Few areas of bankruptcy law are murkier and less-defined than the scope of the post-confirmation subject-matter jurisdiction of the bankruptcy court. Since "reorganization" takes many forms, the post-petition, pre-confirmation bankruptcy "estate" may morph into various entities—e.g., liquidating trust, litigation trust, reorganized debtor, retained estate. The case itself may remain open or closed post-confirmation; substantial consummation may occur at different trigger points. When post-confirmation disputes occur involving pre-petition assets, the plan, or plan-created entities and their post-confirmation dealings, the question arises: Is the matter sufficiently "related to" the bankruptcy case such that bankruptcy jurisdiction exists? The First Circuit Court of Appeals recently weighed in, attempting, at least in one category of cases, to establish a bright-line test for post-confirmation jurisdiction.² However, the journey to the First Circuit's decision began earlier, with the Third Circuit's decision in Resorts International. This article will briefly examine the year that was in the area of post-confirmation jurisdiction.

Resorts International

In Binder v. Price Waterhouse & Co. LLP (In re Resorts Int'l.),³ the Third Circuit was faced with a question. Had the bankruptcy court "related-to" jurisdiction over a post-confirmation lawsuit—brought by a litigation trust formed pursuant to a confirmed plan, against accountants the trust had retained post-confirmation and after formation of the trust for alleged malpractice—in connection with audit and other accounting services performed for the trust? The trustee of the litigation trust argued that the litigation trust was "effectively a continuation of the bankruptcy estate" and, further, that jurisdiction existed because the proceeds of the suit would be distributed to trust beneficiaries, all of whom were former creditors of the estate. The defendant argued that the trust was a distinct legal entity—not a continuation of the bankruptcy estate—and that the beneficiaries were no longer creditors of the estate, having "traded their creditor status to attain rights to the trust's assets." The bankruptcy court agreed with the defendant and found no "related-to" jurisdiction, a decision reversed by the district court. The Third Circuit reversed the district court.

The circuit court rejected the argument that a plan-created litigation trust is a continuation of the estate. Therefore, the court held, "jurisdiction does not extend necessarily to all matters involving litigation trusts."⁴ This holding is noteworthy in light of the fact that the plan made the trustee the successor to the debtor under §1123(b)(3)(B) (providing for the "enforcement...by a representative of the estate appointed for such purpose" of claims).

Wading into the murky waters of post-confirmation jurisdiction, the court noted that the touchstone of related-to jurisdiction is the Third Circuit's Pacor decision.⁵ Under Pacor, a matter is related to a bankruptcy case, for jurisdictional purposes, if "the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy."⁶ "An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options or freedom of action...and which in any way impacts upon the handling and administration of the bankrupt estate."⁷ However, the court acknowledged that a strict application of Pacor in the post-confirmation context would eliminate all of post-confirmation jurisdiction: "At the most literal level, it is impossible for the bankrupt debtor's estate to be affected by a post-confirmation dispute because the debtor's estate ceases to exist once confirmation has occurred."⁸ Noting that the Code seems to contemplate some post-confirmation jurisdiction, and that the courts, including the Third Circuit, had recognized it, the court acknowledged that the Pacor test required some tweaking for application in a post-confirmation setting.

After reviewing the case law, the court noted that "the essential inquiry appears to be whether there is a close nexus to the bankruptcy plan or proceeding sufficient to uphold bankruptcy court jurisdiction over the matter."⁹ The court formulated the following test for extension of related-to jurisdiction over matters involving post-confirmation actions by plan-created trusts:

[W]here there is a close nexus to the bankruptcy plan or proceeding, as when a matter affects the interpretation, implementation, consummation, execution or administration of a confirmed plan or incorporated litigation trust agreement, retention of post-confirmation bankruptcy court jurisdiction is normally appropriate.¹⁰

