Contributed by Damon P. Meyer
To provide a source of recovery for unsecured creditors who may otherwise have limited or no recovery under a chapter 11 plan, the plan may provide for the creation of a trust to which causes of action belonging to the debtor’s estate are transferred. Plans typically provide for broad retention of jurisdiction by the bankruptcy court for post-confirmation matters, and the recent decision by Judge Walrath in the United States Bankruptcy Court for the District of Delaware in BWI Liquidating Corp. v. City of Rialto serves as a reminder that a retention of jurisdiction provision in a plan cannot create jurisdiction for the bankruptcy court to preside over an adversary proceeding commenced post-confirmation. More striking, though, is the narrow interpretation of post-confirmation jurisdiction adopted by Judge Walrath with respect to state law-based causes of action pursued by a trust created under a plan. In light of the decision, defendants may see a new avenue for avoiding post-confirmation litigation before the bankruptcy court. Proponents, on the other hand, should be aware of the decision so they can carefully word their chapter 11 plans to avoid the problem faced by the trustee in BWI Liquidating.
In BWI Liquidating, as part of the debtor’s chapter 11 plan of liquidation, all causes of action belonging to the debtor’s estate were transferred to a liquidating trust created under the plan. Thereafter, the liquidating trust commenced an adversary proceeding against the City of Rialto asserting that, pre-confirmation, the City had materially breached a contract with BWI. Pre-confirmation, BWI had sent a written demand for payment of two outstanding invoices; however, litigation was not commenced until the liquidating trustee brought the action post-confirmation. In response, the City filed a motion to dismiss the complaint for lack of subject matter jurisdiction or, alternatively, for abstention or transfer of venue.
Because the cause of action was based in state law, and, therefore, did not arise under the Bankruptcy Code, all parties agreed that the Court did not have “core” jurisdiction. The liquidating trust asserted, however, that the adversary proceeding fell within the Court’s “related to” jurisdiction. The Liquidating Trust asserted that a sufficiently close nexus existed between the adversary proceeding and the bankruptcy case because (1) the claims arose pre-confirmation, (2) the claims were incorporated into the plan, (3) the proceeds of the claims, if any, would benefit the estate’s creditors, (4) the adversary proceeding was commenced shortly after the plan’s effective date, (5) the case was a liquidating case as opposed to a reorganization, and (6) federal policy and consistency would be fostered by having all actions in one central court. Finally, the liquidating trust argued, the plan retained jurisdiction in the bankruptcy court to preside over such claims.
Judge Walrath noted that, under well-established Third Circuit law, a provision in a plan that retains jurisdiction in the bankruptcy court over various post-confirmation matters may be necessary to commence an action in the bankruptcy court, but cannot create jurisdiction. See Binder v. Price Waterhouse & Co., LLC (In re Resorts Int’l, Inc.). The question, then, was whether the claim has a “‘a close nexus to the bankruptcy plan or proceeding’ and the matter at issue ‘affects the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement.’”
Judge Walrath held that “to find a sufficiently close nexus, the plan must ‘specifically describe an action over which the Court had ‘related to’ jurisdiction pre-confirmation and expressly provide for the retention of such jurisdiction to liquidate that claim for the benefit of the estate’s creditors.’” Such specificity, Judge Walrath reasoned, is required to give notice to all creditors of the importance of the litigation, as well as to prevent un-ending bankruptcy court jurisdiction.
Although BWI Liquidating involves a state law breach of contract action, plan proponents should not be tempted to ignore the decision simply because relatively few breach of contract actions are pursued by post-confirmation trusts. The reasoning of the decision applies to any cause of action based in state law, including, for example, claims for breaches of fiduciary duties. From the perspective of defendants that are faced with such a lawsuit, BWI Liquidating provides a potential defense to litigating such claims before the bankruptcy court. Moreover, if the case is dismissed for lack of jurisdiction after the statute of limitations has run, the defendant may have a complete defense to the claim. Of course, these risks mean that plan proponents seeking to transfer causes of action to a post-confirmation trust and preserve the ability of the trust to pursue such claims before the bankruptcy court should take care to describe the claims with as much specificity as possible to establish the close nexus needed if a post-confirmation action is to fall within the bankruptcy court’s “related to” jurisdiction.