The Bankruptcy Court s Jurisdiction Does Not End Upon Entry of the Confirmation Order

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1 The Bankruptcy Court s Jurisdiction Does Not End Upon Entry of the Confirmation Order Ri c h a r d J. Co r b i The propriety of a bankruptcy court considering issues postconfirmation of a plan of reorganization is not clear from the case law. The Bankruptcy Code (Code) does not specifically define the scope of postconfirmation jurisdiction of the bankruptcy court, and as a result, the bankruptcy courts have developed various methods of determining postconfirmation jurisdiction. 1 This article provides an update of various court decisions interpreting the postconfirmation jurisdiction power of a bankruptcy court in the following cases: (i) derivative creditors committee standing; (ii) releases of nondebtor third parties; (iii) retained causes of action provisions in a plan of reorganization; (iv) postconfirmation resolution of preconfirmation lawsuits; and (v) related to postconfirmation jurisdiction. STATUTORY OVERVIEW Section 1142 of the Code provides little guidance for courts when confronted with postconfirmation jurisdiction issues. Section 1142(b) states: The court may direct the debtor and any other necessary party to execute or deliver or to join in the execution or delivery of any instrument required to effect a transfer of property dealt with by a confirmed plan, and to perform any other act, including the satisfaction of any lien, that is necessary for the consummation of the plan. 2 Likewise, Federal Bankruptcy Rule of Procedure 3020(d) states: Nowithstanding the entry of an order of confirmation, the court may issue any other order necessary to administer the estate. 3 The author is an associate in the Bankruptcy & Restructuring group in the New York City office of Proskauer Rose LLP and may be reached at rcorbi@proskauer.com. The author wishes to thank Professor Richard Lieb of Cooley Godward Kronish LLP of New York City and of the St. John s University School of Law LL.M. in Bankruptcy Program for his guidance. 137

2 138 Norton Journal of Bankruptcy Law and Practice [Vol. 18 # 1] Confirmation of a plan of reorganization, however, does not alter the threshold requirements of jurisdiction of a bankruptcy court. 4 The threshold requirement for jurisdiction is governed by 28 U.S.C.A which provides: (a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11. (b). the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title Judge Learned Hand of the Second Circuit Court of Appeals stated long ago that a reservation of jurisdiction beyond what is requisite to effectuate a plan of reorganization is beyond the power of the reorganization court. 6 The powers reserved by the court upon plan confirmation are limited to only those that are necessary in order to execute the plan of reorganization, not, through the device of retaining jurisdiction, [to] keep a debtor in tutelage and burden the court with future supervision of the reorganized estate. 7 However, recent court decisions demonstrate that some issues require court supervision postconfirmation. RECENT CASES Retained Cause of Action Provisions Recently, in In re United Operating, LLC, the Fifth Circuit Court of Appeals held that because the debtor s plan of reorganization did not specifically retain the claims against the preconfirmation management team of the debtor s estate, the reorganized debtor lacked standing to pursue claims based on the preconfirmation management of the estate s assets and the reorganized debtor also lacked standing to pursue common-law breach of fiduciary claims against the preconfirmation management. 8 Dynasty Oil and Gas survived as a shell corporation after all its assets were liquidated in a Chapter 11 bankruptcy proceeding. 9 In 2004, Dynasty filed a Chapter 11 bankruptcy proceeding and at the time of the Chapter 11 filing, Dynasty owned oil and gas properties that had been out of production. 10 Citizens Bank moved the bankruptcy court to have an operator appointed to bring the oil and gas properties back into production. 11 Wildcat Energy LLC and Wildcat s management were appointed to operate the oil and gas wells of Dynasty. 12 Wildcat was responsible for the operations from April 2004 until the confirmation of

3 Bankruptcy Court Jurisdiction and Entry of Confirmation Order 139 the Plan in November 2004, a total of seven months. 13 The Plan permitted Saber Resources, LLC, another creditor of Dynasty, to purchase all of Dynasty s assets for a lump-sum payment to Citizens totaling $2.5 million. 14 The Plan provided that Dynasty would not be revested with title to assets because Saber was purchasing Dynasty s assets. 15 In March 2006, Dynasty filed a Texas state court action naming Citizens, Wildcat, and Wildcat s management as defendants in an action alleging failure to complete necessary work on wells, completing unnecessary work on other wells, and misrepresentation. 16 The bankruptcy court concluded that the claims were barred by resolution of a prior lawsuit brought by the Creditors Committee against Citizens and Wildcat. 17 The district court affirmed the bankruptcy court s decision, and Dynasty appealed to the Fifth Circuit Court of Appeals. 18 The Fifth Circuit addressed the issue of whether Dynasty, the reorganized debtor, had standing to pursue claims based on the preconfirmation management of the estate s assets by Citizens and Wildcat. 19 The Fifth Circuit began by explaining that, during the Chapter 11 proceedings, Dynasty, as debtor-in-possession, had the power to pursue claims on behalf of the estate, but upon confirmation of the Plan, the estate ceased to exist, and Dynasty was no longer the debtor-in-possession and, as a result, lost its ability to pursue those claims against the management of Citizens and Wildcat. 20 The Fifth Circuit then explained that a debtor may preserve standing to pursue claims belonging to the estate by retaining such claims in the plan of reorganization. 21 Following confirmation of the plan of reorganization, the debtor s ability to pursue a claim previously held by the estate is limited to that which is specifically and unequivocally retained in the plan of reorganization. 22 If a debtor has not made an effective reservation, the debtor has no standing to pursue a claim that the estate owned before it was dissolved. This is a logical consequence of the nature of a bankruptcy, which is designed primarily to secure prompt, effective administration and settlement of all debtor s assets and liabilities within a limited time. 23 Dynasty, according to the Fifth Circuit, did not preserve its right to pursue the claims against Citizens and Wildcat. 24 The Fifth Circuit held that the Plan s blanket reservation of all claims arising under the Code and the specific types of claims under certain Code provisions were not sufficient to preserve the common-law breach of fiduciary duty claims against Citizens and Wildcat. 25 The Fifth Circuit concluded that if Dynasty had wanted to bring a postconfirmation action against Citizen and Wildcat for maladministration of the debtor s estate, it was required to

