Monday, June 26, 2006

N.D. Ill. Finds that Bankruptcy Jurisdiction is Limited after Confirmation of Chapter 11 Plan

Per In re Federalpha Steel LLC, 341 B.R. 872 (Bkrtcy. N.D. Ill., May 31, 2006):

Bankruptcy jurisdiction exists over claims that either arise under title 11 or that arise in or are “related to” a case under title 11. 28 U.S.C. § 1334(b). The Trust's claims in Counts III through XII plainly do not arise under title 11 because they are state law claims, not claims “created or determined by a statutory provision of title 11.” Wood v. Wood (In re Wood), 825 F.2d 90, 96 (5th Cir.1987)… The real question, and the question the parties dispute, is whether the claims in Counts III through XII are at least “related to” the Federalpha bankruptcy.

They are not. Under the Seventh Circuit's strict interpretation of “related to” jurisdiction, a dispute is “related to” a bankruptcy only if “the dispute affects the amount of property for distribution [i.e., the debtor's estate] or the allocation of property among creditors.” In re FedPak Sys., Inc., 80 F.3d 207, 213-14 (7th Cir.1996) (internal quotation omitted). A particular dispute's mere overlap with the debtor's affairs is not enough. Home Ins. Co. v. Cooper & Cooper, Ltd., 889 F.2d 746, 749 (7th Cir.1989)….

After confirmation of a chapter 11 plan, moreover, “related to” jurisdiction is “sharply reduced.” Cytomedix, Inc. v. Perfusion Partners & Assocs., Inc., 243 F.Supp.2d 786, 789 (N.D.Ill.2003); see Pettibone Corp. v. Easley, 935 F.2d 120, 122 (7th Cir.1991). The number of issues potentially affecting the estate or the administration of the case necessarily decreases at that point. Conseco, Inc. v. Davis (In re Conseco, Inc.), 318 B.R. 425, 432 (Bankr.N.D.Ill.2004). Post-confirmation “related to” jurisdiction is therefore appropriate “only to ensure that reorganization plans are implemented and to protect estate assets devoted to implement the confirmed plan.” Cytomedix, 243 F.Supp.2d at 789. Once assets have left the estate, the court's jurisdiction to decide disputes involving them lapses. FedPak, 80 F.3d at 214.

Given the dismissal of Counts III through XII for lack of jurisdiction, the only practical option is for the court to exercise its discretion under 28 U.S.C. § 1334(c)(1) and abstain from hearing the claims in Counts I and II. To do anything else would be inefficient and wasteful.


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