Timothy A. Davis, Defining the Close Nexus: an Analysis of a Bankruptcy Court?s Chapter 11 Postconfirmation Jurisdiction

• Publication year: 2011

DEFINING THE CLOSE NEXUS: AN ANALYSIS OF A BANKRUPTCY COURT’S CHAPTER 11 POSTCONFIRMATION JURISDICTION

INTRODUCTION

Ever since the Supreme Court held in Northern Pipeline Construction Co.

1. Marathon Pipe Line Co. that the 1978 Bankruptcy Code’s broad grant of jurisdictional authority was unconstitutional, courts and legislators have struggled with defining the exact scope of a bankruptcy court’s jurisdiction.1 The 1984 Amendments, which changed the 1978 Code’s jurisdictional scheme, have withstood judicial scrutiny but have created confusion among the district

   and circuit courts as to the constitutionally permissible reach of bankruptcy jurisdiction.2 Because of the lack of clarity provided by Congress and the Supreme Court, the boundaries of a bankruptcy court’s jurisdiction are far from settled.3 This confusion is highlighted in situations involving claims that arise after the bankruptcy court has confirmed a debtor’s chapter 11 reorganization plan. In fact, this area of bankruptcy jurisdiction has led commentators to conclude that “[p]ostconfirmation ‘related to’ jurisdiction is indeed a murky area through which the courts continue to wade.”4 Furthermore, former Chief Judge Robert J. Kressel of the Bankruptcy Court for the District of Minnesota famously stated, “Jurisdiction generally and

   bankruptcy jurisdiction particularly are among the most misunderstood and misapplied concepts in the law.”5 This Comment addresses the current

   
   

   1. N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 87 (1982). After the Supreme Court’s decision in Marathon, Congress passed the Bankruptcy Amendments and Federal Judgeship Act of 1984 to delineate the proper jurisdictional authority for bankruptcy courts. See Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-353, 98 Stat. 333 (codified as amended in scattered sections of 11

      U.S.C. and 28 U.S.C.).

   2. Susan Block-Lieb, The Costs of a Non-Article III Bankruptcy Court System, 72 AM. BANKR. L.J. 529, 530–31 (1998); see also Robert J. Keach & Halliday Moncure, Rule 2004 as a Pre-Litigation Tool in a Post- Twombly/Iqbal World: Part II, 29 AM. BANKR. INST. J., Nov. 2010, at 28, 28 (noting that this area of jurisprudence is far from settled and the postconfirmation landscape “contain[s] traps for the unwary”).

   3. See Keach & Moncure, supra note 2, at 28.

   4. David Lander, The Scope of “Related to Jurisdiction” After Confirmation of a Plan in a Nonindividual Chapter 11 Case, NORTON BANKR. L. ADVISER, Feb. 2007, at 1, 5.

   5. Harstad v. First Am. Bank (In re Harstad), 155 B.R. 500, 505 (Bankr. D. Minn. 1993), aff’d,

Bankruptcy No. 4-90-869, 1994 WL 526013 (D. Minn. Jan. 20, 1994), aff’d, 39 F.3d 898 (8th Cir. 1994).

jurisdictional maze with regard to postconfirmation jurisdiction and proposes recommendations for reform in this area.

Pursuant to 28 U.S.C. § 157(b)(1), “[b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments.”6 Furthermore, 28

U.S.C. § 157(b)(2) provides a nonexclusive list of “core” proceedings that includes matters such as orders to turn over property to the estate and proceedings to determine, avoid or recover preferences.7 With respect to core proceedings, bankruptcy judges can enter final orders, which are subject to traditional appellate review.8

In addition to core proceedings, bankruptcy courts can, under 28 U.S.C.

§ 157(c)(1), hear noncore matters that are “otherwise related to a case under title 11.”9 In noncore proceedings, bankruptcy judges can hear the matter and make proposed findings of fact and conclusions of law to the district judge, but only the district judge can enter a final order after reviewing the bankruptcy

court’s recommendations and reviewing de novo any matters to which any party has objected.10 In chapter 11 cases, courts traditionally have only analyzed “related to” jurisdiction with respect to claims arising before the confirmation of a reorganization plan.11 In this context, most circuits have determined that the bankruptcy court can have “related to” jurisdiction when “the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.”12 “Related to” jurisdiction, however, shrinks and is more limited when determining whether the bankruptcy court has jurisdiction over an adversary proceeding brought in bankruptcy courts after the confirmation of a chapter 11 reorganization plan.13 Attempts to

6 28 U.S.C. § 157(b)(1) (2006).

7 Id. § 157(b)(2).

1. Id. § 157(b)(1). Proceedings “related to a case under title 11” are not covered by the language of 28

   U.S.C. § 157(b)(1) because, under Marathon, bankruptcy judges cannot constitutionally determine such matters. 1 COLLIER ON BANKRUPTCY ¶ 3.02[2] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2011).

2. 28 U.S.C. § 157(c). “Related to” jurisdiction is considered “the broadest of the potential paths to

bankruptcy jurisdiction.” Binder v. Price Waterhouse & Co. (In re Resorts Int’l, Inc.), 372 F.3d 154, 163 (3d Cir. 2004) (citing Donaldson v. Bernstein, 104 F.3d 547, 552 (3d Cir. 1997)).

