This test has been cited approvingly by the Supreme Court, see Celotex v. Edwards, 514 U.S. 300, 308 n. 6 (1995), and adopted by numerous Circuit Courts of Appeal. However, subsequent to Pacor, the Third Circuit revisited the issue of “related to” jurisdiction in Federal-Mogul, and clarified its holding in Pacor.
In Federal-Mogul, the debtor and other manufacturers and distributors of asbestos-containing products had been sued in state courts across the country. When the debtor filed for bankruptcy, the plaintiffs dismissed it from their actions, and the codefendants then removed the litigation to federal court on the grounds that their indemnification and contribution claims against the debtor made the litigation “related to” the bankruptcy. See Federal-Mogul, 300 F.3d at 372-73.
Ignoring the broad standard for “related to” jurisdiction articulated by Pacor and cited approvingly by the Supreme Court in Celotex, the court found that it did not have “related to” jurisdiction. Id. at 384. The court held that “related to” jurisdiction exists where “the allegedly related lawsuit would affect the bankruptcy proceeding without the intervention of yet another lawsuit.” Federal-Mogul, 300 F.3d at 382 (emphasis added). Because there was no express contractual or automatic indemnification right against the debtor, and the third parties would have to commence a separate action against the debtor, the court held that the third-party actions were not sufficiently related to the debtor’s bankruptcy to satisfy jurisdictional requirements.
Against this backdrop, Combustion argued that “related to” jurisdiction existed over the nonderivate claims against the nondebtors because the nondebtors: (i) were corporate affiliates of Combustion; (ii) were making a substantial financial contribution to the Combustion’s post-confirmation trust; (iii) may have contribution and indemnification claims against Combustion; and (iv) shared insurance with Combustion. The court disposed of each of these arguments quickly.
First, the court stated that a corporate affiliation between lateral, peer companies in a holding company structure, without more, cannot provide a sufficient basis for subject matter jurisdiction. The court then rejected the argument that the financial contributions by the nondebtors created jurisdiction, stating that if that were the case, a debtor could create subject matter jurisdiction over any nondebtor third-party simply by structuring a plan that depended on third-party contributions.
Next, the court dismissed the argument that jurisdiction was proper because of potential contribution or indemnification claims. The court first noted that “[Combustion] does not cite to any statutory indemnity obligations or express agreements that would automatically give rise to indemnification obligations with respect [to the nondebtors]. … ” (emphasis added). See Combustion Engineering, 391 F.3d at 230. The court, distinguishing In re Dow Corning, 86 F.3d 482 (6th Cir. 1996), further found that there was no “unity of interest” between Combustion and the nondebtors.
In Dow Corning, the theory of jurisdiction “was based on the near certainty that Dow Corning would be directly or derivatively liable for any injury resulting from a silicone breast implant because it either manufactured or contributed key supplies to every breast implant on the market.” Combustion Engineering, 391 F.3d at 231. By contrast, the nonderivative claims asserted against Combustion’s nondebtor affiliates arose from different products, involved different asbestos containing materials and were sold to different markets. See id.
Finally, the court also rejected the shared insurance argument because the record below was insufficiently developed regarding the terms, scope and coverage of the shared insurance policy. The court noted, however, that in cases where jurisdiction was based on shared insurance, there was additional evidence of automatic liability against the debtor. See id. at 233 (citing A.H. Robins Co., 788 F.2d 994 (4th Cir. 1986) (nondebtor codefendants were entitled to statutory indemnification and were co-insureds under the policies)). The court concluded by questioning whether shared insurance policies could provide a sufficient basis for jurisdiction, given the absence of indemnification obligations, derivative liability or unity of interest, and the minimal corporate affiliation presented in this case.
In Steelworkers Pension Trust v. Citigroup, Inc., 295 B.R. 747 (E.D.P.A. 2003), a case arising out of WorldCom’s bankruptcy, the defendants sought to remove certain securities litigation from state court and consolidate it with WorldCom’s bankruptcy on the grounds that it was “related to” WorldCom’s bankruptcy case because of certain indemnification and contribution rights against WorldCom. See Steelworkers, 295 B.R. at 751, n. 5. In reviewing “related to” jurisdiction based on indemnification rights, the Steelworkers court revisited Pacor and Federal-Mogul and stated:
An indemnification agreement between a defendant and a non-party bankrupt debtor does not automatically supply the nexus necessary for the exercise of “related to” jurisdiction. Only when the right to indemnification is clearly established and accrues upon the filing of the civil action is the proceeding related to the bankruptcy case. Steelworkers, 295 B.R. at 750 (emphasis added).
