Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-canb-5_14-ap-05100/USCOURTS-canb-5_14-ap-05100-0/pdf.json

Parties Involved:
Nobel Group, Inc.
Plaintiff
Cathay Bank
Defendant

Document Text:

UNITED STATES BANKRUPTCY COURT

 For The Northern District Of California

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

In re ] Case No. 10-55902-ASW

]

NOBEL GROUP, INC., ] Chapter 11

]

Debtor. ]

]

]

NOBEL GROUP, INC., ] Adv. Pro. No. 14-05100-ASW

]

Plaintiff, ] 

]

v. ]

] 

CATHAY BANK, ] 

]

Defendant. ]

___________________________________]

MEMORANDUM DECISION RE: DEFENDANT’S MOTION TO DISMISS

Before the Court is the motion of Defendant Cathay Bank (the

“Bank”) which is represented by attorney Christopher Crowell, to

dismiss Plaintiff’s complaint. Plaintiff Nobel Group, Inc.

(“Debtor”), represented by attorney Wayne Silver, opposes the

motion. This Court issued a Tentative Decision on December 11, 2014

and, at a hearing on the same date, heard arguments of the parties.

After considering the parties’ arguments and reviewing applicable

IT IS SO ORDERED.

Signed April 6, 2015

Arthur S. Weissbrodt

U.S. Bankruptcy Judge

________________________________________

Entered on Docket 

April 06, 2015

EDWARD J. EMMONS, CLERK 

U.S. BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA

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case law, for the reasons explained below, the Court grants the

motion to dismiss for lack of subject matter jurisdiction.

I. FACTS

Debtor’s Chapter 11 Plan (the “Plan”) was confirmed on

February 4, 2014. Prior to confirmation, the Debtor sold the real

property at 2585 El Camino Real, Santa Clara, CA (the “Property”)

and paid off the Bank’s filed claim ($3,108,731.73) in full. The

Bank’s escrow demand of $3,380,105 included approximately $250,000

in default interest charged between November 2009 and August 2011.

Debtor disputed the default interest but agreed to pay the entire

amount so the sale could close, reserving its right to challenge

the additional amounts after the sale, post-confirmation. Debtor

reserved $25,000 of sale proceeds as an estimate of attorney’s fees

and costs the Bank might incur in litigating the dispute regarding

the escrow demand. The Plan was confirmed over the Bank’s objection

on the basis that:

Cathay Bank’s claim in this bankruptcy was paid in full

from the proceeds of the sale of the Property. Cathay

Bank does not set forth any basis for why the $25,000

that was set aside by the Debtor is subject to the Bank’s

security interest. There is nothing in the order

approving the sale that specifically provides for a lien

to attach to any funds in excess of the Bank’s claim. 

Nor has the Bank stated any basis for why Debtor cannot

pursue recovery of any overpayment post-confirmation. 

Confirmation of the plan will not prevent the Bank from

pursuing recovery of fees if the Reorganized Debtor

litigates the question of the Bank’s escrow demand.

(Oral ruling, 1/27/14).

A. The Plan

The Plan expressly reserves Debtor’s “right to dispute the

amount paid and seek a refund of any excess payment, and object to

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any amended Proof of Claim filed by CATHAY BANK.” (¶ 4.4). The Plan

further provides a deadline for objections to claims of 30 days

after the Effective Date or 30 days after a proof of claim has been

filed and served (¶ 6.3).

Article VIII of the Plan further provides that all causes of

action held by Debtor and/or the estate on the petition date shall

be transferred to the Reorganized Debtor, including “all claims

against Creditors of the Debtor, including claims for overpayment

from the sale of the 2585 Property . . . . The Reorganized Debtor

shall have all rights to commence and pursue any and all Causes of

Action, . . . in any court or other tribunal, including without

limitation, in an adversary proceeding filed in the Bankruptcy

Court.”

Article IX, Retention of Jurisdiction, provides:

9.0 The Bankruptcy Court shall retain exclusive

jurisdiction of the Proceedings pursuant to the

provisions of the Code until the Proceedings are closed

and further with respect to the following matters:

9.1. To classify, allow or disallow Claims, direct

distributions under the Plan and adjudicate all

controversies concerning classification or allowance of

any Claim.