Such a "close nexus" was not present in the case before the court. In particular, the court rejected the idea that the nexus was present simply because the successful litigation of the action would add to the assets of the trust: "If the mere possibility of a gain or loss of trust assets sufficed to confer bankruptcy court jurisdiction, any lawsuit involving a continuing trust would fall under the 'related-to' grant."¹¹ The fact that the reorganized debtor, holding a claim against the trust, might share in the lawsuit proceeds was similarly insufficient.¹²

The holding in Resorts International is hardly a "bright-line" test. For example, under the examples provided by the court, it was not clear whether all actions brought by the trust arising out of causes of action transferred to the trust under the plan will trigger related-to jurisdiction. However, its rejection of the concept that all plan-created trusts are continuations or extensions of the estate, despite formation under §1123(b)(3)(B), and its requirement of a "close nexus" provided a jurisdictional argument in cases where a plan-created trust is the plaintiff.

Post-Resorts International Cases

Perhaps because of the inherent lack of clarity in the "close nexus" test, the progeny of Resorts International has been a mixed lot. In LaRoche Indus. Inc. v. Orica Nitrogen LLC (In re LaRoche Indus. Inc.),¹³ the reorganized debtor brought an adversary proceeding against a purchaser of assets pursuant to a pre-confirmation §363 sale to compel the purchaser to pay a portion of the purchase price that had been withheld to cover potential environmental liabilities. Under the confirmed plan, all remaining assets (including the claim to the hold-back) had been revested in the debtor and the case had been closed. The court, although agreeing that the matter was "core" as involving the interpretation and enforcement of the sale order, held that it did not have related-to jurisdiction to decide the dispute and, for that and other reasons, the court abstained from considering the dispute. Applying the Resorts International test, the court found that, given that the plan was consummated, "any recovery...will not affect the interpretation, implementation, consummation, execution or administration of the plan."¹⁴

In re Midstate Mortgage Investors Inc.¹⁵ involved reopening a bankruptcy case and a suit by the debtor's limited partners to enjoin state court litigation by creditors as contrary to release language contained in the confirmed plan and releases issued pursuant to the plan. Post-confirmation jurisdiction was found: The Resorts International nexus existed here where the dispute focused on the content and meaning of the plan, issues over which the bankruptcy court properly retained jurisdiction. However, in another Delaware decision, "closeness" but no jurisdiction was found with respect to a debtor's post-confirmation attempt to terminate and/or reject certain supplemental pension benefits agreements, which had "passed through the reorganization process without any attention or provision in the confirmed plan, which by [the date of the action] had been fully consummated."¹⁶ Addressing one of the open issues after Resorts International, two courts have found that the "close nexus" and post-confirmation jurisdiction exists when a plan-created trust pursues the causes of action specifically transferred to the trust for prosecution, as such suits involve implementation, execution and/or consummation of the confirmed plan.¹⁷

In re Boston Regional Medical Center

In Boston Regional Medical Center Inc. v. Reynolds (In re Boston Regional Medical Center Inc.),¹⁸ the circuit court was presented with a "mare's nest of exotic legal problems" including a "novel question of bankruptcy jurisdiction."¹⁹ The "novel question"—which the court believed to be an issue of first-impression in any court—was "the scope of post-confirmation related-to jurisdiction in a case involving a liquidating plan of reorganization."²⁰

The case involved somewhat unusual facts. During her life, Elizabeth Krauss executed a will leaving the residue of her estate to a hospital (which became Boston Regional Medical Center (BRMC)) and two churches. When the aging Krauss was placed under guardianship, her guardians—for tax and other purposes—created certain charitable trusts into which her assets were transformed. To effectuate her intent, the trusts provided that, upon her death, the remaining corpus would be divided among the three residuary beneficiaries under her will. On March 1, 1998, Krauss died. No distribution was made for over a year due to apparent delays in probate. Eleven months after her death, BRMC ceased operations and filed for relief under chapter 11. On Jan. 18, 2000, BRMC's plan was confirmed; the plan was "strictly a liquidating plan."²¹ All assets vested in reorganized BRMC, whose "sole purpose [was] to liquidate the assets and distribute net proceeds to BRMC's creditors in accordance with the plan." In May 2000, the three beneficiaries became aware of the Krauss bequest. The churches sued in probate court to prevent any distribution to reorganized BRMC; BRMC objected, citing an injunction in the plan. The churches sought relief from the injunction in bankruptcy court, which relief was denied. Reorganized BRMC brought an adversary proceeding to compel payment of its share, in which the churches intervened. The churches moved for dismissal and/or abstention, inter alia, on the basis that the bankruptcy court—given the post-confirmation nature of the suit—lacked related-to jurisdiction. The court denied the motion. Following a hearing on the merits, the bankruptcy court recommended a decision to the district court that granted the relief sought by BRMC. In objecting, the churches again questioned jurisdiction, moving the district court to dismiss or abstain. The district court denied the churches' motions and adopted the recommended decision. The churches appealed.