Thus, the Steelworkers court reviewed the provisions of the indemnification agreement in question to determine whether defendants’ indemnification rights arose automatically upon the filing of an action or whether the indemnification rights were contingent upon further litigation. See id. at 753. Ultimately, the court found that it did not have “related to” jurisdiction because WorldCom’s obligation to indemnify the defendants was not automatic and additional litigation would be required to determine if the conditions precedent to WorldCom’s indemnification obligation had occurred. See Steelworkers, 295 B.R. at 753. Because WorldCom’s indemnification obligations were not automatic, defendants’ claims were contingent and therefore not sufficiently “related to” WorldCom’s bankruptcy case. See id.
Steelworkers distinguished In re Bretano’s, 27 B.R. 90 (Bankr. S.D.N.Y. 1983) and Belcufine v. Aloe, 112 F.3d 633 (3d Cir. 1997), cases cited by defendants for the proposition that rights of indemnification give rise to “related to” jurisdiction, because in those cases, the right to indemnification was unconditional and accrued automatically upon the filing of an action. See Steelworkers, 295 B.R. at 751-752 (agreements and corporate bylaws in Belcufine and Bretano’s provided guaranteed reimbursement of legal expenses whenever a corporate officer was sued, regardless of liability).
Therefore, notwithstanding the breadth of the language in Pacor, which suggests that “related to” jurisdiction exists if the third-party action could “conceivably have any effect” on the bankruptcy estate, subsequent decisions (including Combustion Engineering, Federal-Mogul and Steelworkers), make clear that, especially in the Third Circuit, in order to find “related to” jurisdiction over a third-party action, it must not only be “conceivable” that the action could effect the bankruptcy estate, the action must result in “automatic” liability to the debtor and cannot be nonderivative of the debtor’s conduct or product.
Note: Notwithstanding the Third Circuit’s decision in Federal-Mogul, other circuits continue to apply the less stringent “any conceivable effect” test for “related to” jurisdiction set forth in Pacor. See, e.g., In re Cuyahoga Equip. Corp., 980 F.2d 110 (2d Cir. 1992); In re WorldCom., Inc., Securities Litigation, 2003 WL 22953644 (S.D.N.Y.); aff’d sub nom California Public Employees’ Retirement System v. WorldCom, Inc., 368 F.3d 86 (2d Cir. 2004), cert denied, California Public Employees’ Retirement System v. Ebbers, 125 S.Ct. 862 (Jan. 10, 2005); A. H. Robins Co. v. Piccinin, 788 F.2d 994, 1002, n. 11 (4th Cir.), cert. denied, 479 U.S. 876 (1986); In re Wood, 825 F.2d 90, 93 (5th Cir. 1987); Robinson v. Michigan Consol. Gas Co., 918 F.2d 579, 583-584 (6th Cir. 1990); In re Dogpatch U.S.A., Inc., 810 F.2d 782, 786 (8th Cir. 1987); In re Fietz, 852 F.2d 455, 457 (9th Cir. 1988); In re Gardner, 913 F.2d 1515, 1518 (10th Cir. 1990); In re Lemco Gypsum, Inc., 910 F.2d 784, 788, and n. 19 (11th Cir. 1990).
In sum, where nonderivative third-party claims are involved, “related to” jurisdiction over the nondebtor will be lacking unless the debtor can establish a unity of interest with the nondebtor (i) because of the existence of contractual or statutory indemnification rights which give rise to automatic liability against the debtor or (ii) the debtor is otherwise able to establish a unity of interest based on facts similar to Dow Corning. Therefore, before proposing a plan utilizing a �105 injunction to channel third-party claims against nondebtors in the Third Circuit, counsel must be prepared to demonstrate to the court a valid basis for jurisdiction.
Katchen is a partner and Hahn is an associate with Duane Morris of Newark. The views expressed in this article are solely those of the authors and do not necessarily reflect the opinions of Duane Morris, its partners and associates, or clients.
