Restructuring

Logan v. Westchester Fire Insurance Company (In re PRS Insurance Group, Inc.), a recent case from the United States Bankruptcy Court for the District of Delaware, repeats the familiar mantra that a bankruptcy court’s exercise of jurisdiction post-confirmation has limits.  Courts within the Third Circuit strictly adhere to this principle, even where an action has the potential to increase the assets of a post-confirmation trust and, in turn, payments to a debtor’s creditors.
PRS Insurance involved an action commenced by the trustee of the liquidating trust established under the confirmed joint plan of liquidation of debtors PRS Insurance Group, Inc. and certain of its off-shore affiliates.  Approximately four years after confirmation of the debtors’ joint plan of liquidation, the liquidating trustee filed an action against certain insurance companies for breach of two reinsurance treaties and bad faith refusal to settle reimbursement claims under the treaties.  The trustee alleged in his complaint that he submitted claims to the insurers under the treaties prior to plan confirmation, but the circumstances surrounding the insurers’ refusals to pay the claims are alleged to have occurred post-confirmation.
The liquidating trustee originally filed the suit in the District Court for the Northern District of Ohio.  After soliciting briefings from the parties as to whether the district court possessed subject matter jurisdiction over the post-confirmation action, and whether venue in the Northern District of Ohio was proper, the district court transferred the case to the District Court for the District of Delaware.  The Ohio court found the circumstances favored venue transfer to Delaware, where the debtors’ liquidation is pending, from where the liquidating trustee’s authority to institute the action derived, and whose insurance contract law would apply to the action. 
The liquidating trustee then sought an order from the Delaware district court referring the action to the Delaware bankruptcy court.  The insurers objected, arguing that the bankruptcy court lacked subject matter jurisdiction to preside over the actions.  The Delaware district court referred the action to the bankruptcy court for a determination of whether the matter constituted a core proceeding under the Bankruptcy Code.
The liquidating trustee argued that the bankruptcy court had “core” jurisdiction under 28 U.S.C. § 157(b)(2)(E) because the actions sought turnover of estate property.  The insurance companies responded that the action sought a declaration of the respective rights and obligations of the parties under the relevant agreements and, therefore, were non-core in relation to the bankruptcy cases.
Consistent with the Delaware bankruptcy court’s decision in BWI Liquidating Corp. v. City of Rialto that plan provisions retaining jurisdiction in the bankruptcy court for post-confirmation matters cannot create jurisdiction over actions based on state law, the bankruptcy court determined that it did not have “core” jurisdiction over the liquidating trustee’s action to determine insurance coverage because it arises under state law and, therefore, is non-core.  The bankruptcy court, however, did not stop there – it went on to consider whether it even had “related to” jurisdiction over the proceedings.
The statutory grant of “related to” jurisdiction is quite broad.  On its face, 28 U.S.C. § 1334 does not distinguish between pre-confirmation and post-confirmation jurisdiction.  Nonetheless, courts in some jurisdictions – most notably, courts in the Third Circuit – have curtailed the reach of “related to” jurisdiction in the post-confirmation context so that bankruptcy court jurisdiction does not continue indefinitely.  Relying on Third Circuit precedent, the PRS Insurance court explained that, post-confirmation, a bankruptcy court may only exercise “related to” jurisdiction where a claim has “‘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.’”  Moreover, “the fact that the action may impact the size of the liquidating trust does not affect the Court’s determination of the core and non-core issue” because the mere potential to increase the assets of the post-confirmation trust is insufficient to satisfy the close nexus criterion.
Clearly, prior to confirmation of a plan, an action to recover funds that would increase the size of the estate and improve the likelihood and amount of creditor distributions would confer “related to” jurisdiction because it would bear a close nexus to the bankruptcy plan or proceedings.  After confirmation has occurred, though, the Third Circuit considers such a nexus more attenuated because post-confirmation trust beneficiaries no longer have the same connection to the bankruptcy proceeding as when they were creditors of the estate – they traded their creditor status to gain rights to distributions of the liquidating trust’s assets.  To automatically exercise “related to” jurisdiction over actions that have the mere potential to increase or diminish trust assets – particularly where the underlying claim arises post-confirmation and does not relate to any plan provision – would raise the specter of unending bankruptcy jurisdiction over any lawsuit that might involve a continuing trust.  In contrast, other courts find that “related to” jurisdiction over actions involving post-confirmation trusts should not necessarily diminish because a substantial policy interest favors the expeditious liquidation of debtor corporations and the prompt distribution of available assts to creditors. 
It is important to note that the Third Circuit in Resorts International held that the potential to increase assets of the post-confirmation trust and its beneficiaries does not necessarily create a close nexus to the bankruptcy proceeding; this does not mean that a sufficiently close nexus might not exist on different facts.  Such determinations must be made on a case-by-case basis.  It is clear in the Third Circuit, however, that simply because the outcome of an action pursued by a creditor trust could result in additional assets to distribute to creditors is not by itself sufficient to establish “related to” jurisdiction in a post-confirmation proceeding.