Postconfirmation Subject Matter Jurisdiction of Bankruptcy Courts

A trend among Chapter 11 practitioners over the last ten years has been to use general provisions in the Plans of Reorganization they draft. They copy and paste these provisions in all their Plans, close their eyes and hope for the best.

One of those clauses is this “retention of jurisdiction” clause. Some practitioners have a bland one, “The Court shall retain jurisdiction to the maximum extent possible under the law.” To me, that means nothing. The problem is this clause is not helpful. It doesn’t tell the court specifically what it’s allowed to do and not allowed to do, inviting litigation over this issue before the merits are even considered!

So other practitioners responded to this problem by listing a litany of situations where they would like the court to retain jurisdiction, for example:

After confirmation of the Plan and occurrence of the Effective Date, in addition to jurisdiction which exists in any other court, the Bankruptcy Court will retain such jurisdiction as is legally permissible including for the following purposes:

• To resolve any and all disputes regarding the operation and interpretation of the Plan and the Confirmation Order;
• To determine the allowability, classification, or priority of claims and interests upon objection by the Debtor, the Reorganized Debtor, or by other parties in interest with standing to bring such objection or proceeding;
• To determine the extent, validity and priority of any lien asserted against property of the Debtor or property of the Debtor’s estate.
• To construe and take any action to enforce the Plan, the Confirmation Order, and any other order of the Court, issue such orders as may be necessary for the implementation, execution, performance, and consummation of the Plan, the Confirmation Order, and all matters referred to in the Plan, the Confirmation Order, and to determine all matters that may be pending before the Court in this case on or before the Effective Date with respect to any person or entity related thereto;

… this thing goes on for pages and pages. While slightly helpful, some judges won’t allow these clauses into the Plan, but for those that do, case law has demonstrated they are also not very good.

The main situation where the problems arise is in situations where the Debtor is trying to preserve litigation rights. The Plan wiped away the rights of others to sue the Debtor but retained Debtor’s right to sue and do so in Federal Bankruptcy Court!

A few months ago, the District Court for the Eastern District of North Carolina joined the 3^rd Circuit, 4^th Circuit, and 9^th Circuits in invalidating these clauses in so far as they purport to retain jurisdiction for the bankruptcy courts to decide these cases.

Practitioners need to tailor the retention of jurisdiction clause to fit the needs of each client on an individual basis. The first start is to explicitly list the potential litigation matter and the second step is to tie recovery of that litigation to payments due under the Plan. This is not only easy to do but a must for those of us who wish to save our clients the further headache of litigating jurisdiction!

For further reading, the seminal 9^th Circuit case on this topic is: In re Pegasus Gold Corp., 394 F. 3d 1189 – Court of Appeals, 9th Circuit 2005