Heller Ehrman Liquidating Debtor v. Gregory Canyon Ltd. et al

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AUTHENTIC
US. GOVERN
INFORMATION
GPO

Entered on Docket
August 30, 2011

GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA

Signed and Filed: August 30, 2011

UL pruii, Muck

DENNIS MONTALI
U.S. Bankruptcy J udge

UN TED STATES BANKRUPTCY COURT
NORTHERN DI STRI CI OF CALI FORN A

In re

HELLER EHRMAN LLP,

Bankruptcy Case
No. 08- 32514DM

Debt or. Chapter 11
HELLER EFHRMAN LLP, LIQUDAITNG ~~) ~Adversary Proceedi ng
DEBTOR, No. 10-3329DM
Plaintiff,
V.

GREGORY CANYON LTD, LIM ‘TED
LI ABI LITY COMPANY and SERVCON
SAN MARCOS, INC.,

Def endants.

eNO OOOO OE EOE

MEMORANDUM DECI SION REGARDI NG MOTTON TO DISM SS
FI RST AMENDED COMPLAT NI
Qn July 7, 2011, the court held a hearing on the notion of

Gegory Canyon Ltd. and Servcon-San Marcos, Inc. (“Defendants”) to
dismss the first amended complaint of Feller Ehrnan LLP,
Li qui dating Debtor under a confirmed Chapter 11 plan (“Feller”).
For the reasons set forth below the court concludes there is no
related to jurisdiction over this action under 28 US.C. §8§
157(c)(1) and 1334 in this court or the district court. Thus, the

notion to dismss wll be granted.

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. 10-03329 Doc# 28 Filed: 08/30/11 Entered: 08/30/11 13:10:48 Page1of8

