In an opinion published May 20, 2011, Judge Walsh held that a settlement agreement which is rejected in a bankruptcy proceeding is “Core” and will be decided by the Bankruptcy Court, even when it contains a jurisdictional clause that requires the agreement to be interpreted according to the laws of New York. Judge Walsh’s opinion is available here (the “Opinion”).
Point Blank Solutions, Inc. (the “Debtor”), filed an action against various entities and individuals to recover funds that were placed in escrow by third-parties according to a settlement agreement. The settlement was conditioned upon being approved by the courts in New York State. After the EDNY Court approved the settlement, part of the escrowed funds were paid out to law firms as payment of their fees in negotiating the settlement for their clients. One of the shareholders of the Debtor filed an appeal from the settlement to the Court of Appeals for the Second Circuit. While that appeal was pending, the Debtor filed a motion to reject the settlement agreement, which the Delaware Bankruptcy Court granted. Opinion at *4-5.
The Debtor then commenced adversary proceedings against the attorneys who received the payment from the escrow account to try and have the escrowed funds given over to the Debtor’s Estate. The defendants of the adversary proceeding (No. 10-55361) brought a motion to determine that the claims in the adversary proceeding were non-core. They argued that the settlement agreement provided that the EDNY Court has jurisdiction and that the claims made in the adversary proceeding could have been brought outside of the Bankruptcy Court. Opinion at *6-7.
Judge Walsh’s Opinion
Judge Walsh recently decided a similar issue in NEC Holdings Corp. My summary of that opinion is here: Decision in NEC Holdings Corp., Holds Non-Debtor Environmental Liabilities to be Non-Core.
Like that opinion, Judge Walsh begins his analysis with a citation to In re Exide Technologies, 544 F.3d 196 (3d Cir. 2008). Opinion at *6. He then lightly touches on what constitutes property of the bankruptcy estate and the Bankruptcy Court’s ability to apply the laws of other jurisdictions when necessary. Opinion at *8. Judge Walsh then focuses on how a decision as to whether something is property of the bankruptcy estate is a core proceeding, citing numerous precedents to support this point. Opinion at *9-10. Judge Walsh makes a final point that because the adversary proceeding, in effect, asks the Court to interpret its order rejecting the settlement, and the Court “plainly has jurisdiction to interpret and enforce its own prior orders.” Opinion at *10.
As I read this opinion, I thought back to law school. One of the earliest lessons that I learned is that the way an argument is framed can determine how it will be decided. In this case, Judge Walsh framed the argument as ‘how does the rejection of the settlement agreement affect the assets?’ From that framework, it is hard to see how he could have reached any other conclusion. His opinion may have had a different conclusion if he had framed his opinion as the defendants desired, and asked ‘has the stipulation has been terminated and who is entitled to its funds?’