Rite Claims, Wrong Court: Judge Tosses Trustee’s Breach of Duty Claims Against Former Rite Aid D&Os

The Rite Aid Plan and the Trustee’s Claims
Rite Aid Corporation and its affiliates (“Debtors”) filed for chapter 11 on October 1, 2023. Bankruptcy Judge Michael Kaplan confirmed the Debtors’ plan on August 16, 2024. The plan created a litigation trust (“Trust”) as successor-in-interest to the Debtors’ estates and appointed a trustee (“Trustee”).

After confirmation, the Trustee commenced three cases asserting breach of fiduciary duty claims against overlapping, but different, groups of the Debtors’ former directors and officers (“D&Os”). Among other things, those lawsuits alleged that the D&Os breached their duties of care, loyalty and oversight, including by (i) authorizing executive compensation payments weeks before the bankruptcy in violation of law or company policy that provided no benefit to the company, (ii) failing to negotiate with and approving payments to consultants that provided little or no value to the company, and (iii) failing to ensure the company complied with laws governing the sale of opioid products.

The D&Os moved to dismiss all three actions on several grounds, including lack of subject matter jurisdiction. Treating subject matter jurisdiction as a gating question, the court addressed only whether it had jurisdiction over the Trustee’s claims.

Post-Confirmation “Related To” Jurisdiction and the “Close Nexus” Test
Under 28 U.S.C. § 1334(b), bankruptcy jurisdiction extends to cases “under” title 11 and to proceedings “arising under” title 11, “arising in” a bankruptcy case or “related to” a bankruptcy case. The first three categories are “core” matters in which the bankruptcy court can enter final, appealable orders; “related to” proceedings are “non-core” matters in which the bankruptcy court cannot enter final appealable orders, and may only make recommendations to the district court, absent the parties’ consent. In the Third Circuit, a non-core proceeding falls within “related to” jurisdiction only “if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.” In other words, “related to” jurisdiction exists during the bankruptcy if there is a conceivable effect on the estate—a relatively low bar.

Bankruptcy court jurisdiction, however, “diminishes with plan confirmation,” because the estate generally ceases to exist once a plan is confirmed. While a bankruptcy court always retains jurisdiction to interpret and enforce its own confirmation order, post-confirmation “related to” jurisdiction requires a “close nexus” to the plan. Drawing on a recent series of Delaware decisions by Bankruptcy Judge Craig Goldblatt, Judge Poslusny agreed that, at a minimum, the plan must contain a retention of jurisdiction provision that “specifically identifies the claim as one over which the bankruptcy court is retaining jurisdiction,” and that neither a claim’s materiality nor a general retention provision is, standing alone, sufficient.

Specificity. Rite Aid’s confirmation order and plan retained jurisdiction generally, including over “Causes of Action that may arise in connection with any Assigned Claims.” The Trustee argued that these provisions were specific when read together: “Assigned Claims” included the Debtors’ claims against “Excluded Parties,” and the definition of “Causes of Action” expressly included claims for “breach of fiduciary duty.” The court disagreed. Although the definition did list breach of fiduciary duty, it was “so broad that the Court struggles to think of a single cause of action that is not covered by this language,” leaving “little if any distinction between using the phrase ‘any and all causes of action a debtor may hold,’ and simply listing every possible cause of action the Debtors may hold.”

The same was true of the defendants. The “Excluded Parties” definition swept in “any of the Debtors’ current and former directors and officers,” along with joint tortfeasors, distributors, consultants, attorneys and other advisors, without naming any D&O defendant. By contrast, in In re Cyber Litigation, Inc.  the plan named the defendant (one of 76 named parties), which the court found—in a “close” call—sufficient in combination with other factors. Here, each claim targeted a different subset of D&Os, signaling that the plan was not intended to retain jurisdiction over any particular claim against any particular defendant.

Materiality. Although a lack of specificity would “typically end the inquiry,” the court also considered the Trustee’s argument that the claims were “integral” to the plan. Judge Poslusny distinguished Cyber Litigation, where the defendant CEO effectively ran a Ponzi scheme and was “the central driver of the bankruptcy filing.” No comparable allegation existed against the Rite Aid D&Os.

Although the court doubted that a claim’s materiality alone could establish a close nexus, it reasoned that a plaintiff would need to show that the anticipated recovery represented “a very significant portion, if not virtually all, of the total recovery the plan can offer.” The Trustee could not do so given, among other things, the almost 1,000 other cases filed to fund distributions to creditors. Nor did the Trustee’s pages of excerpts from the plan documents help; certain documents were not even finalized until after confirmation.

The court, therefore, granted the motions to dismiss, without prejudice to the Trustee bringing the claims “before a court of competent jurisdiction.”

Conclusion
Rite Aid joins a growing body of bankruptcy court decisions within the Third Circuit—including SunPower and Cyber Litigation—scrutinizing the bankruptcy court’s post-confirmation jurisdiction over litigation trust claims. The decision is the latest to reject a plan’s catch-all definitions and generic retention provisions as a basis for retaining jurisdiction over litigation trust claims.

To be clear, the decision does not take claims away from a litigation trust; it only eliminates the bankruptcy court as the forum for those claims. A trustee may instead pursue those claims in another court with jurisdiction. Losing the bankruptcy forum, however, may be significant for trustees that view it as favorable, particularly given the bankruptcy court’s familiarity with the debtor and its estate. To preserve that forum, plan proponents should specifically identify the claims and the defendants over which jurisdiction is retained and develop a confirmation record establishing the claims’ close nexus to the plan, with evidence and appropriate notice. For directors, officers and other potential defendants, the ruling highlights a potentially significant jurisdictional defense when generic plan provisions and an inadequate confirmation record fail to establish that nexus.