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As noted at the July 7 hearing, this adversary proceeding is
not a core proceeding, notwithstanding Heller’s designation of one
claim for relief as a turnover action under 11 U.S.C. § 542.
Whatever the label, this is not an action for turnover of estate
property; it is a essentially an action to recover an account
receivable, for breach of contract and quantum meruit. 	Turnover
actions involve the “return of undisputed funds.” 	In re Gurga,
176 B.R. 196, 199-200 (9th Cir. BAP 1994). 	Here, however,
Defendants dispute liability to Heller; the estate’s property is
the claim for damages itself, which is not subject to turnover.
There is no specific, identifiable fund belonging to Heller in
Defendants’ possession. 	A suit by a debtor against a non-creditor
arising out of breach of contract, absent more than has been
alleged here, is not a turnover action under § 542. 	Id.
In light of the ruling to dismiss the § 542 claim, the court
observed that it has no basis for asserting core jurisdiction over
the adversary proceeding under 28 U.S.C. § 157(b)(2). 	The court
took under advisement the issue of whether it has related to non-
core jurisdiction over the action. 1
In In re Fietz, 852 F.2d 455, 457 (9th Cir. 1988), the Ninth
Circuit adopted the test set forth in Pacor v. Higgins, 743 F.2d
984, 994 (3d Cir. 1984), for determining whether a court has
related to jurisdiction: could the “outcome of [the] proceeding []
conceivably have [an] effect on the estate being administered in
bankruptcy.” 	Since then, the Ninth Circuit has narrowed the
1Section 1334(b) of title 28 confers original, but not
exclusive, jurisdiction on district courts to hear “all civil
proceedings arising under title 11, or arising in or related to
cases under title 11.”
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inquiry for determining jurisdiction when the action involves a
post-confirmation debtor, the situation here. 	In re Ray, 624 F.3d
1124, 1133-34 (9th Cir. 2010); In re Pegasus Gold Corp., 394 F.3d
1189, 1193-94 (9th Cir. 2005). 	The Ninth Circuit applies a close
nexus test to post-confirmation proceedings: “the 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.” 	Id.
In adopting the “close nexus” test in Pegasus Gold, the Ninth
Circuit followed the reasoning of the Third Circuit in In re
Resorts Int’l, Inc., 372 F.3d 154, 166-67 (3d Cir. 2004), agreeing
that the Pacor test “may be somewhat overbroad in the post-
confirmation context.”
The [Third Circuit in Resorts] also recognized that in
cases involving continuing trusts (such as litigation
trusts, or, as here, a liquidating trust), trusts “by
their nature maintain a connection to the bankruptcy
even after the plan has been confirmed.” 	The [Third
Circuit] ultimately concluded that matters affecting
“the interpretation, implementation, consummation,
execution, or administration of the confirmed plan will
typically have the requisite close nexus.”
Pegasus Gold, 394 F.3d at 1194 (citations omitted).
In Pegasus Gold, the liquidating trust created by a confirmed
plan of reorganization filed an adversary proceeding against a
state environmental agency, asserting that the agency’s post-
confirmation conduct constituted a breach of the plan and a
settlement agreement executed in conjunction with the plan. 	The
Ninth Circuit held that because those claims would require
interpretation of the plan, and could affect the implementation
and execution of the plan itself, the action had a sufficiently
“close nexus” with the plan to justify assertion of non-core
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jurisdiction. 	Id.
In so holding, the Ninth Circuit distinguished the facts
before it -- requiring interpretation and enforcement of the plan
and the incorporated settlement agreement -- from those presented
in Resorts, which involved a malpractice action filed by the
liquidating trust against its accountants. 	Id. 	The Ninth Circuit
indicated that when the underlying litigation does not affect
implementation of a plan but merely increases assets available for
distribution under the plan, related to jurisdiction does not
exist. 	“We specifically note that in reaching this decision, we
are not persuaded by the Appellees’ argument that jurisdiction
lies because the action could conceivably increase the recovery to
the creditors. 	As the other circuits have noted, such a rationale
could endlessly stretch a bankruptcy court’s jurisdiction.” 	Id.
at n.1, citing 	Resorts, 372 F.3d at 170; In re Craig’s Stores of
Texas, Inc., 266 F.3d 388, 391 (5th Cir. 2001).
In Ray, the Ninth Circuit held that the bankruptcy court did
not retain related to jurisdiction over claims brought by a would-
be purchaser against the debtor and the actual purchaser following
plan confirmation, even though the action involved interpretation
of the bankruptcy court’s sale order. 	The Ninth Circuit observed
that “this breach of contract action [] could have existed
entirely apart from the bankruptcy proceeding and did not
necessarily depend upon resolution of a substantial question of
bankruptcy law.” 	Ray, 624 F.3d at 1135. Consequently, the Ninth
Circuit held that no “close nexus” existed to justify related to
jurisdiction.
Here, the only possible nexus between the adversary
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proceeding (essentially a collection action that could have been
initiated by the debtor in state court prior to bankruptcy) is the
possibility that its resolution may affect the amounts ultimately
distributed under the Plan. 	The only cause of action potentially
arising under bankruptcy law, that for turnover under § 542, is
being dismissed for the reasons mentioned above.
As Defendants have not filed a proof of claim, the action
does not involve allowance or subordination of a claim against the
