In Wigley v. Lariat Cos., Inc. (In re Wigley), 624 B.R. 861 (Bankr. D. Minn. Jan. 25, 2021) (Fisher, J.), the Bankruptcy Court held that its retained post-confirmation jurisdiction to interpret and enforce a confirmed Chapter 11 plan had ended when the plan had been fully consummated and all allowed claims were paid.
An individual debtor filed for Chapter 11 bankruptcy relief after a state district court found her severally and jointly liable for a fraudulent transfer of her spouse’s assets to her. That fraudulent transfer occurred sometime after a landlord creditor received a judgment against the debtor’s spouse based on his guaranty of a real property lease. Before the bankruptcy commenced, the debtor (and her spouse) sought to vacate the fraudulent transfer judgment against her, resulting in multiple proceedings before the state district and appellate courts where ultimately the Minnesota Supreme Court denied the debtor’s petition for further review.
After the debtor filed for bankruptcy, the creditor filed a claim based on the fraudulent transfer judgment and amounts of accrued interest. The Bankruptcy Court allowed the creditor’s claim in part, which the Eighth Circuit Court of Appeals affirmed and subjected to a cap pursuant to 11 U.S.C. § 502(b)(6). The creditor then initiated an adversary proceeding to except its fraudulent transfer judgment from discharge under 11 U.S.C. § 523(a)(2)(A). The Bankruptcy Court entered a judgment excepting the debt owed to the creditor from discharge, which the Eighth Circuit B.A.P. affirmed. The debtor appealed that decision to the Eighth Circuit Court of Appeals, but did not seek a stay pending the appeal of the nondischargeable judgment.
While these matters were pending on appeal, the debtor’s Chapter 11 plan was confirmed. Under the terms of the plan, the debtor agreed to pay all allowed claims in full, including the creditor’s allowed claim. The plan provided (among other things) that the creditor was enjoined from collection activity against the debtor unless there was a payment default to it under the plan. The plan also purported to retain the Bankruptcy Court’s jurisdiction over certain proceedings “[t]o the full extent permitted under applicable law, until the Plan has been fully consummated.” This reservation included proceedings involving “interpretation and enforcement of the terms of the Plan.” After the Eighth Circuit Court of Appeals affirmed the creditor’s allowed claim, the debtor paid the creditor’s allowed claim with interest in accordance with the plan. Nearly two years after the petition date, the debtor received discharge of all debts, other than debts owed to the creditor. The creditor then commenced collection efforts against the debtor.
Following various proceedings in the Bankruptcy Court, the debtor brought an adversary proceeding (i) to enjoin the creditor’s collection efforts until the pending appeals in both the state and federal courts had concluded, (ii) for declaratory relief regarding interpretation of certain provisions of the confirmed Chapter 11 plan, and (iii) for application of payments made by the debtor and the debtor’s spouse toward and in satisfaction of the debtor’s indebtedness to the creditor from the fraudulent transfer judgment. The creditor moved to dismiss the complaint for lack of subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1) and (b)(6) (made applicable to the adversary proceeding by Fed. R. Bankr. P. 7012) and, in the alternative, mandatory or discretionary abstention under 28 U.S.C. § 1334(c). In her response, the debtor argued mandatory abstention as an alternative remedy.
The Bankruptcy Court granted the motion and dismissed the complaint. Citing 28 U.S.C. § 1334(c)(1)-(2), the Bankruptcy Court reasoned that subject matter jurisdiction is a prerequisite to abstention. Said differently, the Bankruptcy Court is unable to abstain unless it also has subject matter jurisdiction. The Bankruptcy Court ultimately held it lacked subject matter jurisdiction based on the facts of the case, as opposed to the allegations initially pled in the complaint, for four reasons. First, it was undisputed that all payments on allowed claims required to be made under the terms of the plan had been made, including the debtor’s distribution to the creditor under the terms of the plan. Second, turning to the plain language of the plan—which purported to retain the Bankruptcy Court’s jurisdiction “[t]o the full extent permitted under applicable law, until the Plan has been fully consummated,” the Bankruptcy Court concluded that the plan had been fully consummated. The Bankruptcy Court reasoned that for a plan to be fully consummated, something more than substantial consummation under 28 U.S.C. § 1101(2) must be required, such as a creditor’s treatment under the plan remaining incomplete. The Bankruptcy Court agreed with the creditor that the plan did not govern payment of the disallowed portion of its claim. Indeed, the Bankruptcy Court noted that the plan expressly and directly limited treatment of claims to payment of allowed claims, not any disallowed amount. Third, to the extent the plan enjoined the creditor’s collection efforts, the injunction was tied to payment or nonpayment of the allowed claim only. The Bankruptcy Court reasoned that because the disallowed amount was not required to be paid in the plan, the debtor’s failure to pay the disallowed amount could not constitute a default under the plan. Fourth, the plan did not provide a mechanism to deal with payment or liquidation of the disallowed portion of the creditor’s claim.
Because the Bankruptcy Court found it did not have subject matter jurisdiction, it held that it could not abstain. However, the Bankruptcy Court acknowledged that the outcome could have been different if the parties entered into a generic stipulation of dismissal. Had they done so, the Bankruptcy Court stated it would have dismissed the case because, normally, if both parties agree to dismissal, the reason for dismissal is irrelevant. The debtor’s consent to mandatory abstention alone was insufficient.
Co-Editors in Chief
Alexander J. Beeby, Larkin Hoffman Daly & Lindgren Ltd.
Kesha Tanabe, Tanabe Law