Kennedy Lewis Partners Master Fund LP v. Abry Partners, LLC

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

Chapter 11

In re:

Case No. 20-12168 (CTG)

TOWN SPORTS INTERNATIONAL,

LLC, et al., (Jointly Administered)

Debtors.

KENNEDY LEWIS PARTNERS Adv. Pro. No. 22-50406 (CTG)

MASTER FUND LP and KENNEDY

LEWIS PARTNERS MASTER FUND II

LP,

Plaintiffs,

v.

ABRY PARTNERS, LLC, et al.,

Defendants.

MEMORANDUM OPINION

This adversary proceeding is, at bottom, an effort to fit the square peg of a

breach of contract action into the round hole of disputes over prior orders of this

Court. That effort has given rise to understandable confusion over whether the

breach of contract claims are within this Court’s subject-matter jurisdiction.

In the end, the Court concludes that the best reading of the complaint is that

it asserts ordinary claims for breach of contract. While the events underlying the

alleged breaches occurred in the bankruptcy case and were affected by prior orders of

this Court, these circumstances are insufficient to turn this case for breach of contract

into a matter that either “arises in” a bankruptcy case or “arises under” the

Bankruptcy Code. Nor is the case within the Court’s “related to” jurisdiction. The

Court will accordingly dismiss the contract claims, as it must, for want of subject-

matter jurisdiction.

All of the parties made clear, however, that they are anxious for a resolution

of their disputes on the merits – at least to the extent this Court has the authority to

provide it. Appreciating the possibility that the Court would conclude it lacked

subject-matter jurisdiction over the contract claims, the Court offered to the parties,

if (and only if) they all consented to it, to “deem” the complaint to include a fourth

count – one seeking a declaration that the state-law claims for breach of contract pled

in the complaint are not precluded by this Court’s prior orders. That was the issue

to which the parties devoted most of their briefing. And there is no doubt that the

Court has subject-matter jurisdiction to adjudicate a claim regarding the meaning of

its own prior orders. The parties expressly consented to having the Court proceed on

that basis, and, further, to treat the existing briefing as cross motions for summary

judgment on that fourth count.

On the merits, the Court concludes that the breach of contract claims the

plaintiffs seek to bring are precluded by this Court’s prior orders. The gist of the

breach of contract claims is that the majority lenders and agent bank authorized a

credit bid without the majority lenders giving an appropriate instruction to the agent.

The Court concludes, however, that a fair reading of the Court’s November 2020

ruling denying the lenders’ motion for a preliminary injunction was that the Court

already concluded, when it entered the order approving the sale, that such an

instruction had been given. It is true that neither the Court’s order nor the transcript

of the November 2020 hearing contains precisely those words. But this Court finds,

exercising the discretion it has to construe its prior orders, that this is the only fair

and reasonable way to construe what the Court previously decided.

This question was fully litigated in connection with the November 2020 motion

for a preliminary injunction, which was a dispute to which the plaintiffs in the current

action were parties. And while the denial of a preliminary injunction is not a “final

judgment” in the traditional sense, the Restatement of Judgments recognizes that

principles of finality are to be flexibly applied in the context of the doctrine of issue

preclusion. Applying the factors identified by the Restatement, the Court concludes

that the order denying the preliminary injunction is entitled to issue preclusive effect.

The Court will accordingly grant summary judgment in defendants’ favor on the

“deemed” fourth count of the complaint.

Factual and Procedural Background

1. Town Sports International owned and operated health and fitness clubs

in the Northeast and Mid-Atlantic areas.1 Unsurprisingly, its business was hit hard

1 Debtor Town Sports International, LLC, which is not a party to this adversary proceeding,

is referred to as “Town Sports International.” The factual background set forth herein, as it

bears on the motions to dismiss, is taken from the allegations of the complaint, originally

filed in the U.S. District Court for the Southern District of New York, Kennedy Lewis Partners

Master Fund LP v. Abry Partners, No. 21-04690 (S.D.N.Y. May 25, 2021), which is referred

to as the Complaint. Other pleadings filed on the docket of the U.S. District Court for the

Southern District of New York in this litigation are cited as “New York D.I.__.” Various of

the operative documents have been filed on this Court’s docket as exhibits to declarations.

For convenience, citations to those documents point to the versions filed on this Court’s

docket. In addition, as discussed further below at p. 29, the Court also takes judicial notice

of this Court’s prior orders in connection with the summary judgment motion on the “deemed”

count for a declaratory judgment.

by the pandemic.2 The health and fitness clubs were forced to close in March 2020.3

These bankruptcy cases were filed in September 2020.4

This lawsuit was originally filed as a breach of contract action in the U.S.

District Court for the Southern District of New York.5 The plaintiffs were lenders

under a credit agreement and related security agreement who held a minority of the

debt issuance.6 The defendants in this action are (a) other lenders under the same

credit and security agreements who collectively held a majority of the debt issuance,7

and (b) Wilmington Savings Fund Society, which was the administrative agent under

the credit agreement and collateral agent under the security agreement.8

2. In 2013, the lenders entered into a credit agreement that made $340

million in credit available to Town Sports International, which borrowing would

2 Complaint ¶ 2.

3 Id.

4 In re Town Sports International, LLC, No. 20-12168 (Bankr. D. Del. Sept. 14, 2020).

Citations to materials filed on the docket in these bankruptcy cases are cited as “Main Case

D.I. __.”

5 See Complaint.

6 Plaintiffs Kennedy Lewis Partners Master Fund LP and Kennedy Lewis Partners Master

Fund II LP are referred to as the “minority lenders.”

7 These defendants, Abry Partners, LLC; Apex Credit Partners, LLC; CIFC Asset

Management LLC; Ellington Management Group, L.L.C.; and Trimaran Advisors

Management, L.L.C. are referred to as the “lender defendants.” These lender defendants also

made up the Ad Hoc Term Lender Group in the main bankruptcy case. Plaintiffs and the

lender defendants are referred to collectively as the “lenders.”

8 Wilmington Savings Fund Society, FSB is referred to as “WSFS” or the “agent defendant.”

mature in 2020.9 The related security agreement granted a lien on substantially all

of Town Sports International’s assets to secure its promise to repay the loan.10

The mechanics of the credit agreement are similar to what one would see in a

typical syndicated loan agreement. WSFS serves as the agent, whose role is to

“interface between the borrower and the lenders, and among the lenders

themselves.”11 Section 12.10(a) of the credit agreement provides that the majority of

the lenders (at times referred to as the “Required Lenders”) in accordance with the

terms of the agreement will bind all of the lenders.12 And the security agreement

likewise provides that the collateral agent has the exclusive authority to enforce the

security agreement and may act only upon the instructions of the “Required Secured

Creditors,” which is defined (by cross-reference to the credit agreement) as the

holders of a majority of the outstanding debt.13

3. The bankruptcy case proceeded swiftly to a sale of the debtors’ assets.

The debtors negotiated a sale of substantially all of the debtors’ assets to a new entity

that was to be owned in part by the syndicate lenders under the credit agreement and

9 Complaint ¶ 26.

10 D.I. 21-5 (Security Agreement).

11 Lee M. Shaiman and Bridget K. Marsh, eds., The Handbook of Loan Syndications and

Trading 256 (2d ed. 2022). See also Norton Creditors’ Rights Handbook § 2:25 (typically, in

a syndicated loan, “one of the lenders will act as the agent for the loan and will have primary

responsibility for administering the loan for the benefit of all the lenders. The loan

agreement will specify the rights and duties of the agent bank. The agent bank will generally

have responsibility for making advances to the debtor, collecting and distributing payments

and communicating with the debtor.”); D.I. 21-4 § 12 (setting forth role of administrative

agent under the credit agreement).

