In January 2014, Lehman Brothers Holdings, Inc. (“Lehman”) settled claims filed by Fannie Mae and Freddie Mac arising out of each of their purchases of mortgage loans from Lehman and its affiliates. Lehman then sought to recoup the amounts paid to Fannie and Freddie by way of third-party indemnification claims brought in the Bankruptcy Court against financial institutions that it alleges sold or submitted the defective mortgage loans into Lehman’s loan sale and securitization channels in the first place. A number of the financial institutions moved to dismiss for lack of subject matter jurisdiction. Earlier this week, Bankruptcy Judge Shelley Chapman held that the Bankruptcy Court has “related to” jurisdiction over the indemnification claims pursuant to 28 U.S.C. § 1334(b) and therefore denied the motions to dismiss.[1]
Bankruptcy Court jurisdiction over civil proceedings is limited by 28 U.S.C. 1334(b) to core proceedings: those arising in a bankruptcy case or arising under the bankruptcy law; and non-core proceedings: proceedings that “relate to” a bankruptcy case. An action is “related to” a bankruptcy proceeding for purposes of section 1334 “if its outcome might have a conceivable effect on the estate being administered in bankruptcy.” Id. at 8.
Section 1334 does not further constrain the Bankruptcy Court’s jurisdiction following confirmation of a plan of reorganization, but some courts nevertheless “espous[e] a more stringent standard referred to as the ‘close nexus’ test” when considering post-confirmation jurisdiction. Id. The “close nexus” test requires the party that seeks to establish subject matter jurisdiction to show that “(i) the matter affects the interpretation, implementation, consummation, execution, or administration of the confirmed plan or incorporated litigation trust agreement; and (ii) the plan provides for the retention of jurisdiction over the matter.” Id. (internal citations and quotations omitted).
Judge Chapman recognized that “the applicability of the ‘close nexus’ test rather than the ‘conceivable effects’ test ‘is an open question in the Second Circuit,’” id. at 11, but determined that she did not need to resolve that question in this case because the indemnification claims satisfied the more stringent “close nexus” test. Id. Specifically, because Lehman’s plan is a liquidating plan, the bankruptcy court’s post-confirmation role does not diminish as it might in the case of a reorganized debtor. Id. at 12. Moreover, the plan “preserves the Plan Administrator's right to pursue the Indemnification Claims and provides for the retention of jurisdiction by the bankruptcy court over such claims.” Id. at 14.
The Defendants argued that the Plan’s retention of jurisdiction was insufficient because it did not “explicitly refer to put-back mortgage litigation, litigation regarding mortgage originators, or the GSEs.” Judge Chapman found this argument “unavailing,” and ruled that “there is no requirement in this District that each litigation claim sought to be pursued by a post-confirmation debtor be specifically described in such debtor’s plan in order for the bankruptcy court to have jurisdiction over the claim.” Id.
[1] Lehman Bros. Holdings Inc. v. 1st Advantage Mortg., LLC (In re Lehman Bros. Holdings Inc.), Nos. 08-13555 (SCC), 16-01019 (Bankr. S.D.N.Y. Aug. 13, 2018)
