Article Courtesy of Michael Robson (Greenberg Traurig)
In re Nu-Cast Step & Supply Inc., 639 B.R. 440 (Bankr. E.D. Mich. 2021)
The United States Bankruptcy Court for the Eastern District of Michigan (the “Bankruptcy Court”) ruled that a company that bought a liquidated concrete business’s assets may not reopen the debtor’s 4-year-old bankruptcy case to resolve a dispute with a competitor over whether the deal included the debtor’s intellectual property.
After Nu-Cast Step & Supply Inc. (“Debtor”) filed for Chapter 11 relief in 2015, now-retired Bankruptcy Judge Shefferly approved a sale (the “Subject Sale”) of most of the Debtor’s assets to Legacy Rochester Hills Site Condominium Development, LLC (“Legacy”) pursuant to 11 U.S. Code § 363, which governs a debtor’s sale of assets in bankruptcy. The sale order included a provision referred to as a “Retention of Jurisdiction Provision” by which the Court retained jurisdiction to resolve disputes related to the Subject Sale and the administration thereof. Subsequently, Legacy transferred the Debtor’s assets to another business, NuCast LLC (“NuCast”).
In November 2019, NuCast filed a lawsuit in the Wayne County Circuit Court (the “Circuit Court”) against a competitor, Livonia Pre Cast LLC, and Guilio Ledda, Bruno Ledda and Giuseppe Ciccarelli (collectively, the “Defendants”). The suit alleged, amongst other claims, violations of the Michigan Uniform Trade Secrets Act, Mich. Comp. Laws Ann. § 445.1901, and breach of contract. The Defendants moved for dismissal, arguing that the Circuit Court lacked subject matter jurisdiction as the Subject Sale did not transfer any intellectual property to Legacy and, by extension, NuCast had no such intellectual property rights at issue in the claim. The Circuit Court agreed and granted summary judgment in favor of the Defendants. In May 2021, the Michigan Court of Appeals affirmed the Circuit Court’s opinion, but also ruled that the Circuit Court’s dismissal had been without prejudice and could be overturned if the Bankruptcy Court determined that the Circuit Court lacked jurisdiction. In July 2021, NuCast moved to reopen the Debtor’s bankruptcy case to determine jurisdiction, and the Defendants objected.
Judge Gretcho, Judge Schefferly’s replacement at the Bankruptcy Court, agreed with NuCast that the Bankruptcy Court had jurisdiction, but was unwilling to take up the issues presented by NuCast. Judge Gretcho noted that federal district courts “have original but not exclusive jurisdiction of all civil proceedings arising under Title 11 or arising in or related to cases under Title 11” under 28 U.S.C.A. § 1334(b). Initially, Judge Gretcho pointed out that the Debtor’s case “closely resembled” New England Power & Marine Inc. v. Town of Tyngsborough, Massachusetts (In re Middlesex Power Equipment & Marine Inc.), 292 F.3d 61 (1st Cir. 2002), in which a bankruptcy court determined that it had nonexclusive jurisdiction under Section 1334(b) to enforce a sale order to block a state tax lien foreclosure action. The Court further reasoned that, while the use of the Retention of Jurisdiction Provision in these types of sale orders was prevalent, it was not meant for these provisions to be taken literally so as to provide bankruptcy courts with broad-sweeping jurisdiction and power to be employed at will by debtors.
Despite finding that the Bankruptcy Court had jurisdiction after a detailed analysis, Judge Gretcho determined that the Bankruptcy Court should permissively abstain from exercising jurisdiction to reopen the case. Under 28 U.S.C.A. § 1334(c)(1), federal courts may abstain from hearing a particular matter arising in a case under the Bankruptcy Code “in the interest of justice, or in the interest of comity with state courts or respect for state law.” This point was further supported by precedent in the Celotex Corp v. Edwards (514 U.S. at 3078, 115 S. Ct., 1493) which found that “[t]he jurisdiction of bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute.” Additionally, Michigan courts consider a slew of nonexclusive factors to determine abstention, including the effect on the efficient administration of the bankruptcy if the court abstains and the extent to which state laws predominate over the bankruptcy issues at hand. After reviewing those factors, Judge Gretcho determined that “the state court complaint will have no effect on the administration of the Debtor’s bankruptcy estate” because the bankruptcy case had closed more than four years ago following the sale of Debtor’s assets. Furthermore, Judge Gretcho pointed out that the claims in the Circuit Court were based on Michigan state statutes and common law rather than provisions in the Bankruptcy Code.