4 140 Norton Journal of Bankruptcy Law and Practice [Vol. 18 # 1] specifically preserve such claims in the plan of reorganization. 26 As a result, Dynasty lacked standing to pursue such claims. 27 Derivative Creditors Committee Standing The Second Circuit Court of Appeals in In re Adelphia Communications, Corp, withdrew, without the consent of the Equity Committee, the Equity Committee s derivative standing and transfer of the management of its claims because the Second Circuit concluded that it was in the best interest of the estate. 28 In the Chapter 11 proceedings of Adelphia (Debtors), the U.S. Trustee for the Southern District of New York appointed the Equity Committee to protect the equity holder interests because, at the early stages of the proceedings, the ultimate value of the Debtors was uncertain. 29 After the Debtors rejected a demand to bring claims against the Debtors lenders and investment banks, the Equity Committee presented a motion before the bankruptcy court for standing to assert those lender claims on behalf of the Debtors. 30 In August 2005, the bankruptcy court granted derivative standing to the Equity Committee to bring the estate claims against the lenders and investment banks because the prosecution of such claims was in the best interest of the estate. 31 On January 5, 2007, the bankruptcy court confirmed the Debtors plan of reorganization (Plan). 32 The Plan provided for transfer of estate claims, including those of the Debtors asserted by the Equity Committee, to a litigation trust managed by five trustees appointed by the Official Committee of Unsecured Creditors. 33 The bankruptcy court rejected the Equity Committee s objection to the transfer of the derivative claims to the litigation trust because the Equity Committee was hopelessly out of the money and that the Equity Committee s time has come and gone. 34 The district court dismissed the Equity Committee s appeal. 35 The Second Circuit held that a court may withdraw a committee s derivative standing and transfer the management of its claims, even in the absence of the committee s consent, if the court concludes that such transfer is in the best interest of the estate. 36 The Second Circuit provided an overview of the case law granting derivative standing to creditors. 37 After a review of the derivative standing case law, the Second Circuit explained that the bankruptcy court not only had the authority to confer derivative standing upon the Equity Committee, it also had the authority to withdraw that standing when it concluded that the Equity Committee s role was no longer in the best interests of the estate, and to transfer the derivative claims to a litigation trust. 38 Moreover, the Second Circuit noted that it would be contrary to the Second Circuit s precedent to hold that the bankruptcy court s grant of derivative stand-

5 Bankruptcy Court Jurisdiction and Entry of Confirmation Order 141 ing vested the Equity Committee with a veto over both the bankruptcy court and the debtor-in-possession. 39 Next, the Second Circuit examined the issue of whether the bankruptcy court abused its discretion in transferring the Equity Committee s claims to a litigation trust. 40 Because the Plan required the trustees of the Creditors Committee to maximize the value of the transferred causes of action by litigation or settlement and because the trustees are liable to the interest holders of the litigation trust, the Second Circuit concluded that it had no reason to second-guess the bankruptcy court because the Equity Committee did not put forth any evidence suggesting the trustees breached their fiduciary duties to the interest holders of the litigation trust. 41 The Second Circuit, in addition, held that the bankruptcy court conducted a reasonable cost-benefit analysis of the Equity Committee s management of the estate claims and concluded that the costs of any litigation by the Equity Committee were far greater than the likelihood that the equity holders would recover any money because of the significant amount of money owed to the more senior creditors. 42 The prospect of expensive litigation by the Equity Committee for little recovery was a reasonable basis for the bankruptcy court to transfer the claims to the litigation trust and therefore, not an abuse of discretion. 43 The Equity Committee s final argument challenging the bankruptcy court s confirmation order was to no avail. 44 The Equity Committee argued that the Plan s litigation trust should be found invalid because it amounted to de facto substantive consolidation. 45 The Second Circuit affirmed the district court s ruling that the Equity Committee s argument was equitably moot because effective relief could not be granted without unwinding the Plan. 46 For all the foregoing reasons, the Second Circuit dismissed the Equity Committee s appeal. Releases of Nondebtor Third Parties The Second Circuit Court of Appeals, in In re Johns-Manville Corp., held that the bankruptcy court that presided over the Chapter 11 proceedings of the asbestos manufacturer, Johns-Manville (Manville), did not have jurisdiction, on request for clarification of orders that it entered confirming the debtor s plan of reorganization, approving settlements between the debtor and the insurers that funded the plan, and enjoining causes of action against insurers, to enjoin third-party claims that neither sought to recover insurance proceeds nor relied on insurance proceeds for recovery, but sought to recover from nondebtor insurers for its own alleged misconduct. 47