. . . .

9.4. To liquidate damages or estimate Claims in

connection with any disputed, contingent or unliquidated

Claim.

. . . .

9.6. To adjudicate all Claims or controversies

arising out of any purchase, sale or contract made or

undertaken by the Debtor and/or the Reorganized Debtor

during the pendency of the Proceedings.

. . . .

9.16. Hear and finally adjudicate proceedings

initiated before or after the Confirmation Date and/or

the Effective Date regarding the prosecution of any

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rights, Claims, Causes of Action or claims for relief

held by the Debtor and/or Reorganized Debtor against any

party, including but not limited to the recovery of funds

paid to Cathay Bank, BBCN Bank and/or the Santa Clara

County Tax Collector from the sale of the 2585 Property,

and subordination of Claims and Interests.

As set forth above, the Plan clearly envisions that the Debtor

and the Bank will litigate the Debtor’s claims to the disputed

funds in the bankruptcy court. The Bank did not object to any of

these Plan provisions. It did not raise any of the current

jurisdictional arguments until after the Plan had been confirmed.

The Bank did not file an amended proof of claim. Nevertheless,

the parties stipulated to extend the deadline for Debtor to object

to the Bank’s claim to May 21, 2014. On May 20, 2014, Debtor filed

an objection to the Bank’s claim. A hearing was scheduled for July

10, 2014, and then continued to September 4, 2014. Prior to the

continued hearing, on August 28, 2014, the parties filed a joint

status conference statement indicating that Debtor would be filing

an adversary proceeding within the next 10 days. The matter was

taken off calendar. This adversary proceeding was filed October 2,

2014, approximately one month later.

On August 28, 2014, Debtor’s counsel filed a letter in the

main case (docket no. 335) stating that the Plan had been

substantially consummated and that Debtor had paid $1,520,755 to

allowed claims under the Plan. The letter further states: “All

administrative, priority, and unsecured claims have been paid under

the Plan, and Class 7 Investor Claims have been paid a dividend of

approximately 80%.” The letter also states that there are two

unresolved matters concerning secured creditors, including the

dispute with the Bank. At the December 11, 2014 hearing, Debtor’s

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counsel stated that claims in subordinate classes (i.e., insiders)

had not yet been paid.

B. The Complaint

The complaint contains three claims: breach of contract,

declaratory relief, and objection to claim based on the Bank’s

charging of approximately $250,000 of default interest on the debt

owed to it from November 2009 and August 2011, after the loan had

matured and the Property had been placed into receivership, and

before the Bank had obtained an order in this case granting relief

from stay. 

The Complaint alleges:

4. In January, 2007 Nobel acquired an undeveloped

parcel of real estate located at 2585 El Camino Real in

Santa Clara, California (the “Property”) to develop as a

residential and commercial project. The acquisition was

partially financed by a loan from Cathay in the amount of

$3.0M dollars secured by the Property (the “Cathay Loan”)

pursuant to a Business Loan Agreement dated January 12th,

2007 (“Loan Agreement”).

5. In accordance with the Loan Agreement, Nobel

executed a Promissory Note in the sum of $3,000,000

(“Note”). Pursuant to the terms of the Note, Nobel was

required to make regular monthly payments of all accrued

interest beginning on February 20, 2007 until January 20,

2009, when the entire unpaid balance of principal and

interest would become due and owing.

6. As security for the Note, Nobel executed and

delivered a Deed of Trust dated January 12, 2007 (“Deed

of Trust”) to Cathay whereby Nobel granted all of its

right, title and interest in the Property to Cathay.

7. On or about January 27, 2009, Cathay and Nobel

entered into a Loan Extension Agreement and Modification

of Note (“Extension Agreement”), pursuant to which, among

other things, the Parties extended the maturity date of

the Note until March 31, 2009.

8. On or about May 19, 2009, Cathay and Nobel

entered into a Change in Terms Agreement (“Change in

Terms Agreement”) that: (1) extended the Maturity Date of

the Note to July 31, 2009; (2) changed the interest rate

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to be applied to the unpaid principal on the Note to

.750% over the Bank’s Index Rate; and (3) changed the

interest rate floor under the Note. The Loan Agreement,

Deed of Trust, Extension Agreement and Change in Terms

Agreement are collectively referred to as the “Cathay

Loan Documents”. 

