534 B.R. 500
S.D.N.Y.2015Background
- In April 2014 Texas Competitive Electric Holdings (TCEH) and affiliates filed Chapter 11 in the District of Delaware; the cases are jointly administered there.
- First‑lien creditors include (a) large bank lenders (administrated by Wilmington Trust), (b) First Lien Noteholders (represented by Delaware Trust), and (c) secured swap providers (e.g., J. Aron, MSCG). An Intercreditor Agreement governs priority and contains a permissive New York jurisdiction clause and a waterfall for distributions.
- The Bankruptcy Court authorized use of cash collateral and adequate‑protection monthly payments but parties disputed how to allocate those monthly payments (Petition‑Date Allocation vs. Postpetition Allocation). Judge Sontchi ordered disputed amounts escrowed pending further order or another court’s decision.
- Delaware Trust sued in New York state court seeking declaratory relief and specific performance to allocate escrowed and future payments under the Postpetition Allocation method; Wilmington Trust removed to federal court.
- Proposed intervenors (swap providers and a bank creditor) moved to intervene; Wilmington Trust (and intervenors) moved to transfer to the District of Delaware (to be referred to the Bankruptcy Court); Delaware Trust moved to remand and also sought abstention.
- District court held the allocation dispute is a core "arising in" bankruptcy proceeding, denied remand and permissive abstention, granted intervention, and transferred the case to the District of Delaware for referral to the Bankruptcy Court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether federal jurisdiction exists over the dispute | Delaware Trust: allocation is a state contract claim; no bankruptcy "arising in" nexus; remand warranted | Wilmington Trust: dispute arises from bankruptcy cash‑collateral/adequate‑protection orders and thus is within federal §1334 jurisdiction | Court: jurisdiction exists; at minimum "related to," and on facts dispute "arises in" the bankruptcy (core) |
| Whether mandatory abstention/remand is required | Delaware Trust: if only "related to," mandatory abstention requires remand to state court capable of timely adjudication | Wilmington Trust: dispute is core ("arises in") so mandatory abstention inapplicable | Court: mandatory abstention inapplicable because claim "arises in" Title 11; permissive abstention also denied |
| Whether intervenors may join | Intervenors: swap providers and Titan sought intervention to protect allocation interests | Delaware Trust: opposed some interventions but did not oppose swap providers | Court: granted intervention as of right for swap providers (MSCG, J. Aron) and permissive intervention for Titan |
| Whether transfer to District of Delaware is appropriate | Delaware Trust: chose New York forum per intercreditor clause; state court can resolve simple contract issue | Wilmington Trust/intervenors: transfer promotes centralized, efficient resolution by Bankruptcy Court overseeing reorganization | Court: transfer granted under §1412/§1404(a); Delaware Bankruptcy Court is appropriate forum |
Key Cases Cited
- Baker v. Simpson, 613 F.3d 346 (2d Cir. 2010) (defines "arising in" jurisdiction; claims that would have no existence outside bankruptcy)
- In re U.S. Lines, Inc., 197 F.3d 631 (2d Cir. 1999) (tests for when prepetition contract disputes are core based on relation to reorganization)
- In re Best Prods. Co., 68 F.3d 26 (2d Cir. 1995) (core status for proceedings that directly affect bankruptcy functions)
- Celotex Corp. v. Edwards, 514 U.S. 300 (1995) (scope of bankruptcy jurisdiction; "conceivable effect" test cited)
- Cuyahoga Equip. Corp. v. Nat'l City Bank, 980 F.2d 110 (2d Cir. 1992) (policy favoring centralized adjudication in the district where bankruptcy is pending)
- In re Johns‑Manville Corp. (MacArthur Co. v. Johns‑Manville), 837 F.2d 89 (2d Cir. 1988) (bankruptcy court authority to place property under its control for distribution)