6 142 Norton Journal of Bankruptcy Law and Practice [Vol. 18 # 1] In the Manville Chapter 11, the insurance policies were the estate s most valuable asset. 48 Manville settled with the insurers for $770 million. 49 Travelers, Manville s main insurer, paid $80 million into the bankruptcy estate in exchange for a release of Manville related claims. 50 The Travelers settlement was based on upon the bankruptcy court issuing an injunction that barred lawsuits against Manville s insurers and directed any litigation by potential claimants against the Manville Personal Injury Settlement Trust (Trust). 51 The injunction was contained in the 1986 Confirmation Order and the 1986 Insurance Settlement Order, and channeled to the Trust all claims that were based upon, arose out of, or were related to Manville s insurance policies. 52 The Confirmation Order also enjoined all persons from commencing any action against the insurance companies in the Insurance Settlement Order for the purpose of directly or indirectly, collecting on any claim related to any asbestos obligation of Manville. 53 Despite the 1986 orders, various plaintiffs groups filed direct action lawsuits against Travelers and other insurers in many states under various legal theories. 54 The lawsuits fell into two categories: (i) suits based on statutory regulation of insurance practices (statutory claims); and (ii) suits based on common law (common-law claims). 55 The statutory claims were brought by individuals who were dissatisfied with the settlements received following negotiations with Travelers acting on behalf of Manville or who refused to file a personal injury claim against Manville because Travelers allegedly suppressed information about asbestos hazards. 56 The plaintiffs argued that the suppression of information by Travelers amounted to a violation of unfair insurance trade and settlement practices. 57 These theories were not accepted by any court. 58 In June 2002, Travelers moved the bankruptcy court to enjoin the statutory and common-law actions based on the 1986 orders. 59 The bankruptcy referred the matter to mediation where the claims were settled for a total of $500 million and were conditioned upon entry of an order by the court clarifying that the direct action lawsuits were prohibited by the 1986 orders. 60 The settlement of the statutory claims and commonlaw claims required that the plaintiffs release Travelers from further liability separate and apart from the bankruptcy court injunctions. 61 In August 2004, the bankruptcy court approved the settlement agreement and entered a clarifying order specifying that the direct action suits against Travelers were barred by the 1986 orders. 62 The bankruptcy court determined that Travelers knew everything about asbestos based on its relationship with Manville and that the direct action claims were based on acts or omissions by Travelers arising from or related to the insurance provided to Manville and therefore, claims against Travelers based on acts

7 Bankruptcy Court Jurisdiction and Entry of Confirmation Order 143 or omissions arise out of or are related to the insurance policies. 63 The bankruptcy court relied on a prior Second Circuit Manville decision in which the Second Circuit determined that the 1986 orders were jurisdictionally sound as long as they protected the Manville insurance contracts, the most valuable asset of the estate. 64 The bankruptcy court viewed that the direct action claims violated the 1986 orders. 65 The district court affirmed in part the bankruptcy court s finding of fact and conclusions of law. The district court explained that the direct action claims were creatively crafted complaints to indirectly collect against the Manville insurance policies and barring the claims was a proper exercise of jurisdiction by the bankruptcy court. 66 The district court, however, explained that there were jurisdictional limits on the scope of protecting Travelers from future direct action claims. 67 The Second Circuit recounted the district court s jurisdictional view: the Bankruptcy court has no jurisdiction to bar a suit alleging tortuous conduct by Travelers on behalf of a non-manville insured, conduct that is unrelated to Manville and not based on any knowledge of asbestos gained from Manville, and that did not involve Manville asbestos or asbestos products. 68 The Second Circuit was presented with an issue of whether the bankruptcy court had jurisdiction over the disputed statutory and commonlaw claims. 69 The bankruptcy court had continuing jurisdiction to interpret and enforce its own 1986 orders, but the clarification power, according to the Second Circuit, could not be used as a predicate to enjoin claims against insurers over which it had no jurisdiction. 70 The Second Circuit recounted the district court s jurisdictional analysis. First, the district court found that the direct action lawsuits were covered by the 1986 orders because they were a reasonable interpretation of the 1986 orders because the orders were meant to provide a global finality to Travelers in exchange for its contribution to the Manville estate. 71 The district court next considered whether the 1986 orders were a proper exercise of jurisdiction over nondebtor parties. 72 Relying on a prior Second Circuit Manville decision, the district court considered the application of the 1986 orders to direct action claims filed against Travelers in various states and concluded that the bankruptcy court had jurisdiction over such claims because the lawsuits sought direct recovery from state statutes from Travelers insurance policies that would reduce the estate s recovery from those policies, thus affecting the property of the estate. 73 Therefore, the district court concluded that the bankruptcy court had subject matter jurisdiction to enjoin these claims. 74 The Second Circuit noted that the district court affirmed the bankruptcy court s reliance on 524(g) of the Code and its legislative history that explicitly

