Opinion
Bankruptcy 18-33707 Adversary Proc. 18-03094
05-09-2022
In re: Diocese of Winona-Rochester, Debtor. v. United States Fire Insurance Company, Defendant. DW Harrow & Assoc., LLC, as Trustee of the Diocese of Winona-Rochester Settlement Trust, Plaintiff,
BURNS BOWEN BAIR LLP TIMOTHY W. BURNS (ADMITTED PRO HAC VICE) JEFF J. BOWEN (ADMITTED PRO HAC VICE) JESSE J. BAIR (ADMITTED PRO HAC VICE) ROBERT T. KUGLER ANDREW J. GLASNOVICH EDWIN H. CALDIE STINSON LLP COUNSEL FOR THE TRUSTEE
Chapter 11
BURNS BOWEN BAIR LLP TIMOTHY W. BURNS (ADMITTED PRO HAC VICE) JEFF J. BOWEN (ADMITTED PRO HAC VICE) JESSE J. BAIR (ADMITTED PRO HAC VICE) ROBERT T. KUGLER ANDREW J. GLASNOVICH EDWIN H. CALDIE STINSON LLP COUNSEL FOR THE TRUSTEE
PLAINTIFF'S OPPOSITION TO DEFENDANT'S MOTION TO DISMISS
United States Fire Insurance Company ("U.S. Fire") has moved to dismiss the Amended Complaint for lack of subject matter jurisdiction. As explained herein, however, because (1) the Fifth Amended Joint Chapter 11 Plan of Reorganization of the Diocese of Winona-Rochester (the "Plan") specifically reserves jurisdiction for this Court to hear the insurance adversary proceeding; and (2) the insurance adversary proceeding has a "close nexus" to the bankruptcy case, this Court has jurisdiction to hear the matter. U.S. Fire's jurisdictional argument therefore fails as a matter of law.
As the Court is aware, the Trust has since filed a Second Amended Complaint (Dkt. No. 118). The Second Amended Complaint moots the 12(b)(6) portion of U.S. Fire's motion to dismiss. However, the parties have agreed to move forward to adjudicate U.S. Fire's jurisdictional argument under Rule 12(b)(1).
FACTUAL BACKGROUND
On October 14, 2021, this Court confirmed the Plan. (See Dkt. Nos. 405 & 398). Relevant here, the Plan expressly reserves jurisdiction for the bankruptcy court over "matters related to the assets of the Estate or of the Trust, including the terms of the Trust, or the recovery, liquidation, or abandonment of Trust Assets" and "any and all other suits, adversary proceedings, motions, applications, and contested matters that may be commenced or maintained pursuant to this Chapter 11 case or the Plan, including, but not limited to, disputes arising out of or related to the Transferred Insurance Interests or the rights and obligations of the Non-Settling Insurers on and after the Effective Date." (Plan, §§ 16.1(6) & 16.1(21)).
Under the terms of the Plan, the Trust is established to, among other purposes, pursue recoveries against Non-Settling Insurers in respect of the Transferred Insurance Interests, receive settlement amounts, and make distributions to the Diocese's primary creditors: the sexual abuse survivors. (Plan, § 6.2). The Plan specifically directs the Trust to carry out these duties with "the aim of preserving, managing, and maximizing Trust Assets to pay" the sexual abuse survivors. (Id.).
In addition, the Plan deems the Trustee "the Estate's representative in accordance with Section 1123 of the Bankruptcy Code," with "all the rights, powers, authority, responsibilities, and benefits specified in the Plan and the Trust Agreement," including, to the extent necessary to enforce those rights, the powers of a trustee identified in Sections 704, 108, and 1106 of the Bankruptcy Code and Bankruptcy Rule 2004. (Plan, § 6.6). The Estate continues to exist under the Plan until it has been "fully administered," at which point the Reorganized Debtor, the Trustee, or such other party as the Bankruptcy Court may designate in the Confirmation Order, shall file a motion with the Bankruptcy Court to obtain a Final Decree to close the Chapter 11 case. (Plan, § 16.21).
LEGAL STANDARD
To dismiss a complaint under Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction, "the complaint must be successfully challenged on its face or on the factual truthfulness of its averments." Titus v. Sullivan, 4 F.3d 590, 593 (8th Cir. 1993). Because the issue in a 12(b)(1) motion is the court's own power to hear the case, "'it is free to weigh the evidence to satisfy itself as to the existence of its power to hear the case.'" Osborn v. U.S., 918 F.2d 724, 730 (8th Cir. 1990) (quoting Mortensen v. First Fed. Sav. & Loan Ass'n, 549 F.2d 884, 891 (3d Cir. 1977)). Therefore, in a factual attack, the court may review matters outside the pleadings to determine whether jurisdiction exists. Branson Label, Inc. v. City of Branson, 793 F.3d 910, 914- 15 (8th Cir. 2015). Jurisdiction exists when the matter arises under or is "related to" a Title 11 case. In re Wigley, 624 B.R. 861, 867 (Bankr. D. Minn. 2021).
