Bankruptcy Litigation Blog

[1/13/10 Update:  Thanks to Steve Sather from A Texas Bankruptcy Lawyer's Blog for his comment below.  In his post today, he discusses in greater length the opinion of Judge Edith Jones in holding that "related to" jurisdiction exists over a non-debtor dispute if the indemnity right is contractually based, and hence had already "accrued."  Lone Star Fund V (US), LP v. Barclays Bank, PLC, No. 08-11038 (5th Cir. 1/11/10) (pdf).

To further complicate matters, take a look at a recent decision of Judge Laurel Isicoff, who held that regardless of whether the Pacor test was satisfied, the court had "related to" jurisdiction over a third party franchisor's claims against the debtor's principal where the proceeding arose out of same core of facts as one whose outcome could have a Pacor-type effect, and thus the prerequisites for exercise of "supplemental jurisdiction" were satisfied. Century 21 Real Estate, LLC v. Prestige Realty Group of Ohio & Florida, LLC (In re Prestige Realty Group of Ohio & Florida, LLC), 2009 WL 3817297 (Bankr. S.D. Fla. 11/13/2009).  Respectfully, Judge Isicoff's ruling is not the law in the 7th Circuit, however, so be sure to check your local practice first.  See, Banc of America Inv. Servs., Inc. v. Fraiberg (In re Conseco, Inc.), 305 B.R. 281 (Bankr. N.D. Ill. 2004) (bankruptcy court cannot exercise supplemental jurisdiction under § 1367(a) because it is not a district court.and such exercise would amount to "related to related to" jurisdiction).  It's also a position at odds with 3rd Circuit's decision in In re Exide Techs., 544 F.3d 196 (3d Cir. 2008), which expressly rejected the “intertwinement” theory under which otherwise non-core disputes among non-debtors could be treated as core bankruptcy matters based on the extent of their "intertwinement" with core disputes between those parties and the debtor.]

***

As noted in this post last June, it is fair to assume that the U.S. Supreme Court would not permit a bankruptcy court to adjudicate, settle, or enjoin claims against nondebtors that do not affect the debtor’s estate.  In perhaps the final bankruptcy decision of 2009, the Third Circuit rang in the new year with yet another important case--consistent with this general principle-- interpreting the scope of a bankruptcy court's subject matter jurisdiction.  W.R. Grace & Co. v. Chakarian (In re W.R. Grace & Co.), 2009 WL 5151089 (3d Cir. 12/31/09) (pdf).  In it, the Third Circuit both reaffirmed its previous holdings on the limited scope of a bankruptcy court's "related to" jurisdiction and further held that Code section 105(a) does not expand a bankruptcy court's subject matter jurisdiction beyond its statutory boundaries in 28 U.S.C. § 1334(b) (which grants bankruptcy courts "original but not exclusive jurisdiction of all civil proceedings arising under [the Bankruptcy Code] or arising in or related to a case under [the Bankruptcy Code]").

The Third Circuit's seminal opinion in Pacor, Inc. v. Higgins, 743 F.2d 984 (1984), is the most often cited case on the scope of a bankruptcy court's so-called "related to" jurisdiction under 28 U.S.C. § 1334(b). The "Pacor test," which has been nearly universally adopted by federal Courts of Appeal around the country, provides:

[In] determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.  Thus, the proceeding need not necessarily be against the debtor or against the debtor's property.  An action is related to bankruptcy if the outcome 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 and administration of the bankrupt estate.  Pacor, 743 F.2d 994.

The U.S. Supreme Court, too, looked to Pacor in its first discussion of the scope of a bankruptcy court's "related to" jurisdiction and agreed with Pacor that a bankruptcy court’s "related to" jurisdiction is broad, but "cannot be limitless."  Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995).

The Third Circuit fine-tuned the Pacor test in In re Federal-Mogul Global, Inc., 300 F.3d 368 (3d Cir. 2002), stating that “[t]he test articulated in Pacor for whether a lawsuit could ‘conceivably’ have an effect on the bankruptcy proceeding inquires whether the allegedly related lawsuit would affect the bankruptcy proceeding without the intervention of yet another lawsuit.”  Id. at 382.  Put another way, there's no "related to" jurisdiction over a third-party claim "if there would need to be another lawsuit before the third-party claim could have any impact on the bankruptcy proceedings."  W.R. Grace, 2009 WL 5151089 at *5 (Op. at 15). 

The Third Circuit further refined the boundaries of the Pacor test in In re Combustion Engineering, Inc., 391 F.3d 190, 225 (3d Cir. 2004), when it held that consideration of additional elements like "unity of interest," "shared production," and "shared insurance" among the debtor and its non-debtor affiliates failed to establish "related to" jurisdiction over third party claims against the non-debtor affiliates "when the third party claim did not directly result in liability for the debtor," but only a potential claim for contribution that "would require the intervention of another lawsuit to affect the bankruptcy estate."  Id. at 231-32.  (Op. at 16-17).

