Opinion
Civil Action No: 04-2613 Section: "D"(5), Bankruptcy No. 99-14143.
November 30, 2004
ORDER AND REASONS
Before the court is the Appeal of The Texas Mexican Railway Company (Tex Mex), who appeals the August 4, 2004 Order of the United States Bankruptcy Court denying Tex Mex's Motion to Reopen the Chapter 11 case filed by Sun Drilling Products Corporation. Sun Drilling is the Appellee.
The matter is before the court on the briefs, without oral argument. Having reviewed the briefs of counsel, the record and the applicable law, the court finds that the Bankruptcy Court did not abuse its discretion in denying Tex Mex's Motion to Reopen, and thus the Bankruptcy Court's August 4, 2004 Order should be affirmed.
1. Background
Appellee Sun Drilling is a reorganized debtor in a bankruptcy case entitled " In re: Sun Drilling Products Corporation," No. 99-14143 (B), Chapter 11, in the Bankruptcy Court for the Eastern District of Louisiana. Appellant Tex Mex filed a proof of claim in that bankruptcy proceeding in the amount of $1,990,321.59, alleging a general unsecured claim for property damages, environmental clean up and exemplary damages.Sun Drilling initially objected to Tex Mex's proof of claim. However, Sun Drilling and Tex Mex ultimately agreed to a compromise and settlement agreement which provided that Tex Mex's claim would be reduced and allowed in the amount of $550,000.00, subject to approval of a plan incorporating terms of the settlement agreement.
The Bankruptcy Court ultimately approved the settlement agreement in conjunction with the confirmation of the Amended Plan of Reorganization. The Amended Plan was modified to provide that in consideration for the release by Tex Mex of certain claims, the Tex Mex's Class 6 claim would be increased to $625,000.00 payable over seven years.
The parties also entered an exclusive licensing agreement, which provided that Tex Mex would act as Sun Drilling's exclusive licensee and distributor in Mexico and sell Sun Drilling's products on an exclusive basis in Mexico. Further, Tex Mex was to sell Sun Drilling's products on a non-exclusive basis in Central and South America.
The Order approving the Motion for Authority to Enter into Exclusive Licensing Agreement was entered in the Chapter 11 bankruptcy case on July 17, 2000, however the parties now dispute whether or not this exclusive licensing agreement was a part of the settlement agreement approved by the Bankruptcy Court in conjunction with the confirmation of the Amended Plan of Reorganization. ( See Order approving Motion for Authority to Enter into Exclusive Licensing Agreement, Bankruptcy Ct. Docket 99-14143 "B", Doc. No. 610 USDC Docket No. 04-2266, Minute Entry, Doc. No. 13, pp. 3-4).
Sun Drilling's Amended Plan of Reorganization was confirmed by the Bankruptcy Court on June 30, 2000. The Final Decree closing the case was entered on March 18, 2003.
Sun Drilling, the reorganized debtor, began making payments on Tex Mex's Class 6 claim according to the confirmed plan, and continued to do so until the October 2002 payment became due. Sun Drilling then failed to make the October 2002 payment and has not paid on the Class 6 claim since June 2002. To date, Sun Drilling's payments total $137,236.00.
On August 10, 2004, Sun Drilling filed a Declaratory Judgment action in this court, Civil Action No. 04-2266 "D", in which Sun Drilling alleges that it stopped making payments on Tex Mex's Class 6 claim because Tex Mex had failed to perform its obligations under the Exclusive Licensing Agreement to market Sun's products in Mexico.
On June 14, 2004, Tex Mex notified Sun Drilling that it was in default under the provisions of the Amended Plan of Reorganization in payment of Tex Mex' approved claim for $625,000, since no payments had been received since June 2002. Tex Mex also moved to reopen the bankruptcy case because of this alleged default. Sun Drilling opposed the reopening of the bankruptcy proceeding for lack of jurisdiction, and because Tex Mex had waited too long to reopen the case.
On August 4, 2004, the Bankruptcy Court denied Tex Mex's Motion to Reopen Chapter 11 case. At the hearing on Tex Mex's Motion to Reopen, the Bankruptcy Court found that:
even if I do have jurisdiction, I do not have exclusive jurisdiction. You can go in any state court and sue in any state in which Sun Drilling is doing business, and sue on the confirmation plan and the Order. It's an ordinary contract. You can get a judgment and seize any assets they might have.