9. The Cathay Loan matured on July 31, 2009 and

Cathay refused to either refinance or further extend the

maturity date, instead choosing to file Santa Clara

Superior Court Action No. 109-CV157962 titled Cathay Bank

v. Nobel Group, Inc. (the “Cathay Bank Action”). Cathay

requested and obtained a receiver in the Cathay Bank

Action to collect the rents and manage the Property.

Cathay also commenced a non-judicial foreclosure sale

against the Property, and the sale date was scheduled for

June 8, 2010. Nobel’s Chapter 11 filing on the Petition

Date stayed the Cathay Bank Action and prevented the

Property from being lost to foreclosure.

10. Cathay filed a Proof of Claim in the Nobel

bankruptcy case in the amount of $3,108,731.73 designated

as Claim No. 19 (the “Cathay Claim”).

11. Cathay moved for relief from stay to allow it to

pursue the Cathay Bank Action and foreclose on the

Property. The matter was settled during trial and Nobel

and Cathay (referred to as the “Parties”) worked out a

modified loan calling for monthly payments of $14,502 for

the first six (6) months, and escalating to $18,432 for

the remainder. Interest was to continue at the

“non-default rate”, and the Parties were to bear their

own costs and attorneys’ fees incurred after the Petition

Date. The Order on Cathay Bank's Motion for Relief from

the Automatic Stay Pursuant to 11 U.S.C §362(d)(2) was

entered on October 31, 2011. Nobel is informed and

believes that Cathay never advised Nobel it was accruing

default interest at any time prior to the entry of that

Order.

12. Nobel sold the Property to Silicon Sage

Builders, LLC (“SSB”) (formerly known as “Silicon Valley

Builders”) for $6.1M, free and clear of liens and claims,

which were to be paid through escrow. The Purchase and

Sale Agreement (“PSA”) called for an initial

non-refundable deposit of $1.0M, a portion of which was

used to bring all payments to Cathay current. Escrow was

to close upon the earlier of 30 days from final approval

of the Tentative Map, or one year from the Sale Order.

The Sale Order was entered on November 16, 2012.

13. Escrow closed on October 8, 2013 upon SSB

obtaining the requisite entitlements for the Property.

Cathay made a $3,380,105 escrow demand, a copy of which

is attached as Ex. 1. Nobel disputed the amount of

Cathay’s demand to the extent it included approximately

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$250,000 in default interest between November, 2009 and

August, 2011, however Cathay refused to reduce its

demand. Rather than jeopardize the sale of the 2585

Property, Nobel agreed Cathay could be paid the full

amount it demanded from sale, and reserved the right to:

(1) dispute the amount paid; (2) seek a refund of any

excess payment once the Plan was confirmed; and (3)

object to any amended Proof of Claim filed by Cathay.

14. Cathay was paid the full amount [of] its demand

through escrow. A copy of the Closing Statement is

attached as Ex. 2. Nobel segregated and reserved $25,000

from the proceeds of the sale of the 2585 Property, which

sum represents an estimate of attorneys’ fees and costs

Cathay may be entitled to as a result of this dispute, in

the event Nobel is unsuccessful and Cathay is entitled to

attorneys’ fees.

With respect to the First Claim for Relief for Breach of

Contract, the Complaint further alleges:

16. The Note states the following with respect to

default interest:

“Upon default, the interest rate on this Note shall,

if permitted under applicable law, immediately increase

by adding a 5.000 percentage point margin (Default Rate

Margin). The Default Rate Margin shall also apply to each

succeeding interest rate charge that would have applied

had there been no default.”

17. The Change in Terms Agreement states the

following with respect to interest:

“2. The interest rate to be applied to the unpaid

principal balance of the Note will be at a rate of 0.7500

percentage points over the index effective upon the

completion of this transaction.”

