In Nobel Group, Inc. v. Cathay Bank (In re Nobel Group, Inc.), the Bankruptcy Court for the Northern District of California reviewed the scope of its jurisdiction post-confirmation and held that, notwithstanding plan provisions stating the contrary, the court did not have jurisdiction over the reorganized debtor’s claims asserted against its previously secured creditor.
Prior to filing its bankruptcy petition, Nobel Group, Inc. planned to develop a residential and commercial project and purchased an undeveloped property in Santa Clara, California (the “Property”). Cathay Bank issued Nobel Group a loan for $3 million that was secured by the Property. After a couple of extensions, the loan matured on July 31, 2009. Nobel Group was unable to make the necessary repayments and Cathay Bank refused to refinance or extend the maturity date. Instead, the bank among other things commenced a foreclosure sale against the Property, and Nobel Group filed for bankruptcy just days before the foreclosure sale was to proceed.
In the bankruptcy case, Cathay Bank filed a Proof of Claim asserting a claim in the amount of $3,108,731, secured by the Property. Ultimately, Nobel Group sold the Property for $6.1 million, free and clear of liens and encumbrances, which were paid through escrow. Cathay Bank demanded it be paid $3,380,105 from the sale proceeds, which amount included $250,000 in default interest accruing postpetition. Even though Nobel Group objected to this additional $250,000, in order to close on the sale of the Property, it agreed to pay Cathay Bank the full amount it demanded but reserved, among other things, the right to dispute the amount and seek a refund.
Several months later, the court confirmed Nobel Group’s plan, over Cathay Bank’s objection. The plan transferred debtor Nobel Group’s interest in causes of action, including the claim for overpayment to Cathay Bank, to the reorganized debtor entity. The plan also provided that the bankruptcy court retained exclusive jurisdiction over the proceedings in connection with the disputed amounts.
On October 2, 2014, reorganized Nobel Group commenced an adversary proceeding against Cathay Bank. The complaint included three claims: breach of contract, declaratory relief, and objection to Cathay Bank’s claim. Cathay Bank filed a motion to dismiss the complaint on the grounds that the court lacked subject matter jurisdiction. The court granted the motion to dismiss the complaint.
Limits of Bankruptcy Court Jurisdiction
Post-confirmation, a bankruptcy court’s jurisdiction necessarily becomes more limited. The bankruptcy estate ceases to exist and the “related to” jurisdictional test—whether the outcome of the proceeding could conceivably have any effect on the estate—cannot be met. Nonetheless, the bankruptcy court’s jurisdiction does not completely disappear. As articulated by the Third Circuit, post-confirmation jurisdiction is limited to matters affecting the interpretation, implementation, consummation, execution, or administration of the confirmed plan. The Ninth Circuit has adopted this “close nexus” test, which requires the court to consider the facts and posture of the case before it.
After reviewing cases applying the “close-nexus” test, the court determined that, generally, a close nexus exists where the dispute requires the bankruptcy court to interpret or enforce plan provisions. On the contrary, no close nexus exists if resolution of the dispute does not alter a debtor’s rights or impact the administration of the estate.
Applying the “close nexus” test to Nobel Group’s claims against Cathay Bank, the court found that resolution of the adversary proceeding would not affect the interpretation, implementation, consummation, execution, or administration of the confirmed plan. The court noted that (i) the dispute did not require interpretation of the plan, (ii) the plan had already been substantially consummated, and (iii) the dispute arose entirely under state law. Significantly, in deciding that the dispute did not impact administration of the plan, the court explained that the possibility of greater recovery for creditors is not enough to serve as a basis for subject matter jurisdiction.
Parties Cannot Create Subject Matter Jurisdiction
The court recognized that Nobel Group’s plan specifically provided for the retention of jurisdiction over this particular dispute and that Cathay Bank had not objected to such jurisdiction retention provisions. Nonetheless, the court held that because bankruptcy jurisdiction is conferred by statute, parties cannot create subject matter jurisdiction by simply including it in a plan. If the court does not have jurisdiction pursuant to 28 U.S.C. §§ 157 or 1334, plan provisions to the contrary will not change this. Accordingly, the court explained that the jurisdiction retention provisions “can be given little weight, as they are only effective if the bankruptcy court has jurisdiction in the first instance.”
This case presents an interesting issue – what value do the jurisdiction provisions in plans provide to parties? Time and energy is spent delineating and expressly articulating what matters should be heard by the bankruptcy court after orders and plans are entered and approved. However, this case reminds parties that they cannot create jurisdiction where it does not already exist.