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October 18, 2019

Bankruptcy Court Jurisdiction Does Not Always Narrow After Confirmation

The Legal Intelligencer

Philadelphia and Wilmington partner Andrew Kassner and senior attorney Joseph Argentina have written “Bankruptcy Court Jurisdiction Does Not Always Narrow After Confirmation,” published in The Legal Intelligencer on October 18, 2019.

Courts have held that jurisdiction for claims related to a Chapter 11 bankruptcy case narrows after the Chapter 11 plan becomes effective. The issue was considered by the U.S. District Court for the District of Colorado in Centrix Finan. Liquidating Trust v. Sutton, et al. (In re Centrix, et al.), Case No. 18-cv-02769-RBJ. The district court ruled that, unlike a Chapter 11 reorganization case where the debtor emerges as an operating business, a bankruptcy court’s jurisdiction does not narrow if the matter involves a liquidating trust whose purpose is administering the bankruptcy estate.

In this case, the debtor filed a Chapter 11 bankruptcy case, and its plan was confirmed. Under the plan, the assets, including claims held by the estate, were transferred to a trust overseen by a trustee whose task was to distribute the trust assets (including claims) and their proceeds to creditors. The trustee brought fraud claims against the former CEO of the company and his family, which settled for a “proportionally de minimus amount” because the CEO and family made sworn declarations that they had practically no assets. The trustee later brought a second action alleging that the sworn declarations were fraudulent, and the defendants had transferred assets to other undisclosed entities. The District Court ruled that bankruptcy court jurisdiction existed because, among other reasons, the claims were brought in a liquidating trustee rather than by a reorganized debtor.

A debtor in Chapter 11 can emerge from Chapter 11 as an operating company. However, when a debtor liquidates, post-confirmation activity is usually carried out by a liquidating trust. The district court in this case articulated why the scope of bankruptcy court jurisdiction is different in each scenario.

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