The following is a case update written by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, analyzing a recent decision of interest:

SUMMARY

In Mesabi Metallics Co. LLC v. B. Riley FBR, Inc. (In re Essar Steel Minnesota LLC), 2020 WL 3574743 (D. Del. 2020) (“Essar Steel”), the United States District Court for the District of Delaware (the “District Court”), certified a direct appeal from the bankruptcy court to the Third Circuit Court of Appeals (the “Third Circuit”) to resolve whether the bankruptcy court had subject matter jurisdiction over a lawsuit by the reorganization plan’s buyer’s financial advisor to enforce against the reorganized debtor the fee provision of a contract that was signed before the effective date by a person who became an officer of the reorganized debtor only on the effective date.

The opinion in Essar Steel can be found here.

FACTS

Mesabi Steel (“Mesabi”) and its parent (together, the “Debtors”) filed Chapter 11 petitions in the bankruptcy court for the District of Delaware (the “Bankruptcy Court”). Later, B. Riley FBR (“Riley”) contracted with ERP Iron Ore (“ERPI”) to serve as a financial advisor to ERPI in its quest to acquire Mesabi out of the bankruptcy case. With a plan sponsor Chippewa Capital Partners (“Chippewa” and together with the Debtors, the “Appellants”), the Debtors proposed a plan of reorganization that contemplated a sale of Mesabi to ERPI. The plan contained the customary provisions discharging any pre-effective date debts of the Debtors and enjoining creditors from seeking to collect those debts. The plan also reserved jurisdiction in the Bankruptcy Court “over any matter related to the Plan or the Chapter 11 cases.” Essar, 2020 WL 3574743, at * 2. The Bankruptcy Court confirmed the plan, including the discharge and injunction provisions of the plan in the confirmation order.

On the day before the plan’s effective date, ERPI and Riley added a second amendment to their contract to include Chippewa and the post-effective date reorganized Mesabi (“Reorganized Mesabi”) as parties. A Mr. Clarke, who had been an officer of Mesabi until sometime before the bankruptcy, signed on behalf of Chippewa. According to Riley, Clarke purported to sign as the new CEO of Reorganized Mesabi even though the effective date of the plan establishing Reorganized Mesabi was not until the next day.

After the effective date, Riley demanded that Reorganized Mesabi pay the $17 million fees the amended ERPI contract specified. Riley claimed that Clarke had signed the second amendment for Reorganized Mesabi. It then brought an arbitration action (the “FINRA Arbitration”) for the fees. It also sued the Reorganized Mesabi and others in the District Court for the District of Minnesota (the “Minn. Action”) seeking, among other things, a preliminary injunction requiring that the defendants retain $17 million pending the outcome of its collection attempts. The district court denied that motion and dismissed the Minn. Action with prejudice.

After the district court’s dismissal, Reorganized Mesabi (and others not important here) sued Riley in the Bankruptcy Court for civil contempt of the discharge injunction, breach of the plan and declaratory relief. Riley countered that the underlying debt was a post-effective date obligation of Reorganized Mesabi, not a pre-effective date obligation of Mesabi, so it was not subject to discharge by the plan or to the discharge injunction. In response, Reorganized Mesabi contended that because Clarke was not CEO of Reorganized Mesabi when he signed the second amendment pre-effective date, Clarke could not bind it. Riley, in turn, replied that this analysis only proved that its claim was not a pre-effective date claim asserted in violation of the plan’s discharge provisions and injunction.

Riley moved to dismiss. Although none of the parties raised the issue of subject matter jurisdiction, the Bankruptcy Court found sua sponte that it lacked post-confirmation subject matter jurisdiction over the dispute and dismissed the adversary proceeding. According to Bankruptcy Court, case law indicated that a bankruptcy court’s subject matter jurisdiction shrinks dramatically post-confirmation, requiring that a proceeding have “‘a sufficiently close nexus to implementation of the plan.’” Essar, 2020 WL 3574743, at * 3. The Bankruptcy Court discerned no such connection. The Essar Steel opinion does not elaborate on the Bankruptcy Court’s reasoning (and it is not clear that the Bankruptcy Court did so, either).

Mesabi and the other plaintiff Appellants appealed to the District Court. They contended that the Bankruptcy Court erred in finding both that it lacked subject matter jurisdiction both to interpret the discharge and injunction terms in its confirmation order and to entertain contempt of the discharge injunction. Immediately, both sides in the appeal moved the District Court to certify the case for direct appeal to the Third Circuit under 28 U.S.C. §§ 158(d)(2)(A) and (B). The District Court granted the motion. (As of this writing, the Third Circuit has not acted on the certification.)

