Liquidating Trustee of the MPC Liquidating Trust v. Granite Financial Solutions, Inc. (In re MPC Computers, LLC)

Citations: 465 B.R. 384; 2012 WL 386268; 2012 Bankr. LEXIS 372; 56 Bankr. Ct. Dec. (CRR) 8Docket: Bankruptcy No. 08-12667 (PJW); Adversary No. 10-54299 (PJW)

Court: United States Bankruptcy Court, D. Delaware; February 7, 2012; Us Bankruptcy; United States Bankruptcy Court

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Granite Financial Solutions, Inc. filed a motion to dismiss an adversary proceeding initiated by the Liquidating Trustee of MPC Computers and its subsidiaries, challenging the Court’s subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1). The case arose from the Debtors' bankruptcy filing in November 2008 and subsequent claims of breach of contract and unjust enrichment due to the Defendant’s alleged non-payment for goods delivered before the bankruptcy. Following the confirmation of the Debtors' Second Amended Plan of Liquidation in March 2011, a Liquidating Trust was created to manage the Debtors' assets and liabilities, facilitating distributions to creditors and pursuing legal claims. The Confirmation Order authorized the transfer of all rights to the Liquidating Trust and mandated the automatic substitution of the Liquidation Trustee as the plaintiff in ongoing legal actions. The Court retains jurisdiction to assess its own subject matter jurisdiction, which can be challenged either through a facial or factual attack. The motion to dismiss was ultimately denied.

A facial attack on a complaint challenges its sufficiency, requiring the court to accept all well-pleaded allegations as true and view them favorably towards the plaintiff. In contrast, a factual attack disputes the actual existence of subject matter jurisdiction, allowing the court to consider evidence beyond the pleadings. The plaintiff bears the burden of proving jurisdiction exists. In this case, the defendant does not contest the adequacy of the plaintiff's pleadings but rather challenges the factual basis for jurisdiction, supported by submitted exhibits. 

The defendant presents three arguments for dismissing the case due to lack of subject matter jurisdiction: 

1. The defendant claims that the Bankruptcy Court would unconstitutionally exercise judicial power over state law claims that could exist independently of bankruptcy, citing the Supreme Court case Stern v. Marshall.
   
2. The defendant argues that the court lacks jurisdiction for post-confirmation actions, referencing Binder v. Price Waterhouse Co. LLP.

3. The defendant contends that a demanded jury trial cannot be conducted in this court, further justifying dismissal.

In response, the plaintiff contends that Stern does not address the Bankruptcy Court's subject matter jurisdiction but rather its authority to issue a final judgment on certain state law actions. The court agrees with the plaintiff, noting that Stern's ruling was narrow and did not affect the bankruptcy court’s jurisdiction to hear specific matters, distinguishing between jurisdiction and the authority to enter final judgments.

Section 1334 of Title 28 of the United States Code establishes the bankruptcy jurisdiction of district courts, granting them original and exclusive jurisdiction over cases under Title 11, as well as original but not exclusive jurisdiction over related civil proceedings. Section 157 allows district courts to refer these cases and proceedings to bankruptcy judges, who can hear and determine core matters and issue orders and judgments. For non-core related proceedings, bankruptcy judges may hear cases but must submit proposed findings and conclusions to the district court for final judgment. 

The Supreme Court's decision in Stern clarified that while bankruptcy judges can hear matters without entering final judgments, the authority to issue final judgments is allocated between bankruptcy and district courts, which does not affect jurisdictional questions. The constitutionality of Section 1334 was not challenged in Stern, reinforcing that bankruptcy courts must at least have 'related to' jurisdiction. The context of Stern was focused on the constitutional limits on bankruptcy judges' authority to issue final rulings rather than on subject matter jurisdiction itself. The defendants' argument regarding the lack of jurisdiction based on the nature of the proceeding (core or non-core) misinterprets the jurisdictional framework, as the bankruptcy court retains subject matter jurisdiction as long as the proceeding qualifies as either type.

The Stern Court, in dicta, indicated that its ruling does not prevent bankruptcy courts from hearing counterclaims and making findings of fact. The defendant challenges the court's subject matter jurisdiction, distinct from the ability to issue a final judgment, misapplying the Stern case since jurisdictional matters differ from core/non-core issues. The crux of the inquiry is whether the court has “related to” jurisdiction under Section 1334, which requires the matter to be sufficiently connected to the Debtors’ bankruptcy case. The defendant's argument acknowledges that post-confirmation jurisdiction is narrower than pre-confirmation jurisdiction, referencing In re Resorts Int’l, but the court finds this application unpersuasive. The Resorts case involved a dispute over alleged malpractice by Price Waterhouse after the confirmation of the debtor’s reorganization plan, raising questions about the bankruptcy court's jurisdiction. The Third Circuit noted that post-confirmation, the estate may not exist in a traditional sense, and jurisdiction should depend on whether there is a close nexus to the bankruptcy plan. This nexus is critical for maintaining bankruptcy jurisdiction over matters affecting the confirmed plan's interpretation or execution. However, the court ultimately found that the proceeding lacked the necessary close connection to the bankruptcy plan and was merely collateral to the bankruptcy process.