18. Cathay breached the Note by charging the Default

Rate Margin because:

• The Change in Terms Agreement waived the Default

Margin Rate. Nobel did not agree or consent to the

payment of the Default Rate Margin in addition to .7500

percentage points over the index.

• Nobel was not aware that Cathay secretly intended

to collect interest at the Default Rate Margin in

addition to .7500 percentage points over the index.

Cathay’s misconduct precludes it from recovering default

interest at the Default Margin Rate.

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•Cathay was not entitled to charge the Default

Margin Rate on the fully matured Note under California

law.

• Cathay was not entitled to collect default

interest under Bankruptcy Code § 506(b) because it was

undersecured at all times during which the default

interest was imposed.

• Imposition of the Default Margin Rate would harm

the unsecured creditors.

19. Cathay breached the Note by charging Nobel

default interest.

20. Nobel has fully performed all of its obligations

under the Note.

21. Nobel has been damaged as result of Cathay’s

breach of the Note in the amount of the default interest

paid through the escrow of the sale of the Property.

22. Nobel has further been damaged to the extent it

paid Cathay’s attorneys’ fees and costs through the

escrow of the sale of the Property to which Cathay was

not entitled.

The Complaint prays for the following relief: (1) judgment in

an amount to be proven at trial for the default interest and

attorneys’ fees paid to Cathay in connection with its escrow

demand; (2) a declaration that Cathay was not entitled to default

interest or attorneys’ fees and an order of restitution of the

amounts overpaid; (3) an order sustaining Nobel’s objection

Cathay’s claim; and (4) costs and attorneys’ fees.

C. Motion to Dismiss

The Bank moves to dismiss the Complaint in its entirety for

lack of subject matter jurisdiction. Alternatively, the Bank asks

the Court to abstain from hearing the claims. The Bank also seeks

dismissal of the second and third claims (for declaratory relief

and objection to claim) on the grounds that those claims are

duplicative of the breach of contract claim. With respect to the

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claim for declaratory relief, the Bank also asserts that Debtor may

not seek restitution where a valid express contract covers the

subject matter of the dispute. Regarding the third claim for

objection to claim, the Bank asserts that the claim is time-barred. 

The Bank also contends that the Court should decline to

exercise supplemental jurisdiction over the first and second claims

for relief, and should permissively abstain from hearing the entire

case.

II. ANALYSIS

Post-confirmation bankruptcy court jurisdiction is limited to

matters that affect the interpretation, implementation,

consummation, execution, or administration of the confirmed plan.

In re Resorts Int’l, Inc., 372 F.3d 154, 168-69 (3d Cir. 2004).

This so-called “close nexus” test has been adopted and applied in

the Ninth Circuit. In re Pegasus Gold Corporation, 394 F.3d 1189,

1194 (9th Cir. 2005); In re Wilshire Courtyard, 729 F.3d 1279, 1287

(9th Cir. 2013). “The close nexus test recognizes the limited nature

of post-confirmation jurisdiction but retains a certain

flexibility." Pegasus Gold, 394 F.3d at 1194. The close nexus test

requires “particularized consideration of the facts and posture of

the each case, as the test contemplates a broad set of sufficient

conditions and retains a certain flexibility.” Wilshire Courtyard,

729 F.3d at 1289.

In Resorts Int’l, the Court of Appeals for the Third Circuit

examined the extent of a bankruptcy court’s post-confirmation

jurisdiction. The court noted that after confirmation of a

reorganization plan, retention of bankruptcy court jurisdiction may

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be problematic. This is because once a plan is confirmed, the

debtor-in-possession becomes the reorganized debtor, and, as a

general rule, the bankruptcy estate ceases to exist. Therefore, the

traditional test for “related to” jurisdiction – whether the

outcome of the proceeding could conceivably have any effect on the

estate being administered in bankruptcy – could not be met. Resorts

Int’l, 372 F.3d at 164-65 (citing Pacor, Inc. v. Higgins, 743 F.2d

984, 994 (3d Cir. 1984)). 