12 D.I. 21-4 § 12.10(a).

13 D.I. 21-5 §§ 7.1, 9; D.I. 21-4 § 1.01.

in part by Tacit Capital, a private equity firm that was to capitalize the new entity

with $47.5 million in cash.14 The lenders were to contribute $80 million of the $167

million outstanding under their loans to the new entity, which would use the $80

million in loans as a credit bid to acquire the debtors’ assets.15

The debtors filed a motion to approve the sale (subject to an auction) on October

2, 2020, approximately two weeks after the case was filed.16 This Court approved the

bid procedures by order dated October 9, 2020.17 That order set a deadline of October

26, 2020 for the receipt of any competing bids.18 Had the debtors received a qualifying

competing offer, the auction was scheduled to occur on October 28, 2020.19 The sale

hearing was to take place on November 3, 2020.20

On October 26, 2020, however, the debtors filed a notice on the docket

indicating that they had not received any other qualifying offers.21 The auction was

therefore cancelled.22 On November 4, 2020, the Court issued an order authorizing

the sale to the buyer.23

14 Complaint ¶ 6; Tacit Capital LLC is referred to as “Tacit Capital.” The proposed buyer was

to be a newly formed entity named New TSI Holdings, Inc., and is referred to as “Buyer.”

15 Complaint ¶ 7.

16 Main Case D.I. 160.

17 Main Case D.I. 208.

18 Id. ¶ 2.

19 Id. ¶¶ 2, 6.

20 Id. ¶ 2.

21 Main Case D.I. 347.

22 Id.

23 Main Case D.I. 639.

On November 27, 2020, however, the ad hoc term lender group (the members

of which are the lender defendants in this action) filed an emergency motion seeking

injunctive relief.24 In their motion, they reported that after the Court’s entry of the

sale order it “became clear that Tacit would be unable to meet any of its funding

commitments” to capitalize the buyer.25 The ad hoc term lender group took the

position that it had neither contributed the $80 million of its debt, nor had it

instructed the agent to transfer the right to credit bid, to the buyer and therefore the

sale could not close.26 The debtors, however, argued in opposition to the emergency

motion (filed two days later on November 29, 2020) that the sale order stated that the

lenders had already contributed their $80 million of debt to the buyer.27 Accordingly,

they contended that whether or not Tacit Capital had capitalized the buyer with the

$47.5 million that the lenders had anticipated, the buyer was able to, and legally

obligated to, close on the credit-bid sale with the debtors.28

This Court held a hearing on the preliminary injunction motion on November

30, 2020.29 The Court agreed with the debtors’ construction of the sale order,

24 Main Case D.I. 710.

25 Id. ¶ 20.

26 Main Case D.I. 710 ¶¶ 4, 16-20.

27 Main Case D.I. 714 ¶¶ 3-4 (“The Prepetition Agent (as defined in the DIP Order), on behalf

of the Prepetition Lenders, has the right under section 363(k) of the Bankruptcy Code and is

authorized by this Court pursuant to the Bid Procedures Order and this Sale Order,

to credit bid the Credit Bid Consideration. Pursuant to the Asset Purchase

Agreement, the Buyers agreed to provide, as consideration for the Acquired Assets, the

Purchase Price, which includes, among other things, the Credit Bid Consideration.”)

(emphasis in debtors’ objection) (quoting Main Case D.I. 639 (Sale Order) ¶ X).

28 Id. ¶¶ 7-10.

29 See generally Nov. 30, 2020 Hr’g Tr. on ad hoc lender group’s emergency motion.

concluding that “the sale order makes it clear that the preliminaries, i.e. the transfer

of the right to credit bid, have already occurred and we’re not awaiting that

happening.”30 The Court added that the syndicate lenders’ $80 million “was a

fundamental part of the bid that was the stalking horse bid that went out for

competing bids, the auction was canceled, [the] court had a sale hearing, nobody

objected, nobody raised this issue, I entered an order, we’re going to closing and now

all of a sudden the term lenders say we never gave the authority for the buyer to

credit bid, it’s just too late.”31

The Court added that “the documents made it clear that contribution already

– and to the extent that it didn’t already occur pursuant to some sort of the documents

being exchanged among the parties I deem[] it as a matter of law and to the extent I

have to exercise equitable power here [–] did occur.”32 The Court accordingly entered

an order denying the emergency motion, which included a statement that “the

Prepetition Agent, on behalf of the Prepetition Lenders, has transferred the right to

credit bid the Credit Bid Consideration to the Buyer, and the Buyer is authorized to

contribute the Credit Bid Consideration at closing of the sale.”33 On December 18,

30 Nov. 30, 2020 Hr’g Tr. at 27.

31 Id.

32 Id.

33 Main Case D.I. 721 at 2.

2020, this Court entered an order confirming the debtors’ plan of reorganization.34

That plan became effective on December 22, 2020.35

4. In May 2021, the minority lenders brought this lawsuit in the U.S.

District Court for the Southern District of New York.36 The theory of the lawsuit is

that the actions taken by the lender defendants and the agent defendant, in credit

bidding the $80 million of debt, violated the terms of the applicable agreements.37

The complaint asserts three claims for breach of contract against the defendants and

seeks to recover monetary damages resulting from the alleged breaches.38 According

to the facts as alleged in the complaint, there is not complete diversity between the

plaintiffs and defendants.39 The only asserted basis for federal jurisdiction is that the

action is “related to the Debtors’ Chapter 11 proceeding,” such that it would fall

within the related-to jurisdiction of 28 U.S.C. § 1334(b).40

Defendants moved the district court to dismiss the complaint or, in the

alternative, to transfer this lawsuit to the District of Delaware.41 Those motions do

not, however, challenge the district court’s subject-matter jurisdiction over the

34 Main Case D.I. 828.

35 Main Case D.I. 849 at 1.

36 See Complaint.

37 Complaint ¶¶ 1-12.

38 Complaint ¶¶ 47-53 (breach of § 12.10 of the credit agreement and § 7.1 of the security

agreement by the lender defendants), 54-62 (breach of §§ 12.02 and 12.10 of the credit

agreement and § 7.1 of the security agreement by the agent defendant), 63-69 (breach of §

13.12 of the credit agreement by all defendants), 70 (prayer for relief).

39 Complaint ¶¶ 13-22.

40 Complaint ¶ 21.

41 See New York D.I. 47, 48, 50, 51.

action.42 The New York district court judge found that the case was within the

bankruptcy court’s “core” jurisdiction, because the claims within the complaint

required the interpretation of a bankruptcy court order, “even though the contracts

were made before the bankruptcy,” and therefore the claims were “arising in” the

bankruptcy case.43 The district court judge stated,

[A] contract dispute can be core to bankruptcy proceedings depending

on its nature, and [c]ourts have held contract disputes to be core where,

similar to the situation here, although the contract preceded the

bankruptcy, the dispute did not, and the dispute that emerged in the

bankruptcy proceedings would not exist absent those proceedings and is

intertwined with them.44

By order dated August 17, 2022, the district court granted the motions to transfer,

directing that the case be transferred to the District of Delaware.45

The U.S. District Court for the District of Delaware docketed this proceeding

on August 24, 2022.46 Because the complaint purports to invoke the district court’s

bankruptcy jurisdiction, by order dated September 6, 2022, the district court referred

the proceeding, in accordance with 28 U.S.C. § 157(a) and the district court’s standing

order of reference, to this Court.47

42 Id.

43 New York District Court, Aug. 17, 2022 Hr’g Tr. at 8-11.

44 New York District Court, Aug. 17, 2022 Hr’g Tr. at 10-11 (citing Delaware Trust Co. v.

Wilmington Trust N.A., 534 B.R. 500, 516 (S.D.N.Y. 2015)).

