The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:
The Third Circuit Court of Appeals (the “Circuit”) reversed a decision by the Delaware bankruptcy court which had dismissed an adversary proceeding because the bankruptcy court ruled it did not have post confirmation jurisdiction to interpret and enforce a discharge injunction contained in the confirmation order. The Circuit reinforced the principle stated by the Supreme Court in Travelers Indem. Co. v Bailey, 557 U.S. 137, 151 (2009) that a bankruptcy court “plainly ha[s] jurisdiction to interpret and enforce its own prior orders.” Mesabi Metallics Company, LLC v. B. Riley FBR, Inc. (In re Essar Steel Minnesota, LLC), 2022 WL 3652961 (3rd Cir. August 25, 2022).
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Essar Steel Minnesota and affiliates (together “Debtor”) filed a Chapter 11 bankruptcy in Delaware in July 2016 and confirmed a plan of reorganization in 2017. Chippewa Capital Partners, LLC (Chippewa) was the plan’s sponsor and funded the Debtor’s exit from bankruptcy. The confirmation order discharged all claims against the Debtor arising before the plan’s effective date and enjoined actions against the Debtor and Chippewa by holders of those claims. The bankruptcy court also retained jurisdiction over matters arising under the Bankruptcy Code, arising in or related to the case or plan, and that related to various matters stemming from the plan or confirmation order.
During the case, Chippewa and its affiliate ERP Iron Ore (ERPI) had engaged B. Riley & Co, LLC (B. Riley) as its financial advisor and later amended the engagement agreement to provide that B. Riley would receive a commission of 3-5% on consummation of certain debt financing transactions. A day before the plan’s effective date, the Debtor, Chippewa, ERPI and the post-effective date reorganized debtor, Mesabi Metallics Co., purported to amend the engagement agreement to bind not only Chippewa and the Debtor but also Mesabi.
After a debt financing transaction closed in 2018, B. Riley sought payment from Chippewa and Mesabi of a $16 million fee under the amended engagement agreement. When they refused to pay, B. Riley sued them in the District Court of Minnesota and initiated an arbitration with FINRA (both since dismissed). In response, Mesabi filed an adversary complaint for civil contempt, declaratory judgment and breach of the plan in the bankruptcy court, asserting that the fee was based on a pre-effective-date agreement and was discharged. As relevant here, B. Riley filed a motion to dismiss, which Mesabi opposed. Although neither party raised the bankruptcy court’s subject matter jurisdiction in the briefing on the motion, the bankruptcy court itself raised the issue at oral argument. The next day it dismissed the adversary proceeding, ruling that it lacked subject matter jurisdiction.
Mesabi appealed to the District Court, requesting that the appeal be certified directly to the Circuit. The District Court certified the appeal and the Circuit accepted the direct appeal; it then reversed.
The bankruptcy court had applied the “close-nexus” test, as adopted in the Circuit by In re Resorts International, Inc., 372 F. 3d 166-68 (3rd Cir. 2004), which B. Riley urged the Circuit to follow. Under that test, if a post-confirmation proceeding lacks a close connection to the implementation of a plan or the underlying bankruptcy case, the bankruptcy court lacks subject matter jurisdiction. Mesabi countered that since the action was a core proceeding, the close nexus test was inapplicable because the bankruptcy court always had jurisdiction over core proceedings. It also asserted that the lower court’s ruling was in conflict with Travelers’ mandate that bankruptcy courts had jurisdiction to enforce their own orders.
The Circuit agreed with Mesabi that the close-nexus test did not apply here. That test only applied to non-core matters. Here, the bankruptcy court was requested to interpret its own discharge order, annunciated in the plan confirmation order to discharge all pre-effective date claims, which Mesabi asserted included the B. Riley claim. Moreover, if the debt was discharged, then enforcement of the discharge was a core matter under 28 U.S.C. § 157(b) (2) (I), (J), and (L).
Concluding that the adversary proceeding unequivocally asked the bankruptcy court to interpret and enforce its own orders, a matter of subject matter jurisdiction blessed by the Supreme Court in Travelers, the Circuit reversed and remanded for further proceedings.
The surprising thing to me about this case is that the bankruptcy court got it wrong. Since the Circuit’s own authority, Resorts International, which applied the close-nexus test arose from a non-core proceeding and the Supreme Court had clarified that bankruptcy courts always had jurisdiction to interpret and enforce their own orders, I do not understand why the lower court was misled. However, this is the right decision and reinforces the jurisdictional powers of the bankruptcy court in these circumstances. I would ask the bankruptcy court: if this court cannot enforce the discharge injunction which it issued, which court should be accorded that power? Surely, we want it to be the court which issued the order, a concept well-accepted in federal jurisprudence.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., 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.