8 144 Norton Journal of Bankruptcy Law and Practice [Vol. 18 # 1] authorizes a bankruptcy court to enjoin derivative claims against third party insurers. 75 The district court agreed with the bankruptcy court s interpretation of 524(g) as congressional authority that the bankruptcy court s jurisdiction extends to claims against third party insurers. 76 The district court held that the direct action lawsuits sought indirect recovery of proceeds of the insurance policies due to personal injuries caused by Manville. 77 The district court s determination came in reliance on the bankruptcy court s factual determination that Travelers learned of the asbestos risks from its defense of Manville in asbestos claims and failed to disclose or suppressed this knowledge. 78 The Second Circuit explained that the jurisdictional analysis by the lower courts failed. 79 The cases relied upon by the bankruptcy and district court differed from the statutory and common-law claims at issue. 80 The statutory and common-law lawsuits sought damages from Travelers that were unrelated to the insurance policy proceeds, unlike the lawsuits in the cases relied upon by the lower courts where the plaintiffs sought compensation for the tortuous wrongs to be paid out of the proceeds of the proceeds of the Manville insurance policies. 81 Here, the plaintiffs sought to recover directly from Travelers, a nondebtor insurer, for its own alleged wrongdoing. 82 The Second Circuit continued to explain that the fact that the case involved a clarification of the bankruptcy court s prior order did not alter the jurisdictional prerequisites needed to enjoin third-party nondebtor claims. 83 The plaintiffs sought to recover from a debtor s insurers for the insurer s own independent wrongdoing. 84 The plaintiffs were pursuing the assets of Travelers. 85 The plaintiffs did not raise a claim against Manville s insurance coverage, an asset of the bankruptcy estate, and the plaintiffs actions did not affect the bankruptcy estate. 86 As a result, the bankruptcy court had no jurisdiction to enjoin the claims against Travelers. 87 Moreover, the Second Circuit proceeded to explain that global finality of a case is only as global as the bankruptcy court s jurisdiction not its good intentions. 88 Even though the bankruptcy court could enter the 1986 orders barring claims arising out of and related to the Manville insurance policies, the bankruptcy court could not enjoin claims against a third-party nondebtor solely because of the third-party s financial contribution to the bankruptcy estate. 89 The Second Circuit explained that the parties cannot create subject matter jurisdiction in a plan of reorganization if the court lacks such jurisdiction. 90 Rather, a bankruptcy court only has jurisdiction to enjoin third-party non-debtor claims that directly affect the res of the bankruptcy estate. 91 The 1986 orders must be read to conform with the court s jurisdiction over the res of the estate, not with dealing with disputes that should be resolved in state court. 92

9 Bankruptcy Court Jurisdiction and Entry of Confirmation Order 145 Lastly, the Second Circuit explained that the lower court s reliance on 524(g) channeling injunction was misplaced because 524 is limited to cases where a third party is derivatively liable to the debtor for claims brought against the debtor. 93 Here, the claims were not derivative of Manville s liability, but instead, the claims sought to recover from Travelers for its own misconduct. 94 The channeling injunction of 524 was not intended to reach nonderivative claims and because the claims here had no effect on the res of the Manville estate, they were beyond the reach of 524(g). 95 Based on the foregoing reasons, the bankruptcy court lacked jurisdiction to enjoin claims against Travelers that were based on Travelers own alleged misconduct and were unrelated to Manville s insurance policy, policy proceeds, and the res of the estate. 96 Postconfirmation Resolution of Preconfirmation Disputes The Bankruptcy Court for the Southern District of Texas recently held, in In re Blast Energy Services, Inc., that the debtor s cause of action was one which the bankruptcy court could exercise continuing postconfirmation jurisdiction. 97 The parties involved in the dispute were Eagle Domestic Drilling Operations, L.L.C. (EDDO), Eagle Drilling, L.L.C. (Eagle), and Hallwood Petroleum (Hallwood). 98 Hallwood and Eagle entered into two IADC drilling contracts involving oil and gas wells in Oklahoma (the Contracts). 99 On August 25, 2006, Eagle assigned all of the rights under the Contracts to EDDO for $750,000, except that Eagle retained title to the accounts receivable existing as of August 25, On January 19, 2007, EDDO filed for Chapter 11 bankruptcy protection, and on February 26, 2008, the bankruptcy court confirmed EDDO s plan of reorganization. 101 Several lawsuits were filed during the Chapter 11 proceedings. First, a lawsuit between EDDO and Eagle over the title to oil rigs and equipment was settled on May 11, Second, prior to confirmation of the plan of reorganization, EDDO and Hallwood were involved in a dispute concerning Hallwood s termination of the Contracts and the amount owed to EDDO as a result of the termination of the contracts. 103 The lawsuit was still pending as of the date that the bankruptcy court confirmed the plan of reorganization. 104 EDDO s disclosure statement represented to the creditors that, as part of the plan of reorganization, EDDO would prosecute the lawsuit against Hallwood in order to fund a source of recovery for the creditors. 105 After the confirmation of the plan of reorganization, EDDO prosecuted the lawsuit against Hallwood, which resulted in a settlement in which Hallwood would make a $2 million payment to EDDO in exchange for a release. 106