In the recently decided W.R. Grace case, the Third Circuit reaffirmed its holdings in Pacor, Federal-Mogul, and Combustion Engineering, and held that an injunction granted in 2001 (shortly after Grace filed for bankruptcy) against  further prosecution of a lawsuit against Grace for injuries caused by exposure to asbestos at a Montana mine over a 37 year period would not be extended to the State of Montana, who had also been sued by the same plaintiffs for negligence in failing to warn them of the asbestos risks at the mine.  The Montana Supreme Court held that the State of Montana in fact owed the plaintiffs a duty of disclosure of potentially adverse health risks, and so remanded the case back to the trial court for a "determination by the fact-finder of whether the State breached its duty to the [plaintiffs], and if so, whether such breach caused the damages claimed by them."  (Op. at 7).  Grace subsequently moved in the Bankruptcy Court to expand the 2001 injunction to include the plaintiffs' now remanded actions against the State of Montana.  The bankruptcy court refused to so extend the injunction, and the Third Circuit affirmed, holding:

In short, our recently reaffirmed precedent dictates that a bankruptcy court lacks subject matter jurisdiction over a third-party action if the only way in which that third-party action could have an impact on the debtor's estate is through the intervention of yet another lawsuit. Here, we are presented with state court actions that have only the potential to give rise to a separate lawsuit seeking indemnification from the debtor. Accordingly, we must affirm the Bankruptcy and District Courts' conclusion that subject matter jurisdiction does not exist for the purpose of expanding the § 105(a) injunction to preclude the Montana Actions.  (Op. at 18).

Significantly, the Third Circuit also rejected an alternative ground for expansion of the bankruptcy court's subject matter jurisdiction on the basis that "a bankruptcy court has subject-matter jurisdiction to adjudicate a motion in an adversary proceeding initiated by a debtor in its own bankruptcy case, regardless of the subject matter of that motion."  (Op. at 21).  Citing Celotex, the Third Circuit flatly rejected this opportunity to expand upon the bankruptcy court's subject-matter jurisdiction, stating:

| Posted By Steve Jakubowski In Code Statutory Interpretation , Recent Case Law Developments | 1 Comments |
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[12/24/09 Update:  Part II - My Father's Reflections on the Holocaust, Pre-War Poland, and a Life Rebuilt from the Ashes]

To most Americans, this month is a reminder of miracles, great and small.  For Christians, Christmas lights are a reminder that "[a]t the moment when the darkness of human society is at its deepest, the Light of the World will come."  For Jews, Chanukah's lights are a reminder of the miracles of creation (light), of Mt. Sinai (where the Torah--likened to light--was delivered), and of the Second Temple's restoration and rededication in 164 BCE.  Chanukah's most conspicuous tradition--the Menorah--provides a simple, yet effective, reminder of the importance of rekindling and rededicating within ourselves the moral values represented by the light of creation (representing our partnership with the Almighty) and the light of the Torah (representing the moral precepts for everyday living).

This year, more than ever, my thoughts turn to two miracles that are very personal to me: those being both my parents' survival from the hell known as the Holocaust.  These thoughts were triggered this year by this recent short film from Richard Bloom and Karen Lynne Bloom that retells, through clips taken from the survivors' oral histories on file at the USC Shoah Foundation library (including my Dad's), the story of the Warsaw Ghetto uprising of Passover, 1943.  So this year, I decided to dedicate two blog posts in remembrance of the miracle of their survival.

This first post features my Mom's oral history, split into four parts (video links embedded at the end of this post):

• Part I - Childhood through the Initial "Judenrein" (1920's-43)

• Part II - Survival as a "Chemist" Through Ravensbruck (1943-44)

• Part III - Survival Through Bergen Belzen Liberation (1944-45)

• Part IV - Rebuilding a Life and Beating the Odds (1945-95)

Long time followers of this blog may remember my Mom's sudden passing in August, 2006 and this post of the eulogy I delivered where I summed up her essence (or Emes) as follows:

The proof of my mother’s greatness is not readily apparent, is it?  She received no awards.  No inscribed silver chalices or platters.  No dinners were sponsored in her honor.  No buildings named after her.  No honorariums established in her name. Seems quite an ordinary life. Yet, when we closely examine her life story, even in a brief eulogy, it resonates with a feeling that somehow, it was “meant to be,” as she often liked to say....

The first chapter, the “Formative Years,” were pastoral; indeed, idyllic.  Her memories are only happy and positive.  And the optimism and independence her parents and grandparents nurtured within her during the enlightened interwar period remained with her to the end, and very much defined the Emes of who she was.  

