The trustee of a liquidating trust established under a plan of reorganization brought an action against a purchaser to enforce the terms of the plan and asset purchase agreement. The purchaser moved to dismiss on the basis that the bankruptcy court did not have continuing post-confirmation jurisdiction, or alternatively asked the court to abstain.
The debtors (Fisker Automotive) conducted a bankruptcy auction of substantially all of their assets. The winning bid of $149.2 million, which was documented in an asset purchase agreement, consisted of $126.2 million cash, $8 million assumed liabilities, and a 20% equity interest in the company that was to be formed to own the acquired assets. After obtaining bankruptcy court approval, the sale closed.
The confirmed plan of reorganization incorporated the equity interest as set forth in the purchase agreement and provided that the interest would be held indirectly by a liquidating trust established under the plan. Subsequently the new company issued additional equity interests to the purchaser in exchange for capital contributions. The liquidating trustee objected since the new issuance diluted interests held by the trust.
The adversary proceeding brought by the trustee included 5 counts: (1) declaratory relief on the grounds that the new company did not have authority to issue the additional interests, (2) breach of fiduciary duties to the trust, (3) violation of the plan, (4) breach of the implied covenant of good faith and fair dealing, and (5) promissory estoppel based on the promise of a 20% equity interest. The opinion dealt with the questions of subject matter jurisdiction and abstention, leaving the merits for another day.
District courts have jurisdiction over cases arising under, arising in or related to cases under the Bankruptcy Code, and may refer to bankruptcy judges “any or all cases under title 11 and any or all proceedings arising under title 11 arising in or related to a case under title 11….” The bankruptcy court characterized the issue in this case is whether the complaint “‘arises in’ or is ‘related to’ a title 11 case.”
Under case law, “arising in” jurisdiction means claims that by their nature could only arise in a bankruptcy case. “Related to” jurisdiction includes both proceedings directly against the debtor or its property and cases that “could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling the administration of the bankruptcy estate.”
There is a further caveat that after confirmation of a plan court should exercise jurisdiction only if there is a close nexus and the matter Of Facts in some way the plan. The court noted that it may find a close nexus if the plan specifically references the cause of action.
The court reviewed a series of cases and then concluded that it had “arising in” jurisdiction because there were allegations that the defendants violated the plan (as well as related documents such as the purchase agreement) that called into play the integrity of the bankruptcy process.
And even if it did not have “arising in” jurisdiction, the court concluded it had “related to” jurisdiction. Although jurisdiction may be problematic post-confirmation since the bankruptcy estate ceases to exist, “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.”
While concluding that it had jurisdiction, the court noted that this was a separate question from the merits of the case, and highlighted several areas that remained to be addressed.
The court also considered whether it should abstain permissively and determined that abstention would not be appropriate. It based its decision on a 12-factor test, while noting that evaluation was not a “mathematical exercise” and the decision was within its broad discretion.
Parties often take for granted that a bankruptcy court will be available to referee issues arising from a sale of the debtor’s assets. However, as noted in the opinion jurisdiction may be “problematic” after confirmation of a plan. It certainly helps to include a specific provision in the plan that the court retains jurisdiction over controversies arising from the sale transaction. However, as noted in one of the cases discussed in the opinion, recognize that if the court does not have jurisdiction, reservation of jurisdiction in a plan by itself cannot confer jurisdiction.
Vicki R Harding, Esq.
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