45 New York D.I. 61.

46 Kennedy Lewis Partners Master Fund LP v. Abry Partners, No. 22-0111 (MN) (D. Del. Aug.

24, 2022). Citations to materials on the docket of the Delaware District Court case are

hereafter cited as “Del. Dist. D.I. __.”

47 Del. Dist. D.I. 68; see Amended Standing Order of Reference from the United States District

Court for the District of Delaware, dated Feb. 29, 2012.

5. After the case was docketed in this Court, the parties filed supplemental

briefing regarding the defendants’ motions to dismiss the complaint.48 On November

29, 2022, before the reply briefs were due and two weeks before oral argument, the

Court set forth some preliminary observations on whether the action was within this

Court’s subject-matter jurisdiction.49 The Court emphasized the Third Circuit’s

guidance that “federal courts have an independent obligation to determine whether

subject-matter jurisdiction exists, even in the absence of a challenge from any party,”

because it “can never be forfeited or waived.”50

Because this is a post-confirmation action, the Court explained that in order

for the case to be within the “related-to” jurisdiction, there would need to be a “close

nexus” between the action and the confirmed plan of reorganization.51 The Court

expressed some measure of doubt that such a nexus was present.52 The Court also

observed that the prepetition breach of contract claims did not seem to “arise in” the

bankruptcy case because by their nature the breach of contract claims could arise

outside of the bankruptcy context.53 The Court therefore asked the parties to address

the Court’s subject-matter jurisdiction over this proceeding at the December 13, 2022

48 D.I. 19, 20, 22.

49 D.I. 26 (“In preparing for [the hearing on the motions to dismiss for December 13, 2022],

however, it occurred to the Court that its subject-matter jurisdiction over this action was at

least subject to doubt.”).

50 Hartig Drug Company Inc. v. Senju Pharmaceutical Co. Ltd., 836 F.3d 261, 267 (3d Cir.

2016) (internal citation and quotation omitted).

51 D.I. 26 at 7-8.

52 Id.

53 Id. at 8.

hearing. The Court also permitted the parties to address these issues in

supplemental briefs filed before the hearing.54

While pointing out that the Court was obligated to assure itself of its own

subject-matter jurisdiction, the Court appreciated that the parties were anxious to

obtain a resolution on the merits.55 The Court further observed, in its preliminary

observations, that the parties’ briefing on the motion to dismiss was principally

directed to the effect of the Court’s prior orders on the present action, and that

whether or not the Court had subject-matter jurisdiction over the breach of contract

lawsuit, the Court would certainly have jurisdiction to construe its prior orders.56 The

Court accordingly offered the parties the option for it to “deem” the Complaint to

include a fourth count, one for a declaratory judgment on the preclusive effect of this

Court’s prior orders.57

The parties took up the Court’s invitation to submit additional briefing

addressing the question of subject-matter jurisdiction58 The lender defendants

argued that the Court has subject-matter jurisdiction over the lawsuit because it falls

within 28 U.S.C. § 1334(b)’s “arising in” jurisdiction.59 “[B]ecause Plaintiffs’ claims

challenging the propriety and result of a bankruptcy sale order cannot exist without

54 Id. at 9.

55 Id. at 9-11.

56 Id. at 10-11 (citing Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151 (2009)).

57 Id. at 11.

58 D.I. 29, 30, 31.

59 D.I. 30.

that proceeding, and indeed call into question the final ruling and order of that

proceeding,” the lender defendants contended, the action falls within the arising-in

jurisdiction.60 The agent defendant asserted that the Court has subject-matter

jurisdiction over the claims against the agent defendant “pursuant to paragraph 45

of the Court’s November 4, 202[0] original sale order, which contains a broad

retention of jurisdiction provision.”61 The plaintiffs essentially acknowledged that the

Court lacked subject-matter jurisdiction, explaining that they believed that the case

was within the “related-to” jurisdiction under Second Circuit law (where they filed

the lawsuit), which they say does not apply the rigorous “close nexus” test to post-

confirmation jurisdiction that is applicable here in the Third Circuit.62 At the

December 13, 2022 hearing, all of the parties expressly agreed that, if the Court were

to conclude it lacked subject-matter jurisdiction over the three breach of contract

claims, it should proceed to address the “deemed” fourth count for a declaratory

judgment, treating the existing briefing as cross motions for summary judgment.63

Jurisdiction

The circumstances of how this case was filed and referred to this Court are

described above under point four of the Factual and Procedural Background. This

Court’s subject-matter jurisdiction over the breach of contract claims is described in

60 D.I. 30 at 2, 3 (“Plaintiffs’ theory of this case turns entirely on their interpretation of Judge

Sontchi’s sale orders, thus implicating the very sale process Judge Sontchi oversaw.”).

61 D.I. 29 at 1 (citing Main Case D.I. 639).

62 D.I. 31 at 3-4; Dec. 13, 2022 Hr’g Tr. at 28.

63 Dec. 13, 2022 Hr’g Tr. at 5.

Part I, and its subject-matter jurisdiction over the “deemed” fourth count for a

declaratory judgment is described in Part II, below.

Analysis

I. This Court lacks subject-matter jurisdiction over the claims for

breach of contract.

Bankruptcy jurisdiction “extends to four types of title 11 matters: (1) cases

‘under’ title 11; (2) proceedings ‘arising under’ title 11; (3) proceedings ‘arising in’ a

case under title 11; and (4) proceedings ‘related to’ a case under title 11.”64 The first

of those categories, a case “under” title 11, is the main bankruptcy case – the one

initiated by the filing of the petition.65 For a court to have subject-matter jurisdiction

over other proceedings in bankruptcy, they must fit into one of the other three

categories.66 The Third Circuit’s recent decision in Essar Steel described the scope of

those categories:

A case ‘arises under’ [the Bankruptcy Code] when the cause of action is

based on a right or remedy expressly provided by the Bankruptcy Code.

Proceedings ‘arising in’ a case under [the Bankruptcy Code] include

matters that, though not explicitly mentioned in the Code, would not

exist outside of bankruptcy. Related matters are generally causes of

action under state law that are imported into the bankruptcy because of

their impact on the size of the debtor’s estate, and hence the distribution

to the debtor’s creditors.67

64 Stoe v. Flaherty, 436 F.3d 209, 216 (3d Cir. 2006).

65 Id.

66 Id.

67 In re Essar Steel Minnesota LLC, 47 F.4th 193, 197 (3d Cir. 2022) (quoting In re Weiand

Auto. Indus., 612 B.R. 824, 854 (Bankr. D. Del. 2020)) (brackets in original; internal footnote

omitted).