But those idyllic days passed quickly, and war overtook them, and imprinted within her an indelible mark… that of a survivor.  And to listen to her stories, and few have done so, is something you have to do.  They are stories you have to hear to believe, for there are none others like them.  But let me sum it up this way.  When my mother reached the fork in the road, to quote the famous philosopher Yogi Berra, she took it.  She didn’t turn around, she didn’t freeze.  She didn’t second guess herself and run.  No, she knew when there was a fork in the road, and she took it, wherever it may lead.  And it was by making those tough, smart, spontaneous decisions, by choosing a path and not looking back, when coupled with the ample blessings with which G-d protected her, that her choices were transformed into something that seemed “meant to be.”

In a world of fallen heroes, my Mom's story of survival proves that there's a potential hero in all of us.  And for the millions out there feeling despondent, I hope her story (and my Dad's soon to follow) proves the importance of maintaining dignity and hope in the face of seemingly insurmountable odds.

Happy holidays to all! 

[The inset picture is a fused glass, entitled "Remember—One for Each Million."  It's origin is described in this feature story about The University of Texas at Austin's "forgiveness and resilience study" for the 10th anniversary of the Holocaust Museum Houston.  In it, Professor Roberta Greene studied the lives of 133 survivors and concluded (no surprise here) :

Amazingly, this unique group of older adults—who experienced unprecedented separation and loss during the Holocaust, living through horrors most of us cannot imagine—built new productive lives. They are resilient survivors who were able to move into a better place, raise families, develop careers and contribute to their communities.]

Here are embedded links to each of the four-parts of my Mom's interview:

| Posted By Steve Jakubowski In Personal Notes | 2 Comments |
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Hard to ignore today's bombshell summary disposition by the US Supreme Court today on the Indiana Pension Funds' appeal of the Second Circuit's decision in Chrysler (see earlier discussion of case here).  Clearly, however, the Court's six line summary disposition tossing the 2d Circuit’s decision in Chrysler requires careful thought.  First, here's what the Supreme Court held:

The petition for a writ of certiorari is granted.  The judgment is vacated, and the case is remanded to the United States Court of Appeals for the Second Circuit with instructions to dismiss the appeal as moot.  See United States v. Munsingwear, Inc., 340 U.S. 36 (1950).

One may be tempted (as this esteemed blogger was) to claim that Chrysler remains persuasive authority, but was simply “vacated on other grounds.”  I don’t think that's the case here, however.  For starters, the Supreme Court couldn't have vacated Chrysler on the basis that the matter was moot at the time the case was decided.  After all, the 2d Circuit's original order of 6/5/09 denying the appeal on the merits wasn’t moot at the time of entry since the effectiveness of the bankruptcy court's sale order had been stayed by the 2d Circuit itself until it had a chance to rule on the merits.  Additionally, the effectiveness of the 2d Circuit's judgment itself was stayed by the Supreme Court.  As such, there’s no basis for the Supreme Court now to have vacated Chrysler based on an argument that the matter was moot at the time of the original decision.

Perhaps then, a better reading of today's mysterious "summary disposition" is that the Court found merit in the petition, and hence granted it, and furthermore didn’t much care for the opinion on substantive grounds, so vacated it.  Having done so, however, the Court had nothing left to decide since the matter truly was moot because the sale had closed and couldn't be unwound.

One also may be tempted to say that the Court wasn’t tipping its hand in this way, but if not, then why not simply deny the petition as moot, which it clearly is at this point?  Why take the extra, unnecessary step of vacating the judgment and only then dismissing the appeal as moot?  Also, why cite to Munsingwear if the Court didn't intend to erase the precedential effect of the decision, for there the Court noted:

Our supervisory power over the judgments of the lower federal courts is a broad one.  As already indicated, it is commonly utilized in precisely this situation to prevent a judgment, unreviewable because of mootness, from spawning any legal consequences.  (Citations omitted, emphasis added).

If nothing else, reading the Court's summary disposition today as a spaying of Chrysler to "prevent a ... spawning of any legal consequences" surely neuters any reading of the Court's 2 page per curiam opinion from last June suggesting there wasn't a "fair prospect that a majority of the Court will conclude that the decision below was erroneous."

Given all the speeches, articles, and thought advanced about the significance and game-changing nature of Chrysler, it's amazing how two simple sentences from the highest court in the land can turn the bankruptcy world on its head.

I'd say the slow boat's finally catching some wind!

[Inset is an artist's rendition of the USS Constitution (a/k/a "Old Ironside"), the oldest commissioned naval vessel still afloat today.]

[12/15/09 Update:  Be sure to check out Steve Lubben's Credit Slips post linking to the Alvarez v. Smith case for further insights into the Court's practice of vacating lower court judgments that, by happenstance, are moot.]

