42 F.4th 523
5th Cir.2022Background
- GenOn Mid-Atlantic (GenMa) leased two coal-fired plants and covenanted not to grant liens and to provide uncollateralized qualifying credit support for Lessors’ rent.
- To satisfy that requirement, GenMa paid Natixis Funding Corporation (NFC) $130 million as an "irrevocable, indefeasible" prepayment; NFC (through affiliate Natixis) agreed to issue letters of credit and to pay rent or reimburse draws up to duties it assumed.
- Natixis issued uncapped letters of credit covering many lease periods (totaling ~$2.2 billion); Lessors drew $125 million, Natixis/NFC paid, and NFC faced potential exposure exceeding $130 million when further draws were attempted.
- GenOn (GenMa’s parent) filed chapter 11; a settlement among GenOn, GenMa, and the Lessors—incorporated into GenOn’s plan—required GenMa to pay off Lessors and maintain cash reserves; NFC sued GenMa in New York state court over the Payment Agreement.
- GenMa removed NFC’s claims to federal court under the bankruptcy removal statute, arguing the dispute "related to" GenOn’s reorganization; courts in SDNY and the Southern District of Texas (bankruptcy court) kept the case, and the bankruptcy and district courts ultimately dismissed NFC’s claims.
- On appeal, the Fifth Circuit affirmed: it held federal related-to jurisdiction existed at removal, mandatory abstention under §1334(c)(2) was not required, and NFC’s contract claims (warranty, indemnity, implied covenant, reformation) failed on the merits.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Related-to jurisdiction at removal | NFC: non-debtor contract dispute; GenOn’s plan was confirmed and NFC’s claims did not pertain to plan implementation, so no federal bankruptcy jurisdiction | GenMa: NFC’s claims threatened the settlement embodied in GenOn’s plan (cash reserves, payoff obligations) and could impede plan consummation | Jurisdiction existed: NFC’s claims, removed before plan was fully consummated, could conceivably affect implementation/execution of GenOn’s plan and thus were "related to" bankruptcy at removal |
| Mandatory abstention under 28 U.S.C. §1334(c)(2) | NFC: abstention required because the underlying state action involved nondiverse parties and could have been timely adjudicated in state court | GenMa: claims against GenMa (the only claims removed) could have been commenced in federal court on diversity grounds; abstention not mandatory | Abstention not required: the federal action concerned only NFC’s claims against GenMa, which could have been filed in federal court (diversity jurisdiction), so §1334(c)(2) didn’t compel abstention |
| Breach of warranty (did GenMa create a lien by paying $130M?) | NFC: the payment economically functioned as a deposit/secured arrangement (a lien) that breached GenMa’s lease covenants and its warranty to NFC | GenMa: payment was an unconditional, irrevocable transfer; GenMa expressly disclaimed any interest and the Agreement allocated all risk to NFC, so no lien or warranty breach | Held for GenMa: contract language showed no retained interest or security interest; no lien existed and warranty claim failed |
| Indemnity / implied covenant / reformation | NFC: indemnity covers losses from litigation and reimbursement obligations; GenMa breached implied covenant by refusing to pay rent; reformation warranted for mutual drafting mistake that allowed excessive draws | GenMa: indemnity expressly excludes reimbursement obligations and NFC-initiated suits; implied covenant cannot override express risk allocation; reformation requires mutual mistake and proof of the true agreement—NFC failed to plead these | Held for GenMa: indemnity did not cover reimbursement for letter-of-credit disbursements or NFC’s own suits; implied-covenant and reformation claims dismissed for failure to state plausible claims |
Key Cases Cited
- Bass v. Denny (In re Bass), 171 F.3d 1016 (5th Cir. 1999) (defining related-to bankruptcy jurisdiction: conceivable effect on the estate suffices)
- Enron Corp. Sec. (In re Enron Corp. Sec.), 535 F.3d 325 (5th Cir. 2008) (articulating factors for assessing post-confirmation related-to jurisdiction and that jurisdiction is assessed at time of removal)
- Craig’s Stores of Tex., Inc. v. Bank of La. (In re Craig’s Stores of Tex., Inc.), 266 F.3d 388 (5th Cir. 2001) (confirmation generally dissolves the estate except for matters pertaining to implementation or execution of the plan)
- Feld v. Zale Corp. (In re Zale), 62 F.3d 746 (5th Cir. 1995) (post-confirmation related-to jurisdiction can extend to non-debtors when a dispute affects assets or assumptions of the plan)
- U.S. Brass Corp. v. Travelers Ins. Grp. (In re U.S. Brass Corp.), 301 F.3d 296 (5th Cir. 2002) (jurisdiction exists for disputes that affect post-confirmation rights and responsibilities tied to the plan)
- First Am. Title Ins. Co. v. First Tr. Nat’l Ass’n (In re Biloxi Casino Belle), 368 F.3d 491 (5th Cir. 2004) (post-confirmation jurisdiction over non-debtors where recovery was assigned to a trust created by the plan)
- Wood v. Wood (In re Wood), 825 F.2d 90 (5th Cir. 1987) (Congress’s broad jurisdictional grant and abstention doctrines inform district-court discretion)
- W.W.W. Assocs., Inc. v. Giancontieri, 566 N.E.2d 639 (N.Y. 1990) (parol evidence rule: unambiguous writing controls)
- Dalton v. Educ. Testing Serv., 663 N.E.2d 289 (N.Y. 1995) (scope and limits of the implied covenant of good faith and fair dealing under New York law)
- Chimart Assocs. v. Paul, 489 N.E.2d 231 (N.Y. 1986) (reformation requires mutual mistake in drafting and proof of the parties’ actual agreement)