by Michael Murray*
May bankruptcy courts assume “related to” jurisdiction under 28 U.S.C. § 1334(b) over a post-confirmation successor liability suit when the estate’s assets have already been disbursed? Michael Murray (’17) examines this question, based on his experience at the 2016 Duberstein Moot Court Competition, sponsored by St. John’s University School of Law. His Contribution analyzes the legal landscape of “related to jurisdiction” in bankruptcy courts. Ultimately, the Contribution proposes that the Seventh Circuit has adopted the clearest interpretation of the statute and reasonably limits “related to” jurisdiction to disputes in which either the debtor is a party or the dispute affects the amount or distribution of the debtor’s estate.
Bankruptcy courts have far-reaching power from the moment the petition is filed, throughout the reorganization or liquidation process,2 and until the plan is confirmed. The automatic stay in 11 U.S.C. § 362 and the court’s broad equitable powers under 11 U.S.C. § 105 allow the bankruptcy judge to stay proceedings in other courts or aggregate them into its own court. However, the extent of the court’s post-confirmation jurisdiction is less certain.
The issue is particularly relevant when plaintiffs believe they can obtain more favorable rulings in state court rather than federal bankruptcy court. For example, bankruptcy courts may apply permanent injunctions from successor liability suits as part of a free and clear sale of assets under 11 U.S.C. § 363, but state courts may be friendlier to plaintiffs in determining whether the injunction applies to different parties. The circuit courts generally agree that bankruptcy court jurisdiction diminishes post-confirmation, but there is significant disagreement as to its precise limitations. In particular, the circuits have disagreed as to what contexts “related to” jurisdiction applies.3 This essay will argue that, if the Supreme Court grants certiorari to hear a post-confirmation jurisdiction case, it should adopt the Seventh Circuit’s “affecting the estate” test. The test establishes a reasonable limit to bankruptcy courts’ already far-reaching power and provides clear guidance to lower courts.
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28 U.S.C. § 1334(b) states, “district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” Civil proceedings arising under or in title 11 are cases directly related to specific bankruptcy law, while disputes related to a case under title 11 might be in the realm of tort, contract, or other law that have some relationship with either the debtor or the debtor’s estate. The law is ambiguous as to whether “related to” jurisdiction extends past the confirmation of a plan, but other sections of the code provide some direction.
“Implementation of Plan” authorizes the court to direct any action necessary for the consummation of the plan.4 While “consummation” is not specifically defined anywhere in the code, “substantial consummation” is defined to include “transfer of all or substantially all of the property proposed by the plan to be transferred.”5 If “consummation” is reasonably construed to mean the transfer of all property proposed by the plan, a bankruptcy court is authorized to make sure that assets are transferred in accordance with the plan; once this task is completed, jurisdiction of the bankruptcy court ends. Any future dispute would need to be resolved by federal district courts (under diversity or federal question jurisdiction) or state courts.
Still, § 1334(b) does not explicitly limit “related to” jurisdiction to pre-confirmation matters, and § 105 grants broad powers to the bankruptcy court to “issue any order, process, or judgment necessary to carry out provisions of this title.”6 Moreover, Congress enacted § 1334(b) in 1978 to give broad reach to the bankruptcy courts. The House report states that a “comprehensive grant of jurisdiction to the bankruptcy courts over all controversies arising out of any bankruptcy or rehabilitation case would greatly diminish the basis for litigation of jurisdictional issues consum[ing] much time, money, and energy of the bankruptcy system and those involved in the administration of debtors’ affairs.”7
In 1982, the Supreme Court cut back the powers of Article I bankruptcy courts in Northern Pipeline, by requiring that “non-core” matters—including “related to” disputes—be adjudicated by Article III judges.8 Congress subsequently amended the code in the Bankruptcy Act of 1984 and required bankruptcy courts to conduct discovery on these matters and submit findings of fact and law to the district court, which enters final judgment.9 Significantly, Congress left the text of § 1334(b) unchanged, potentially indicating its intention to keep the jurisdiction of the bankruptcy courts as broad as constitutionally permissible otherwise.