As noted above and in this Court’s preliminary observations, while no party has

questioned this Court’s subject-matter jurisdiction, it is clear that every federal court

has an independent obligation to assure itself of its own subject-matter jurisdiction

over a proceeding.68 The Third Circuit has explained that subject-matter jurisdiction

is “non-waivable” and “must be policed by the courts on their own initiative,

irrespective of whether that policing of jurisdictional authority is voiced.”69

A. This case is not within the Court’s related-to jurisdiction.

The original complaint for breach of contract, filed in the U.S. District Court

for the Southern District of New York, asserted that the district court’s subject-

matter jurisdiction was satisfied because this lawsuit was “related to the Debtors’

Chapter 11 proceeding” pursuant to 28 U.S.C. § 1334(b).70

While the related-to jurisdiction extends, before plan confirmation, to any

dispute that might have a “conceivable effect” on the bankruptcy estate, upon

confirmation related-to jurisdiction is significantly narrowed. The Third Circuit

explained in Resorts, “At the most literal level, it is impossible for the bankrupt

debtor’s estate to be affected by a post-confirmation dispute because the debtor’s

estate ceases to exist once confirmation has occurred.”71 Accordingly, post-

confirmation related-to jurisdiction requires a “close nexus” between the claim

68 Hartig, 836 F.3d at 267.

69 Id. (quoting Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 583 (1999)).

70 New York D.I. 1 ¶ 21.

71 In re Resorts International, Inc., 372 F.3d 154, 165 (3d Cir. 2004).

asserted and the confirmed plan.72 The jurisdiction thus extends to causes of action

that “affect the interpretation, implementation, consummation, execution, or

administration of the confirmed plan.”73

No such nexus is present here. While the confirmed plan states that it

preserves jurisdiction over the debtors’ post-effective causes of action, the debtors are

not a party to this lawsuit. 74

The lender defendants contend that “the resolution of this action could affect

the post-confirmation administration of the Debtors, given the Lender Defendants’

reservation of their right to claim indemnification from the Debtors under the

governing credit agreement.”75 While such a potential claim for indemnification may

be sufficient to establish pre-confirmation related-to jurisdiction,76 where the sole

requirement is that the action have a conceivable effect on the bankruptcy estate, it

72 Resorts, 372 F.3d at 166-167 (“[T]he essential inquiry appears to be whether there is a close

nexus to the bankruptcy plan or proceeding sufficient to uphold bankruptcy court jurisdiction

over the matter.”).

73 Resorts, 372 F.3d at 167.

74 See Main Case D.I. 828 (“Schedule of Retained Causes of Action”).

75 D.I. 30 n.1 (citing Main Case D.I. 1180 (Sept. 21, 2021 reservation of rights) and In re Seven

Fields, 505 F.3d 237, 265 (3d Cir. 2007)).

76 In re Philadelphia Newspapers, LLC, 423 B.R. 98, 103 (Bankr. E.D. Pa. 2010) (holding that

the impact of the proceeding on the debtors’ estate and the debtors’ indemnification practice

established “related-to” jurisdiction); see also In re LTL Mgmt., LLC, 645 B.R. 59, 75-77

(Bankr. D.N.J. 2022) (finding “related-to” jurisdiction, pre-confirmation, to enjoin third-party

action because of debtor’s indemnification obligations); but see In re W.R. Grace & Co., 591

F.3d 164, 174-175 (3d Cir. 2009) (holding that potential indemnification claim did not satisfy

related-to jurisdiction, noting that “will or will not be sufficiently related to a bankruptcy to

warrant the exercise of subject matter jurisdiction is a matter that must be developed on a

fact-specific, case-by-case basis.”); In re Lower Bucks Hosp., 488 B.R. 303, 314 (E.D. Pa. 2013)

(“The existence of an indemnification agreement between a defendant in a proceeding outside

the bankruptcy action and a non-party bankrupt debtor does not automatically supply the

nexus necessary for the exercise of ‘related to’ jurisdiction.”).

is insufficient to meet Resorts’ more stringent “close-nexus” test that governs post-

confirmation related-to jurisdiction.77

B. This action neither “arises in” the bankruptcy case nor “arises

under” the Bankruptcy Code.

The dispute over “arising in” and “arising under” jurisdiction is ultimately a

dispute over how to make sense of the plaintiffs’ complaint. The defendants’ position

is that this lawsuit is, in substance, a dispute over what the Court did when it denied

the motion for a preliminary injunction.78 They argue that, on that basis, the claim

is so inexorably tied to what happened in the bankruptcy case that it fits within the

“arising in” jurisdiction.79 As the lender defendants put it, “Plaintiffs’ notion that

Judge Sontchi’s order caused Defendants to breach a contract would ‘have no

existence outside the bankruptcy case’ because the cause of action accrued only as a

consequence of the bankruptcy case.”80

That assertion is incorrect. For the reasons described below, the Court

concludes that the complaint asserts claims for breach of contract. To be sure, the

reason the contract was allegedly breached has a great deal to do with this Court’s

prior orders. But that allegation is insufficient to bring the claim within the “arising

77 Resorts, 372 F.3d at 167.

78 D.I. 29 at 1; D.I. 30 at 2-4; see also Dec. 12, 2022 Hr’g Tr. at 12 (“[Lender Defendants’] view

is that our first argument is that this is a 12(b)(6) motion to dismiss where they have failed

to formulate a breach of contract claim. They failed to state the claim because if a Court

order had been entered that essentially made it impossible for us to have breached and

therefore impossible for them to state a claim.”); Dec. 12, 2022 Hr’g Tr. at 14 (“[Agent

Defendant does] think that there is subject matter jurisdiction here based on the Court’s prior

orders where the [C]ourt retained jurisdiction, and we can go through that in detail”).

79 Id.

80 D.I. 30 at 3 (citing In re FormTech Indus., 439 B.R. 352, 357 (Bankr. D. Del. 2010)).

in” or “arising under” jurisdiction. At the end of the day, the fundamental basis for

the breach of contract claims is that the defendants allegedly failed to live up to their

contractual promises. Such claims cannot fit within “arising in” or “arising under”

jurisdiction.

Whatever the reasons for the alleged breaches, there is no question that the

complaint states three counts for ordinary breach of contract.81 The first count alleges

a breach of § 12.10 of the credit agreement and § 7.1 of the security agreement –

which, read together, allegedly require a majority of the lenders to instruct the agent

before the agent may credit bid.82 The second count alleges violations of §§ 12.02 and

12.10 of the credit agreement and § 7.1 of the security agreement, which allegedly

prohibit any effort to enforce the security agreement except upon the instructions of

a majority of the holders.83 And the third count of the complaint alleges that the

defendants effectively released the plaintiffs’ collateral in violation of § 13.12 of the

credit agreement.84

In contending that the claims are within the Court’s subject-matter

jurisdiction, defendants seek to recast the claims as ones that are about what

happened in the bankruptcy case. That effort is unsuccessful. It is true that the

events that gave rise to the alleged breaches had something to do with this Court’s

prior orders. But as further described below, the caselaw is clear that the particular

81 See generally Complaint.

82 Complaint ¶¶ 47-53.

83 Id. ¶¶ 54-62.

84 Id. ¶¶ 63-69.

factual circumstances in which the claim arises does not alter the basic nature of the

claim. It is certainly the case that the complaint makes factual allegations about

events that took place in the bankruptcy case. That, however, is insufficient to

transform a complaint that alleges breaches of contract into one that is somehow

about the bankruptcy case.

1. The breach of contract claims cannot “arise under” the

Bankruptcy Code.

As the Third Circuit explained in Essar Steel, “[a] case ‘arises under’ [the

Bankruptcy Code] when the cause of action is based on a right or remedy expressly

provided by the Bankruptcy Code.85 This head of jurisdiction is limited to claims for

which the basis for the relief sought is created by the Bankruptcy Code itself.86

Defendants insist that the breach of contract claims in this action “arise under”

the Bankruptcy Code because the preclusive effect of the Court’s order denying the

preliminary injunction bars this lawsuit.87 That argument, however, is foreclosed by

Stoe v. Flaherty.88 There, the plaintiff’s claim, an effort to collect unpaid wages from

former officers of his prior employer, arose under the Pennsylvania Wage Payment

and Collection Law.89 The defendants in Stoe argued, like the defendants here, that

85 In re Essar Steel, 47 F.4th at 197 (quoting In re Weiand Auto. Indus., 612 B.R. 824, 854

(Bankr. D. Del. 2020)) (brackets in original; internal footnote omitted).

