute between Threshold and Warner Brothers because the two were unrelated third parties fighting over former assets of the estate, which by definition, cannot affect the assets of the estate.  Moreover, the Court suggested that even though courts may have “core” jurisdiction over proceedings that require a bankruptcy court to interpret and give effect to a sale order, the enforcement of a jurisdiction retention provision, even when placed in a sale order, does not, by itself, grant a court “core” jurisdiction over a dispute.
Now that the Bankruptcy Court has dismissed Threshold’s adversary complaint, the future of both the next Mortal Kombat film and the heir-apparent to the director’s chair will likely be decided by the District Court.