The resolution of malpractice claims will not impact the estate directly but will have minimal incidental effects on the reorganized debtor. While former creditors, now beneficiaries of the Litigation Trust, may be affected, their connection to the bankruptcy proceedings has diminished due to their exchange of creditor status for litigation rights. The court clarified that the potential to increase Litigation Trust assets does not establish a sufficient connection to maintain bankruptcy jurisdiction after confirmation. Furthermore, retention of jurisdiction over actions linked to the trust agreement does not extend beyond the boundaries set by 28 U.S.C. 1334 and 28 U.S.C. 157. Consequently, the bankruptcy court lacks jurisdiction over the malpractice action.

A critical factual distinction from the Resorts case is noted: the malpractice claim in Resorts arose and was initiated post-confirmation, whereas the current action was initiated by the Debtors months before confirmation, making it a pre-confirmation cause of action transferred to the Trust under the Plan. The Plan expressly allows the Liquidating Trust to retain all rights to pursue any causes of action accrued before or after the Petition Date. Additionally, the Confirmation Order ensures that the Liquidating Trustee is substituted as the plaintiff in pending litigation, inheriting all associated rights and standing to pursue claims.

Plaintiff contends that the "close nexus" test should be disregarded in favor of the "conceivable effect" test from Pacor, which determines bankruptcy court jurisdiction based on whether the outcome could impact the estate in bankruptcy. While the Plaintiff's referenced case applied the "close nexus" test despite the pre-confirmation nature of the cause of action, the court agrees that the Pacor test is more appropriate for the current situation.

A Third Circuit case, Geruschat v. Ernst Young LLP, clarified the application of the "close nexus" test for "related to" jurisdiction post-confirmation, confirming its relevance to claims filed after confirmation, irrespective of when the underlying conduct occurred. The court emphasized that the test is limited to actions initiated post-confirmation, as recognized in In re SemCrude. Consequently, the Pacor "conceivable effect" test was applied, which assesses whether the outcome of an action could affect the debtor’s rights or the administration of the bankrupt estate. A case applying this test established that a bankruptcy court had "related to" jurisdiction over a legal malpractice action filed pre-confirmation but pursued post-confirmation, as it was clearly outlined in the disclosure statement and plan.

The action in the current case aligns with this standard, as the Plan, Trust Agreement, and Confirmation Order explicitly contemplated the proceeding for implementing the Plan. The Plan details the establishment of a Liquidating Trust for managing post-confirmation responsibilities, including the pursuit of litigation claims and collection of accounts receivable. The Trust Agreement stipulates that the Trust was created to fulfill obligations from the Plan, benefiting the holders of allowed claims. Additionally, the Confirmation Order grants the Liquidating Trustee all rights concerning pending litigation. Article XII of the Plan retains the court's jurisdiction over all causes of action and related proceedings, affirming the court's authority in adjudicating these matters.

The Confirmation Order retains jurisdiction over matters related to the bankruptcy cases and the Plan, explicitly including categories outlined in Article XII of the Plan. The adversary action against the Defendant for breach of contract and unjust enrichment, aimed at recovering accounts receivable due to alleged non-payment for goods/services shipped by Debtors, qualifies as Pending Litigation and Litigation Claims essential for the Plan's implementation and Trust administration. The Trust was created to meet Debtors' obligations to creditors by pursuing Debtors' causes of action, which have been transferred to the Trust. The action is aligned with the Plan, satisfying the “related to” jurisdiction under Pacor and subsequent cases, particularly because the Plan explicitly contemplates this litigation.

The court emphasizes the distinction between broad categories of action and those with a close nexus to the Plan, citing cases such as In re AstroPower Liquidating Trust to support its finding of jurisdiction. The Plan and Confirmation Order clearly articulate the significance of these claims, which are integral to the Plan's execution, contrasting with less relevant claims seen in past cases. 

Regarding the Defendant's demand for a jury trial, the court notes that this issue does not affect subject matter jurisdiction and should be addressed through a motion to withdraw the reference. Typically, the District Court retains bankruptcy-related proceedings in this Court until ready for trial. Consequently, the court concludes it possesses subject matter jurisdiction over the action and denies the Defendant's Motion to dismiss.

Defendant’s motion to dismiss for lack of subject matter jurisdiction is denied, as outlined in the Court's memorandum opinion. The plaintiff, Liquidating Trustee of the MPC Liquidation Trust, has also sought to strike an answer filed by the Defendant and requested a default judgment due to the Defendant's failure to respond. However, since the Defendant has now submitted a responsive pleading, the motion to strike is considered moot.

The term 'Assets' in the Plan encompasses all types of Debtors' assets, including property under Bankruptcy Code §541, cash, and various causes of action. 'Litigation Claims' are defined as all Avoidance Actions and other causes of action for the Debtors. The term 'Cause of Action' includes a wide range of claims and debts as per section 101(5) of the Bankruptcy Code, applicable to both known and unknown claims against any person.

Liquidating Trust Assets refer to all assets of the Debtors' Estates that are to be transferred to the Liquidating Trust according to the Liquidating Trust Agreement. There is a standing order in this District for the automatic reference of all Title 11 proceedings to bankruptcy judges. The matter has a close nexus to the bankruptcy process, which satisfies the jurisdictional standard. Comparisons are made to previous cases concerning the definition of rights and actions under bankruptcy plans, highlighting the distinctions in jurisdiction based on plan specificity.