The Court of Appeals for the Fourth Circuit recently held that a bankruptcy court did not have jurisdiction to hear a chapter 11 debtor's breach of contract and tortious interference claims, which the debtor filed after its chapter 11 plan had been confirmed and substantially consummated. Valley Historic Limited Partnership v. Bank of New York, No. 06-1571,___ F.3d ___, WL 1439734 (4th Cir. May 17, 2007). This decision delineates the limits of bankruptcy court's jurisdiction over claims filed by the debtor after plan confirmation.
In 1992, the debtor Valley Historic Limited Partnership's predecessor in interest financed the acquisition and renovation of two Virginia office buildings with a loan from Bank of New York's predecessor in interest. Unable to make the payments associated with those loans, Valley Historic filed a chapter 11 bankruptcy petition in February of 2002. Ultimately, the bankruptcy court confirmed Valley Historic's plan of reorganization, which provided for the satisfaction of the debtor's obligations entirely from post-petition rents and earnings through the operation of its real estate. The confirmed plan also provided that the bankruptcy court would retain jurisdiction over a potential adversary proceeding through which the debtor contemplated liquidating its claims against the Bank. In 2005, Valley Historic sold its real estate and used the proceeds to pay all of its creditors in full, including the Bank.
Shortly thereafter, Valley Historic filed an adversary proceeding against the Bank. It alleged that the Bank had breached the loan agreement by sharply increasing the debtor's monthly lease payments, which had necessitated the bankruptcy filing, and had tortiously interfered with the debtor's contractual relationship with its tenant. The Bank moved to dismiss the adversary proceeding on several grounds, including that the bankruptcy court lacked subject matter jurisdiction over the debtor's claims. The bankruptcy court denied the Bank's motion to dismiss, which the U.S. District Court for the Eastern District of Virginia reversed, after granting leave to appeal the interlocutory order. The debtor appealed the district court's decision to the Fourth Circuit.
The Fourth Circuit's Decision
The Fourth Circuit affirmed the district court's ruling that the bankruptcy court lacked jurisdiction over the claims that the debtor had filed after entry of the order confirming its chapter 11 plan because such claims neither "arose in" nor were "related to" the bankruptcy. It found that the debtor's claims failed to meet the requisite jurisdictional standards and that Valley Historic could not "write its own jurisdictional ticket" by relying on the jurisdiction retention provision in its chapter 11 plan.
First, the Fourth Circuit held that the bankruptcy court did not have "arising in" jurisdiction. It explained that, under Fourth Circuit's precedent, a claim "arises in" Title 11 when it is not based on any right specifically created by Title 11 but would nevertheless have no independent existence outside of the bankruptcy. Applying this test to Valley Historic's claims, the Fourth Circuit found that the breach of contract claim pre-dated the bankruptcy and that the fact that the alleged breach caused the debtor's bankruptcy was immaterial for the purposes of determining bankruptcy court jurisdiction. The court affirmed the district court's rationale that the debtor's breach of contract and tortious interference claims would have existed whether or not Valley Historic filed for bankruptcy. Consequently, it held that the bankruptcy court had no "arising in" jurisdiction over the debtor's claims.
Second, the Fourth Circuit ruled that the bankruptcy court also lacked "related to" jurisdiction. Under the widely accepted articulation of the "related to" jurisdiction test, a civil proceeding is "related to" a chapter 11 bankruptcy when the outcome of that proceeding could conceivably have an effect on the estate being administered in bankruptcy. Prior to Valley Historic, the Fourth Circuit had applied this test only to claims filed prior to plan confirmation and had not ruled on the proper standard for "related to" jurisdiction over claims in the post-confirmation context. In Valley Historic, the Fourth Circuit adopted the Third Circuit's analytical framework for "related to" jurisdiction in the post-confirmation stage. Under that analysis, the bankruptcy court has jurisdiction over claims filed post-confirmation only if these claims affect an integral aspect of the bankruptcy process or have a close nexus to the bankruptcy plan or process. The Fourth Circuit held that Valley Historic's claims against the Bank failed to meet the "close nexus" requirements. It found that the debtor's adversary proceeding served no conceivable bankruptcy administration purpose. The potential recovery on account of debtor's claims against the Bank was not going to fund the chapter 11 plan, which had already been substantially consummated, with all claims having been paid in full. The court also rejected the debtor's argument that the retention of jurisdiction provision in the debtor's plan gave rise to bankruptcy court jurisdiction. The Fourth Circuit emphasized that neither the bankruptcy court nor the parties could create jurisdiction when the bankruptcy court otherwise lacked jurisdiction, as it did with respect to the debtor's claims against the Bank.
The Valley Historic decision highlights the limitations of bankruptcy court jurisdiction over claims that a debtor files post-confirmation. The bankruptcy court must determine if it has subject matter jurisdiction in every post-confirmation adversary proceeding even if the debtor's plan provides that the bankruptcy court would retain jurisdiction over future claims. Debtors may not bootstrap future bankruptcy court jurisdiction over unfiled adversary proceedings by simply inserting a retention of jurisdiction provision in the chapter 11 plan. Rather, post-petition claims must have a "close nexus" to the bankruptcy case, such as where recoveries on such claims will be used to fund the plan and make payments to creditors.