(Transcript of August 4, 2004 hearing before United States Bankruptcy Judge Jerry Brown, p. 6).
However, the Bankruptcy Court also cautioned Sun Drilling:
even if I decline to reopen this case and to accept jurisdiction in the case, I'm certainly not going to do anything to preclude [Tex Mex] going into state court and bringing whatever action they want to bring. To the contrary, I'm going to state that they can do that, as far as I'm concerned.
Because I'm not going to let you take the perch: Well, look, they can't sue me for not making the payments, but if they go into state court, I'm going to raise the point that the plan discharged the debt.
You can't ride two horses in this thing.
( Id. at 16).
In refusing to reopen the case, the Bankruptcy Court concluded:
considering all the arguments of Counsel and reading what I can in the short time available to me, I'm not clear at all whether I have or do not have jurisdiction. Craig's Stores would certainly indicate to me that I do not have jurisdiction, because the Debtor estate ceases to exist upon confirmation and, thus, jurisdiction of the bankruptcy court ceases to exist, other than for matters pertaining to the implementation or execution of the plan. And that's the situation raised by U.S. Brass Corporation.
But, even if I do have jurisdiction in this case, it's certainly not exclusive jurisdiction, and I decline to exercise jurisdiction, because I don't want to get involved in reopening the case after the Debtor's estate has already ceased. . . .
It seems to me that the best course of action for the railroad is to sue the former Debtor-the Debtor's estate no longer exists, I repeat-to sue the former Debtor or the reorganized Debtor in state court on the contractual provisions of the plan, as approved by the Court. . . .
And . . . the jurisdiction of the Bankruptcy Court, if it continues to exist after confirmation of the plan, is not exclusive, and that's true after consummation of the plan. . . .
( Id. at 18-19).
On September 22, 2004, Tex Mex filed this suit appealing that ruling from the Bankruptcy Court. In its appeal brief, Tex Mex raises the following two issues:
(1) whether the Bankruptcy Court has jurisdiction to adjudicate a controversy arising from default by Sun Drilling Products Corporation in the payment of the Texas Mexican Railway Company's Class 6 Claim included in the confirmed Amended Plan of Reorganization in the Chapter 11 case; and
(2) whether the Bankruptcy Court abused its discretion in refusing to grant the Texas Mexican Railway's Company's Motion to Reopen the Chapter 11 case for the purposes of adjudicating such controversy between the parties.
( See Tex Mex's Appeal Brief, p. 4).
II. Legal Analysis
A. The bankruptcy court had jurisdiction to adjudicate Tex Mex's claim that Sun Drilling has defaulted in its payment of the Texas Mexican Railway Company's Class 6 Claim included in the confirmed Amended Plan of Reorganization.The bankruptcy court did not expressly rule, but doubted, that it had subject matter jurisdiction to adjudicate Tex Mex's claim that Sun Drilling has defaulted in its payment of the Texas Mexican Railway Company's Class 6 Claim included in the confirmed Amended Plan of Reorganization. In narrowing a bankruptcy court's post-confirmation jurisdiction, the Fifth Circuit has instructed:
After a debtor's reorganization plan has been confirmed, the debtor's estate, and thus bankruptcy jurisdiction, ceases to exist, other than for matters pertaining to the implementation and execution of the plan. No longer is expansive bankruptcy court jurisdiction required to facilitate "administration" of the debtor's estate, for there is no estate left to reorganize.In re Craig Stores of Texas, Inc., 266 F.3d 388, 390 (5th Cir. 2001) (citations omitted) (emphasis added).
In Craig Stores, the Chapter 11 debtor, Craig's Stores, had done business with the Bank of Louisiana (BOL) since 1989, using the BOL to administer Craig's credit card program and assist in financing Craig's operations by buying the company's receivables. The parties' relationship continued after Craig's sought Chapter 11 bankruptcy protection in 1993, and their contract was assumed as part of the debtor's reorganization plan confirmed in December 1994.