ARGUMENT
U.S. Fire contends that this Court has no jurisdiction to hear the insurance action because (1) the Plan has been confirmed; (2) the Trustee's complaint raises only non-core matters; and (3) the insurance action will have "no conceivable impact on the bankruptcy estate." (Mot. at 5). U.S. Fire's arguments miss the mark. First, irrespective of whether the Plan has been confirmed, a bankruptcy court's "related to" jurisdiction can continue to exist. In re RFC & ResCap Liquidating Tr. Litig., No. 13-CV-3451(SRN/HB), 2017 WL 3129748, at *3 (D. Minn. July 21, 2017) ("Bankruptcy jurisdiction still exists, even after a plan has been confirmed, 'if there is sufficient connection to the bankruptcy.'") (internal citations omitted). Second, the "non-core" nature of Plaintiff's claim does not divest this Court of jurisdiction, as even U.S. Fire recognizes in its own motion papers. (See Mot. at 7) (acknowledging that bankruptcy courts have "limited powers" to issue orders in matters that are before them pursuant to their 'related to' jurisdiction). And, lastly, this insurance action will impact the Estate. See In re RFC & ResCap Liquidating Tr. Litig., 2017 WL 3129748, at *4 ("The Trust is participating in the administration of RFC's bankruptcy estate by pursuing claims and distributing funds, and the claims have not just a conceivable-but an actual-effect on the estate."). For these reasons, and for the reasons discussed in greater detail below, this Court has jurisdiction over the matter.
A. Applicable Law
Bankruptcy courts have jurisdiction over civil proceedings arising under or "related to" bankruptcy cases. In re A.P.I., Inc., 537 B.R. 902, 908 (Bankr. D. Minn. 2015). Statutorily enumerated proceedings arising under the bankruptcy case are deemed core proceedings. Id. "Related to," or non-core, proceedings are those that "'could alter the debtor's rights, liabilities, options, or freedom of action . . . and which in any way impact[] upon the handling and administration of the bankruptcy estate.'" Id. (quoting Cutliff v. Reuter, 791 F.3d 875, 881-82 (8th Cir. 2015)). Prior to confirmation of a bankruptcy plan, the Eighth Circuit applies the "conceivable effect" test to determine whether a proceeding is related to a bankruptcy case for the purpose of jurisdiction. See Specialty Mills, Inc. v. Citizens State Bank, 51 F.3d 770, 774 (8th Cir. 1995) ("For subject matter jurisdiction to exist in a 'related to' action, there must be some nexus between the civil proceeding and the Title 11 case. . . . We have adopted the 'conceivable effect' test for determining whether a civil proceeding is related to a bankruptcy case."). The Eighth Circuit has not, however, established a standard for related post-confirmation proceedings, and courts throughout the circuit have applied varying tests. See, e.g., In re Pursell Holdings, LLC, 605 B.R. 914 (Bankr. W.D. Mo. 2019) (applying the conceivable effects test to conclude that it had jurisdiction to reopen a plan but abstaining in favor of state court proceedings); In re Jr. Food Mart of Ark., Inc., 161 B.R. 462, 463 (Bankr. E.D. Ark. 1993) (post-confirmation jurisdiction is retained only to the extent provided for in the plan and is "further limited to those matters which will in fact affect the administration" of the plan); In re RFC & ResCap Liquidating Tr. Litig., 2017 WL 3129748, at *3 (explaining that bankruptcy jurisdiction still exists post-confirmation "if there is sufficient connection to the bankruptcy"). What is clear, however, is that a bankruptcy court's jurisdiction can continue after Plan confirmation. E.g., In re Wigley, 624 B.R. at 868 ("A bankruptcy court can have jurisdiction after confirmation of a chapter 11 plan to hear matters.")
This Court, in particular, has applied a two-part test whereby "the party seeking to establish post-confirmation jurisdiction must meet two requirements: (1) a close nexus to the bankruptcy case; and (2) the plan must provide for jurisdiction." Id. at 868. A "close nexus" exists "when a matter affects the interpretation, implementation, consummation, execution, or administration of the confirmed plan." Id. (internal citations and quotations omitted). A Plan satisfies the second prong when it "provide[s] for the retention of jurisdiction over the dispute." Id. (internal citations and quotations omitted). Both parts of the two-part test are satisfied here.
