By Mark Ellenberg, Howard Hawkins, Ivan Loncar, Ellen Halstead, Michele Maman and Tom Curtin of Cadwalader Wickersham & Taft LLP
In Delaware Trust Company v. Wilmington Trust N.A. the United States District Court for the Southern District of New York found that a complaint based on an intercreditor agreement among secured creditors of Texas Competitive Electric Holdings LLC constituted a core proceeding. Accordingly, the court denied a motion to remand the case to New York state court, where it had originally been filed, and also transferred the case to the US District Court for the District of Delaware. The case was subsequently referred to the bankruptcy court presiding over the TCEH bankruptcy cases. Plaintiff had alleged that the dispute, which involved allocation of adequate protection payments ordered by the Delaware Bankruptcy Court, was an intercreditor dispute that turned solely on the interpretation of a prepetition intercreditor agreement and, accordingly, should be decided in state court. As such, the issue before the District Court was whether a New York court or the Delaware Bankruptcy Court should resolve the intercreditor dispute.
The District Court ruled that the dispute was core because the dispute would have no meaningful existence but for TCEH’s bankruptcy filing, as the ability to receive adequate protection derives solely from the Bankruptcy Code. In addition, the Court found that the dispute was core because the intercreditor issue would likely arise again in the context of plan confirmation. The decision is important because it reaffirms the often-challenged principle that contractual disputes solely among creditors may nonetheless qualify as “core” proceedings where, as here, the underlying dispute could only arise in the context of a bankruptcy proceeding.
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