10 146 Norton Journal of Bankruptcy Law and Practice [Vol. 18 # 1] One week after the bankruptcy court approved the Hallwood ED- DO settlement, Eagle itself filed for Chapter 11 in the Western District of Oklahoma. 107 Eagle motioned to the court to file an amended complaint against Hallwood alleging that Hallwood owed Eagle money due to Hallwood s termination of the Contracts. 108 Hallwood then informed EDDO that it did not want to pay them $2 million if the Eagle owned the claim for the termination of the Contracts, thus rendering the release granted to them by EDDO meaningless. 109 On May 18, 2008, EDDO filed a contempt motion against Eagle asserting that Eagle was in contempt of the court order approving the Eagle settlement, the court order approving the Hallwood settlement, and the court order confirming the plan of reorganization. 110 EDDO made several allegations against Eagle, most notable among them was that the bankruptcy court s confirmation of the plan of reorganization revested title to the claim in reorganized EDDO and that EDDO had the right to prosecute and settle the claim with Hallwood. 111 EDDO argued that because Eagle did not object to EDDO s scheduling of the claim against Hallwood, the disclosure statement and plan of reorganization is estopped from taking the position that it owns that claim against Hallwood and the termination of the Contracts. 112 Eagle responded to EDDO s motion by arguing that the bankruptcy court has no jurisdiction because the claim that Eagle sought to file against Hallwood did not involve the debtor, EDDO. 113 The court first addressed the jurisdiction issues presented by the parties. 114 The dispute arose postconfirmation since the plan was confirmed on February 26, 2008, and EDDO filed their contempt motion on May 13, The bankruptcy court explained that the bankruptcy court has limited postconfirmation jurisdiction when: (i) the claims principally deal with postconfirmation relations between the parties; (ii) there is no antagonism or claim pending between the parties; and (iii) no facts or law deriving from the plan of reorganization are necessary to the claim. 116 In addition, bankruptcy courts retain jurisdiction over preconfirmation claims based on preconfirmation activities even if the dispute is tried postconfirmation. 117 Here, the claims dealt with preconfirmation relations between EDDO and Hallwood as well as Eagle and Hallwood. 118 The Eagle settlement, entered into and approved preconfirmation, involved claims against Hallwood; and therefore, the dispute between EDDO and Eagle is concerned with preconfirmation activities between EDDO and Eagle. 119 There was antagonism between EDDO and Eagle preconfirmation while they were prosecuting claims against one another. 120 In addition, there was antagonism between EDDO and Hallwood as well as

11 Bankruptcy Court Jurisdiction and Entry of Confirmation Order 147 Eagle and Hallwood preconfirmation. 121 As a result of the foregoing, the court had jurisdiction over the contempt motion. 122 In addition, the Fifth Circuit Court of Appeals applied a six-factor test to determine whether a bankruptcy court has postconfirmation jurisdiction over a matter: (1) when the claim at issue arose; (2) what provisions in the confirmed plan exist for resolving disputes and whether there are provisions in the plan retaining jurisdiction for trying these suits; (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. 123 The first factor weighed in favor of finding that the court has jurisdiction over the matter. [W]hen the claim arises pre-petition, the bankruptcy court retains subject matter jurisdiction particularly when the claim has been incorporated into the reorganization plan. 124 In this case, EDDO s claim and Eagle s claim relating to the termination of the Contracts arose prepetition and EDDO s claim against Hallwood was listed in the disclosure statement as well as the plan of reorganization. 125 The second factor also weighed in favor of finding that the court has jurisdiction over the matter. Although a Plan cannot, by itself, confer subject matter jurisdiction, some courts find that a plan which fails to retain subject matter jurisdiction may leave it lacking. 126 The plan of reorganization defined the Hallwood litigation to include the prosecution or settlement of the Hallwood claim involving the oil and gas contracts. 127 Moreover, the plan of reorganization provided that the court would retain jurisdiction to enforce the terms of the plan which included the Eagle and Hallwood settlement agreements. 128 Therefore, the plan provisions weighed in favor of the court exercising jurisdiction. The third factor, substantial consummation of the plan weighed against the court exercising jurisdiction. Pursuant to 1102(c), substantial consummation of the plan has occurred because property of the estate revested to the reorganized debtor, the reorganized debtor assumed management of the revested property, and the reorganized debtor made payments to creditors. 129 Although substantial consummation of the plan occurred, Eagle s lawsuit against Hallwood in the Oklahoma bankruptcy court would threaten the complete settlement payments by Hallwood to EDDO, the reorganized debtor, which in turn, would leave EDDO with insufficient funds to make payments on the remaining unpaid Chapter 11 claims. 130 The court held that even though the plan had been substantially consummated, the risk that other creditors would not be paid was a factor that the court took into account in determining whether it had postconfirmation jurisdiction. 131

