Here are some basic rules on bankruptcy court jurisdiction:
–“Core” proceedings can be heard and decided by bankruptcy courts;
–“Related to” proceedings can be heard and decided by bankruptcy courts upon consent of the parties but, otherwise, must be resolved through proposed findings of fact and conclusions of law to the district court;
–If a proceeding is not “core” or “related to,” neither the bankruptcy court nor the district court has bankruptcy jurisdiction over it, although the district court might have separate diversity or federal question jurisdiction; and
–After confirmation, bankruptcy court jurisdiction is more limited and uncertain — and trickier.
So . . . what happens when a Debtor files a post-confirmation lawsuit in bankruptcy court on an inadequately-disclosed claim, only to learn that the case is neither “core” nor “related to”? The answer is not good for plaintiff.
A January 2018 Appellate Ruling (In re IMMC Corp.) – Its Pre-Appeal Chronology
The bankruptcy case is Troisio v. Erickson (In re IMMC Corp.), Adv. No. 10-53063 (Bankr. D. Del.).
–The primary issue is whether a Bankruptcy Court has jurisdiction over a claim that is inadequately-disclosed in the disclosure statement and plan.
Here is a chronology of the case before appeal:
June 11, 2008—Debtor files Chapter 11
November 7, 2008—Debtor’s Plan is Confirmed
September 18, 2010—Trustee sues Debtor’s former officers and directors, in Bankruptcy Court, for breach of fiduciary duties in failing to properly manage Debtor’s business.
December 29, 2011—Bankruptcy Judge issues his first ruling (Doc. 33), declaring the claims in question to be both “non-core” and “not related” and making these findings:
–A “failure” in the disclosure statement or plan to specifically identify “a non-chapter 5” claim for post-confirmation pursuit “deprived this Court of jurisdiction to dispose of” the claim, due to the absence of a “close nexus” of such claim to the bankruptcy case;
–“I do not perceive any ‘unique bankruptcy-related issues’ here”; and
–A “close nexus” establishing “related to” jurisdiction would have existed, if the plan and disclosure statement had adequately identified the claims for post-confirmation pursuit.
By the time of the December 29, 2011 ruling, statutes of limitations on claims asserted in the case had already expired.
January 19, 2012—Trustee requests a transfer of the case to U.S. District Court under 28 U.S.C. § 1631 (Doc. 36).
February 14, 2012—Bankruptcy Judge denies Trustee’s request to transfer the case to U.S. District Court but grants Trustee’s request for “an opportunity to file a motion” with the U.S. District Court “seeking withdrawal of the reference” of this case (see Doc. 42).
February 9, 2015—U.S. District Court denies Trustee’s Motion to withdraw the reference (see Doc. 11, Case No. 12-406) because, (i) the action was never properly “referred” to the Bankruptcy Court, so there could be “no basis for withdrawing the reference,” and (ii) the Trustee cannot now change the basis of jurisdiction to diversity.
October 30, 2015—Bankruptcy Court reaffirms its prior rulings on no-jurisdiction and no-transfer and denies Trustee’s “Renewed Motion to Transfer” (Doc. 68). And it cites these reasons: (i) “the close nexus required for subject matter jurisdiction does not exist here”; and (ii) “bankruptcy courts are not ‘courts’ as defined 28 U.S.C. § 610 (which is referenced in § 1631) and, therefore, are without authority to effect such a transfer.”
On November 12, 2015, Trustee appeals the Bankruptcy Court’s order. And on January 2, 2018, U.S. District Court affirms the Bankruptcy Court’s In re IMMC Corp. rulings. The appellate opinion is at Troisio v. Erickson (In re IMMC Corp.), Civ. No. 15-1043 (D. Del., January 2, 2018, Doc. 27).
The District Court’s no-transfer ruling is based on these two conclusions:
–Bankruptcy courts “are not among the ‘courts’ granted transfer authority” under the “plain language of §§ 1631 and 610”; and
–Legislative history of both §§ 1631 and 610 “supports the Bankruptcy Court’s analysis and conclusion.”