The churches argued that related-to jurisdiction narrows post-confirmation, and that related-to jurisdiction only includes matters with a "close nexus" to the confirmed plan—a nexus, the churches argued, absent in this case. The First Circuit acknowledged Resorts International and like cases, but undertook an exploration of the rationale behind the "narrowing" of related-to jurisdiction post-confirmation.

The court found that the "rationale behind the line of decisions starts with the premise that a reorganized debtor is emancipated by the confirmation of the reorganization plan.... From that point forward, it is just like any other corporation...."²² Given the broad sweep of related-to jurisdiction under 28 U.S.C. §1334, applying the general rule of broad related-to jurisdiction would result in the bankruptcy court retaining jurisdiction in cases affecting the reorganized debtor for many years, which would not only work in an "unwarranted expansion of federal court jurisdiction," but also give a reorganized debtor an unfair advantage over its competitors. The court noted, however, that "content is important." This "narrowing" approach was invoked only as to reorganized debtors that had reentered the marketplace as operating entities.²³

The BRMC plan, by contrast, called for complete liquidation; BRMC would not reenter the marketplace. "That fact undercuts the primary purposes for parsimoniously policing the perimeter of post-confirmation jurisdiction: the specter of endless bankruptcy jurisdiction and a kindred concern about unfairly advantaging reorganized debtors."²⁴

Citing Resorts International, the First Circuit noted that its holding was based on the "conclusion that, once confirmation has occurred, fewer proceedings are actually related to the underlying bankruptcy case," a conclusion that made sense in the case of operating, reorganized debtors. However, "this justification is absent in the case of a liquidating plan."²⁵ Since a liquidating debtor exists for the singular purpose of executing the plan and the confirmation order, "any litigation involving such a debtor thus relates much more directly to a proceeding under Title 11."²⁶ The strong federal policy in favor of expeditious liquidation of debtors and prompt distributions to creditors also supported concentrating litigation by liquidating "reorganized" debtors in one forum—the bankruptcy court.²⁷

Thus, the First Circuit definitively held "that when a debtor (or a trustee acting to the debtor's behoof) commences litigation designed to marshal the debtor's assets for the benefit of its creditors pursuant to a liquidating plan of reorganization, the compass of related-to jurisdiction persists undiminished after plan confirmation."²⁸ The court affirmed the lower courts' exercise of subject-matter jurisdiction.

After Boston Regional

The First Circuit's approach, while providing guidance where the "reorganized debtor" retains assets for the purpose of liquidating them, seems to assume, however, that cases can be neatly categorized as "liquidating" or "reorganizing." Its policy-based approach is less helpful in "hybrid" cases where, say, the company is sold as a going-concern, and the remaining assets, including perhaps residual rights arising from the sale, are transferred to a trust. However, the combination of Resorts International, its progeny and Boston Regional begins to shed some light in this area. Related-to jurisdiction should be found where interpretation or enforcement of the plan, confirmation order, trust instrument or another court-approved, plan-implementing document is at issue. Similarly, the bankruptcy court should have jurisdiction when the litigation at issue is the very litigation contemplated by the plan to be prosecuted for the benefit of creditors, such as the liquidating trustee pursuing a cause of action assigned to the trust. The same should be true where title to, or rights in, an asset assigned to the trust or retained by the reorganized debtor is at issue. However, where the post-petition entity (a reorganized debtor, trust, etc.) enters into post-confirmation transactions, like any other non-debtor entity (such as hiring professionals, selling assets, executing contracts, etc.), disputes arising out of these "new" relationships are likely outside of the bankruptcy court's jurisdiction under either the Resorts International "nexus" test or the policy-based approach of the First Circuit (designed to prevent conferring "advantage" on reorganized debtors). In the spaces between those categories, the mystery continues.

