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Bankruptcy Court Finds “Close Nexus” Between Adversary Proceeding and Plan Necessary to Exercise Post-Confirmation, “Related to” Jurisdiction

Emerald Capital Advisors Corp. v. Karma Auto. LLC (In re FAH Liquidating Corp.), Adv. No. 16-51528 (KG), 2017 WL 663521 (Bankr. D. Del. Feb. 16, 2017)

In denying the motion to dismiss filed by Wanxiang Clean Energy USA LLC (“Wanxiang”) and Karma Automotive LLC (“Karma” and together with Wanxiang, “Defendants”), the Bankruptcy Court found that it has both “arising in” and “related to” jurisdiction to hear an adversary proceeding filed by the Trustee for the FAH Liquidating Trust (“Trustee”) over two years after confirmation.

A more fulsome history of the bankruptcy cases filed by Fisker Automotive Holdings, Inc. and Fisker Automotive, Inc. (collectively, “Debtors”) can be found here and here.  The facts relevant to the instant dispute relate to the sale of the Debtors’ assets to Wanxiang.  The purchase price was $149.2 million, which included $126.2 million in cash, $8 million of assumed liabilities and a 20% equity interest (the “Equity Consideration”) in Karma, a holding company formed by Wanxiang and Fisker.  Pursuant to the limited liability company agreement (the “LLC Agreement”), the Debtors received 200 common units and 200 Series B preferred units, which represented a 20% interest in Karma.  The Equity Consideration was eventually transferred to the Trust.  Years later, Karma issued additional units of Series A preferred and common units to Wanxiang.  The Trustee objected to the issuance of common units to Wanxiang and filed an adversary proceeding alleging that the Defendants violated the LLC Agreement and Plan by diluting the Equity Consideration.

In this Opinion, Judge Gross found that the Bankruptcy Court has subject matter jurisdiction over the allegations in the adversary complaint.  In order to do so, the Court held that the claims in the complaint had “a close nexus to the bankruptcy plan” and the issues “affect[] the interpretation, implementation, consummation, execution, or administration of a confirmed plan[,]” following the Third Circuit’s guidance in In re Resorts Int’l, Inc., 372 F.3d 154 (3d Cir. 2004).  For a recent case describing the standards for “related to” jurisdiction, see our Solyndra blog post.  Here, the Court previously approved Wanxiang’s purchase of the Debtors’ assets for a price that included the Equity Consideration.  Because the claims asserted in the adversary proceeding arise from the Purchase Agreement, LLC Agreement, and Plan, such claims are “inseparable from the bankruptcy case itself” and “call[] into play the integrity of the bankruptcy process.”  Op. at 9-10.  While post-confirmation jurisdiction can be problematic, the Court found that the adversary proceeding seeks interpretation and enforcement of the Plan, which satisfies the “close nexus” required for the Bankruptcy Court to exercise jurisdiction.

Alternatively, Defendants ask the Bankruptcy Court to permissively abstain from hearing the adversary proceeding under 28 U.S.C. § 1334(c)(1) to allow the claims to proceed in a state forum.  In exercising His Honor’s discretion, Judge Gross found that the twelve-factor permissive abstention test, from In re TransWorld Airlines, Inc., 196 B.R. 711 (Bankr. D. Del. 1996), weighed heavily against abstention.