Motion to Expand Preliminary Injunction to Include Actions Against State of Montana Denied; State Court Claims Permitted to Proceed Against State Without Debtors Based on Finding of Absence of Related-To Jurisdiction
W.R. Grace & Co. v. Chakarian (In re W.R. Grace & Co.), 366 B.R. 295 (Bankr. D. Del. 2007) (Judge Judith K. Fitzgerald)
In an opinion interpreting the Third Circuit’s Pacor standard for related-to jurisdiction, the Court held that state court actions against the State of Montana in which the W.R. Grace & Co. debtors were named as co-defendants – but which causes of action were enjoined – could proceed to the extent that they sought to establish the liability of the State of Montana. Because Montana would have to bring subsequent claims against the Debtors for indemnity and contribution, the state court actions had no “conceivable” effect on the bankruptcy estate, as contemplated by Pacor, so as to vest the Court with related-to jurisdiction over the claims. The Court therefore denied the Debtors’ motion to expand a preliminary injunction against the suits to the state of Montana.
In this companion case to one previously discussed in this blog (here), the United States Bankruptcy Court for the District of Delaware held that it lacked related-to jurisdiction over the Montana State Court Actions to the extent that they involved a determination of the liability of the state of Montana only.The asbestos personal injury claimants in these 120 state court actions asserted claims arising out of the Debtor’s former vermiculite mining operations in Montana. Although these actions were enjoined back in 2001 as to the Debtors and those whoSE liability was derivative of the Debtors, the Debtors moved to expand the preliminary injunctions to include the actions as they related to the State of Montana, arguing that the Debtors and the state had such an identity of interest that a suit against the state was essentially a suit against the Debtors, and would have an impact on the Debtors’ ability to reorganize. The State of Montana opposed the motion, arguing that the courts lacked subject matter jurisdiction over the state court actions because they were not related to the bankruptcy under 28 U.S.C. § 1334(b).
The leading case on the scope of “related to” jurisdiction in the Third Circuit is Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984), which famously held that the test for whether the court has jurisdiction over litigation among non-debtor third parties is whether “the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Discussing the difficulties that courts have had applying the Pacor test, the Court noted that the Third Circuit had, in In re Federal-Mogul Global, Inc., 300 F.3d 368 (3d Cir. 2002), clarified the meaning of its “conceivably have any effect on the [bankruptcy] estate” language in its Pacor opinion. In Federal-Mogul, the Third Circuit held that this test required an inquiry into “whether the allegedly related lawsuit would affect the bankruptcy proceeding without the intervention of yet another lawsuit.”
In the Grace state court actions, the liability of the Debtors to Montana, if any, was in the nature of indemnification and contribution. Accordingly, under Montana law, even if the plaintiffs were to prevail, the state would have to commence another action to determine the scope of the Debtors’ liability, if any. In short, the state court actions would not bind the Debtors. Therefore, an intervening adjudication would be required, putting the state court actions outside the scope of the Court’s related-to jurisdiction. The Court noted, however, that the automatic stay remained in effect as to the Debtors and their property.
