News & Events

Avoiding Bankruptcy Court (in Litigation)

During the recent recession, it was not unusual for one of the parties in a commercial litigation case to be a trustee or debtor in bankruptcy.  Bankruptcy court is a convenient and, at least in common perception, favorable forum for debtors. Bankruptcy adversary proceedings also tend to move more quickly than litigation in other courts, and speed usually works to the advantage of the plaintiff.  These reasons may be why, in Chapter 11 reorganization cases, debtors often invoke the bankruptcy court’s jurisdiction even after confirmation of a plan of reorganization.  One might reasonably expect to litigate in bankruptcy court if the litigation relates to a claim against the debtor or assets of the bankruptcy estate, but the boundaries of a bankruptcy court’s subject matter jurisdiction post confirmation are unclear.

The United States Bankruptcy Court for the Middle District of Tennessee explored the scope of its post confirmation jurisdiction last year in Equipment Finders, Inc. of Tennessee v. Fireman’s Fund Insurance Co., 473 B.R. 720 (Bankr. M.D. Tenn. 2012).  The case involved a dispute over insurance coverage for a flood loss.  A flood damaging the debtor’s equipment occurred during the pendency of the bankruptcy, but the debtor did not file suit against the insurer or its insurance agency until six months after confirmation of the plan of reorganization.  The debtor’s complaint alleged only contract and state law claims.  The insurer moved to dismiss the case, arguing that the bankruptcy lacked subject matter jurisdiction post confirmation.  In response, the debtor argued the proceeds from the insurance policy were a significant asset of the bankruptcy estate and that “recovery of insurance proceeds was implicit in the success of its plan.”

The bankruptcy court granted the insurer’s motion to dismiss.  The court began by noting that bankruptcy court jurisdiction, like the jurisdiction of other federal courts, is grounded in and limited by statute.  Bankruptcy courts derive their jurisdiction (through district courts) from 28 U.S.C. § 1334.  Under section 1334, a bankruptcy court has subject matter jurisdiction if the matter before it is at least “related to” the bankruptcy.  In reviewing Sixth Circuit case law on “related to” jurisdiction, the court distilled the principal “that ‘related to’ jurisdiction in the post confirmation period expands or contracts depending on the relationship between the post confirmation debtor and the defendant, the language of the confirmed plan and the impact the matter will have on performance of the confirmed plan.”

In holding that the insurance dispute was beyond the bankruptcy court’s subject matter jurisdiction, the judge considered several factors.  The defendants in the case were not creditors of the debtor, and although the dispute arose pre-confirmation, the debtor’s claims against its insurer and the insurance agency were not referenced in the confirmed plan or the disclosure statement sent to creditors.  Recoveries under the litigation would not impact treatment under the confirmed plan.  The plan proposed to pay secured creditors in full, without condition, from the post confirmation operations of the reorganized debtor.  The judge also noted that the debtor’s suit did not ask it to “interpret, construe, enforce or implement” the confirmed plan and that the Bankruptcy Code was not invoked in any cause of action asserted.

When called to bankruptcy court to defend a case post confirmation, the first step should always be to evaluate the debtor’s grounds for invoking bankruptcy court jurisdiction.  The Equipment Finders case provides a helpful list of factors to consider in determining whether to challenge a bankruptcy court’s post confirmation subject matter jurisdiction.  In some circumstances, litigating in bankruptcy court can be avoided with the added benefit of taking the plaintiff-debtor away from its bankruptcy court comfort zone.

— W. Neal McBrayer