estate. 	The action does not affect the ability of the plan
administrator or Heller to administer or enforce the plan. 	In
fact, this action does not fall within any of the fifteen
categories in the plan’s provision describing matters over which
this court retains jurisdiction. 	See Article IX of the Joint Plan
of Liquidation of Heller Ehrman LLP (August 9, 2010) (Docket No.
1431 in Case No. 08-32514), confirmed by this court’s order
entered on August 16, 2010 (Docket No. 1446 in Case No. 08-32514).
Subsection (iv) of Article IX of the plan states that the court
can “hear and determine any and all adversary proceedings,
contested matters or applications pending on the Effective Date.”
(Emphasis added). 	This adversary proceeding was filed on December
27, 2010, after the Effective Date. 2
In light of the Ninth Circuit’s statements in Pegasus Gold
and its holding in Ray, the court agrees with Defendants that it
does not have post-confirmation jurisdiction over this state law
breach of contract and account receivable claim that arose . 	See
2Even if the plan had contained a broader, more general
retention of jurisdiction provision, such a provision may not have
established the necessary close nexus. Resorts, 372 F.3d at 161.
That question is for another day.
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also, ML Servicing Co. Inc. v. Greenberg Traurig, LLP, 	--- B.R. -
--, 2011 WL 3320916 (D. Ariz. Aug. 2, 2011) (applying Pegasus Gold
and Ray, district court concluded that related to jurisdiction did
not exist over post-confirmation malpractice and breach of
fiduciary action brought by liquidating trustee based on pre-
petition conduct of debtor’s securities counsel); 3 	In re The
Fairchild Corp., 2011 WL 3267764 at *4 (Bankr. D. Del. July 29,
2011) (“claims based on pre-petition conduct that were asserted
post-confirmation, but could have been brought prior to
confirmation lack a nexus sufficient to confer jurisdiction upon
the bankruptcy court”). 	As acknowledged by the Ninth Circuit in
Pegasus Gold, the scope of a bankruptcy court’s post-confirmation
jurisdiction would be unlimited if the potential gain or loss of
3This decision by the Arizona district court was rendered
more than one month after a decision issued by the Arizona
bankruptcy court on the same issue in a different adversary
proceeding arising out of the same bankruptcy case. 	In re
Mortgages Ltd., --- B.R. ---, 2011 WL 2533295 (Bankr. D. Ariz.
June 24, 2011). 	While the district court decision is not an
appeal of the bankruptcy court’s decision, it reaches the opposite
conclusion. 	In the bankruptcy decision, the post-confirmation
liquidating trust filed a state court malpractice action against
the debtor’s former accountants and auditors, alleging that audits
prepared 	were materially false and misleading and deepened the
debtor’s insolvency. 	The defendants removed the action to federal
court, and the bankruptcy court held that under Pegasus Gold, it
had related to jurisdiction over the action. “This case concerns
Debtor causes of action that the plan specifically created the
Liquidating Trust to pursue for the benefit of the creditors of
the estate. 	This litigation is therefore the part and parcel of
the ‘consummation, execution, [and] administration of the
confirmed plan.’”
This court believes that the district court’s August 2
decision adheres more closely to the Ninth Circuit’s statement in
Pegasus Gold that related to jurisdiction does not exist simply
because the action could conceivably increase the recovery to
creditors. 	And like the claims in Ray, the action here and the
Arizona actions “could have existed entirely apart from the
bankruptcy.”
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assets alone was sufficient to confer bankruptcy court
jurisdiction. 	“Although a post-confirmation adversary proceeding
may ‘promote the efficient distribution of trust assets to
creditors,’ it is insufficient in and of itself to confer
jurisdiction upon the bankruptcy court.” Fairchild, 2011 WL
3267764 at *4. 4
Counsel for Defendants should prepare an order granting the
motion to dismiss for the reasons set forth on the record at the
July 7 hearing and in this Memorandum Decision. 	Counsel should
comply with B.L.R. 9021-1 before uploading the order.
*** END OF MEMORANDUM DECISION ***
4In their reply, Defendants contended that the Supreme
Court’s recent decision in Stern v. Marshall, 131 S. Ct. 2594,
stripped this court of jurisdiction over this adversary
proceeding. 	The court disagrees. 	In Stern v. Marshall, the
Supreme Court addressed the issue of when a bankruptcy judge has
the power and authority to enter final orders, and did not address
subject matter jurisdiction found in 28 U.S.C. § 1334. 	As the
court agrees with Defendants that it and the district court both
lack related to subject matter jurisdiction, a bankruptcy judge’s
power and authority to enter findings of fact and a final judgment
is not implicated. 	Fairchild, 2011 WL 3267764 at *5, n.14. See
also Matrix Iv, Inc. v. Am. Nat. Bank & Trust Co. of Chicago, ---
F.3d —--, 2011 WL 3211500 (7th Cir. 2011) (“The question before
the Court in Stern was whether Article III permits the bankruptcy
courts to hear and finally decide a particular type of core
proceeding.”); In re Polaroid Corp., 451 B.R. 493, 495 n.6 (Bankr.
D. Minn. 2011) (“As Stern v. Marshall emphasizes, this is not a
matter of jurisdiction. . . . Bankruptcy jurisdiction reposes in
the United States District Court, under 28 U.S.C. § 1334(a).
Under that grant of jurisdiction, the district court may refer
bankruptcy cases and proceedings to the bankruptcy judge(s) for
the district, who constitute the “bankruptcy court” for the
district.”).
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Cas

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