The United States Court of Appeals for the Third Circuit has issued a decision that provides an important summary concerning the circumstances under which state law causes of action asserted between nondebtor parties are sufficiently interconnected with claims brought against a debtor to be considered “core proceedings,” which may be determined as part of a bankruptcy case. In re Exide Technologies, 544 F.3d 196 (3d. Cir. 2008).
The case arose out of pre-petition agreements through which Pacific Dunlop Holdings (USA), Inc. and affiliates (collectively, “PDH”) sold interests in various businesses to Exide Technologies f/k/a Exide Corporation and its affiliates (collectively, “Exide”). After the sale, a dispute developed, and PDH brought several causes of action against Exide seeking approximately $16 million. Of the $16 million, $6.7 million was directly against Exide Corporation. The remaining amounts were sought from foreign affiliates of Exide Corporation.
The action originally was commenced in Illinois state court pursuant to the forum selection clause in the underlying sales agreements. After various procedural motions in state court, Exide Corporation (the “Debtor”) commenced a bankruptcy case. None of the foreign affiliates was the subject of the bankruptcy proceedings. After the Debtor commenced the bankruptcy case, PDH continued to prosecute claims against the non-debtor defendants in state court.
During the Debtor’s bankruptcy case, PDH filed a proof of claim against the Debtor asserting contingent rights to recovery in the event that the actions against the foreign affiliates were successful, and such affiliates were unable to satisfy the judgment obtained. As a result of the filing of the proof of claim, the Debtor sought to remove the entire state court action to bankruptcy court, arguing that the filing of the proof of claim subjected the entire matter to bankruptcy court determination.
Alternatively, the Debtor argued that the claim against the nondebtor entities and the claims against the Debtor were so intertwined that it was impossible was a practical matter to disentangle them. The Debtor also argued that the agreements were unambiguous and clear that only the Debtor was liable for indemnification claims to PDH. PDH opposed the removal, arguing that the claims against the nondebtor affiliates were not within the bankruptcy court’s “core” jurisdiction.
The bankruptcy court heard argument on the removal. The court concluded that the agreements were not ambiguous and that only the Debtor was liable on account of PDH’s claims. Therefore the bankruptcy court concluded that all of PDH’s claims involved claims against the Debtor, presented in the claims allowance process, which was an admittedly core matter.
Alternatively (assuming PDH could proceed against the non-debtor Exide entities), the court accepted that Debtor’s “intertwined” argument determined the claims (including any claims by PDH against non-debtor Exide entities) were “core.” Therefore, all claims were subject to the jurisdiction and determination by the bankruptcy court.
The district court affirmed and an ultimate appeal was taken to the Third Circuit.
In a Sept. 19 decision, the Third Circuit reiterated the limited nature of bankruptcy jurisdiction. The court began by stating that bankruptcy jurisdiction extends to only four types of proceedings: (1) cases that “arise under” the Bankruptcy Code; (2) proceedings that “arise under” the Bankruptcy Code; (3) proceedings “arising in” a bankruptcy case; and (4) proceedings “related to” a bankruptcy case.
The jurisdictional limits on bankruptcy courts are imposed by the U.S. Constitution. While the jurisdiction extends to those four types of proceedings, the fourth category are proceedings determined to be “non-core.” A bankruptcy court may hear non-core proceedings but cannot issue final orders in connection with those proceedings. While non-core proceedings, can have some connectedness to a bankruptcy case, they are not so pivotal to the underlying determinations in the bankruptcy case to require sole adjudication in the bankruptcy court.
Therefore, “non-core” claims may proceed in nonbankruptcy court forums.
PDH asserted that because the claims against the non-debtor Exide entities were “non-core,” those claims should not proceed in bankruptcy court and should proceed in the underlying state court action.
In assessing whether a claim is core or non-core, the court must first look at the illustrative list of proceedings set forth in the judicial code. A claim is “core” only if (1) it invokes a substantive right provided by the Bankruptcy Code or (2) it is a proceeding that, by its nature, can only arise in connection with a bankruptcy case. Unless the claim falls within one of those two categories, the claim must be determined to be “non-core.” When claims assert various theories of relief, each theory must be analyzed to determine whether each independent theory is “core” or “non-core.”
The Third Circuit first analyzed whether the bankruptcy court’s determination that the agreement between PDH and Exide was unambiguous to force the parties to proceed solely against the Debtor. If such claims only could be pursued against the Debtor, the claims clearly would be core; however, if the claims could be asserted against other non-debtor parties (even if those claims could be pursued simultaneously against the Debtor), the non-debtor claims would not necessarily be “core.”
The Third Circuit disagreed with bankruptcy court that the underlying agreement was unambiguous. In fact, the court concluded that because the agreement was not unambiguous and did not limit claims to those brought only against the Debtor, the bankruptcy court’s conclusion that the agreement’s limitations rendered all claims core, must be reversed.
Individual Rights of Recovery
The court further analyzed whether the mere presentation of a proof of claim (even if such proof of claim asserted contingent obligations related to non-debtor actions) would render the underlying non-debtor actions “core.” No one disputed that the claims pending against the Debtor were core; however, PDH asserted that the claims against the non-debtor Exide entities were not core.
The court reiterated that each individual right of recovery must undergo a core/non-core analysis. While the court acknowledged that the claims against the Debtor were core, the claims against the non-debtors were not core because those claims did not arise solely as a result of the Debtor’s bankruptcy case.
Having disposed of the “proof of claim” argument, the Third Circuit turned to the Debtor’s “interrelated claims” argument. The court dismissed this argument, noting extensive jurisprudence, which concludes that the bankruptcy of one joint tortfeasor does not require the adjudication of all claims against other, non-debtor joint tortfeasors by the bankruptcy court. Plaintiffs are not precluded from proceeding against non-debtor parties in a non-bankruptcy forum.
The court soundly rejected the only decision that supported the “interrelatedness proposition,” stating that the intertwined theory could be extended to almost any multiclaim/multiparty action, and would test the constitutional limits of bankruptcy jurisdiction.
The In re Exide Technologies decision provides an important summary and explanation of the core/non-core determination, which must be made by practitioners and bankruptcy courts in assessing the ultimate ability to proceed on particular claims and their appropriate venue. Judicial economy may be benefitted by the unified determination of interrelated claims. The Third Circuit, however, emphasized the principle that each right of recovery must be analyzed to ensure that the bankruptcy court’s exercise of jurisdiction is within constitutional bounds.