REASONING

The District Court first reviewed the statutory grounds for direct appeal from the bankruptcy court to the circuit court of appeals. Section 158(d)(2)(A) directs a district court to certify a direct appeal if any of four grounds are present: (1) that the issue is a question of law on which there is no controlling authority at the circuit or Supreme Court level; (2) that the appeal implicates a matter of “public importance;” (3) that in the absence of controlling authority there is conflicting authority on the issue; or (4) that a direct appeal would “materially advance the progress of the case or proceeding.” Section 158(d)(2)(B) adds a fifth ground: that a majority of the appellants and a majority of the appellees seek certification. The Appellants argued that the first three grounds of 158(d)(2)(A) were present. Riley urged instead the fourth ground. The District Court was puzzled that neither the Appellants nor the Appellee cited the fifth, majority of appellants and appellees standard of 158(d)(2)(B) despite their agreement that one or another of the four 158(d)(2)(A) grounds obtained, that is, that that they all wanted certification.

The argument on absence of controlling authority centered on an esoteric discussion of the jurisdiction concepts of core and noncore, and arising in, arising under and related to. The District Court and parties debated whether the certain cases using these concepts were controlling on the issue of jurisdiction over a confirmation plan’s order and injunction. There was disagreement over whether these cases established that the “close nexus test” would apply to such an order. Suffice it to say that the District Court ultimately agreed with the Appellants that there was no controlling authority in the Third Circuit or Supreme Court on whether the narrower “close nexus” test of the bankruptcy court’s jurisdiction applies to the bankruptcy court’s exercise of post-confirmation jurisdiction over its confirmation order.

There was no real fight between the parties on the public importance standard. According to the District Court, the criterion for this ground of certification is whether the significance of the issue on appeal goes beyond the parochial interests of the parties to an unusual degree. Here the District Court agreed with the Appellees: a bankruptcy court’s jurisdiction to adjudicate the elements of a plan and confirmation order is of far broader public interest than just resolution of a two-party dispute.

Next, the District Court readily found the conflicting authority test satisfied. According to it, numerous district court and bankruptcy court decisions both within and outside the Third Circuit reached opposite conclusions on essentially the same subject matter jurisdiction question as that presented by the appeal. Finally, the District Court agreed with Riley that a direct appeal would materially advance the proceeding because it would save a lot of litigation and also thereby help to assure that Reorganized Mesabi would still have the funds to pay a judgment. The District Court noted that the Appellants did not vigorously contest the point.

AUTHOR’S COMMENT

To get to the bottom line first, this is the right decision. It is important for the Third Circuit to resolve unequivocally whether a bankruptcy court has normal jurisdiction to interpret and enforce its confirmation order, including its discharge injunction rather than jurisdiction only if there is a “close nexus” between the issue facing the bankruptcy court and the underlying case. That question should not be left hanging on the vagaries of other cases in which it may arise that may or may not result in appeals (that themselves may be prolonged). Although the Third Circuit is not obligated to accept such a certification (28 U.S.C. § 152(d)(2) “and if the court of appeals authorizes the direct appeal”)), the District Court’s ruling is a necessary condition of obtaining a decision, and perhaps even advancing the issue eventually to the Supreme Court, where it really should be decided for all courts (and given that there evidently is $17 million at stake, the ultimate loser very likely will seek certiorari).

A couple of final points bear mention. The District Court’s agreement with Riley’s contention that the need to protect its ability to realize on a money judgment as a factor finding that certification will materially advance the case is a kind of poor cousin of a stay pending appeal. That is not as such advancing the case’s prompt progress, but advancing the interest of one of the parties (who in this instance, incidentally, could not get a protective injunction in the Minn. Action) in assuring recovery on a money judgment. I do not think that is a proper application of the “materially advance” test. More broadly speaking on the resources point, any direct appeal that bypasses an intermediate level of appeal is going to save litigation, time and money. That hardly is news, nor should that simple fact be reason enough to certify a direct appeal. In the same vein, as presaged by the District Court’s observation on the point, one wonders why the parties did not save themselves time and money by simply stipulating to request the District Court to certify a direct appeal since doing so would seem to satisfy the fifth ground that a majority of both sides seek certification. In fact, the facial ease of satisfying section 158(d)(2)(B)’s majority of parties standard would seem to make it the route of choice in most appeals (although of course the circuit need not accept the appeal), the more so because in a sense an intermediate appeal is a waste of resources since the circuit normally reviews an intermediate appeal de novo, without deference to the decision of the intermediate court. Perhaps parties have been constrained by the supposition that circuit courts will be stingy in accepting certification (as the Supreme Court is in granting petitions for a writ for certiorari) and doing themselves no favor by wasting the time of the circuit court that may ultimately hear their case on a normal appeal. Finally, it is puzzling why the Bankruptcy Court found that the litigation did not satisfy even the “close nexus” test. It was faced with a situation in which a reorganized debtor suddenly allegedly had a $17 million debt it and the creditors did not know about when the plan was confirmed. Even if the plan did not depend at all on the operations of the Reorganized Mesabi with $17 million less to pay creditors than had been anticipated at confirmation, the suspicious maneuvering going on behind the scenes that led to the contract amendment at the last minute might well have affected whether the plan was confirmed had the creditors and Bankruptcy Court known about it in time.

These materials were authored by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, a member of the ad hoc group, with editorial assistance by Meredith Jury, (bankruptcy judge, C.D. Cal. (Ret.)), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.