86 1 Collier on Bankruptcy ¶ 3.01[4][e][i] (Richard Levin & Henry J. Sommer eds., 16th ed.

2022).

87 See generally D.I. 19, 22, 29, 30; Dec. 13, 2022 Hr’g Tr.

88 436 F.3d 209, 217 (3d Cir. 2006).

89 Stoe, 436 F.3d at 217.

any defense to Stoe’s claim implicated bankruptcy law.90 Indeed, prior Third Circuit

precedent had held that officers were not liable under the Pennsylvania Wage

Payment and Collection Law when federal bankruptcy law prohibited the employer

from paying the wages that were otherwise due.91 But that was insufficient to make

the case one that arose under the Bankruptcy Code.92 “The fact that federal

bankruptcy law is implicated as a defense to Stoe’s claim[] does not change the fact

that Stoe’s claim itself does not ‘arise under’ title 11.”93

That principle is controlling here. Though the defendants argue that the

preclusive effect of this Court’s prior orders could give rise to a defense to the

plaintiffs’ lawsuit, that assertion does not turn the claims into ones that arise under

the Bankruptcy Code.

2. The breach of contract claims do not “arise in” a

bankruptcy case.

When the New York district court transferred this case to the District of

Delaware, it held that the claims at issue were “core” on the ground that they fell

within the bankruptcy court’s “arising in” jurisdiction.94 The district court explained

that whether a case is a “core matter” was a significant factor in deciding whether to

grant a motion to transfer the case to the district in which the underlying bankruptcy

90 Id.

91 Id.

92 Id.

93 Id.

94 New York District Court, Aug. 17, 2022 Hr’g Tr. at 9-10.

case was pending.95 The district court noted that “the district in which the underlying

bankruptcy case is pending is presumed to be the appropriate district for hearing and

determination of a proceeding in bankruptcy,”96 and that “when a proceeding is core,

the public interest in centralizing [the] bankruptcy proceeding always outweighs the

public and private interests in enforcing a forum selection clause.”97

The district court went on to conclude because this Court’s prior orders play a

central role in the dispute, the case itself “arises in” the bankruptcy case.98 “Courts

have held contract disputes to be core where, similar to the situation here … the

dispute that emerged in the bankruptcy proceedings would not exist absent those

proceedings and is intertwined with them.”99 As the district court put it, claims “that

require a Court to interpret a bankruptcy court order are considered to arise in a

bankruptcy proceeding and are considered to be core claims.”100

While this Court has the utmost respect for the U.S. District Court for the

Southern District of New York and has no reason to dispute that Court’s construction

of its own precedent and that of the Second Circuit, that court’s conclusion cannot be

squared with the law that is controlling in this Court. The Third Circuit has been

clear that “arising-in” jurisdiction must be limited to claims that can only arise in a

95 Id. at 8-10.

96 Id. at 12.

97 Id. at 13.

98 Id. at 8-10.

99 Id. at 10-11.

100 Id. at 9 (citing Deutsche Oel & Gas S.A. v. Energy Cap. Partners Mezzanine Opportunities

Fund A, LP, 2020 WL 5814233, at *9 (S.D.N.Y. Sept. 30, 2020)).

bankruptcy case.101 “Proceedings ‘arising in’ a case under [the Bankruptcy Code]

include matters that, though not explicitly mentioned in the Code, would not exist

outside of bankruptcy.”102 “[C]laims that ‘arise in’ a bankruptcy case are claims that

by their nature, not their particular factual circumstance, could only arise in the

context of a bankruptcy case.”103 As described above, the three causes of action in the

complaint are for breach of contract.104 Such breach of contract claims can and do, of

course, exist outside of bankruptcy. The claims therefore do not “arise in” a

bankruptcy case.

That conclusion is reinforced by the underlying rationale for the distinction

between “core” and “non-core” claims. A plurality of the Supreme Court held in

Northern Pipeline that Article III of the Constitution did not permit non-Article III

bankruptcy courts to enter final judgment on matters of “private right,” such as

ordinary prepetition contract claims.105 The plurality suggested, however, that

bankruptcy courts could enter judgment on matters of public right, including

(according to the plurality) matters that were integral to the restructuring of the

relationship between a debtor and its creditors.106

101 In re Essar Steel, 47 F.4th at 197.

102 Id. at 197 (quoting In re Weiand Auto. Indus., 612 B.R. 824, 854 (Bankr. D. Del. 2020))

(brackets in original; internal footnote omitted).

103 Stoe, 436 F.3d at 218 (emphasis added).

104 D.I. 20 at 3.

105 Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 69-71 (1982).

106 Id. at 71.

The 1984 amendments to the bankruptcy jurisdiction provisions were intended

to take up the Northern Pipeline plurality on its distinction between “core” and “non-

core” matters. Issues at the heart of the “restructuring of debtor-creditor relations,

which is at the core of the federal bankruptcy power,”107 are matters of “public right.”

Such matters may be heard and determined by a non-Article III bankruptcy court.

“Non-core” matters are matters of “private right” that are otherwise “related to” the

bankruptcy case.108 The Supreme Court made clear in Stern v. Marshall that the

three heads of jurisdiction in § 1334(b) track this distinction between “core” matters

of public right and “non-core” matters of private right. Cases that “arise under” the

Bankruptcy Code or “arise in” a bankruptcy case are matters of public right and are

core; matters that are within the “related-to” jurisdiction are matters of private right

and are non-core.109

The result of that dichotomy is that matters of “private right” must necessarily

be non-core matters, and therefore cannot “arise in” a bankruptcy case. As Northern

Pipeline explains, an ordinary claim for breach of contract is a paradigmatic matter

of “private right” that cannot be a core matter.110 The necessary consequence is

107 Id.

108 28 U.S.C. § 1334(a)-(b) advisory committee’s notes to 1984 amendment.

109 See Stern v. Marshall, 564 U.S. 462, 476-477 (2011) (explaining that “core proceedings are

those that arise in a bankruptcy case or under Title 11” whereas “related-to” matters must

be non-core, since a core matter that “arise[s] neither under Title 11 nor in a Title 11 case”

would be “a contradiction in terms”).

110 458 U.S. at 71 (describing the “adjudication of state-created private rights, such as the

right to recover contract damages” as something that is “obviously” not a matter of public

right). See also Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 42, 56 (1989) (“State-law

causes of action for breach of contract or warranty are paradigmatic private rights.”).

therefore that such a claim cannot be a “core matter” that fits within either the

“arising in” or “arising under” jurisdiction.

Accordingly, the three breach of contract claims pled in the complaint cannot

be matters that fit within the “arising in” jurisdiction under Third Circuit precedent.

This Court thus lacks subject-matter jurisdiction over those claims and must dismiss

the claims on that basis.

II. The defendants are entitled to summary judgment on the “deemed”

fourth count seeking a declaratory judgment.

While the Court lacks subject-matter jurisdiction over this lawsuit as it was

pled there remains a commonsense point to the view expressed by the District Court

for the Southern District of New York and the defendants. The heart of the parties’

dispute is over this Court’s prior orders, so it only makes sense to have this Court

resolve that question. And even if the Court cannot adjudicate the claims for breach

of contract, that does not mean it cannot otherwise entertain a claim seeking a

declaration regarding the meaning of its prior orders.

