Breach of Pre-petition Contract Claims Not Immune From Core Jurisdiction

By: Matthew S. Smith

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

Recently, the United States Bankruptcy Court for the Southern District of New York in In re Charter Commc’ns held that a creditor’s adversary proceeding for an alleged pre-petition breach of contract was one over which the bankruptcy court could exercise its “core” jurisdiction.[1] In deciding whether the creditor’s claims fell within its core jurisdiction, the court was guided by 28 U.S.C. § 157,[2] which provides a list of matters that are characterized as “core proceedings.”[3]  The creditor, JPMorgan, alleged that debtor, Charter, had committed non-curable, nonmonetary pre-petition defaults under a pre-petition contract, which would prevent Charter from being able to take additional loans as originally provided in their Credit Agreement.[4] Since JPMorgan refused to consent to adjudication in the bankruptcy court, the court focused on “the close interconnection between the adversary proceeding [at issue] and the bankruptcy process.”[5] The court found that the nature of plaintiff JPMorgan’s proceeding directly affected the confirmation of debtor Charter’s chapter 11 bankruptcy plan – a core administrative function of the bankruptcy court – and thus held that the matter came within the court’s core jurisdiction.[6]

 

The Credit Agreement between the parties created a secured term and revolving loan facility under which Charter would be able to continuously take out loans from JPMorgan up to a specified limit, provided that Charter was not in default.[7]  JPMorgan alleged that Charter breached the agreement by making allegedly false representations that “no Default or Event of Default” had occurred when Charter sought to borrow an additional $750 million.[8] Although Charter had made all of its interest payments on time as required so as not to have been in default, JPMorgan argued that the agreement’s language that debts be paid “as they become due” should be read as Charter’s ability to pay “as they would become due.”[9] Under this interpretation, JPMorgan alleged that Charter was in default when it requested the advance because at least one of the Designated Holding Companies, as defined by the agreement, would not be able to pay its debt when it would become due at some point in the future.[10] Charter argued against this forward-looking interpretation by asserting that JPMorgan was creating an extra-contractual obligation under the Credit Agreement.[11]

 

JPMorgan filed an adversary proceeding in bankruptcy court, and claimed that the alleged default under the Credit Agreement should be deemed “non-core” because it involved a breach of contract that occurred prior to Charter’s bankruptcy filing and thus was not properly before the bankruptcy court.[12] However, as the court explained, in determining whether an action is core, the focus is on “the nature of the proceeding” and its relation to core bankruptcy functions.[13] Since JPMorgan’s claim would ultimately determine whether the Credit Agreement could be reinstated due to the non-curable nature of the alleged breach,[14] and since Charter’s plan of reorganization relied on the Credit Agreement’s reinstatement in order to provide the loans it required, the nature of the proceeding was deemed to be core due to its potential effect on confirmation of Charter’s plan.[15]

 

JPMorgan did not file a proof of claim before commencing the adversary proceeding. The court noted that JPMorgan might not have done so for strategic reasons.[16] Charter argued that, despite not filing a proof of claim in the bankruptcy proceeding, JPMorgan had nevertheless consented to the court’s jurisdiction by voluntarily electing to involve itself in the bankruptcy proceeding.[17] As the court determined, however, filing a proof of claim is “irrelevant” to the determination of a proceeding as core;[18] instead, the creditor preserves the right to object to the court’s jurisdiction.[19]  Rather, whether a cause of action for breach of contract is core depends on “(1) whether the contract is antecedent to the reorganization petition; and (2) the degree to which the proceeding is independent of the reorganization.”[20] Although the claim asserted by JPMorgan related to a pre-petition breach of a pre-petition agreement, “a factor which ‘weighs against finding core status,’”[21] the court found the dispute to be core since the dispute might result in a judgment of default under the Credit Agreement which would then render confirmation of Charter’s reorganization plan impossible.[22] 

 

The court distinguished In re Orion Pictures Corp.,[23] in which the Second Circuit found a pre-petition beach of contract claim to be non-core.[24] In In re Orion Pictures Corp., the chapter 11 trustee simply sought to augment the size of the debtor’s estate.[25]  JPMorgan’s proceeding, on the other hand, would directly affect confirmation of the reorganization plan.[26] The bankruptcy court further noted that, unlike in In re Orion Pictures, JPMorgan’s adversary proceeding had been brought by a creditor, not a debtor.[27] As such, JPMorgan was not an “unwilling party that ha[d] been ‘involuntarily subjected’ to the [c]ourt’s jurisdiction,”[28] but rather a willing party that had strategically elected to file its complaint with the bankruptcy court.[29] Under section 157(b)(2)’s defined “core” categories, the court held that JPMorgan’s claims fell within the court’s jurisdiction since it was “so factually and legally interconnected” with one of the court’s functions, namely “confirmation of plans.”[30]

 

After In re Charter Commc’ns, a creditor who brings a state law claim for breach of a pre-petition contract can find itself under the core jurisdiction of the bankruptcy court if the court cannot confirm the plan without addressing the claimed pre-petition defaults.  Therefore, a claimed pre-petition breach of contract that must be resolved in order for the court to rule on final confirmation of a plan cannot as a legal and practical matter be decided in another forum.

 

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