The two cited statutes provide in part (italics added for emphasis):
—28 U.S.C. § 1631. “Whenever a civil action is filed in a court as defined in section 610 of this title . . . and that court finds that there is a want of jurisdiction, the court shall, if it is in the interest of justice, transfer such action or appeal to any other such court in which the action or appeal could have been brought at the time it was filed.”
—28 U.S.C. § 610. “As used in this chapter the word ‘courts’ includes the courts of appeals and district courts of the United States.”
A 2005 Precedent
This same Bankruptcy Judge issued a similar ruling in Shandler v. DLJ Merchant Bank, Inc. (In re Insilco), 330 B.R. 512 (Bankr. D. Del. 2005). Insilico involved a confirmed plan that generally described “Rights of Action” but did not specifically identify claims against directors and officers to be pursued post-confirmation. The Insilico ruling says:
–Such “general language” about post-confirmation litigation “does not provide any notice to creditors (or to the Court, for that matter) as to the importance of this or any particular litigation”;
–“If the litigation is truly so critical to the Plan’s implementation, it would have been more specifically described in the Disclosure Statement and Plan so that creditors could have considered its effect when deciding whether to vote in favor of the Plan”;
–The “pursuit of these non-core claims does not call for the interpretation of any Plan provision”; so
–“I decline to find the requisite ‘close nexus’ of these non-core claims to the bankruptcy case based solely upon the Plan’s” general terms.
However, Insilico did not address the transfer issue under §§ 1631 and 610.
The practical problem in Insilico is the same as in In re IMMC Corp.: the statute of limitations expired, and a dismissal of the case would leave plaintiff without a remedy.
A Recent 11th Circuit Opinion in a Different Context
Adequacy of claim disclosure is also addressed, in a different context, by the Eleventh Circuit Court of Appeals in a September 2017 ruling.
The Eleventh Circuit opinion involves an individual Chapter 7 case in which the Debtor failed to schedule a pre-existing claim against her former employer: the Chapter 7 Trustee issued a no asset report and the Debtor, then, continued pursuing the undisclosed claim.
The Eleventh Circuit’s prior “equitable estoppel” standard for pursuing non-disclosured claims was clear and firm:
“the mere fact of the plaintiff’s nondisclosure” is sufficient to warrant dismissal on equitable estoppel grounds, “even if the plaintiff” had “corrected his bankruptcy disclosures” with bankruptcy court permission.
However, the Eleventh Circuit clarified and broadened its “equitable estoppel” standard, in Slater v. U.S. Steel Corp., 871 F.3d 1174 (11th Cir. 2017), as follows:
“Today we clarify that the district court must consider all the facts and circumstances in determining whether the plaintiff acted with the intent to make a mockery of the judicial system.”
[Note: The issue of an inadvertent failure to disclose a potential claim in bankruptcy is the subject of a currently-pending Petition for a Writ of Certiorari before the U.S. Supreme Court in Nicholson v. Thrifty Payless, Inc., Supreme Court Case No. 17-772.]
So . . . for plan proponents and administrators, here are some practical takeaways from the foregoing:
–When preparing a plan and disclosure statement, any and all non-chapter 5 claims should be identified with specificity as assets for potential pursuit post-confirmation.
–When filing a post-confirmation lawsuit on a non-chapter 5 claim that’s specifically identified in the disclosure statement and plan, consider filing it in U.S. district court anyway because:
(i) if “related to” jurisdiction exists, the District Court can (and probably will) refer the case to the Bankruptcy Court;
(ii) if diversity or federal question jurisdiction can also be established in District Court, that’s all the better; and
(iii) if needed, the District Court can transfer the case to another federal court (under such statutes as 28 U.S.C. §§ 1404, 1406 and 1631) or exercise other powers unavailable to a bankruptcy court.
–When concerned about whether a non-chapter 5 claim is adequately identified in the plan and disclosure statement, consider filing the lawsuit in a state or federal court where personal jurisdiction, subject matter jurisdiction and proper venue are most likely to exist under non-bankruptcy laws.
A bankruptcy court’s post-confirmation jurisdiction is often an uncertain and tricky realm. And the In re IMMC Corp. rulings, from both the Bankruptcy and appellate courts, reveal another difficulty in that jurisdiction. However, the In re IMMC Corp. rationale also provides clues for minimizing post-confirmation jurisdiction risks.
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