B. Discussion
This matter meets the two jurisdictional prongs set forth in Wigley. First, there is a "close nexus" between this insurance case and the rights and duties of the Trust under the Plan. In particular, the Plan expressly preserved the insurance claims at issue in this case and transferred those claims to the Trust to be pursued on behalf of the Diocese's creditors-namely, the sexual abuse survivors. (Plan, § 6.2). Moreover, the Plan provides that any recovery obtained by the Trust on the insurance claims will be shared with the survivors and the Trust will distribute such funds. (Plan, §§ 4.3(c), 6.2 & 8.6(c)). Given the above, this matter certainly affects the "interpretation, implementation, consummation, execution, or administration" of the Plan and, therefore, satisfies the "close nexus" standard.
The case of In re RFC & ResCap Liquidating Trust Litigation is instructive here. 2017 WL 3129748 (D. Minn. July 21, 2017). There, a residential funding corporation in the business of selling mortgage-backed securities filed for bankruptcy. Id., at *1. Under the plan of reorganization in that case, the Trust succeeded to all of the Debtor's rights and interests, and the purpose of the Trust was to "monetize [the debtor's] remaining assets, pursue claims in litigation, and distribute the proceeds to [the debtor's] creditors." Id. Upon confirmation of the plan, the Trust did just that-it brought claims for breach of contract and for indemnification against certain lenders who were supposed to have (but allegedly did not) ensure the loan quality of the residential loans that the debtor acquired. Id. Like U.S. Fire here, the lenders argued that the Trust's claims could not possibly have any impact on the bankruptcy estate because the estate-and with it the bankruptcy court's jurisdiction-ceased to exist when the plan was confirmed. Id., at *3. The District of Minnesota, however, specifically rejected that argument. As the court explained:
It is beyond dispute that the Trust was established for the purpose of administering, winding down, and distributing the assets of RFC's bankruptcy estate, and that the Plan expressly preserved the claims now asserted against PNC and Origin . . . . Both the Disclosure Statement and the Liquidating Trust Agreement envisioned that the winding down would commence after the Plan was confirmed . . . . Given the Trust's appointment as representative and task of winding down the bankruptcy estate after confirmation of the Plan, "the estate must also still exist post-confirmation. Otherwise, the [representative] would represent nothing." Sergent v. McKinstry, 472 B.R. 387, 399 (E.D. Ky. 2012).
The Trust is participating in the administration of RFC's bankruptcy estate by pursuing claims and distributing funds, and the claims have not just a conceivable- but an actual-effect on the estate.Id., at *4 (emphasis added). Although the court acknowledged that the scope of "related to" jurisdiction diminishes after Plan confirmation, the court made clear that there was "no question" that the Trust's claims “involve the administration and interpretation” of the Plan, and, therefore, triggered “related to” bankruptcy jurisdiction:
To summarize, the Plan expressly preserved the claims and transferred them to the Trust to pursue on behalf of the estate's creditors, and the purpose of these actions is to pursue those claims. The Plan provides for RFC's creditors to share in any recoveries obtained by the Trust and for the Trust to distribute such funds.
In sum, the Trust's claims directly affect the implementation, interpretation, and administration of the Plan, and "related to" jurisdiction is present.Id., at *5-6 (emphasis added).
This case is also similar to cases such as In re Lehman Brothers Holdings, Inc. 2018 WL 3869606 (Bankr. S.D.N.Y. 2018), and In re MPC Computers, LLC, 465 B.R. 384 (Bankr. D. Del. 2012). The Lehman Brothers plan administrator brought adversary actions against original sellers of faulty loans for which LBHI was found liable. 2018 WL 3869606, at *3. The court held that because "the Plan provides for the retention of jurisdiction over [the Indemnification] Claims and [] prosecution of the [] Claims by the Plan Administrator affects the implementation and administration of the Plan," the claims met the close nexus test. Id., at *6. Similarly, the liquidating trust formed under the plan in MPC Computers was to "administer certain post-confirmation responsibilities under the Plan, including but not necessarily limited to, . . . the pursuit and collection of Litigation Claims," and was automatically substituted as plaintiff for any causes of action. 465 B.R. at 387. The court found that the "Plan, Trust Agreement, and Confirmation Order clearly contemplat[ed] this proceeding as a means of implementing the Plan," and thus the Plan expressly provided for jurisdiction under the close nexus test. Id. at 383-94. See also, In re Jesup & Lamont, Inc., 2012 WL 3822135, at *3-5 (Bankr. S.D.N.Y. 2012) ("the Post-Confirmation Trust was expressly established as the principal if not only 'means for implementation of the Plan, '" and, "[t]he causes of action against the Defendants were transferred by the Debtors . . . to the Liquidating Trust pursuant to the Plan and the Litigation Trust Agreement," thereby satisfying both prongs under General Media). This Plan likewise assigns the Debtor's causes of action to the Trust, empowers the Trust to litigate issues related to the Transferred Insurance Interests, and specifies that any recoveries will become part of the Trust. See Plan, §§ 6.7(a)1 & 8.6(c). Thus, the actions of the Trust to prosecute litigation with U.S. Fire in order to benefit the Estate are an expressly contemplated means of implementing the Plan.