12 148 Norton Journal of Bankruptcy Law and Practice [Vol. 18 # 1] The fourth factor weighed in favor of the court having jurisdiction. The relief requested by EDDO was to have the court clarify the terms of the plan of reorganization and the two settlements that formed a basis for the terms of the plan. 132 EDDO was not attempting to reinstate the bankruptcy court protection to avoid postconfirmation hardship; rather, they wanted the court to clarify EDDO s ownership of a claim against Hallwood, which served as a main component of the plan of reorganization and source of recovery for creditors. 133 The fifth factor weighed in favor of the court granting jurisdiction. The fifth factor states that because state laws have not yet been litigated in state court, the state court is a more appropriate forum than a bankruptcy court to determine the matter. 134 Although state law applies to the Contracts and who owns the damages to the accounts receivables, the bankruptcy court already approved the settlement between EDDO and Hallwood pursuant to Bankruptcy Rule 9019 and related bankruptcy laws. Because the court held hearings on EDDO s plan of reorganization and disclosure statement, both of which discuss the contract claims against Hallwood, the bankruptcy court is best suited to interpret the terms and conditions of the plan, the Hallwood settlement, prior court orders and the Contracts. 135 The sixth and final factor weighed in favor of the bankruptcy court having jurisdiction. The court explained that permitting Eagle to have the Oklahoma bankruptcy court interpret a settlement between EDDO and Eagle that was litigated and ruled upon by the Texas bankruptcy court would constitute egregious forum shopping. 136 The court continued to reason that if it permitted Eagle to assert a claim against Hallwood in Oklahoma, Eagle would be able to thwart the Texas bankruptcy court s settlement agreement approval and related orders. 137 Therefore, the court had jurisdiction to hear EDDO s contempt motion. 138 Related To Postconfirmation Jurisdiction In In re Resorts Intern., Inc., the Third Circuit Court of Appeals first identified the limits of postconfirmation jurisdiction. 139 In Resorts, the debtor s plan of reorganization provided for the assignment of some of the debtor s litigation claims to a litigation trust. 140 The trustee sued Price Waterhouse, the trust accountants, alleging that the accountant negligently advised that certain accrued interest in on the litigation proceeds were to be distributed to the debtor and not the trust beneficiaries. 141 The accrued interest was the subject of a dispute that the bankruptcy court decided in favor in part to the debtor and in favor in part to the trust. 142 The trustee alleged that to the extent the bankruptcy court approved the debtor s claim to the interest; it relied on Price Waterhouse s audit re-

13 Bankruptcy Court Jurisdiction and Entry of Confirmation Order 149 ports, so that the errors injured the trust. 143 The trustee further argued that even though the trust partially prevailed, the trust incurred unnecessary litigation costs to its detriment. 144 The trustee sought disgorgement of fees and damages of at least $500, The trustee relied on the plan of reorganization s retention of jurisdiction provision in which the bankruptcy court retained exclusive jurisdiction over the trust. 146 The Third Circuit held that postconfirmation jurisdiction exists where there is a close nexus to the bankruptcy plan or proceedings, as when a matter affects the integration, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement, retention of post-confirmation bankruptcy court jurisdiction is normally appropriate. 147 In Resorts, the Third Circuit held that the proceedings lacked a close nexus to the bankruptcy plan and the proceedings affected matters collateral to the bankruptcy process. 148 The resolution of the malpractice claims against Price Waterhouse would not affect the estate; rather, the resolution would only have an incidental effect on the reorganized debtor. 149 The Third Circuit continued that the malpractice claims would not interfere with the plan of reorganization and although it would affect former creditors as trust beneficiaries, those creditors no longer have a close nexus to the bankruptcy proceedings because they exchanged their creditor in order to obtain rights to the litigation trust claims. 150 Therefore, the malpractice claims did not have a close nexus to be within the bankruptcy court s related to postconfirmation jurisdiction. 151 The Third Circuit, moreover, continued to explain that resolution of the malpractice claims against Price Waterhouse would not require court interpretation of the plan of reorganization or the litigation trust agreement contained in the plan. 152 The malpractice claims were ordinary professional negligence and breach of contract claims arising under state law and although the plan and trust provided the context of the case, it was insufficient to confer jurisdiction over the matter. 153 Most importantly, the Third Circuit reasoned that if the mere possibility of gain or loss of trust assets sufficed to confer bankruptcy court jurisdiction, any lawsuit involving a continuing trust would fall under the related to grant. Such a result would widen the scope of bankruptcy court jurisdiction beyond what Congress intended for non-article III bankruptcy courts. 154 Later, the Third Circuit clarified the close nexus test it articulated in Resorts in In re Seven Fields Development Corp., 155 where the Third Circuit held that the close nexus test applies in all disputes raised postconfirmation, regardless of when the complaint of conduct occurred. 156 In Seven Fields, the debtors plan consisted of the develop-

