Who doesn’t love a good catch-all provision? In a world of infinite possibilities, attorneys often find themselves drafting language designed to encompass a plethora of contingencies. Are such efforts sometimes overkill? Perhaps. Nevertheless, given our imperfect ability to predict the future, such provisions are often necessary and appropriate. In this installment of the Weil Bankruptcy Blog, however, we examine a recent decision demonstrating that in the context of post-confirmation bankruptcy jurisdiction, catch-all provisions are no substitute for identifying specific claims that are likely to arise. In In re AmCad Holdings, LLC, Judge Walrath considered whether a liquidation trustee had standing to bring claims for breach of fiduciary duty against the debtors’ former managers and officers based upon a broadly-defined assignment of causes of action to the trust that did not expressly identify breach of fiduciary duty claims.
About a year after the debtors commenced their chapter 11 cases, the bankruptcy court confirmed their joint liquidating plan. The confirmed plan established a liquidation trust, appointed a trustee, and transferred certain assets, including “Causes of Action,” to the liquidation trust.
The liquidation trustee brought an action in the bankruptcy court against certain of the debtors’ former managers and officers. The trustee’s complaint asserted claims for breach of fiduciary duty (Counts I-III), avoidance of preferential transfers (Count IV), and recovery of the alleged preferential transfers (Count V). In response, the defendants filed motions to dismiss arguing, among other things, that the bankruptcy court lacked jurisdiction to consider the breach of fiduciary duty claims.
The bankruptcy court noted that it has both the authority and an independent duty to determine whether it has subject matter jurisdiction over a particular claim. Pursuant to 28 U.S.C. §§ 157 and 1334, a bankruptcy court has jurisdiction over claims (i) “arising under” the Bankruptcy Code (claims created by the Bankruptcy Code), (ii) “arising in” a case under the Bankruptcy Code (claims that could only arise in a bankruptcy case), and/or (iii) related to a case under the Bankruptcy Code. The trustee conceded the breach of fiduciary claims did not provide “arising in” or “arising under” jurisdiction; however, because the confirmed plan retained jurisdiction over a wide range of causes of action, the trustee argued that the bankruptcy court had “related to” jurisdiction over such claims.
Prior to confirmation, a bankruptcy court’s “related to” jurisdiction extends to the resolution of non-core matters that “could conceivably have any effect on the estate being administered in bankruptcy.” Pacor, Inc. v. Higgins. Post-confirmation, “related to” jurisdiction narrows significantly and applies only to matters that have a “close nexus to the bankruptcy plan or proceeding.” Binder v. Price Waterhouse & Co., LLP. Generally, a “close nexus” exists where a matter affects the interpretation, implementation, consummation, execution, or administration of a plan. Plan provisions retaining jurisdiction over a specific cause of action suggest such litigation is critical to the plan’s implementation, and, therefore, the “close nexus” test is generally satisfied. In contrast, a broad assignment of causes of action generally does not satisfy the “close nexus” test.
Based on the foregoing, the bankruptcy court found that it lacked “related to” jurisdiction over the breach of fiduciary duty claims. Under the confirmed plan, the bankruptcy court retained jurisdiction over “Causes of Action” including the following:
all of the Debtors’ actions, causes of action, choses in action, liabilities, suits, debts, sums of money, accounts, reckonings, bonds, bills, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, third-party claims, counterclaims, and crossclaims, whether known or unknown, reduced to judgment or not reduced to judgment, liquidated or unliquidated, contingent or non-contingent, matured or unmatured, disputed or undisputed, secured or unsecured, assertable directly or derivatively, existing or hereinafter arising, in law or equity or otherwise, based in whole or in part upon any act or omission or other event occurring prior to the Petition Date, or during the course of the Bankruptcy Cases, through, and including the Effective Date, including but not limited to, the Avoidance Actions and Trust Claims.
While broad, the grant of “Causes of Action” to the trust did not explicitly reference breach of fiduciary claims against the defendants. Moreover, relying on In re Insilco Tech., Inc., Judge Walrath explained that even where specific claims are encompassed within a wholesale assignment of claims to a post-confirmation trust, such an assignment does not establish a “close nexus” with respect to any individual claim. Accordingly, the bankruptcy court granted the defendants’ motions to dismiss Counts I-III.
The bankruptcy court also dismissed the trustee’s claims to avoid and recover alleged preferential transfers. Judge Walrath found that the complaint—which alleged only that “numerous Managers of the Debtor caused [AmCad Holdings, LLC] to repay the loans that those Managers made to the company”—did not satisfy the pleading requirements. According to the bankruptcy court, alleged preferential transfers must be identified with particularity to ensure defendants have received sufficient notice. Because the complaint failed to identify specific loan(s), the dates or amounts of alleged repayments, or the specific parties who were allegedly repaid, the bankruptcy court also dismissed Counts IV and V.
This decision once again reminds us that a bankruptcy court’s “related to” jurisdiction is significantly limited following confirmation. Indeed, bankruptcy courts will not be available to resolve post-confirmation disputes that do not share a “close nexus” to the bankruptcy proceedings. Thus, when drafting plan provisions regarding a bankruptcy court’s retention of jurisdiction post-confirmation, professionals and parties-in-interest must carefully consider (i) what claims are likely to be asserted, (ii) whether it is preferable for such claims to be heard by the bankruptcy court, and (iii) tailor the plan provisions accordingly.
Patrick Thompson is an Associate at Weil Gotshal & Manges, LLP in New York.