In In re Thickstun Brothers Equipment Co., Inc. No. 05-8054 (6th Cir. 06/02/2006), the Bankruptcy Appellate Panel for the Sixth Circuit held that a bankruptcy court lacks subject matter jurisdiction to determine whether a debtor’s failure to object to a claim is preclusive in related state court litigation.

In Thickstun, the Debtor and Encompass Services Corporation held claims against each other stemming from alleged breaches of a construction contract. In 1997, Encompass initiated state court litigation of its claims, and some time later the Debtor commenced a Chapter 11 bankruptcy case. Encompass then filed a $860,000 claim in the Debtor’s Chapter 11 case. Although the Debtor’s confirmed Chapter 11 plan required that the Debtor object to claims within 60 days after the Plan’s effective date, the Debtor did not file such an objection to Encompass’s claim. Rather, the Debtor asserted that language in its Plan and Disclosure Statement indicated that Encompass’s claim was disputed and would be litigated in proceedings outside of the Bankruptcy Court.

Following confirmation of the Plan, Encompass took the position in the state court litigation that the res judicata effect of the Debtor’s failure to object to Encompass’s claim barred the Debtor from defending against Encompass’s cause of action in the state court litigation. In response, the Debtor requested that the Bankruptcy Court (1) determine that the Debtor’s failure to file a motion objecting to the Encompass claim in its Chapter 11 case had no preclusive effect in the state court litigation, and (2) interpret the provisions of the Plan and determine that the Plan provided sufficient notice to Encompass of the Debtor’s objection such that the claim had not been conclusively allowed in the Bankruptcy Case.

On appeal, the Bankruptcy Appellate Court first held that "without question" the lower court had correctly concluded that it lacked jurisdiction to enter an order determining whether the Debtor’s failure to object to Encompass’s claim was entitled to preclusive effect in the state court litigation. See Midway Motor Lodge of Elk Grove v. Innkeepers’ Telemanagment & Equip. Corp., 54 F.3d 406, 409 (7th Cir. 1995) ("In the law of preclusion . . . the court rendering the first judgment does not get to determine that judgment’s effect; the second court is entitled to make its own decision . . . .").

The Bankruptcy Appellate Panel then went on to hold that the Bankruptcy Court did have jurisdiction under 28 U.S.C. § 1334 to interpret its own order confirming the Debtor’s Plan. The appellate court reasoned that a matter is within the Bankruptcy Court’s jurisdiction if it is related to the bankruptcy under the so-called "Pacor test." Under this test, a matter is "related to" the underlying bankruptcy case if "the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy." Pacor, Inc. v. Higgins (In re Pacor), 743 F.2d 984 (3d Cir. 1984). In analyzing post-confirmation bankruptcy jurisdiction, "the essential inquiry appears to be whether there is a close nexus to the bankruptcy plan or proceeding sufficient to uphold bankruptcy court jurisdiction over the matter," such as matters that affect the interpretation, implementation, consummation, execution, or administration of the confirmed plan. In re Resorts Int’l, Inc., 372 F.3d at 166-67. In Thickstun, the appellate court noted that: "It is difficult to imagine a closer nexus to the Debtor’s bankruptcy case and the confirmed Plan than this direct request for interpretation and clarification of the Plan’s terms." The Bankruptcy Appellate Court rejected the lower court’s reasoning that, under the terms of the Plan, it only retained jurisdiction over disputes involving claims to which a party had brought an objection. Instead, the Bankruptcy Appellate Panel pointed to other provisions of the Plan retaining jurisdiction over "controversies concerning . . . interests in the property of or transferred by the Debtor" and to provisions securing "execution of the provisions of this Plan," and it held that the relief sought by the Debtor fit within these broader categories.

Written by: Mette Kurth