Restructuring

Executive Summary

A recent decision from the United States Bankruptcy Court for the Northern District of Texas, In re Care Ctrs., LLC, No. 18-33967, 2020 Bankr. LEXIS 3205 (Bankr. N.D. Tex. Nov. 12, 2020), examined (1) the scope of bankruptcy court subject-matter jurisdiction for post-confirmation actions filed in state court and removed to bankruptcy court; and (2) when the court must or should abstain and remand a proceeding back to the court where the action was originally brought.

The bankruptcy court held that it had subject matter jurisdiction in the current case, and that the well-pleaded complaint rule does not apply to actions that “arise in” a bankruptcy case pursuant to 28 U.S.C. § 1334. In addition, the court concluded that it is not required to abstain from the action nor should it according to the doctrine of permissive abstention.

Background

Senior Care Centers, LLC (“SCC”) is a nursing home and senior care operator headquartered in Dallas, Texas. As part of its business, it leased and operated 11 properties from TXMS Real Estate Investments, Inc. (“TXMS”). The lease agreement (the “Lease”) between SCC and TXMS had a change of control provision permitting, if triggered, TXMS to terminate the Lease. Due to shifts in the industry and tightening terms with various creditors, SCC filed for bankruptcy protection in 2018.

SCC’s reorganization plan (the “Plan”) provided for the restructuring of its business around a subset of its facilities.  SCC assumed the Lease as part of the Plan. In addition, SCC would transfer all of its equity to a newly created entity called Abri Health Services, LLC (“Abri”). On the Effective Date of the Plan, 80% of the equity in Abri would be transferred into a Liquidating Plan Trust (the “Trust”) to pay unsecured creditors. The purpose of the Trust was to liquidate assets that could not be readily converted into cash. While TXMS raised an objection stating that the Lease should be amended to include Abri as party (now the owner of SCC), it did not raise any change of control issue.

At a status conference the day before the Plan went effective, the Unsecured Creditors’ Committee notified the court that it was in discussions to sell the equity in the Trust. A few weeks later, TXMS sent a letter to SCC and Abri (collectively the “Debtors”) indicating that any sale of the equity would violate the change of control provision and constitute an “Event of Default.” TXMS filed suit in Texas state court, seeking to enjoin the Debtors from taking any action that contravenes the change of control provision. The Debtors subsequently removed the action to bankruptcy court.

Subject Matter Jurisdiction

TXMS took the position that the bankruptcy court lacked subject matter jurisdiction because this action arose post-confirmation and the complaint is based on state law.

Supreme Court Travelers Test

The bankruptcy court first articulated the standard under Travelers Casualty & Surety Co. of America v. Bailey, where the Supreme Court held that a bankruptcy court plainly has jurisdiction to interpret and enforce its own prior orders, even decades after a plan is confirmed. The Court added that explicit retention of jurisdiction in the confirmation is further evidence that post-confirmation jurisdiction exists. 557 U.S. 137, 151 (2009).

In the current case, because the bankruptcy court explicitly retained “exclusive jurisdiction over all matters arising out of, and related to the Chapter 11 Cases”, including “all matters relating to the assumption of unexpired lease,” the court concluded that it had subject matter jurisdiction under the Travelers test.

Fifth Circuit U.S. Brass and Craig’s Store Tests

The bankruptcy court then moved to Fifth Circuit cases, which interpret the scope of bankruptcy court post-confirmation jurisdiction more narrowly than in other Districts.

In re U.S. Brass Corporation used a four-factor standard to explain why it had jurisdiction: (1) while the plan had been substantially consummated, it had not been fully consummated; (2) there was a dispute over whether the relief requested was consistent with the plan or an improper modification of a substantially consummated plan and bankruptcy law would ultimately determine the dispute; (3) the outcome of the dispute could affect the parties’ post-confirmation rights and responsibilities; and (4) the proceeding would impact compliance with, or completion of, the plan. 301 F.3d 296, 305 (5th Cir. 2002). In addition, In re Craig’s Stores of Texas limited the scope of its post-confirmation jurisdiction to matters that bear on the interpretation, implementation, or execution of the plan. 266 F.3d 388, 390-91 (5th Cir. 2001).

The bankruptcy court concluded that the current proceeding satisfies both tests. Like U.S. Brass, there is substantial consummation of the plan, but not full consummation, as the general unsecured creditors have not yet received distributions. Bankruptcy law will determine whether the Trust is allowed to liquidate the stock and distribute the proceeds. The bankruptcy court will have to look at the Plan and related orders entered during the bankruptcy case to resolve the issue. Finally, this proceeding will impact compliance with the Plan. As a result, the court concluded that this proceeding pertains to the Plan’s “implementation or execution,” satisfying the Craig’s Stores test for post-confirmation jurisdiction as well.

Collateral Attack

The bankruptcy court then noted that the injunctive relief sought by TXMS is, in substance, a collateral attack on the confirmation order and the court’s subject matter jurisdiction. The court cited In re Linn Energy, L.L.C., which held that final bankruptcy orders are res judicata to the parties as to any admissible matter which might have been offered to sustain or defeat a claim or demand. 927 F.3d 862, 867 (5th Cir. 2019) (quoting Travelers, 557 U.S. at 152). Because TXMS had a fair chance to challenge the relevant portion of the Plan that authorized the Trust to sell the stock and distribute the proceeds but failed to do so, the court held that TXMS cannot retroactively challenge the court’s order through a collateral attack.