The Court accordingly offered, if all of the parties were to consent to it, to treat

the complaint as having a fourth count, pled in the alternative, for a declaratory

judgment. That declaration sought would be a determination that the Court’s prior

orders would not bar the claims for breach of contract pled in plaintiffs’ complaint.111

As noted above, that is in any event the question to which most of the briefing on the

motions to dismiss was addressed. The parties agreed to have the Court proceed on

111 D.I. 26 at 10-11.

that basis.112 For the reasons described below, the Court concludes that this Court’s

prior orders do preclude the assertion of breach of contract claims based on the facts

alleged in this complaint.

A. With the consent of the parties, the Court may treat the

complaint as including a fourth count, one seeking a declaratory

judgment about the effect of the Court’s prior rulings.

The defendants filed their motions to dismiss the complaint under Federal

Rule of Civil Procedure 12(b)(6) for failure to state a claim for which relief may be

granted.113 There is no question that the plaintiffs could have, with leave of the Court,

expressly amended their complaint, under Rule 15, to seek a declaratory judgment.

Indeed, the Third Circuit has explained that “Rule 15(b)(2) allows for the amendment

of a complaint to conform to the evidence offered at trial, as long as the parties consent

either expressly or impliedly.”114 Express consent can be given to the Court by

interested parties verbally or in written form.115 Implied consent is found where the

parties have notice that a claim has entered the case at trial, the claim is being tried,

and opposing parties have the opportunity to respond.116 This case has not gone to

trial. Rule 15(b) is therefore not, by its terms, applicable. The basic principle

animating the rule, however, is that the formalities of the pleadings should not

prevent a court from resolving an issue that the parties have presented. Applying

112 Dec. 13, 2022 Hr’g Tr. at 5.

113 See New York D.I. 47, 48, 50, 51.

114 Addie v. Kjaer, 737 F.3d 854, 867 (3d Cir. 2013) (citing Douglas v. Owens, 50 F.3d 1226,

1236 (3d Cir. 1995)).

115 Id.

116 Id.

this principle, this Court sees no reason why, under the unusual circumstances

presented here and with the parties’ express consent, the Court may not treat the

complaint as having been implicitly amended to include a count for a declaratory

judgment.

To resolve any potential uncertainty regarding the parties’ consent, the Court

set a status conference (at the plaintiffs’ sound suggestion117) the day before the

scheduled argument on the motion to dismiss to determine whether the parties’

consented to proceeding on this basis. At that status conference, the Court made the

following suggestion to the parties:

What that proposal would be is that I think I could, with everyone’s

consent, essentially deem the existing complaint to include a fourth

count which would be a count that would say that in the alternative,

that if the court were to lack subject matter jurisdiction over the breach

of contract claims, that the plaintiff would seek a declaration that

nothing in the bankruptcy court’s prior orders operate to preclude a

court of competent jurisdiction from resolving the claims for breach of

contract.

And … that is a pure question of law, and one that … most of the existing

briefing on the motion to dismiss is directed to. Again, with everyone’s

consent I think I could treat the existing briefing as essentially cross-

motions for summary [judgment] on whether it was appropriate to grant

that declaratory [judgment] or not. And then, I would consider that

question on the merits and resolve it to the best of my ability…. If it

turns out I conclude that I don’t have subject matter jurisdiction, you

would then get a resolution from me on as much as I could resolve as

quickly as I could resolve it.118

The Court made clear that it would not proceed on this basis “in the absence of

consent from everyone” and suggested that the parties consider the matter and “let

117 See D.I. 31 at 4.

118 Dec. 12, 2022 Hr’g Tr. at 5-6.

me know at the beginning of the hearing tomorrow” whether they would consent to

proceeding on that basis.119

Counsel for the lender defendants said that she “will tell you now that we agree

that that would be an approach that is acceptable to our clients and that we find

acceptable.”120 Counsel for the agent defendant agreed.121 “You could deem there to

be a fourth cause of action as part of … the complaint, and that would be the

declaratory judgment action … [T]his can go forward substantively before your Honor

tomorrow.”122

While counsel for the plaintiffs had proposed taking an additional month to

permit the parties formally to amend the pleadings, counsel said that he would “think

about what you’ve suggested and be prepared to discuss that tomorrow.”123 At the

outset of the hearing the following day, plaintiffs’ counsel stated that they “have

considered your proposal and are fully ready to agree to that. I believe that

defendants voiced their consent to that yesterday.”124

The Court is mindful of the command of Federal Rule of Bankruptcy Procedure

1001 that the rules “be construed, administered and employed by the court and the

parties to secure the just, speedy, and inexpensive determination of every case and

119 Id. at 6-7.

120 Id. at 11.

121 Id. at 13.

122 Id.

123 Id. at 11.

124 Dec. 13, 2022 Hr’g Tr. at 5.

proceeding.”125 In view of all parties’ express consent and the dictate of the Rules, the

Court is satisfied that it may proceed to address the merits of the “deemed” claim for

a declaratory judgment, which it will treat as being presented on cross motions for

summary judgment.

For the reasons described below, the Court finds that the claims are precluded

by the Court’s prior order. The Court will accordingly deny the plaintiffs’ motion for

summary judgment and enter summary judgment in favor of defendants.

B. The breach of contract claims are barred by the preclusive effect

of this Court’s prior orders.

As an initial matter, there is no question that the Court has subject-matter

jurisdiction over the declaratory judgment count, which follows from the precept that

a court always has the jurisdiction to implement or enforce its prior orders.126

There is certainly a live and ripe dispute between the parties that warrants

judicial resolution.127 The fact that there is not a breach of contract action now

pending in a court of competent jurisdiction does not stand as a bar to this Court’s

entering a declaration with respect to the preclusive effect of its prior judgment. The

point of a declaratory judgment action, after all, is to “allow potential defendants to

resolve a dispute without waiting to be sued…and the mere fact that a declaratory

125 Fed. R. Bankr. P. 1001.

126 Travelers, 557 U.S. at 151.

127 See generally Maryland Cas. Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273 (1941);

Armstrong World Indus., Inc. v. Adams, 961 F.2d 405, 411 (3d Cir. 1992).

judgment action is brought in anticipation of other suits does not require the

dismissal of the declaratory judgment action by the federal court.”128

There is a question, however, whether it is appropriate for the Court to enter

a declaratory judgment when the motion that has formally been briefed is a motion

to dismiss the complaint. The Court is satisfied, however, that issue preclusion is a

pure question of law. The matter that needs to be decided is whether the issue that

is at the core of the breach of contract action – whether the majority lenders

instructed the agent to transfer the loans to the buyer – had been actually litigated

in a prior proceeding in a way that precludes the plaintiffs from relitigating that

issue.

The only materials that need to be considered to resolve that question are those

available on the Court’s docket, and that accordingly fall within the doctrine of

judicial notice.129 In addition, because the arguments the Court must consider in

order to resolve the right to a declaratory judgment were all fully engaged by the

parties in their very able briefing on the motions to dismiss, the Court is satisfied

that proceeding in this fashion is appropriately respectful of all parties’ procedural

rights.

As far as the merits go, the fundamental question is whether the issue raised

in the potential breach of contract claims has already been decided in a previous order

128 17 Charles Alan Wright & Arthur Miller, Federal Practice & Procedure § 2751 (3d ed. Apr.

2022 update).

