Subject Matter Jurisdiction over Pre-Petition State Law Claims

Two recent bankruptcy opinions out of the Delaware Court, IT Litigation Trust v. D'Aniella, et al. (In re: IT Group, Inc., et al.), ___ B.R. ___, 2005 WL 3050611 (D. Del. Nov. 15, 2005) and Shandler v. DLJ Merchant Banking, Inc., et al. (In re Insilco Technologies, Inc.), 330 B.R. 512 (Bankr. D. Del. 2005), each of which addresses post-confirmation bankruptcy court subject matter jurisdiction over state law causes of action, have potentially significant implications on both litigation in the Delaware Bankruptcy Court and plan structure for Chapter 11 debtors. In the IT Group opinion, the Delaware District Court, sitting as a trial court, held that it did have subject matter jurisdiction over pre-petition waste of corporate asset and breach of fiduciary duty claims based exclusively on Delaware state law, which were asserted originally by the Official Committee of Unsecured Creditors and post-confirmation by a litigation trust established by a Chapter 11 plan to pursue causes of action. 2005 WL 3050611 at *7. In contrast, the Insilco opinion held that the Bankruptcy Court lacked subject matter jurisdiction over pre-petition state law unjust enrichment and deepening insolvency causes of action commenced post-confirmation by a litigation trust authorized generally to bring such causes of action under a plan of liquidation. 330 B.R. at 526. In each opinion, the courts interpreted last year's decision by the Third Circuit Court of Appeals in Binder v. Price Waterhouse & Co., LLP (In re Resorts Int'l, Inc.), 372 F.3d, 154 (3d Cir. 2004), which held that 'related to' jurisdiction is greatly diminished post-confirmation and limited to matters in which there is a 'close nexus' to the bankruptcy plan or a proceeding. The different results reached in these cases illustrate the importance of a properly drafted Chapter 11 plan in retaining subject matter jurisdiction over important state law causes of action.