10 28 U.S.C. § 157(c)(1).

1. See, e.g., Celotex Corp. v. Edwards, 514 U.S. 300, 302–06 (1995) (claim to enforce supersedeas bond against surety); Pacor, Inc. v. Higgins, 743 F.2d 984, 986–87 (3d Cir. 1984) (products liability claim).

2. Pacor, 743 F.2d at 994 (emphasis removed); see also Celotex, 514 U.S. at 308 (agreeing with the Third Circuit’s views in Pacor).

3. In re Resorts Int’l, 372 F.3d at 164.

   determine the actual scope of a bankruptcy court’s postconfirmation “related to” jurisdiction has led to the application of different tests by the various circuit courts.

   
   

   To define the scope of a bankruptcy court’s postconfirmation “related to” jurisdiction, the Third and Ninth Circuits have adopted a “close nexus” test.14 Additionally, bankruptcy courts in the Eleventh Circuit have attempted to apply the close nexus test.15 Moreover, the Fourth Circuit has found the close nexus requirement to be a “logical corollary” of “related to” jurisdiction.16 Under the close nexus test, a bankruptcy court has jurisdiction over a collateral matter when “there is a close nexus to the bankruptcy plan or proceeding sufficient to uphold bankruptcy court jurisdiction over the matter.”17 For example, in In re Florida Development Associates, the court used the test to determine that a debtor’s action against an engineer for defective railings and construction design defects, which were revealed by a hurricane only after the debtor’s chapter 11 plan had been confirmed, was within the court’s “related to” jurisdiction.18 The court noted that even though the debtor did not discover the defects until after the plan’s confirmation, a close nexus between the cause of action and the debtor’s bankruptcy proceeding existed for the following reasons: (1) the debtor was the plaintiff in the adversary case; and (2) because

   the defects were latent, the causes of action were unknown to the debtor at the time of confirmation.19 Thus, the close nexus test focuses on the relationship between the collateral causes of action and the bankruptcy proceedings.

   
   

   Courts in the Second Circuit have also applied the close nexus test but with the additional requirement that the chapter 11 reorganization plan and disclosure statement describe the claims over which the bankruptcy court retains jurisdiction.20 Under this analysis, the claim must be sufficiently related

   to the bankruptcy proceeding and expressly considered in the reorganization plan. For example, under this approach a claim for defective design must not

   
   

4. See Montana v. Goldin (In re Pegasus Gold Corp.), 394 F.3d 1189, 1194 (9th Cir. 2005); In re Resorts Int’l, 372 F.3d at 166–67.

5. See, e.g., Fla. Dev. Assocs. v. Knezevich & Assocs., Inc. (In re Fla. Dev. Assocs.), No. 04-12033-

   BKC-AJC, 2009 WL 393870, at *4–5 (Bankr. S.D. Fla. Feb. 4, 2009).

6. Valley Historic Ltd. P’ship v. Bank of N.Y., 486 F.3d 831, 837 (4th Cir. 2007).

7. In re Resorts Int’l, 372 F.3d at 166–67.

8. In re Fla. Dev. Assocs., 2009 WL 393870, at *1–4.

9. Id. at *4–5.

10. Penthouse Media Grp. v. Guccione (In re Gen. Media, Inc.), 335 B.R. 66, 73–74 (Bankr. S.D.N.Y. 2005) (citing Hosp. & Univ. Prop. Damage Claimants v. Johns Manville Corp. (In re Johns Manville Corp.), 7 F.3d 32, 34 (2d Cir. 1993)).

    only have a connection to the bankruptcy estate, but must also be stated in the reorganization plan.21

    
    

    The Fifth Circuit has adopted a somewhat narrower approach to postconfirmation jurisdiction.22 In the Fifth Circuit’s seminal postconfirmation jurisdiction case, In re Craig’s Stores of Texas, Inc., the court indicated that “[a]fter a debtor’s reorganization plan has been confirmed, the debtor’s estate, and thus bankruptcy jurisdiction, ceases to exist other than for matters pertaining to the implementation or execution of the plan.”23 In applying this test, one bankruptcy court has indicated that it will determine whether it has jurisdiction based on six factors: (1) when the claim arose; (2) whether the confirmation plan provided for the retention of jurisdiction over the claim; (3)

    whether the plan has been substantially consummated; (4) the nature of the parties involved; (5) whether state law or bankruptcy law applies; and (6) indices of forum shopping.24 By balancing these factors, a court will be able to determine whether a claim is best brought in bankruptcy court, district court, or state court.

    
    

    It is important for Congress and the Supreme Court to resolve the circuit split over the scope of postconfirmation “related to” jurisdiction for three reasons. First, there is the need to provide for judicial economy and the efficient resolution of bankruptcy cases. With respect to postconfirmation “related to” jurisdiction, the tests that grant the broadest jurisdictional scope possible—while remaining within constitutional limits—promote the most

    efficient resolution...