Contributions

The Buck Stops Here: The Limits of Bankruptcy Court Jurisdiction Post-Confirmation

by Michael Mur­ray  1

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

Notes:

  1. 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©.
  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.