14 150 Norton Journal of Bankruptcy Law and Practice [Vol. 18 # 1] ment of 600 acres of land in Seven Fields, Pennsylvania. 157 The debtors became delinquent on payments to investors, which caused the debtors to oversell shares to maintain promised payments. 158 As a result of this overselling of shares, the debtors filed Chapter 11. Prior to the debtors bankruptcy, they employed Ernst & Young to review their financial records and prepare the required financial schedules in the bankruptcy proceedings. 159 During the bankruptcy proceedings, the bankruptcy court found the debtors to be insolvent and confirmed an amended plan of reorganization based on the information that Ernst & Young provided to the bankruptcy court. 160 Under the plan of reorganization, the debtors were merged into a successor entity, Seven Fields Development Corporation (Seven Fields), and their principal assets were located in Seven Fields, Pennsylvania. 161 Under the plan, all of the secured and trade claims were to be paid, but the investor class of unsecured creditors was to receive common stock in Seven Fields at par value equal to 5% of their allowed claims with the remaining 95% classified as unsecured, nondischargeable debt. 162 The investors voted to accept the plan. 163 After confirmation of the plan, Seven Fields liquidated its assets but did not pay the allowed claims of the investors in full during the liquidation process. 164 The shareholders of Seven Fields subsequently sued Ernst & Young in state court alleging: (i) professional negligence; (ii) fraud and deceit; and (iii) negligent misrepresentation. 165 Ernst & Young removed the case to the bankruptcy court where the bankruptcy court asserted that it had subject matter jurisdiction to rule on the merits of the case and subsequently dismissed the case for failure to state a claim because the investor claims were shareholder derivative claims that could only be asserted through a shareholder derivative lawsuit, and the bankruptcy court found that it should dismiss the case on grounds of res judicata, collateral estoppel, and judicial estoppel because the bankruptcy court had previously declared the debtors insolvent in the confirmation proceedings. 166 The district court affirmed, and the investors appealed to the Third Circuit. 167 The investors argued that the close nexus test should apply when the action is commenced postconfirmation no matter when the underlying conduct complained occurred. 168 The Third Circuit affirmed the lower court decisions, holding that the action was a core proceeding and the complained of conduct arose in the bankruptcy proceedings, so, as a result, the close nexus did not apply. 169 [A] malpractice action against an accountant for misconduct during the bankruptcy on which the bankruptcy judge relied in con-

15 Bankruptcy Court Jurisdiction and Entry of Confirmation Order 151 firming the plan of reorganization, and in reliance on which the bankruptcy judge approved the fees to the accountants, and on which appellants representatives relied to their detriment in selling the assets to pay their claims, in a manner that contravenes the terms of the reorganization plan, constitutes a core proceeding which is subject to federal jurisdiction and the final adjudicative authority of the bankruptcy court. 170 The Third Circuit proceeded to clarify the Resorts decision by explaining that the court was satisfied that the close nexus test is applicable to related to jurisdiction over any claim or cause of action filed post-confirmation, regardless of when the conduct giving rise to the claim or cause of action occurred. 171 The Third Circuit noted that in Resorts, it did not indicate that the test should be confined to situations in which the conduct giving rise to the complaint occurred postconfirmation. 172 The Third Circuit concluded that limiting the close nexus test to cases involving only post-confirmation conduct would be inconsistent with [its] reasoning to depart from Pacor in Resorts. 173 The Third Circuit explained that [t]he time when the conduct raised in the post-confirmation complaint occurred is of no consequence in this analysis as regardless of whether the conduct was post-confirmation or pre-confirmation, there would not be an estate at the post-confirmation stage. 174 Therefore, the close nexus test applies in all disputes raised postconfirmation, regardless of when the alleged conduct occurred. 175 CONCLUSION These cases illustrate that a bankruptcy court does not always lose its authority to decide matters postconfirmation. These issues will continue to be addressed by courts until the Code is amended to address such postconfirmation matters. NOTES 1. See Bruce W. Akerly & Christopher J. Ozburrn, The Impact of Confirmation and Postconfirmation Remedies: A Practical Guide, 3 J. Bankr. L. & Prac. 551, 573 (September/ October 1994). 2. See 11 U.S.C.A. 1142(b). 3. See Fed. R. Bankr. P. 3020(d) (2008). 4. See In re Polar Molecular Corp., 195 B.R. 548, 552, 29 Bankr. Ct. Dec. (CRR) 77 (Bankr. D. Mass. 1996). 5. See 28 U.S.C.A. 1334(a) to (b). 6. See Reese v. Beacon Hotel Corp., 149 F.2d 610, 611 (C.C.A. 2d Cir. 1945). See also, Towers Hotel Corp. v. LaFayette Nat. Bank of Brooklyn in N.Y., 148 F.2d 145, 148 (C.C.A. 2d Cir. 1945); Prudence-Bonds Corp. v. City Bank Farmers Trust Co., 186 F.2d 525, 528 (2d Cir. 1951). 7. See Towers Hotel, 148 F.2d at 148.