But courts do not usually apply Pacor’s “effect on

the bankruptcy estate” test so literally as to entirely

bar post-confirmation bankruptcy jurisdiction. As the

District Court correctly noted, though the scope of

bankruptcy court jurisdiction diminishes with plan

confirmation, bankruptcy court jurisdiction does not

disappear entirely. Post-confirmation jurisdiction is

assumed by statute and rule: 11 U.S.C. § 1142(b)

authorizes the bankruptcy court to “direct the debtor and

any other necessary party ... to perform any other act

... that is necessary for the consummation of the plan,”

and Fed. R. Bankr.P. 3020(d) provides that

“[n]otwithstanding the entry of the order of

confirmation, the court may issue any other order

necessary to administer the estate.” Although § 1142(b)

assumes that post-confirmation jurisdiction exists for

disputes concerning the consummation of a confirmed plan,

28 U.S.C. § 1334 remains the source of this jurisdiction.

Resorts Int’l, 372 F.3d at 165 (citations omitted).

Because bankruptcy court jurisdiction is conferred by statute,

parties to litigation cannot confer subject matter jurisdiction

where none exists. 

Retention of jurisdiction provisions will be given

effect, assuming there is bankruptcy court jurisdiction.

But neither the bankruptcy court nor the parties can

write their own jurisdictional ticket. Subject matter

jurisdiction “cannot be conferred by consent” of the

parties. Where a court lacks subject matter jurisdiction

over a dispute, the parties cannot create it by

agreement, even in a plan of reorganization. Similarly,

if a court lacks jurisdiction over a dispute, it cannot

create that jurisdiction by simply stating it has

jurisdiction in a confirmation or other order. Bankruptcy

courts can only act in proceedings within their

jurisdiction. If there is no jurisdiction under 28 U.S.C.

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§ 1334 or 28 U.S.C. § 157, retention of jurisdiction

provisions in a plan of reorganization or trust agreement

are fundamentally irrelevant. But if there is

jurisdiction, we will give effect to retention of

jurisdiction provisions.

Resorts Int’l, 372 F.3d at 161 (citations omitted). See also In re

Captain Blythers, Inc., 311 B.R. 530, 538 (9th Cir. BAP 2004),

aff’d, 182 Fed. Appx. 708 (9th Cir. 2006); In re 350 Encinitas

Investments, LLC, 2007 WL 2669546, at *6 (S.D. Cal. Sept. 6, 2007),

aff’d, 313 Fed. Appx. 70 (9th Cir. 2009); United States v. Bond, 762

F.3d 255, 261 (2d Cir. 2014); In re Washington Mutual, Inc., 2012

WL 4755209 (Bankr. D. Del. Oct. 4, 2012) (citing Resorts Int’l, 372

F.3d at 169; In re BWI Liquidating Corp., 437 B.R. 160, 166 (Bankr.

D. Del. 2010); In re The Fairchild Corp., 452 B.R. 525, 532 (Bankr.

D. Del. 2011)); Quincy Medical Center v. Gupta, 2015 WL 58633, at

*4 (D. Mass. Jan. 5, 2015); In re Angel Fire Corp., 2012 WL

5880675, at *4-5 (Bankr. D.N.M. Nov. 20, 2012) (citing Insurance

Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456

U.S. 694, 702 (1982) (holding that no action of the parties can

confer subject matter jurisdiction upon a federal court, thus the

consent of the parties is irrelevant)).

Although the question of subject matter jurisdiction is to be

decided on the basis of the facts and circumstances of each case,

Wilshire Courtyard, 729 F.3d at 1289, it is helpful to examine the

cases to get a sense of the circumstances under which courts have

analyzed whether a bankruptcy court had post-confirmation

jurisdiction. The Court has reviewed a number of these cases. As a

general rule, the cases where a close nexus was found involved a

situation where resolution of the dispute would require the

bankruptcy court to interpret or enforce a provision of the

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confirmed plan. See, e.g., Pegasus Gold, 394 F.3d at 1194

(“Resolution of these claims will likely require interpretation of

the Zortman Agreeement and the Plan.”); Wilshire Courtyard, 729

F.3d at 1289 (“the ultimate merits question depends in part on the

interpretation of the confirmed Plan.”). Additionally, in Wilshire

Courtyard, the resolution of the claims required application of a

federal bankruptcy statute, 11 U.S.C. § 346. Id. at 1290-91. 