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In this context, the Seventh Circuit attempted to draw a clear line for post-confirmation jurisdiction. Under its interpretation of § 1334(b), “related to” jurisdiction can only extend to disputes in which either the debtor is a party or the dispute affects the amount or distribution of the debtor’s estate.10 According to this reading, once an estate has been fully distributed or liquidated, the bankruptcy court can no longer assert jurisdiction.11 The court reasoned that as a dispute departs further away from the bankruptcy proceedings, it bears less relevance to federal law, less federal interest is at stake, and a claim for federal bankruptcy jurisdiction is reduced.12 Once the assets are fully distributed in accordance with the plan, the interest in resetting rights and obligations of debtors and creditors no longer exists.13
The Seventh Circuit’s “affecting the estate” test provides a clear, workable standard for lower courts to apply. If the debtor is not a party to the dispute, the plaintiff’s claim must alter the amount or distribution of the estate among creditors in order for the bankruptcy court to have jurisdiction. In ZerandBernal Group, Inc. v. Cox, a successor liability case, the court ruled that the bankruptcy court did not have jurisdiction, because the assets had been sold through a § 363 sale and the transfer of those assets had been fully implemented by the time the suit commenced.14 The First and Fifth Circuits came to the same conclusion in similar cases.15
In contrast, the Third Circuit outlined its “close nexus” test in In re Resorts Int’l, Inc.16 The court ruled that post-confirmation disputes must “affect an integral aspect of the bankruptcy process” and jurisdiction is appropriate “when a matter affects the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement.”17 The court insisted that bankruptcy courts’ jurisdiction must be broad in order to effectuate Congressional goals.18
While the Third Circuit adopted broader, more ambiguous language in its “close nexus” test, cases following the approach have indicated agreement with the Seventh Circuit and have found that assets must be available for distribution in order for the bankruptcy court to retain jurisdiction post-confirmation. In U.S. Tr. v. Gryphon at Stone Mansion, Inc., the Third Circuit granted jurisdiction because the dispute involved payment of trustee fees from a continuing liquidation trust.19 In In re A.H. Robins Co., Inc., the Fourth Circuit allowed jurisdiction over a dispute involving claimants of the litigation trust established to pay claimants from a product liability suit and resulting bankruptcy.20 In both cases, assets were available post-confirmation, and the disputes affected how those assets would be distributed among various creditors. The Seventh Circuit’s “affecting the estate” test captures this requirement with clear parameters. In contrast, the Third Circuit’s “close nexus” test uses ambiguous language providing little more clarity than the statute itself.
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So far, the Supreme Court has provided little guidance on post-confirmation “related to” jurisdiction. The Court dealt with § 1334(b) in Celotex Corp. v. Edwards, but only in the context of a pre-confirmation dispute.21 In Celotex, the estate itself was not at issue, but the Court determined that resolution of the dispute between the debtor and its insurers was essential to assuring the feasibility of the bankruptcy plan, so the Court granted jurisdiction to the bankruptcy court.22 The Court took a seemingly broad view when it stated, “Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate,” including those beyond “simple proceedings involving property of debtor or the estate.”23 However, the Court went on to limit its view: “whatever test is used, these cases make clear that bankruptcy courts have no jurisdiction over proceedings that have no effect on the estate of the debtor.”24 The holding of Celotex conforms with the Seventh Circuit’s “affecting the estate” test, such that once a plan is fully implemented, the jurisdiction of the bankruptcy court terminates.
There are also significant policy implications at stake in the debate. In order to maximize the value of the estate through free and clear asset sales, bankruptcy courts must be able to assure purchasers that the assets are free and clear of all claims, including successor liability. Without that assurance, the value of the estate could significantly diminish, returning less value to creditors.25 On the other hand, the goal of bankruptcy is to reset the claims of creditors and debtors, not to assure the long-term success of reorganized companies or assets that once belonged to a debtor. Post-confirmation bankruptcy court jurisdiction should be limited to implementing the plan, after which the reorganized debtor or asset purchaser must stand on its own feet to defend itself against subsequent claims.26
* This article reflects my experience at the 2016 Duberstein Moot Court Competition, sponsored by St. John’s University School of Law. The case was modeled after the General Motors bankruptcy and subsequent successor liability litigation surrounding ignition switch defects. An automaker sold its successful product line assets to a newly formed company through a § 363 free and clear sale, which included a permanent injunction from any liability from the debtor/seller. After the sale was completed, victims of a manufacturing defect sued the purchaser in state court under the “product line” theory of successor liability. The debtor/seller intentionally failed to give notice of the bankruptcy proceedings to these victims, so they were unable to contest the sale. The purchaser contended that the bankruptcy court retained jurisdiction to interpret and enforce its own order against the claims. The questions presented were: (1) whether a bankruptcy court may assume “related to” jurisdiction under 28 U.S.C. § 1334(b) over a post-confirmation successor liability suit when the estate’s assets have already been disbursed; and (2) whether a free and clear sale order entered pursuant to the confirmation of a Chapter 11 plan is void against a party who was not given notice of the proceeding.
2. Bankruptcy court jurisdiction may reach pre-petition for fraudulent conveyance claims. See 11 U.S.C. § 548.
3. 28 U.S.C. § 1334(b).
4. 11 U.S.C. § 1142(b).
5. 11 U.S.C. § 1101.
6. 11 U.S.C. § 105.
7. H.R. Rep. No. 95-595, at 46 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6007.
8. Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 84–87 (1982).
9. 28 U.S.C. § 157(c).
10. See Matter of FedPak Sys., Inc., 80 F.3d 207, 214 (7th Cir. 1996); Matter of Xonics, Inc., 813 F.2d 127, 131 (7th Cir. 1987).
11. Id.
12. Zerand-Bernal Grp., Inc. v. Cox, 23 F.3d 159, 162 (7th Cir. 1994).
13. Id.
14. Id.
15. See In re Savage Indus., Inc., 43 F.3d 714 (1st Cir. 1994); Matter of Mooney Aircraft, Inc., 730 F.2d 367 (5th Cir. 1984).
16. 372 F.3d 154, 167 (3d Cir. 2004).
17. Id. at 167–69.
18. Id.
19. 166 F.3d 552 (3d Cir. 1999).
20. 86 F.3d 364 (4th Cir. 1996).
21. 514 U.S. 300 (1995).
22. Id.
23. Id. at 300, 308 (internal citations omitted).
24. Id. at 308, n.6.
25. See Zerand-Bernal Grp., 23 F.3d at 163.
26. Id.