The Bottom Line:

The e-ink is barely dry on the commentators' articles and blog postings about the Supreme Court's jurisdiction-affecting decision last month in Stern v Marshall, 10-179, 56 U.S. --, 2011 U.S. LEXIS 4791 (June 23, 2011) (see our own blog below for coverage). And yet, at least one prominent bankruptcy judge recently applied the High Court's ruling to modify his prior decision retaining exclusive jurisdiction over a lawsuit to be brought under a confirmed Chapter 11 plan. In In re BearingPoint, Inc., et al., Case No. 09-10691, 2011 Bankr. LEXIS 2585 (Bankr. S.D.N.Y July 11, 2011) (a bench decision), S.D.N.Y Bankruptcy Judge Gerber considered a variety of factors in whether to retain exclusive jurisdiction over the lawsuit (based upon state law claims for alleged breaches of fiduciary duty by officers and directors). After examining whether he could enter a final judgment on any such litigation claims, the bankruptcy court reasoned that “litigants could tie a case up in knots by exploiting their rights to an Article III determination when the litigation against them is non-core.”  As a result, the court allowed the litigation to be commenced in state court despite the provisions of the confirmed plan.

What Happened:

On December 22, 2009, the bankruptcy court confirmed BearingPoint’s Chapter 11 plan (the “Plan”).  The Plan provided for, among other things, the creation of a trust (the “Trust”) by which claims owned by BearingPoint could be pursued.  Among those claims were claims for alleged breaches of fiduciary duty against BearingPoint’s former CEO and former directors.  The claims were to be brought in the context of a provision specifically added into the Plan and confirmation order.  Initially, the Plan proposed to grant various releases to former officers and directors.  The creditors’ committee objected to the releases.  The bankruptcy court sustained the objection.  However, while the court ruled that the claims would not be released, Judge Gerber required that the bankruptcy court and the district court for the Southern District of New York have exclusive jurisdiction over actions such as the one that the Trustee wanted to bring.  Notably, the bankruptcy court expressed a view that by overseeing the litigation, he could impose “safeguards” that the claims were “legitimate claims” and not brought for “harassment” or “retaliation”.  Following confirmation, the Trustee sought permission to bring the litigation in the Virginia state court (as BearingPoint’s headquarters had been located in Virginia).  The prosecution of the action in state court, however, would have violated the confirmation order.  As such, the Trustee moved for limited relief from the confirmation order to commence the action in state court.  The proposed defendants (called “Targets” in the decision) opposed the potential change for venue. 

In considering the issue, there was no dispute that the bankruptcy court (and district court) in S.D.N.Y. would have subject matter jurisdiction over the litigation claims under 28 U.S.C. § 1334.  The parties also agreed that the proposed action was “non-core” under 28 U.S.C. §157.  (Note:  The relevance of core and non-core claims is discussed in our Stern v. Marshall blog).  The court also determined that, without ruling on the merits, the complaint not being brought for purposes of harassment and the claims were colorable.  The Targets argued that there would be efficiencies and other benefits from the bankruptcy court hearing the case on the merits since the court had learned a lot about the surrounding issues during the course of the Chapter 11 case.  Among other views, the bankruptcy court dismissed this argument, reasoning that “if it will have to be an Article III district judge making the findings, or a jury, my knowledge of facts with respect to this controversy, even if properly obtained and used, would be of little or no value.  I will not be the trier of fact, at least in any way that is dispositive.”  Id. at *16.  While the bankruptcy court considered a variety of factors in its ruling, one factor was that “after Stern v. Marshall, this action, if still litigated here, would be subject to a considerably greater risk that it would be materially slowed by motion practice premised on my lack of constitutional authority to enter a final judgment[.]”  Id. at *24-25.  Instead of being able to try the claims with the efficiency normally used by the bankruptcy court, the court observed that “litigants could tie a case up in knots by exploiting their rights to an Article III determination when the litigation against them is non-core.”  Id. at *25.  Specifically discussing Stern v. Marshall, the court questioned (but did not decide) whether non-debtors could effectively consent to a non-core matter being heard by a bankruptcy court.  Noting that at least one potential Target sent the court a letter stating that the court “would not be authorized to enter final judgment,” the court observed that the letter “presages the procedural skirmishing to come” from forcing the Trustee to litigate the matter in the bankruptcy court.  Id. at *34.   The bankruptcy court concluded that he could safeguard against unnecessary litigation by simply “subject[ing] the Trustee to the gatekeeping function and any necessary review to ensure that future litigation would be fair” without requiring the matter to be brought in the bankruptcy court.  Id. at *35.

Why the Case is Interesting:

First, it is one of the immediate bankruptcy court reactions to Stern v Marshall, which limited the bankruptcy court's ability to enter final judgments on non-core counterclaims. Second, the case did not involve a non-core counterclaim; it concerned an affirmative lawsuit (albeit non-core) that would be initiated against non-debtors by the litigation Trustee appointed under the confirmed Plan.  However, considering various factors, including Stern v Marshall, the bankruptcy court expressed concern that its mandatory oversight of the lawsuit could create future procedural uncertainties, delays and costs in the as-yet, untested post-Stern world. Bankruptcy Judge Gerber is a highly regarded jurist, who has presided over some of the largest and most complex bankruptcies. His reaction may give pause to other courts similarly considering how far Stern goes or should go in retaining jurisdiction over litigation claims under chapter 11 plans or otherwise.