In mid 1996, Craig's sued the BOL in an adversary proceeding in the bankruptcy court, asserting state law claims for damages alleged to have risen in 1994 and 1995. The case went to trial before the bankruptcy court, resulting in a quarter-million dollar judgment for Craig's. On appeal, the district court questioned " sua sponte how the bankruptcy court could exercise jurisdiction over a post-confirmation, state law-based contract dispute," and ultimately found that the bankruptcy court's exercise of jurisdiction was improper. Id. at 390.
The Fifth Circuit affirmed, reasoning that:
Viewed from the narrower perspective, it is clear that Craig's claim against the Bank principally dealt with post-confirmation relations between the parties. There was no antagonism or claim pending between the parties as of the date of the reorganization. The fact that the account management contract existed throughout the reorganization and was, by implication, assumed as part of the plan is of no special significance. And even if such circumstances might bear on post-confirmation bankruptcy court jurisdiction, no facts or law deriving form the reorganization or the plan was necessary to the claim asserted by Craig's against the Bank. Finally, while Craig's insists that the status of its contract with the Bank will affect its distribution to creditors under the plan, the same could be said of any other post-confirmation contractual relations in which Craig's is engaged. In sum, the state law causes of action asserted by Craig's against the Bank do not bear on the interpretation or execution of the debtor's plan and therefore do not fall within the bankruptcy court's post-confirmation jurisdiction. See 11 U.S.C. § 1142(b).Id. at 391 (emphasis added).
The Craig Stores Court also distinguished a prior decision, In re Case, 937 F. 2d 1014 (5th Cir. 1991), which involved the post-confirmation dispute over a promissory note provided for in the debtor's reorganization plan. The note was executed in settlement of a creditor's claim as part of the reorganization plan itself. Id. at 1017. Thus, unlike the dispute in Craig Stores, the dispute in Case involved an obligation created by the debtor's reorganization plan, and the Fifth Circuit found the bankruptcy court did not abuse its discretion in reopening it and adjudicating it as a core proceeding under 28 U.S.C. § 157. Case, 937 F.2d at 1018-20; Craig Stores, 266 F.3d at 391.
In U.S. Brass Corp. v. Travelers Ins. Group (In re U.S. Bras Corp.), 301 F.3d 296 (5th Cir. 2002), the Fifth Circuit refined its analysis of post-confirmation jurisdiction which had been adopted in Craig Stores. At issue in U.S. Brass was a post-confirmation debtor's request for court approval of a proposed agreement to liquidate claims through binding arbitration where the confirmed plan provided that the claims would be resolved in a court of competent jurisdiction and determined by settlement or final judgment. Insurers objected to the proposed claim liquidation agreement relying on the Bankruptcy Code's prohibition on modification of a substantially consummated plan. On the other hand, the debtors contended that their proposed agreement with the arbitration provision was consistent with the language of the plan. U.S. Brass, 301 F.3d at 305.
In finding subject matter jurisdiction, the U.S. Brass court concluded:
Bankruptcy law will ultimately determine the dispute, and the outcome could affect the parties' post-confirmation rights and responsibilities. Furthermore, this proceeding will certainly impact compliance with or completion of the reorganization plan. Consequently, the [debtor's motion for approval of a proposed agreement to liquidate claims through binding arbitration] pertains to the plan's implementation or execution and therefore satisfies Craig's Stores test for post-confirmation jurisdiction.U.S. Brass, 301 F.3d at 305.
Although "post-confirmation jurisdiction exists for disputes concerning the implementation or execution of a confirmed plan, 28 U.S.C. § 1334 remains the source of this jurisdiction." U.S. Brass, 301 F.3d at 305, n. 29.
Here, the issue of whether or not Sun Drilling defaulted on its payments to Tex Mex pursuant to the provisions of the Amended Plan clearly involves an "obligation created by the debtor's reorganization plan." Craig's Stores, 266 F.3d at 391. Thus, as in Case and U.S. Brass, the dispute "bear[s] on the interpretation or execution of the debtor's plan, [it falls] within the bankruptcy court's post-confirmation jurisdiction." Id.
