No “Related to” Jurisdiction Despite Stipulation and Bankruptcy Court Order Governing the Non-Debtor Parties’ Rights and Responsibilities

Seagate Tech. (US) Holdings, Inc. v. Global Kato HG, LLC (In re Solyndra, LLC), 2015 WL 6125246 (MFW) (Bankr. D. Del. Oct. 16, 2015).

In this Memorandum Opinion, Judge Mary Walrath of Delaware’s Bankruptcy Court granted a motion to dismiss an adversary proceeding between two non-debtor parties based on lack of subject matter jurisdiction, and also remanded similar litigation between the parties back to California state court.  Among other things, the Court concluded that an order issued by the Bankruptcy Court approving a stipulation did not confer subject matter jurisdiction over a proceeding between two non-debtors alleging state law claims, where a state court could easily interpret and give effect to it.

The non-debtor defendant, Global Kato HF, LLC (“Global Kato”), as landlord, leased a manufacturing facility in California to which the non-debtor plaintiff, Seagate Technology (US) Holdings, Inc. (“Seagate”), was the assignee.  Seagate then subleased the premises to 360 Degree Solar Holdings, Inc. (together with its affiliate, Solyndra, LLC, the “Debtors”).  Soon after the Debtors’ bankruptcy petitions were filed, the Debtors moved to reject the lease and sublease.  In settlement of Global Kato’s objection to the Debtors’ rejection motion, the parties entered into a stipulation (the “Stipulation”) (i) limiting Global Kato’s rejection damages to $17.5 million; (ii) causing Global Kato to pay up to $848,318 (the “Work Cap”) to remediate environmental damage to the premises; and (iii) providing Seagate a credit up to the Work Cap for any claims Global Kato may have against Seagate that relate to the Debtors’ occupancy.  The Bankruptcy Court entered an order approving the Stipulation (the “Order”).  A dispute then arose between Seagate and Global Kato over payment to remediate environmental damage to the premises, and both parties filed lawsuits alleging substantially similar state law claims: Seagate filed an adversary proceeding in the Delaware Bankruptcy Court and Global Kato commenced an action in California state court.  The California action was subsequently removed to the Delaware Bankruptcy Court.  Global Kato filed a motion to dismiss Seagate’s complaint and to remand the California action back to California state court, arguing, among other things, lack of subject matter jurisdiction.

“Federal bankruptcy jurisdiction extends to four types of matters: (1) cases under title 11, (2) proceedings arising under title 11, (3) proceedings arising in a case under title 11, and (4) proceedings related to a case under title 11.”  Op. at 7.  In rendering its decision, the Court quickly shot down arguments under the first two types.  The Court also declined to exercise “arising in” subject matter jurisdiction (type 3) because Seagate’s complaint, “though mentioning the Stipulation and Order approving it, is not founded on that Order and Stipulation” but instead is grounded on its rights under the lease.  Op. at 9.  The Court then turned its analysis to the final type of subject matter jurisdiction — “related to”.

“Related to” jurisdiction requires a sufficiently close nexus between the bankruptcy case and the proceeding.  Post-confirmation, subject matter jurisdiction shrinks, and the matter at issue must “affect[] the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement.”  Op. at 11.  In applying this narrow principle, the Court first held that the Debtors’ confirmed plan did not specifically identify the Seagate/Global Kato dispute and thus it had no “close nexus” to the plan, holding that general claims resolution language in a plan is not sufficient to confer subject matter jurisdiction.  Second, the Court held that the possible indemnity claims against the Debtors’ estate are too conditional and remote to confer subject matter jurisdiction over the claims, which are—at their core—claims between two non-debtors over a lease dispute governed by state law.  The Court considered that the dispute had “the potential to increase (or decrease) recovery for creditors” but did not give such argument any weight given that no plan provision related to the complaint and the proceeding was filed two years post-confirmation.  Op. at 15 (noting that a court must consider “whether the suit is post-confirmation and its relatedness to the Plan” when examining whether increased/decreased creditor recoveries is a sufficient enough nexus to confer subject matter jurisdiction).  Finally, the Court held that even if adjudication of the claims required interpreting the Stipulation and related Order, a state court is fully able to interpret the Stipulation, and any effect on the Debtors’ bankruptcy is too attenuated to justify “related to” jurisdiction.  For these reasons, the Court dismissed the adversary proceeding and remanded the California action back to California state court.