129 See generally Southern Cross Overseas Agencies, Inc. v. Wah Kwong Shipping Group, Ltd.,

181 F.3d 410, 426-427 (3d Cir. 1999) (explaining consideration of prior judicial proceedings,

on judicial notice, for purposes of preclusion).

of the Court in a way that is binding on the plaintiffs. The doctrine of issue preclusion

bars the relitigation of an issue that has been litigated.130 The standard formulation

of issue preclusion, or collateral estoppel, is that “[w]hen an issue of fact or law is

actually litigated and determined by a valid and final judgment, and the

determination is essential to the judgment, the determination is conclusive in a

subsequent action between the parties, whether on the same or a different claim.”131

The Third Circuit has construed this standard to contain four elements.132

Collateral estoppel is appropriate where: ‘‘(1) the identical issue was decided in a prior

adjudication; (2) there was a final judgment on the merits; (3) the party against whom

the bar is asserted was a party or in privity with a party to the prior adjudication;

and (4) the party against whom the bar is asserted had a full and fair opportunity to

litigate the issue in question.”133 Here, the order entered by this Court denying the

motion for a preliminary injunction satisfies each of these elements with respect to

the “issue” whether the majority lenders had instructed the agent to credit bid the

debt, a question of fact that is central to the plaintiffs’ breach of contract claims.

130 Wallace v. United Parcel Service, 387 Fed. App’x 127, 128 (3d Cir. 2010). The Court notes

that at argument on the motion, the Court erroneously suggested that the principal basis for

asserting preclusion would be the doctrine of claim preclusion, or res judiciata. See Dec. 13,

2022 Hr’g Tr. at 88. While the parties’ briefs do address the doctrine of claim preclusion, for

the reasons described below this dispute is most appropriately resolved as a matter of issue

preclusion. The Court accordingly has no occasion to reach the questions of claim preclusion

presented by the parties.

131 Restatement (Second) of Judgments § 27 (1982) (Oct. 2022 update); see also Doe v. Hesketh,

828 F.3d 159, 171 (3d Cir. 2016).

132 Doe, 828 F.3d at 171.

133 Id.

1. The question whether the majority lenders had instructed

the agent to credit bid the debt was decided in a prior

adjudication.

The heart of the contract claims that the plaintiffs seek to pursue is the factual

question whether the majority lenders had instructed the agent to transfer loans to

the buyer so that the buyer would be able to credit bid them. The “deemed” fourth

count in this action seeks a declaration that the majority lenders had not so instructed

the agent.

Defendants assert that this identical issue was litigated when the lender

defendants sought a preliminary injunction in the main bankruptcy case.134 The

plaintiffs argue that the Court’s order denying the preliminary injunction did not

address the question whether the lender defendants had instructed the agent to

transfer the right to credit bid, as evidenced by the fact that the word “instruction”

does not appear in the Court’s order.135

Whether or not the Court used the word “instruction,” the unmistakable import

of the Court’s decision denying the preliminary injunction was that whatever needed

to happen to permit the sale to close had already happened, including the transfer of

the right to credit bid. There is no question that the plaintiffs’ position that no

instruction had been given was placed squarely in front of the Court. In their motion

for a preliminary injunction, the ad hoc term lender group block quoted § 7.1 of the

security agreement, which provides that the agreement “may be enforced only by

134 D.I. 19 at 3; Dec. 13, 2022 Hr’g Tr. at 38, 47.

135 D.I. 20 at 3, 6; D.I. 33 at 7-8; D.I. 34 at 2.

the Collateral Agent acting upon the instructions of the Required Secured

Creditors.”136

Counsel for the ad hoc term lender group made this same point at the

argument on the preliminary injunction.137 “[T]he ad hoc term lender group, as the

required lenders and required secured creditors and the agent acting at the direction

of the ad hoc term lender group [] are the only part[ies] that can take actions or

exercise powers like credit bidding.”138

The Court squarely and unequivocally rejected that argument. In denying the

preliminary injunction, the Court observed that the “credit bid has been contemplated

from day one.”139 The Court noted the ad hoc term lender group’s position that “the

term lenders have never transferred to the buyer the right to make that credit bid,”

but rejected it.140 “I think the sale order makes it clear that the preliminaries, i.e. the

transfer of the right to credit bid, have already occurred and we’re not awaiting that

happening.”141 Underscoring that point, the Court went on to say that while “I think

the documents made it clear that the contribution already [occurred] – and to the

extent that it didn’t already occur pursuant to some sort of documents being

exchanged among the parties I deemed it as a matter of law and to the extent I have

136 Main Case D.I. 710 at 8 (emphasis in original).

137 Nov. 30, 2020 Hr’g Tr. at 15.

138 Id. at 14.

139 Id. at 26.

140 Id.

141 Id. at 27.

to exercise equitable power here it did occur…. So, I am finding that the buyer has

the authority to credit bid.”142 The Court’s order denying the motion makes the same

point, stating that the “Prepetition Agent, on behalf of the Prepetition Lenders, has

transferred the right to credit bid … to the Buyer.”143

The central question now before this Court is how to construe this ruling. The

language quoted above is perhaps amenable to two plausible constructions. On the

one hand, it could be read, as defendants suggest, as a ruling that not only had the

right to credit bid been transferred to the buyer, but also that any of the necessary

steps to effect that transfer, including the majority of the lenders giving the necessary

instructions to the agent, had also occurred. Alternatively, it could be read as the

plaintiffs argue, as limited to a finding that the right to credit bid had been

transferred to the buyer but failing to address whether the necessary steps needed to

effectuate that transfer (such as the majority lenders’ giving of the instruction to the

agent) had occurred. On this reading, if that instruction had not in fact been given,

then the plaintiffs would retain their rights to enforce the terms of the credit

agreement and security agreement against the defendants.

The Third Circuit held in In re Shenango Group that a bankruptcy court is

afforded some measure of discretion in construing ambiguous provisions of its own

orders.144 Because the Court finds that the order in question is subject to more than

142 Id.

143 Main Case D.I. 721 at 2.

144 501 F.3d 338, 345-346 (3d Cir. 2007).

one plausible construction, this case presents precisely the circumstance

contemplated by Shenango in which a bankruptcy court is left to exercise that

discretion.145 It is true that this bankruptcy case was reassigned to the undersigned

bankruptcy judge after Judge Sontchi’s retirement so that (unlike the paradigmatic

case) this is not a circumstance in which the author of the prior order is construing

an order that he or she previously entered. This Court nevertheless has little doubt

that the first of the two suggested constructions of this Court’s order is the better one.

That is true for several reasons. First, read in context, this Court believes that

the Court’s reference to the “preliminaries” having occurred is best understood as a

reference to the required majority of the lenders instructing the agent under the

terms of the applicable agreements.146 In seeking a preliminary injunction, the

lenders emphasized, after all, that the buyer could only obtain the right to credit bid

after an instruction was given to the agent, and contended that such an instruction

had not been given.147 The Court rejected that argument, construing the sale order

as providing that the instruction had already been given.148 The Court believes that

the reference to the “preliminaries” is not limited to “the transfer of the right to credit

bid” but is better understood also to include all other steps that needed to be taken to

make that transfer effective, such as the required lenders giving appropriate

instruction to the agent.