Cases where courts found that the close nexus test was not met

include Resorts Int’l. There, nearly seven years after confirmation

of the plan, the trustee of a litigation trust formed pursuant to

the confirmed plan filed a malpractice claim against the

accountants for the litigation trust. In determining that the

bankruptcy court lacked subject matter jurisdiction over the

dispute, the Third Circuit Court of Appeals held that

the resolution of these malpractice claims will not

affect the estate; it will have only incidental effect on

the reorganized debtor; it will not interfere with the

implementation of the Reorganization Plan; though it will

affect the former creditors as Litigation Trust

beneficiaries, they no longer have a close nexus to

bankruptcy plan or proceeding because they exchanged

their creditor status to attain rights to the litigation

claims; and as stated, the jurisdictional retention plans

cannot confer jurisdiction greater than that granted

under 28 U.S.C. § 1334 or 28 U.S.C. § 157.

Resorts Int’l, 372 F.3d at 169.

In In re Valdez Fisheries Dev. Ass’n, Inc., 439 F.3d 545 (9th

Cir. 2006), the Court of Appeals found that the close nexus test

was not met where the post-dismissal determination of liability

between a creditor and the state of Alaska “could not conceivably

alter the debtor’s rights, liabilities, options, or freedom of

action or in any way impact upon the handling and administration of

the bankrupt estate.” Id. at 547-48.

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The retention of jurisdiction provisions in the Plan clearly

indicate that the parties intend and agree to resolve the instant

dispute in this Court. Additionally, the Plan expressly provides

for recovery of the alleged overpayment to the Bank and provides

that the Plan will be funded in part through recoveries on “Causes

of Action,” which includes the instant claims. However, under the

authorities cited above, these provisions do not confer

jurisdiction over this dispute in the bankruptcy court. Indeed,

they can be given little weight, as they are only effective if the

bankruptcy court has jurisdiction in the first instance. 

The Court finds that the resolution of this dispute does not

affect the interpretation, implementation, consummation, execution,

or administration of the confirmed plan. First, the issues in the

adversary proceeding do not require the Court to interpret the

plan. Second, by the Debtor’s own admission, the Plan has been

substantially consummated, notwithstanding the fact that

subordinated classes have yet to be paid. Third, the issues in the

adversary proceeding arise solely under state law. Despite Debtor’s

characterization of its third claim for relief as an objection to

claim, there is no claim to object to. The Bank’s filed claim has

been paid in full; the Bank never amended its claim. As far as the

bankruptcy estate is concerned, the Bank’s claim no longer exists. 

The Debtor’s Plan has not been fully consummated. This Court

has found no cases that illuminate exactly what level of

“consummation” or “execution” would suffice to confer subject

matter jurisdiction. The only way the Court could find a close

nexus exists in this case is through a broad interpretation of

those terms, which is not supported in the existing case law.

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Because the Plan provides for partial funding via any funds

recovered from the lawsuit between Debtor and the Bank, this

reasonably could be construed as part of the consummation or

execution of the Plan. However, the recovery of overpayment to the

Bank is not a primary or major component of the Plan. Additionally

and importantly, the Ninth Circuit has made clear that even if a

dispute could potentially increase recovery to creditors, that is

not a basis for finding that this Court has subject matter

jurisdiction. Pegasus Gold, 394 F.3d at 1194 n.1 (“[W]e are not

persuaded . . . that jurisdiction lies because the action could

conceivably increase the recovery to creditors. . . . such a

rationale could endlessly stretch a bankruptcy court’s

jurisdiction.”) (citing Resorts Int’l, 372 F.3d at 170; In re

Craig’s Stores of Texas, Inc., 266 F.3d 388, 391 (5th Cir. 2001)).

For these reasons, the Court finds that under the close nexus

test, this Court lacks jurisdiction over the claims in this

adversary proceeding. This is not a situation where this Court has

any discretion in the matter. Therefore, the Court need not address

the Bank’s remaining arguments. 

Counsel for the Bank may submit a proposed form of order

dismissing the adversary proceeding.

*** END OF MEMORANDUM DECISION ***

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Court Service List

Parties to be served electronically.

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