The Third Circuit Court of Appeals reviewed a bankruptcy jurisdiction issue stemming from the case of Essar Steel Minnesota, LLC (ESML) and its affiliated entities, which filed for Chapter 11 bankruptcy in July 2016. The Delaware Bankruptcy Court had previously confirmed ESML's restructuring plan, discharging all claims against it prior to the plan's effective date and enjoining actions from claim holders. The Court retained jurisdiction over matters related to the bankruptcy and the confirmation order.
In this appeal, Mesabi Metallics Company, LLC (the reorganized entity) and Chippewa Capital Partners, LLC challenged the Bankruptcy Court's dismissal of their adversary proceeding that sought to interpret and enforce a discharge injunction. The appellate court held that the Bankruptcy Court indeed had jurisdiction over the adversary proceeding, reversing the dismissal and remanding the case for further proceedings.
Additionally, during the bankruptcy process, Chippewa engaged B. Riley, FBR, Inc. as a financial advisor for the acquisition of ESML. An engagement agreement was amended to include additional advisory services, with B. Riley entitled to a success fee for certain financing transactions. This agreement was finalized on December 21, 2017, just prior to the plan's effective date.
B. Riley sought over $16 million from Chippewa and Reorganized Mesabi, collectively referred to as "Mesabi," as a success fee following a June 2018 debt financing transaction. When Mesabi refused payment, B. Riley initiated two collection actions: a lawsuit in the U.S. District Court for Minnesota and an arbitration with FINRA. In response, Mesabi filed an adversary complaint in Bankruptcy Court alleging civil contempt, declaratory judgment, and breach of the plan, arguing that the fee was discharged by the plan's confirmation order and that B. Riley's collection efforts violated it. B. Riley moved to dismiss this complaint, asserting its claim was not barred by the plan. Mesabi countered that Clarke lacked authority to bind Reorganized Mesabi before the plan’s effective date and that B. Riley's claim arose before the plan's effective date, thus was discharged.
The Bankruptcy Court held oral arguments and subsequently ruled it lacked subject matter jurisdiction, dismissing the adversary proceeding. The Minnesota lawsuit was dismissed with prejudice, and the FINRA arbitration was stayed pending the case's outcome. Additionally, B. Riley sued Clarke personally for fraud related to the Engagement Agreement. This lawsuit settled after the District Court denied Clarke's motion to dismiss. Mesabi appealed, seeking direct certification to the appellate court, which was granted to address whether the Bankruptcy Court erred in concluding it lacked jurisdiction regarding the Discharge Injunction and contempt redress. The District Court had jurisdiction under 28 U.S.C. § 158(a) for bankruptcy appeals and the appellate court accepted jurisdiction under § 158(d)(2) for the certified appeal. The standard of review for a bankruptcy court's dismissal for lack of subject matter jurisdiction is de novo.
The parties present differing views on the Bankruptcy Court's jurisdiction over the adversary proceeding. B. Riley advocates for the application of the 'close nexus' test established in In re Resorts International, Inc., which asserts that if a post-confirmation proceeding is not closely connected to a reorganization plan or the bankruptcy case, the bankruptcy court lacks jurisdiction. In contrast, Mesabi argues that the proceeding is a core matter, granting the bankruptcy court clear jurisdiction, and that the close nexus test is inapplicable. Mesabi further claims that the Bankruptcy Court's decision contradicts the Supreme Court's ruling that a bankruptcy court has inherent authority to interpret and enforce its prior orders.
The analysis begins with a broader overview of bankruptcy jurisdiction as outlined in the Bankruptcy Code (11 U.S.C. 101 et seq.), which aims to centralize a debtor's financial affairs within a bankruptcy court. District courts hold original and exclusive jurisdiction over cases under title 11 and original but not exclusive jurisdiction over civil proceedings arising under or related to title 11. The term 'case' refers to the entire bankruptcy process initiated by a petition, while 'proceeding' denotes specific activities within that process, which include contested matters and adversary proceedings.
The jurisdictional framework includes four categories of matters under title 11, with only three relevant here: (1) cases under title 11, (2) proceedings arising under title 11, and (3) proceedings arising in a case under title 11. A case arises under the Bankruptcy Code when the cause of action is based on a right provided by it, while proceedings arising in a case are those that would not exist outside of bankruptcy. Related matters involve state law causes of action that impact the debtor’s estate.
