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District Court Rejects Federal Jurisdiction Over Breach Claims, Remands to Superior Court

CIT Commc’ns Fin. Corp. v. Level 3 Commc’ns, LLC, 2007 WL 951799 (D.Del. Mar. 29, 2007).

In this suit alleging breach of contract, unjust enrichment and conversion, Plaintiff moved for the District Court to remand the case to Delaware Superior Court, asserting that the District Court did not have subject matter jurisdiction. Plaintiff leased a telephone system to a company that later filed for bankruptcy. Through that bankruptcy, Defendants acquired the telephone system lease from the debtor, and the debtor was later liquidated pursuant to the Bankruptcy Court’s Confirmation Order. After the dissolution, Plaintiff filed several claims in the bankruptcy proceedings related to lease payments due by the debtor prior to Defendants’ acquisition of the lease. Plaintiff later filed the breach of contract, unjust enrichment and conversion claims against Defendants in the Delaware Superior Court, based on non-payment of Defendants’ non-payment of obligations under the acquired lease. Defendant filed notice of removal of the suit to federal court, alleging that the claims were pending in, and therefore related to, the bankruptcy proceedings, such that the District Court had subject matter jurisdiction over the claims. In seeking remand, Plaintiff argued that the claims against Defendants existed independent of the bankruptcy, such that the federal court did not have subject matter jurisdiction.

The District Court found that the test for determining whether it had jurisdiction required that the civil proceeding “could conceivably have any effect on the estate being administered in bankruptcy.” Furthermore, retention of bankruptcy jurisdiction after confirmation of a debtor’s reorganization plan is permissible only if there is a “close nexus” between the post-confirmation causes of action and the bankruptcy plan or proceeding. Defendants argued that Plaintiff had already submitted claims in the bankruptcy proceedings based on non-payment under the lease. Furthermore, because Defendants acquired the lease pursuant to the Bankruptcy Court’s Confirmation Order, which retained jurisdiction over claims “resulting from unexpired leases”, the Bankruptcy Court had jurisdiction over the claims. The District Court rejected this argument, concluding that the Bankruptcy Court could not reserve jurisdiction for itself that did not otherwise exist. The District Court concluded that while Plaintiff’s claims in the bankruptcy proceedings related to payments due while the debtor was the lessee under the lease, the claims against Defendants were separate and independent allegations of contractual breach once they acquired the lease. The Court also rejected Defendants’ argument that any determination of liability would require construction of documents integral to the bankruptcy proceeding, finding insufficient the fact that the Superior Court would be required to read the Sale Agreement approved by the Bankruptcy Court. The Court therefore found that Defendants did not establish the “close nexus” required to give the Court subject matter jurisdiction over the state law claims, and granted Plaintiff’s motion to remand.

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