In re: Midway Games Inc., Case No. 09-10465 (KG); Threshold Entertainment, Inc. v. Midway Games Inc., et al., Adv. Case No. 09-51081 (KG)(March 29, 2011) (J. Gross)

Following their bankruptcy, Midway Games Inc. and its affiliated debtors (the “Debtors” or “Midway”) sold their assets to Warner Bros. Entertainment Inc. (“WBEI”). Threshold Entertainment, Inc. (“Threshold” or “Plaintiff”) initiated an adversary proceeding (the “Adversary”) against the Debtors and sought declaratory relief with respect to certain license and intellectual property rights (the “Intellectual Property Claims”) relating to Midway’s series of Mortal Kombat videogames. Threshold also objected (the “Objection”) to the asset sale (the “Sale”) to WBEI and the parties agreed to resolve the Objection by including language in the Sale Order that made the purchase subject to Threshold’s Intellectual Property Claims, if any. The Court entered the Sale Order on July 1, 2009.

Relating to the Adversary, the Court was asked to rule on Threshold’s motions to: (1) substitute WBEI as a defendant pursuant to Rule 25 of the Federal Rules of Civil Procedure and 2) transfer the Adversary to the District Court for the Central District of California. WBEI, in turn, argued that the Delaware Bankruptcy Court (the “Court”) lacked subject matter jurisdiction over these matters because the Sale relieved the Debtors of any interest in the outcome of the Adversary or Mortal Kombat. As discussed below, the Court found that it lacked jurisdiction over the Adversary, denied Threshold’s motions and dismissed the Adversary.

Discussion:

The Court dismissed the Adversary finding that it did not have subject matter jurisdiction over the Adversary. With respect to non-core proceedings, the Court noted, a bankruptcy court will have jurisdiction over such matters only if they are sufficiently “related to” the bankruptcy estate.  See Binder v. Price Waterhouse & Co., LLP (In re Resorts Int’l, Inc.) 372 F.3d 154, 162 (3d Cir. 2004) (bankruptcy court jurisdiction potentially extends to four types of title 11 matters). Quoting Pacor Inc. v. Higgins, (In re Pacor), 743 F.2d 984, 994 (3d Cir. 1984) the Court set forth the test for “related to” jurisdiction, which is “whether the outcome of [a] proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Because the Intellectual Property Claims could have no conceivable effect on the bankruptcy estate, the Court, therefore, declined to retain jurisdiction of the Adversary. The Court reasoned that the dispute was between two related third parties – Threshold and WBEI, and the property, Mortal Kombat, was sold and therefore, was no longer part of the estate. The dispute did not concern the terms of the Sale or anything that may have placed the Debtors’ estate at risk. As such, the Court dismissed the Adversary and denied Threshold’s motions.