Bankruptcy courts act as adjuncts to district courts, which can refer title 11 cases to bankruptcy judges. Under 28 U.S.C. 157, bankruptcy courts can hear and determine core proceedings, while in non-core proceedings, they can only make proposed findings unless all parties consent. Core proceedings include cases under title 11, proceedings arising under title 11, and proceedings arising in a case under title 11, whereas non-core proceedings relate to a case under title 11.
The terms 'arising under,' 'arising in,' and 'related to' in bankruptcy law are broad and context-dependent, prompting courts to interpret their meaning. In the context of a post-confirmation adversary proceeding, the Bankruptcy Court's jurisdiction is reduced but not entirely eliminated after plan confirmation. B. Riley argues that the Bankruptcy Court lacked jurisdiction over Mesabi’s claims due to insufficient connection to the underlying bankruptcy, referencing the close nexus test established in Resorts. However, this test is not applicable to core proceedings. The Resorts case involved a malpractice action where the court found no close nexus to the bankruptcy plan, resulting in a lack of jurisdiction. In contrast, Mesabi's request to interpret a discharge injunction in its confirmed plan directly relates to core proceedings as defined by 28 U.S.C. 157(b)(2), which includes actions regarding dischargeability and plan confirmations. Courts have consistently recognized such requests as core, thereby affirming the Bankruptcy Court's jurisdiction in this matter.
Enforcement of the discharge injunction is a core jurisdiction of the Bankruptcy Court, as it relates to the confirmation order under the Bankruptcy Code. This jurisdiction includes motions to enforce confirmation orders, as established in *In re Christ Hosp.* and *In re Texaco Inc.*, which affirm that such motions are squarely within the court’s authority. The court recognizes that proceedings to enforce and interpret confirmation orders are core, especially when they arise from cases under title 11.
The timing of a second amendment, executed just before a plan’s effective date, suggests potential circumvention of bankruptcy processes by Chippewa and ERPI, which could bind Reorganized Mesabi to contracts prematurely. This is viewed as a core bankruptcy issue. The court references *In re Allegheny Health Education and Research Foundation*, where interpretation and enforcement of sale orders were deemed core proceedings.
B. Riley argues that disputes related to post-confirmation plans can trigger jurisdiction under a "close nexus" standard, citing *In re Shenango Group, Inc.*, which held that a motion to reopen a bankruptcy case for compliance with a plan was "related to" jurisdiction. However, the court clarifies that this case concerns whether the matter is "arising in" the bankruptcy rather than merely "related to" it.
The Bankruptcy Court also retains jurisdiction to address potential contempt regarding its plan and confirmation order, supported by various circuit rulings that classify civil contempt proceedings stemming from core matters as core themselves. Since the contempt proceeding arose from core proceedings, it is also considered a core matter. The court emphasizes that not all post-confirmation disputes are inherently core; rather, their classification should be determined case by case, and the specifics of this case warrant its classification as a core proceeding.
The Bankruptcy Court's determination of lacking subject matter jurisdiction over the adversary proceeding contradicts the Supreme Court's ruling in Travelers, which established that bankruptcy courts possess the authority to interpret and enforce their prior orders. In Travelers, involving Johns-Manville Corporation's bankruptcy, the 1986 settlement order created a creditor trust for future claimants and included an injunction against future lawsuits. When Travelers sought to enforce this injunction against new asbestos-related claims, the Bankruptcy Court clarified that the prior orders barred those claims. The Second Circuit initially reversed this clarification, but the Supreme Court upheld it, affirming the Bankruptcy Court's jurisdiction to interpret its own orders.
In the current case, Mesabi similarly requested the Bankruptcy Court to enforce the discharge and injunction provisions of its reorganization plan post-bankruptcy. The argument made by B. Riley, distinguishing Travelers on the basis of the Circuit's 'fact-based approach' to post-confirmation jurisdiction and the concern of 'unending jurisdiction,' was found unpersuasive. The court noted that the facts of the current case are sufficiently similar to those in Travelers, and bankruptcy courts are equipped to discern key facts to avoid overreach. Moreover, under 28 U.S.C. 1334(c)(1), a court can permissively abstain from proceedings even when jurisdiction exists.
The court concluded that the Bankruptcy Court indeed had jurisdiction to interpret and enforce the relevant discharge and injunction provisions. Mesabi's request to determine whether a fee owed to B. Riley was discharged under the previous orders constituted a core proceeding under the Bankruptcy Code, making the close nexus test inapplicable. Consequently, the court reversed the dismissal for lack of jurisdiction and remanded the case for further proceedings.
