Ruling Provides Guidance on Standard to Reopen Fully Administered Chapter 11 Case “for Other Cause”

Section 350(b) of the Bankruptcy Code permits a bankruptcy court under certain circumstances to reopen a bankruptcy case even after the estate has been fully administered and the case is closed. In In re Atari, 2016 BL 125936 (Bankr. S.D.N.Y. Apr. 20, 2016), the U.S. Bankruptcy Court for the Southern District of New York explored the circumstances under which it may be appropriate to reopen a closed chapter 11 case. The court ruled that “other cause” existed to reopen the case under section 350(b) because, among other things, the bankruptcy court, rather than a foreign court, was a more appropriate forum to adjudicate disputes, including the enforceability of releases, concerning a confirmed chapter 11 plan which implemented a global settlement among the debtor and other stakeholders.

Closing and Reopening Bankruptcy Cases

Generally, after a bankruptcy estate has been “fully administered”—e.g., the debtor’s chapter 11 plan has been confirmed, all bankruptcy claims have been resolved, and the plan is “substantially consummated”—the court, pursuant to section 350(a) of the Bankruptcy Code, is required to close the case by issuing a “final decree” in accordance with Rule 3022 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”). Once a case is closed, the bankruptcy court’s jurisdiction over the debtor and its estate normally terminates.

However, section 350(b) of the Bankruptcy Code and Bankruptcy Rule 5010 authorize the court, on motion of the debtor or another party in interest, to reopen a closed bankruptcy case “to administer assets, to accord relief to the debtor, or for other cause.” Pursuant to Bankruptcy Rule 9024(1), a motion to reopen a case is not subject to the one-year time limit that generally applies to motions for relief from an order of the court. A decision on a motion to reopen is committed to the sound discretion of the bankruptcy court.

Common reasons that have warranted reopening a closed case under section 350(b) include: (i) the discovery of unadministered assets which were unknown at the time of closure; (ii) amending schedules to add a previously omitted debt or creditor; (iii) avoiding a lien impairing exempt property; (iv) granting the debtor a discharge if the case was closed before a discharge was granted; and (v) enforcing the discharge injunction under section 524(a) of the Bankruptcy Code. See generally Collier on Bankruptcy ¶ 350.03 (16th ed. 2016).

Neither section 350(b) nor any other provision of the Bankruptcy Code specifies what constitutes “other cause” for reopening a closed case. In the absence of statutory guidance, bankruptcy courts have broad discretion in making this determination. For example, courts have granted motions to reopen a case to modify a chapter 11 plan or to interpret a provision in a previously confirmed plan. Id. (citing cases).

Courts are generally reluctant to reopen closed cases. Reopening a case removes the element of certainty and finality that comes with full administration of an estate and entry of a final decree. For this reason, courts consider a number of factors in determining whether reopening a case is justified under the particular circumstances of each case. For example, bankruptcy courts in the Southern District of New York have applied the following six-factor test:

1. The length of time that the case was closed;
2. Whether a nonbankruptcy forum has jurisdiction to determine the issue cited for reopening the case;
3. Whether prior litigation in the bankruptcy court determined that another court would be a more appropriate forum;
4. Whether any parties would suffer prejudice if the court grants or denies the motion to reopen;
5. The extent of any benefit to any party by reopening the case; and
6. Whether it would be futile to reopen the case because the requested relief cannot be granted.

See In re Easley-Brooks, 487 B.R. 400 (Bankr. S.D.N.Y. 2013); In re PlusFunds Grp., Inc., 2015 BL 113361 (Bankr. S.D.N.Y. Apr. 21, 2015). The moving party bears the burden of establishing “other cause” to reopen.

The bankruptcy court in Atari considered a motion to reopen a closed chapter 11 case under section 350(b).

Atari

Video arcade and video gaming industry pioneer Atari, Inc., and certain of its affiliates (collectively, “Atari”) filed for chapter 11 protection in the Southern District of New York in January 2013. Atari and a nondebtor affiliate, Atari S.A. (“Atari SA”), proposed a chapter 11 plan that provided for a global settlement among Atari; Atari SA; Alden Global Recovery Master Fund, L.P. (“Alden”), a prepetition lender to Atari under a €20 million credit facility (the “credit agreement”); and the official creditors’ committee.