In its brief, Sun Drilling argues that the issue here "is more analogous to Craig Store's than to In re Case, because it is not clear whether the Exclusive Licensing Agreement was part of the Settlement Agreement which was approved in conjunction with the plan of reorganization." (Sun Drilling's Appellee Brief at 12-13). However, Tex Mex was not attempting to re-open the Chapter 11 case to litigate the Exclusive Licensing Agreement, but rather was attempting to re-open the Chapter 11 case to litigate Sun Drilling's default of payments to Tex Mex under the terms and provisions of the Amended Plan of Reorganization. Indeed, in Sun Drilling's Declaratory Judgment Action, No. 04-2266, Tex Mex maintains that while the parties sought bankruptcy approval to enter the Exclusive Licensing Agreement, the Exclusive Licensing Agreement was not connected to the plan of reorganization. B. Although the bankruptcy court had jurisdiction to adjudicate Tex Mex's claim that Sun Drilling was in default in paying Tex Mex's Class 6 Claim included in the confirmed Amended Plan of Reorganization, the bankruptcy court did not abuse its discretion in refusing to grant the Texas Mexican Railway's Company's Motion to Reopen the Chapter 11 case.
The court also notes that the bankruptcy court's Order granting Sun Drilling's Motion to Enter Into Exclusive Licensing Agreement was signed after the bankruptcy court signed the Order Confirming Plan of Reorganization. ( See Bankruptcy Court Docket, 99-14143, Docs. Nos. 597 610).
In denying Tex Mex's Motion to Re-open the bankruptcy case, the bankruptcy court found that even if it had jurisdiction, it did not have exclusive jurisdiction, and opined that Tex Mex could seek enforcement of Sun Drilling's obligation to pay Tex Mex's Class 6 Claim by suing the reorganized debtor under state contractual law. This court agrees as Sun Drilling's "reorganization plan functions as a contract in its own right." U.S. Brass, 301 F.3d at 307. Indeed, on October 18, 2004, Tex Mex filed a Counter-Claim in Sun Drilling's Declaratory Judgment Action No. 04-2266, alleging in part that the confirmed Amended Plan of Reorganization is a contract between Sun Drilling and all creditors, and that Sun Drilling (the Reorganized Debtor) is in default of its payments to Tex Mex under the provisions of the Amended Plan. ( See No. 04-2266, Doc. No. 14, p. 8).
The court rejects Tex Mex's arguments that it should be allowed to seek enforcement of the plan through the Bankruptcy Court's contempt powers, or seek conversion or dismissal of the Chapter 11 case. This court, which also has Sun Drilling's Declaratory Judgment Action with Tex Mex's compulsory counter-claim (USDC No. 04-2266), will necessarily decide Tex Mex's claims for breach of contract, enforcement of Sun Drilling's obligation to pay under the Amended Plan, and damages. Thus, there is no reason why the bankruptcy case should be re-opened to litigate these same issues under the bankruptcy court's contempt powers.
Tex Mex argues that "a state court would not have jurisdiction to either dismiss or convert the chapter 11 case because the U.S. District Court, through the Bankruptcy Court, has exclusive jurisdiction over all cases under title 11.28 U.S.C. 1334(a), e.g., conversion or dismissal of a chapter 11 case." (Tex Mex's Appellant's Brief at 14).
Further, dismissal or conversion of the Chapter 11 case would be of no avail when the Debtor's estate has been terminated by the confirmation order, and no assets exist. As the Bankruptcy Court stated during the hearing of Tex Mex's Motion to Reopen:
I can dismiss the case, but how does that help you? That just puts you back — if you go into state court right now.
I can convert the case, but if I can convert it, there's no assets, because the Debtor estate ended. So, I don't know that I can give you any better or maybe not even as good a relief as you can get from a state court by suing on the confirmation of the plan.
(Transcript at p. 8).
The court concludes that the bankruptcy court permissively abstained to exercise jurisdiction under 28 U.S.C. § 1334(c) (1), and in so doing did not abuse its discretion in denying Tex Mex's Motion to Re-Open. In re Gober, 100 F.3d 1195, 1206-07 (5th Cir. 1996).
28 U.S.C. § 1334, entitled "Bankruptcy cases and proceedings," provides in part:
(c)(1) Nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.