U.S. Fire does not mention In re RFC in its motion, but instead relies on In re A.P.I., Inc., 537 B.R. 902 (Bankr. D. Minn. 2015), which U.S. Fire describes as presenting an "identical jurisdictional issue" to this case. That, however, could not be further from the truth. In A.P.I., a law firm sued a post-confirmation Trust for allegedly unpaid legal fees. Id. at 903. The law firm filed its lawsuit in 2015, ten years after the Plan was confirmed and seven years after the Chapter 11 case was closed. Id. at 903-04. Moreover, the law firm alleged that its right to fees arose under a separate agreement that it and the Trust had entered into in January 2009, not the Plan itself. Id. at 906. This situation, of course, is materially different from the present case because (1) the plan at issue in A.P.I. did not preserve the claims sought to be litigated; and (2) resolution of the claims brought in that action would not have impacted the estate.
Here, of course, the Plan does specifically preserve the insurance claims, (see Plan, § 6.7(a)(1)), and resolution of those claims will impact the Estate because any insurance recovery will go to the Diocese's creditors under the terms of the Plan-the sexual abuse survivors. (Plan, §§ 4.3(c), 6.2 & 8.6(c)). Indeed, the In re RFC case distinguished In re A.P.I. on this very basis. See In re RFC & ResCap Liquidating Tr. Litig., 2017 WL 3129748, at *3 (describing the A.P.I. case as "finding no jurisdiction where claim was not preserved in the plan and did not belong to the estate") (emphasis added). The same reasoning applies here, and U.S. Fire's reliance on A.P.I. should be rejected.
Second, the Plan provides for the retention of jurisdiction over this dispute. In particular, the Plan expressly retains jurisdiction over "any and all other suits, adversary proceedings, motions, applications, and contested matters that may be commenced or maintained pursuant to this Chapter 11 case or the Plan, including, but not limited to, disputes arising out of or related to the Transferred Insurance Interests or the rights and obligations of the Non-Settling Insurers on and after the Effective Date." (Plan, § 16.1(21)). That is exactly the subject matter of this insurance adversary proceeding-i.e., the rights and obligations of a Non-Settling Insurer, U.S. Fire.
In In re Wigley, 624 B.R. 861, 868 (Bankr. D. Minn. 2021), this Court interpreted a plan that contained a retention of jurisdiction provision that lapsed, by its terms, when the case was "fully consummated." Id. There, this Court concluded that the plan had been "fully consummated"-and thus jurisdiction under the plan had lapsed-where the distribution process to creditors under the plan was already complete and all allowed claims under the plan had already been paid. Id. at 869, 871-72. Here, of course, the retention of jurisdiction provision contains no such self-limiting language. (See Plan, § 16.1(21)). But, even if it did, jurisdiction would still exist because the Plan has not been "fully consummated." As this Court explained, "[s]o long as [a creditor's] treatment under the Plan remains incomplete, this Court retains its section 1142(b) authority because the Plan will not be fully consummated so long as the estate continues to be administered." Id. at 869 (internal citations and quotations omitted). That is the situation here. Though the Trust is moving with all deliberate speed, it has not yet even recovered the proceeds of the Non-Settling Insurer policies, let alone distributed those proceeds to the sexual abuse survivors. For these reasons, even if the retention of jurisdiction clause in the Plan contained a "fully consummated" limitation (which it does not), jurisdiction would still exist because the Plan has not been "fully consummated."
See also id. at 872 ("[P]ursuant to the terms of the plan, the Court only maintained jurisdiction to interpret or enforce plan terms until it has been fully consummated. The Court concludes that the plan has been fully consummated as all allowed claims have been paid and the plan does not provide for payment (or liquidation) of the disallowed portion of Lariat's claim. Jurisdiction has lapsed.").
CONCLUSION
For the foregoing reasons, the Court should deny U.S. Fire's motion to dismiss.
Although the Trust's brief focuses primarily on the "close nexus" test, as the In re RFC case makes clear, the facts of this case would also meet the "any conceivable effect" test and, separately, show that the Trust's claims "involve the administration and interpretation" of the Plan. See In re RFC & ResCap Liquidating Tr. Litig., 2017 WL 3129748, at *5.