16 152 Norton Journal of Bankruptcy Law and Practice [Vol. 18 # 1] 8. See In re United Operating, LLC, 540 F.3d 351, , 50 Bankr. Ct. Dec. (CRR) 100, Bankr. L. Rep. (CCH) P (5th Cir. 2008). 9. See United Operating, 540 F.3d at United Operating, 540 F.3d at United Operating, 540 F.3d at United Operating, 540 F.3d at United Operating, 540 F.3d at United Operating, 540 F.3d at United Operating, 540 F.3d at United Operating, 540 F.3d at United Operating, 540 F.3d at United Operating, 540 F.3d at United Operating, 540 F.3d at United Operating, 540 F.3d at United Operating, 540 F.3d at 355 (citing 11 U.S.C. 1123(b)(3)(B) (2008)). 22. United Operating, 540 F.3d at 355 (citations omitted). 23. United Operating, 540 F.3d at 355 (citations omitted). 24. United Operating, 540 F.3d at United Operating, 540 F.3d at United Operating, 540 F.3d at United Operating, 540 F.3d at See In re Adelphia Communications Corp., 544 F.3d 420, 423, 425, 50 Bankr. Ct. Dec. (CRR) 166, Bankr. L. Rep. (CCH) P (2d Cir. 2008). 29. Adelphia, 544 F.3d at Adelphia, 544 F.3d at Adelphia, 544 F.3d at Adelphia, 544 F.3d at Adelphia, 544 F.3d at Adelphia, 544 F.3d at Adelphia, 544 F.3d at Adelphia, 544 F.3d at Adelphia, 544 F.3d at Adelphia, 544 F.3d at Adelphia, 544 F.3d at Adelphia, 544 F.3d at Adelphia, 544 F.3d at Adelphia, 544 F.3d at Adelphia, 544 F.3d at Adelphia, 544 F.3d at Adelphia, 544 F.3d at 426 (italics in original). 46. Adelphia, 544 F.3d at 426 (citations omitted). 47. In re Johns-Manville Corp., 517 F.3d 52, 49 Bankr. Ct. Dec. (CRR) 144, Bankr. L. Rep. (CCH) P (2d Cir. 2008), cert. granted, 2008 WL (U.S. 2008) and cert. granted, 2008 WL (U.S. 2008). 48. Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at 57.

17 Bankruptcy Court Jurisdiction and Entry of Confirmation Order Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at 60 (citing In re Johns-Manville Corp., 340 B.R. 49, 65 (S.D. N.Y. 2006), order vacated, 517 F.3d 52, 49 Bankr. Ct. Dec. (CRR) 144, Bankr. L. Rep. (CCH) P (2d Cir. 2008), cert. granted, 2008 WL (U.S. 2008) and cert. granted, 2008 WL (U.S. 2008)) 68. Johns-Manville, 517 F.3d at 60 (quoting citing In re Johns-Manville Corp., 340 B.R. 49, 65 (S.D. N.Y. 2006), order vacated, 517 F.3d 52, 49 Bankr. Ct. Dec. (CRR) 144, Bankr. L. Rep. (CCH) P (2d Cir. 2008), cert. granted, 2008 WL (U.S. 2008) and cert. granted, 2008 WL (U.S. 2008)). 69. Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at 61 (citations omitted). 77. Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at 63 (citations omitted). 82. Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at 66 (relying on In re Combustion Eng g., Inc., 391 F.3d 190, 228 (3d Cir. 2004)). 91. Johns-Manville, 517 F.3d at 66.

18 154 Norton Journal of Bankruptcy Law and Practice [Vol. 18 # 1] 92. Johns-Manville, 517 F.3d at 67 (citations omitted). 93. Johns-Manville, 517 F.3d at 68 (citations omitted). 94. Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at Johns-Manville, 517 F.3d at In re Blast Energy Services, Inc., 396 B.R. 676, 50 Bankr. Ct. Dec. (CRR) 175 (Bankr. S.D. Tex. 2008). 98. Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at 684. Although the court addressed the merits of the parties, this article focuses on postconfirmation jurisdiction and will only address the postconfirmation jurisdiction issues presented in the case Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at 684 (relying on In re Craig s Stores of Texas, Inc., 266 F.3d 388, 390-1, 38 Bankr. Ct. Dec. (CRR) 146, Bankr. L. Rep. (CCH) P (5th Cir. 2001)) Blast Energy, 396 B.R. at 684 (citations omitted) Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at 685 (citations omitted) Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at 686 (citing In re Coho Energy, Inc., 309 B.R. 217, 220 n.4, 42 Bankr. Ct. Dec. (CRR) 207 (Bankr. N.D. Tex. 2004)) Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at 687.

19 Bankruptcy Court Jurisdiction and Entry of Confirmation Order Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at Blast Energy, 396 B.R. at In re Resorts Intern., Inc., 372 F.3d 154, 43 Bankr. Ct. Dec. (CRR) 46 (3d Cir. 2004) Resorts, 372 F.3d at Resorts, 372 F.3d at Resorts, 372 F.3d at Resorts, 372 F.3d at Resorts, 372 F.3d at Resorts, 372 F.3d at Resorts, 372 F.3d at Resorts, 372 F.3d at Resorts, 372 F.3d at Resorts, 372 F.3d at Resorts, 372 F.3d at Resorts, 372 F.3d at Resorts, 372 F.3d at Resorts, 372 F.3d at Resorts, 372 F.3d at In re Seven Fields Development Corp., 505 F.3d 237, 48 Bankr. Ct. Dec. (CRR) 276, Bankr. L. Rep. (CCH) P (3d Cir. 2007) Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at Seven Fields, 505 F.3d Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at Seven Fields, 505 F.3d at 265.