Delaware Business Bankruptcy Report : Delaware Business Bankruptcy Report : Morris James LLP Lawyers & Attorneys

In a pre-bankruptcy state court lawsuit, Pacific Dunlop Holdings (USA), Inc. and its affiliated foreign entities asserted state law claims against Exide Technologies and its affiliated foreign subsidiaries, arising from their sale of their respective interests in a global battery business. Over a year after the lawsuit was commenced, Exide Technologies, but not its foreign subsidiaries, filed for Chapter 11 bankruptcy protection. The Illinois state court was prepared to allow the claims of the foreign Pacific Dunlop entities against the nondebtor foreign Exide entities to proceed, but Exide removed the lawsuit to federal court, where it was transferred to the Delaware bankruptcy court overseeing Exide’s chapter 11 case. The Pacific Dunlop foreign entities sought a remand back to state court of their claims in the lawsuit against the nondebtor Exide foreign entities, based on mandatory or discretionary abstention and based on the forum selection clause in the parties’ agreements. Meanwhile, a claims bar date had already been set in that case, and all the Pacific Dunlop entities filed proofs of claim. The proofs of claim filed by the Pacific Dunlop foreign entities against Exide were contingent on not being able to collect from the respective Exide foreign entities to which they had sold their businesses.

Exide argued that (1) the operative contracts between the parties unambiguously made Exide the “sole indemnitor” of all the claims against its nondebtor foreign subsidiaries; (2) the fact that the Pacific Dunlop entities had all filed proofs of claim meant that the entire lawsuit had to be dealt with in the bankruptcy court as a core matter, and (3) even if the claims of the foreign plaintiffs against the nondebtor defendants might otherwise be considered “non-core” matters, they were so intertwined with the claims of Pacific Dunlop (USA) against the debtor, Exide, and with the contingent claims of the Pacific Dunlop foreign entities against the debtor in their proofs of claim, that all the nondebtor vs. nondebtor claims had to be treated as “core” ones over which the Bankruptcy Court should retain jurisdiction. The Bankruptcy Court agreed with Exide, and the District Court agreed with the Bankruptcy Court. The Court of Appeals reversed those lower court rulings.

The Court rejected Exide’s broad arguments about the effect of filing proofs of claim as expanding to the level of “core” jurisdiction a Bankruptcy Court’s authority over claims between and among nondebtors. The Court did find, however, that it was appropriate for the bankruptcy court in the first instance to review the underlying contracts for purposes of determining whether the contract claims at issue were core or non-core. Having rejected the Bankruptcy Court’s finding that the underlying contract “unambiguously” made Exide the sole indemnitor of the claims against the Exide foreign subsidiaries, the Court remanded the case to the Bankruptcy Court for an evidentiary hearing on whether the claims in the lawsuit were core or non-core.

In vacating or directing to be vacated two Bankruptcy Court rulings and the District Court’s affirmance of those rulings, and remanding the dispute back to bankruptcy court for further proceedings, the Court of Appeals expressly overruled the “intertwinement” theory espoused in In re RBGSC Inv. Corp., 253 B.R. 369 (E.D. Pa. 2000), under which otherwise non-core disputes among non-debtors could be treated as core bankruptcy matters based on the extent of their intertwinement with core disputes between those parties and the debtor. Representing the successful appellants in the case, the Pacific Dunlop Holding entities, were Douglas N. Candeub and Brett D. Fallon of Morris James LLP.