© 2009 by Steve Jakubowski

| Posted By Steve Jakubowski In US Supreme Court Cases | 6 Comments |
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One of blogging's many benefits is in meeting people I would not have otherwise met.  Coming off an extended personal--and blogging--vacation, and with the three-week fall cycle in the Jewish Holidays fast approaching (not to mention my appeal brief in GM due next Wednesday and a chunk of other work), I'm thankful that one of the people I've recently met--Yitzhak Greenberg--has offered to author a guest post for the blog.  Yitzhak is associated with the Law Offices of Gabriel Del Virginia in New York City.  His practice is focused on bankruptcy, including the representation of landlords and tenants in bankruptcy.  He previously worked for a prominent New York City bankruptcy boutique and clerked after law school for Bankruptcy Judge Arthur J. Gonzalez, of Chrysler, Enron, and Worldcom fame.  He was selected by Fordham University School of Law, his alma mater, as a Centennial Fellow, where his responsibilities included assisting in the drafting of The Final Report to the Chief Judge of the State of New York: The Commission to Promote Confidence in Judicial Elections (a topic of considerable interest to Retired Justice Sandra Day O'Connor).  He also just authored the lead article for this month's The Bankruptcy Strategist, “File for Chapter 11, Get the First Month’s Rent Free?”

If anyone knows anything about "stub" rent, it's Yitzhak, and I thank him for graciously providing us with his thoughtful analysis of this thorny issue of law in this post, which he entitles: 

In re Sportsman's: The Death Knell for Stub Rent?

| Posted By Steve Jakubowski In Code Statutory Interpretation | 0 Comments |
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With the Second Circuit's Judge Sotomayor soon to ascend to the Supreme Court, bankruptcy lawyers must be disappointed at the complete absence of any questioning of her on bankruptcy issues.  And it's not like there's nothing to talk about!  Only 10 days ago, Judge Gerber felt compelled by the Second Circuit's Chrysler decision to issue this opinion and order permitting "New GM" to walk away from a few hundred million dollars of product liability claims despite the fact that We, the People (via the US Treasury) were paying $90 billion for a company that had a liquidation value of no greater than about $9 billion (on a good day).  Even putting aside the equities of not assuming a de minimus amount of claims (relatively speaking) of people least able to defend themselves from loss, does she really believe--like her colleagues who decided Chrysler--that Bankruptcy Code section 363 lets a debtor sell its assets "free and clear" of in personam products liability claims that could be asserted against the purchaser under state law theories of successor liability?  And if so, why?  And, furthermore, exactly how was due process advanced when New Chrysler walked away from successor products liability claims of people who haven't even been injured yet in an accident?  A letter sent by Senators Reid and Durbin late last month gave me hope that we'd hear these questions asked, but it looks like that's not going to happen.

As for Judge Sotomayor's bankruptcy jurisprudence, Clean Slate's Andy Winchell (here and here) and Texas Bankruptcy Lawyer Steve Sather (here and here) were the first (and last) to canvass her opinions involving bankruptcy issues.  All in all, nothing to complain about, and certainly her decision in Official Comm. of Equity Sec. Holders v. Official Comm. of Unsecured Creditors (In re Adelphia Communs. Corp.), 544 F.3d 420 (2d Cir. 2008) (pdf), affirming dismissal of the equity committee's appeal was a notable one.  There, Bankruptcy Judge Gerber confirmed Adelphia's chapter 11 plan, which stripped the equity committee of standing previously granted to it to prosecute derivative claims and transferred those claims to a litigation trust established under the plan (the first about $6.5 billion of which would go to unsecured creditors until they were paid in full, leaving equity "hopelessly out of the money").  In affirming Judge Gerber's confirmation order (but don't forget to look at Judge Scheindlin's first crack at the appeal), Judge Sotomayor wrote that a court "may withdraw a committee's derivative standing and transfer the management of its claims, even in the absence of that committee's consent, if the court concludes that such a transfer is in the best interests of the bankruptcy estate."  In other words, she wrote, the "Equity Committee's derivative standing under STN [did not] vest it with ownership over its derivative claims."  Curiously, she never addressed the obvious question of whether the appeal was moot because the plan had been substantially consummated.  So maybe there is hope for those concerned that substantial consummation of a plan or sale moots all appeals (especially--as Steve Sather points out--given her having joined in last year's Manville decision that was just reversed on procedural grounds, as discussed here, by the Supreme Court in Travelers v. Bailey).

This is long-winded background to what I've been wanting to write about for a very long time.  And I figured as long as people are giving Judge Sotomayor tips on how to be a better Judge or Justice, I'd offer a tip of my own:

READ THESE BOOKS!

• Kenneth Klee's Bankruptcy and the Supreme Court; and

• Law Prof. Blogger M. Jonathan Hayes's Bankruptcy Jurisprudence from the Supreme Court.

| Posted By Steve Jakubowski In US Supreme Court Cases | 2 Comments |
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