Well-Pleaded Complaint

The well-pleaded complaint rule requires that a federal question appear on the face of a well-pleaded complaint in order for a court to have federal question jurisdiction. TXMS argued that the Debtors cannot remove the case because there was no federal issue on the face of TXMS’s complaint filed in state court. Fifth Circuit courts have held that the well-pleaded complaint doctrine only applies to federal question “arising under” jurisdiction. In re Brooks Mays Music Co., 363 B.R. 801, 807 (Bankr. N.D. Tex. 2007).

According to the bankruptcy court, bankruptcy court jurisdiction under §1334¹ extends further than the 28 U.S.C. § 1331 federal question jurisdiction. While federal question jurisdiction applies to cases “arising under” a federal law, bankruptcy jurisdiction extends to matters “arising under” the bankruptcy code or “arising in” or “related to” a bankruptcy case. For reasons articulated below, the court held that this case “arises in” a bankruptcy case and is not based on “arising under” jurisdiction. Consequently, the court concluded that the well-pleaded complaint rule is not applicable here.

The bankruptcy court then held that when the well-pleaded complaint rule is inapplicable, the court may consider unfiled claims of a defendant, provided that they are not (1) immaterial; (2) made solely for the purpose of obtaining jurisdiction; or (3) wholly insubstantial and frivolous, to determine whether a bankruptcy court has jurisdiction over a removed action.

During the course of the proceeding, the Debtors made clear that it will file a declaratory judgment determining that the sale of Trust assets is allowed under the Plan and that TXMS’s attempt to prevent the sale is an inappropriate, post-confirmation modification of the Plan. The bankruptcy court concluded that the Trust’s claims are not immaterial, made solely for the purpose of obtaining jurisdiction, or wholly insubstantial and frivolous. Therefore, they are sufficient to give jurisdiction over this matter.

Abstention

TXMS argued, in the alternative, that even if the bankruptcy court has subject matter jurisdiction, it must abstain from adjudicating the case and remand the proceeding back to Texas state court.

Mandatory Abstention

The Fifth Circuit has articulated that mandatory abstention applies where: (1) the claim has no independent basis for federal jurisdiction, other than §1334; (2) the claim is not a “core” proceeding pursuant to 28 U.S.C. § 157, i.e., it is not related to a case under the bankruptcy code; (3) an action has been commenced in state court; and (4) the action could be adjudicated timely in state court. In re Senior Care Centers, LLC, 611 B.R. 791, 800 (Bankr. N.D. Tex. 2019). According to U.S. Brass, a proceeding is “core” under §157 if it is invokes a substantial right provided by the bankruptcy code (“arises under” the bankruptcy code), or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case (“arises in” a bankruptcy case). 301 F.3d at 304.

The bankruptcy court found that “arising under” jurisdiction does not exist here. According to the court, proceedings “arise under” the bankruptcy code “when the section itself confers substantive rights to the party who is making the claim.” Here, the court found that there is no bankruptcy code provision that confers substantive rights to either TXMS or the Debtors.

However, the court found that “arising in” jurisdiction does exist since TXMS’s claims could only arise in the context of bankruptcy. More specifically, any action to enjoin Trust assets would be preempted by the confirmation order and TXMS would need to seek modification or clarification of that order in bankruptcy court. Consequently, the court held, this proceeding can be characterized as “core” and mandatory abstention is inappropriate.

Permissive Abstention

Explaining that permissive abstention may be appropriate even when the matter before the court is “core,” the bankruptcy court then analyzed whether it should remand the current case. The court enumerated 14 factors to consider in making this determination:

1. The effect or lack thereof on the efficient administration of the estate if the court decides to remand or abstain;
2. The extent to which state law issues predominate over bankruptcy issues;
3. The difficult or unsettled nature of applicable law;
4. The presence of a related proceeding commenced in state court or other non-bankruptcy proceeding;
5. The jurisdictional basis, if any, other than §1334;
6. The degree of relatedness or remoteness of the proceeding to the main bankruptcy case;
7. The substance rather than the form of an asserted core proceeding;
8. The feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court;
9. The burden on the court’s docket;
10. The likelihood that the commencement of the proceeding in the bankruptcy court involves forum shopping by one of the parties;
11. The existence of a right to a jury trial;
12. The presence in the proceeding of non-debtor parties;
13. Comity; and
14. The possibility of prejudice to other parties in the action.

According to the bankruptcy court, these factors weighed heavily against permissive abstention. Determining whether the Trust may liquidate stock in the reorganized company requires interpretation of complex aspects of bankruptcy law, the Plan, and prior court orders. Because bankruptcy issues overwhelm state issues in this case, the court held that permissive abstention is not appropriate.

Conclusion

The bankruptcy court in In re Care Ctrs., LLC articulated a very broad view of post-confirmation bankruptcy court subject matter jurisdiction. Ultimately, it appears Fifth Circuit courts will have jurisdiction if the Plan has not been fully consummated, and adjudication of the dispute requires interpretation of bankruptcy law, the Plan, and prior bankruptcy court orders.