The proposed plan provided significant debt relief to Atari SA and another nondebtor affiliate, Atari Europe, as well as Atari, and modified Alden’s rights under the credit agreement. Atari SA and Atari Europe were signatories to the credit agreement, but Atari was not, although certain of its intellectual property (“IP”) assets acted as security for the obligations of Atari SA and Atari Europe under the agreement. Among other things, the plan provided that Alden waived its right to receive distributions from Atari or to enforce its security interest in Atari’s IP assets. In addition, Atari SA and Atari Europe waived their intercompany claims against Atari, which also served as collateral under the credit agreement.

The plan also provided for broad mutual releases. Finally, the plan provided that the bankruptcy court would retain exclusive jurisdiction to determine disputes arising in connection with the interpretation, implementation, and enforcement of the plan or the confirmation order and authorized the court to “issue . . . orders in aid of [the plan’s] execution, enforcement, implementation, and consummation.”

The court confirmed the plan in December 2013. Shortly after the plan became effective, the parties to the credit agreement and reorganized Atari entered into an amendment to the credit agreement whereby, among other things, reorganized Atari pledged substantially all of its assets as additional collateral to secure the obligations of Atari SA and Atari Europe.

A final decree closing Atari’s chapter 11 case was issued in June 2014. More than a year afterward, a dispute arose among the parties to the amended credit agreement over alleged overpayments. After Alden declared an event of default under the agreement and notified Atari of its intent to foreclose on the IP collateral, Atari sued Alden in the Commercial Court of Paris seeking, among other things, a stay of enforcement of Alden’s rights, recovery of the overpayments, and damages for wrongful foreclosure. Alden then filed a motion with the U.S. bankruptcy court to reopen Atari’s chapter 11 case for the purpose of staying the French litigation and enforcing the confirmed plan.

The Bankruptcy Court’s Ruling

The bankruptcy court applied the six-factor test described previously to determine whether Atari’s chapter 11 case should be reopened under section 350(b) “for other cause.” It concluded that all six factors weighed in favor of granting the requested relief. The court found, among other things, that:

1. Although Atari’s chapter 11 case had been closed for more than one year, Alden filed its motion to reopen the case only three months after the French litigation was commenced (factor one);
2. While another forum—the Commercial Court of Paris—also had jurisdiction to interpret and, if necessary, enforce the releases contained in Atari’s chapter 11 plan, the U.S. bankruptcy court expressly had jurisdiction to interpret and enforce its own prior orders even post-confirmation, and in the bankruptcy court’s view, it was a more appropriate forum to adjudicate disputes, including the enforceability of releases, concerning Atari’s reorganization and the global settlement (factors two and three);
3. Although the obligation to defend a claim in another forum is not typically the type of “legal prejudice” that is relevant to a section 350(b) inquiry, Alden would have been unduly prejudiced by having to litigate in a different forum issues relating to the scope of the chapter 11 plan’s release provisions because, as part of the global settlement, the parties agreed to litigate those issues before the bankruptcy court (factor four);
4. Reopening the cases to enforce rights that were bargained for in a confirmed chapter 11 plan constitutes sufficient “benefit” to justify reopening the cases (factor five); and
5. It was not clear at the outset that no relief would be forthcoming if the cases were reopened because Alden made “at least a colorable claim” that the releases entitled Alden to an injunction barring the pending French litigation (factor six).

The bankruptcy court rejected Atari’s argument that, even though the court had jurisdiction to consider the issues raised in the motion to reopen, it should abstain from exercising that jurisdiction because the litigation before the French court was filed first, the parties to the actions were the same, and the issues raised in the French litigation were sufficiently similar to the issues raised in the motion. According to the court, because the main inquiry in this case was interpretation and enforcement of its own prior order, abstention in favor of the French court was not appropriate.

Outlook

Atari illustrates the circumstances that rise to the level of “other cause” to reopen a closed bankruptcy case under section 350(b) of the Bankruptcy Code. In addition, the decision highlights the importance of a retention of jurisdiction provision in a chapter 11 plan. Careful attention should be devoted to the drafting of such a provision if the plan proponent and other stakeholders involved want to ensure that disputes regarding the plan’s provisions and implementation are decided in the bankruptcy court, rather than another forum, which may be less familiar with the issues involved.

Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our "Contact Us" form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.