145 Id.

146 Nov. 30, 2020 Hr’g Tr. at 27.

147 Main Case D.I. 710 at 8; Nov. 30, 2020 Hr’g Tr. at 15.

148 Nov. 30, 2020 Hr’g Tr. at 27.

Second, the Court’s reference to the invocation of “equitable power” is

consistent with this position.149 The Supreme Court’s decision in Pepper v. Litton, in

emphasizing the equitable powers of the bankruptcy court, described the authority

as one to ensure “that substance will not give way to form, that technical

considerations will not prevent substantial justice from being done.”150 The agent

defendant similarly pointed, at argument on the motions, to the maxim that “equity

regards as done, that which ought to be done.”151

The Court’s reliance on its equitable powers thus indicates that the Court’s

intent was broadly to sweep aside “technical considerations,” such as the issuance of

a formal document from the majority lenders to the agent bearing the caption

“instruction.” The Court is best understood as saying that at the time the sale order

was entered, the agent would reasonably know and understand that that majority

lenders intended to give the buyer the authority to credit bid, and that under the

circumstances there was no need to honor the formalities of the issuance of an

“instruction” per se. Rather, as the maxim goes, the Court would regard as being

given those instructions that ought to have been given.

Finally, just as a matter of common sense, it would ignore reality to adopt a

reading of the Court’s order that leave the majority lenders and the agent in such a

precarious position. To be clear, when the Court found that the right to credit bid

149 Id.

150 308 U.S. 295, 305 (1939).

151 Dec. 13, 2022 Hr’g Tr. at 48; see also 27 Am. Jur. 2d Equity § 10.

had been transferred to the buyer, the Court was obviously aware of the arguments

that as a formal legal matter, the parties had not dotted all of the i’s and crossed all

of the t’s contemplated by the loan documentation. It makes far more sense to read

the Court’s decision as sweeping away all of the formalities and treating the

instruction as having been given than – as the plaintiffs would read it – to leave the

defendants exposed for having transferred the right to credit bid after ignoring the

formal prerequisites.

The Court appreciates that all of this has some element of fiction to it. No one

has pointed to any actual record evidence suggesting that the majority lenders, as a

matter of historical fact, issued a letter of instruction to the agent. And the conclusion

that this issue was in fact resolved by the Court’s sale order is, from the face of the

order itself, far from obvious. But that is the thing about giving collateral estoppel

effect to a court’s resolution of a factual issue. If that resolution is wrong, it is

incumbent on the party to that dispute to litigate to final judgment and then appeal.

Otherwise, subject to the satisfaction of the remaining elements of preclusion

(discussed herein), the resolution is binding. So while the Court appreciates

plaintiffs’ frustration with the preliminary injunction “findings” that may not be fully

supportable by the record, it is now too late to complain about that fact. One cannot

bring a collateral attack on the Court’s prior ruling in the guise of a breach of contract

action. That is the aspect of this lawsuit that seeks to fit a square peg into a round

hole.

2. The denial of the motion for a preliminary injunction was

a final judgment for purposes of the issue preclusion

doctrine.

The plaintiffs argue that the Court never entered final judgment because “the

Emergency Motion was not the type of prior proceeding susceptible to being given

preclusive effect in later litigation. The Lender Defendants styled the Emergency

Motion as one seeking only an order temporarily enjoining the closing of the

impending sale.”152

The Third Circuit has explained, however, that “finality for purposes of issue

preclusion is a more pliant concept than it would be in other contexts.”153 That

determination is in line with the approach taken in the Restatement (Second) of

Judgments.154 While § 27 applies preclusive effect only to “a valid and final

judgment,” § 13 importantly modifies what is meant by a “final judgment.”155 “[F]or

purposes of issue preclusion (as distinguished from merger and bar) ‘final judgment’

includes any prior adjudication of an issue in another action that is determined to be

sufficiently firm to be accorded conclusive effect.”156 Comment g to § 13 goes on to

152 D.I. 33 at 4.

153 Henglein v. Colt Indus. Operating Corp., 260 F.3d 201, 209-210 (3d Cir. 2001) (internal

citations and quotations omitted); see also In re Brown, 951 F.2d 564, 569 (3d Cir. 1991)

(unlike “claim preclusion, the effectiveness of issue preclusion, sometimes called collateral

estoppel, does not require the entry of a judgment, final in the sense of being appealable.”).

154 Restatement (Second) of Judgments § 27.

155 Id. § 13.

156 Id.

explain that preclusive effect should not be given to rulings that were “avowedly

tentative.”157

Preclusive effect is appropriate, however, when “the parties were fully heard”

and “the court supported its decision with a reasoned opinion.”158 Following this

principle, the Third Circuit recently gave preclusive effect to an order granting a Rule

2004 examination on the ground that “there was nothing ‘avowedly tentative’ about

the Rule 2004 Order.”159 The same is true here. There was nothing at all tentative

about the Court’s ruling. And while the denial of a preliminary injunction is not a

final judgment in the strictest sense, the Court has little question that the order was,

in the language of the Restatement, sufficiently firm to be accorded preclusive effect.

3. The plaintiffs were both parties to the motion for a

preliminary injunction and in privity with the defendants.

The third element of issue prelusion asks if “the party against whom the bar

is asserted was a party or in privity with a party to the prior adjudication.”160 The

basic premise of this element is to ensure that a party not be collaterally estopped

from asserting a claim unless the party had itself (or was in privity with a party that

had) litigated and lost the issue earlier.161 The fact that Party A may have litigated

and lost an issue should not give rise (absent privity) to collateral estoppel running

against Party B. That element is satisfied.

157 Id. § 13 cmt. g.

158 Id.

159 In re Bestwall, 47 F.4th 233, 243-244 (3d Cir. 2022).

160 Doe, 828 F.3d at 171.

161 Restatement (Second) of Judgments § 27.

The plaintiffs were at the hearing on the motion for a preliminary injunction.162

Alternatively, under the terms of the credit agreement, a majority of the lenders could

and did assert the rights of (and therefore bind) all holders in seeking the preliminary

injunction.163 Otherwise put, while a credit agreement permits minority holders to

sit back and have the majority take action to enforce the terms of the loan, they are

nevertheless bound by that outcome in the same way that they would have been had

they been parties themselves. Either way, this element of collateral estoppel is

satisfied.

4. Plaintiffs had a full and fair opportunity, at the

preliminary injunction hearing, to litigate the question

whether a majority of the lenders had appropriately

instructed the agent.

The fourth element of issue preclusion requires the court to consider whether

“the party against whom the bar is asserted had a full and fair opportunity to litigate

the issue in question.”164 As a party in the bankruptcy case, the plaintiffs were fully

entitled to appear and be heard in connection with the motion for a preliminary

injunction. There is no suggestion that the plaintiffs sought and were denied an

162 Dec. 13, 2022 Hr’g Tr. at 87.

163 See D.I. 21-4 (Credit Agreement) § 12.10(a) (“Each Lender hereby agrees… that … any

action taken by the Required Lenders … in accordance with the provisions of this Agreement

… shall be authorized and binding upon all of the Lenders.”).

164 Doe, 828 F.3d at 171; Restatement (Second) of Judgments § 29 (“A party precluded from

relitigating an issue with an opposing party, in accordance with §§ 27 and 28, is also

precluded from doing so with another person unless the fact that he lacked full and fair

opportunity to litigate the issue in the first action or other circumstances justify affording

him an opportunity to relitigate the issue.”).

opportunity to participate in any respect. Indeed, the plaintiffs make no argument

to this effect. This element is thus satisfied.

Conclusion

For the reasons described above, the Court will dismiss the breach of contract

claims for want of subject-matter jurisdiction. The Court will deny summary

judgment for the plaintiffs and will grant summary judgment in favor of the

defendants on the deemed count seeking a declaratory judgment. The Court will

enter a separate judgment reflecting these rulings.

Dated: January 6, 2023

CRAIG T. GOLDBLATT

UNITED STATES BANKRUPTCY JUDGE

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