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Footnotes

¹ Board Certified in Business Bankruptcy Law by the American Board of Certification. Return to article

² Boston Regional Medical Center Inc. v. Reynolds (In re Boston Regional Medical Center Inc.), 410 F. 3d 100, 2005 WL 1390165 (1st Cir. 2005). Return to article

³ 372 F.3d 154 (3rd Cir. 2004). Return to article

⁴ Id. at 169. Return to article

⁵ Pacor Inc. v. Higgins, 743 F.2d 984 (3rd. Cir. 1984). Return to article

⁶ Id. at 994. Return to article

⁷ Id. Return to article

⁸ 372 F.3d at 165. Return to article

⁹ Id. at 166-67. Return to article

¹⁰ Id. at 168-69. Return to article

¹¹ Id. at 170. Return to article

¹² Id. Return to article

¹³ 312 B.R. 249 (Bankr. D. Del. 2004). Return to article

¹⁴ Id. at 257. Return to article

¹⁵ 105 Fed. Appx. 420, 2004 WL 1758255 (3rd Cir.). Return to article

¹⁶ Northwestern Corporation v. Ammondson (In re Northwestern Corp.), 2005 WL 1077559 (Bankr. D. Del.). Return to article

¹⁷ Guttman v. Martin (In re Railworks Corp.), 2005 WL 1383324 at * 11 (Bankr. D. Md.); Michaels v. World Color Press Inc. (In re LGI Inc.), 322 B.R. 95, 102-103 (Bankr. D. N.J. 2005). See, also, Montana v. Goldin (In re Pegasus Gold Corp.), 394 F.3d 1189 (9th Cir. 2005) (post-confirmation jurisdiction over suit by plan-created trust with respect to breach of pre-confirmation agreement incorporated into confirmed plan); Rahl v. Bande, 316 B.R. 127 (S.D.N.Y. 2004) (post-confirmation jurisdiction found where issue was what actions were conveyed to plan-created trust under confirmed plan); Texas Mexican Rwy. Co. v. Sun Drilling Prod. Corp., 2004 WL 2784949 (E.D. La.) (post-confirmation jurisdiction exercised over suit for breach of performance under confirmed plan); Finger v. County of Sullivan Indus. Dev. Agency (In re Paramount Hotel Corp.), 319 B.R. 350 (Bankr. S.D.N.Y. 2005) (post-confirmation jurisdiction found where plaintiff-liquidating trustee alleged defendants interfered with liquidation of trust assets); Conseco Inc. v. Adams (In re Conseco Inc.), 318 B.R. 425 (Bankr. N.D. Ill. 2004) (no post-confirmation jurisdiction over post-confirmation suit to collect pre-petition loans to directors and officers where no impact on distributions under plan); Shaw Pittman LLP v. Shin (In re Shin), 2004 WL 3214462 (Bankr. D. D.C.) (no post-confirmation jurisdiction over suit where no impact or plan distributions). Return to article

¹⁸ 410 F.3d 100, 2005 WL 1390165 (1st Cir.). Return to article

¹⁹ 410 F.3d at 103. Return to article

²⁰ Id. at 107. Return to article

²¹ Id. at 104. Return to article

²² Id. at 106. Return to article

²³ Id. Return to article

²⁴ Id. Return to article

²⁵ Id. at 107. Return to article

²⁶ Id. Return to article

²⁷ Id. Return to article

²⁸ Id. Return to article