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Bankruptcy Court Dismisses Turnover Action for Lack of Subject Matter Jurisdiction

By GianClaudio Finizio

On June 28, 2013, Judge Brendan Linehan Shannon of the United States Bankruptcy Court for the District of Delaware (the “Court”) granted West Plains Company’s (“Defendant”) motion to dismiss the complaint (the “Complaint”) for lack of subject matter jurisdiction that had been filed by reorganized debtors, VeraSun Energy Corporation and certain affiliated debtors (collectively, “Plaintiffs”) .  VeraSun Energy Corp. v. West Plains Co. (In re VeraSun Corp.), 2013 WL 3336870 (Bankr. D. Del. 2013).

By way of background, approximately one year after filing for relief under chapter 11 of title 11, United States Code, as amended (the “Bankruptcy Code”), the Court entered an order confirming the joint plan of liquidation (the “Plan”) of VeraSun Energy Corporation and certain affiliated debtors.  Plaintiffs subsequently filed the Complaint alleging breach of contract and seeking turnover pursuant to Bankruptcy Code section 542 in connection with allegations that Defendant failed to pay Plaintiffs $979,747.56 for providing Defendant dried distillers grains with solubles pursuant to agreements between certain Plaintiffs and Defendant.  Defendant argued that the Court lacked subject matter jurisdiction to determine, on the merits, Plaintiffs’ claims for relief because Plaintiffs’ claims were neither core nor “related to” the bankruptcy proceedings.

In granting the Defendant’s motion to dismiss, the Court first determined that Plaintiffs’ claims were not core proceedings pursuant to 28 U.S.C. § 157(b)(2)(E).  Specifically, the Court noted that the breach of contract claims did not invoke substantive rights provided by the Bankruptcy Code nor were they claims which could only arise in the context of bankruptcy.  The Court further noted that while a turnover claim under Bankruptcy Code section 542(b) is considered a core proceeding, turnover is not a proper cause of action where there is a bona fide dispute of the claim, as existed in this proceeding and evidenced by Defendant’s answer to the Complaint.

After concluding that the matter was a “non-core” proceeding, the Court determined that it could not exercise “related to” jurisdiction pursuant to 28 U.S.C. § 157(c)(1) over the post-confirmation action because Plaintiffs’ claims did not affect the interpretation, implementation, or consummation of the Plan sufficient to demonstrate a close nexus with the Plan.1  The Plan’s broad and general language concerning jurisdiction without any specific description of the instant action was insufficient to establish the required close nexus.

As Plaintiff’s claims were neither core nor “related to”, the Court held that it lacked subject matter jurisdiction and granted Defendants’ motion to dismiss. A copy of the Court’s opinion is available here.

1 Citing to Nuveen Mun. Trust ex rel. Nuveen High Yield Mun. Bond Fund v. WithumSmith Brown, P.C., 692 F.3d 283 (3d Cir. 2012); In re Resorts Int’l, Inc., 372 F.3d 154 (3d Cir. 2004).

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