Adversary Proceeding Relating to Pre-Petition Insurance Coverage Dispute Was Non-Core Matter
Consolidated SWINC Estate and SWE&C Liquidating Trust v. ACE USA, Inc. (In re Stone & Webster, Inc.), 367 B.R. 523 (Bankr. D. Del. 2007) (Judge Peter J. Walsh)
The liquidating trusts of the Stone & Webster debtors commenced an adversary proceeding against insurers of the debtors in connection with a coverage dispute that had been waged for many years, including well before the petition date. The insurers moved for a determination of the core/non-core status of the adversary proceeding. The United States Bankruptcy Court for the District of Delaware determined that the suit was merely a pre-petition state law breach of contract action over which the court had no jurisdiction under the United States Supreme Court’s decision in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71 (1982).
The plaintiff, successors in interest to debtors Stone & Webster, commenced this adversary proceeding in the United States Bankruptcy Court for the District of Delaware against insurers ACE USA, Inc. and Century Indemnity Co. seeking damages and a declaration that policies issued by the insurers to the debtors cover alleged environmental liabilities of the debtors. Century brought this motion for a determination that the adversary proceeding is non-core.
Prior to the debtors’ bankruptcy filing, Southern Union Company and Narragansett Electric Company filed environmental tort claims against the debtors. The plaintiff alleged that Century’s predecessor in interest failed to fulfill its duty to defend and indemnify the debtors in connection with these environmental claims. Southern Union and Narragansett filed proofs of claim in the debtors’ cases for costs incurred and future cleanup costs. The debtors settled the claims with Southern Union and Narragansett, agreeing to pay $5 million and 50% of any recovery from insurers, up to $10 million. Century objected to the motion to approve the settlement, but the objection was overruled and the settlement approved.
Plaintiffs commenced this adversary proceeding on January 26, 2007 alleging the following counts against Century and Ace: (1) breach of contract; (2) breach of an implied covenant of good faith and fair dealing; and (3) violation of Rhode Island General Law § 9-1-33, which prohibits an insurer from refusing in bad faith to pay a claim under an insurance policy. Plaintiffs also requested a declaratory judgment stating that (1) Plaintiffs have complied with all terms and conditions of the policies; (2) Century had a duty to defend the Debtors in connection with the Southern Union and Narragansett claims or to compensate the Debtors for their reasonable costs of defending such claims, and Century breached that duty; and (3) Plaintiffs' claim in connection with the settlement with Southern Union and Narragansett is covered by the policies.
In addition to filing a motion for determination of core/non-core status, Century also filed a motion to withdraw the reference to the United States District Court for the District of Delaware.
As the Court noted, the Third Circuit test for a determination of core or non-core status first requires an examination into whether the matter fits within one of the categories of core proceedings provided at 28 U.S.C. § 157(b)(2). If it does not, the court must apply the following test set forth in Halper v. Halper, 164 F.3d 830, 836 (3d Cir. 1999): “’a proceeding is core [1] if it invokes a substantive right provided by title 11 or [2] if it is a proceeding, that by its nature, could arise only in the context of a bankruptcy case.’” Also, in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71 (1982), the United States Supreme Court held that bankruptcy courts are constitutionally restricted when it comes to adjudication of pre-petition state law claims, but that there is no such impediment to deciding post-petition state law causes of action. Such post-petition actions are typically core. The court also noted that some courts assess whether the claim may bring an economic benefit to the estate. If there is an economic benefit to the estate, then that may support the exercise of related-to jurisdiction over a non-core claim under 28 U.S.C. § 157(a); however that is a separate inquiry from the core/non-core one.
Century argued that the adversary proceeding was non-core because (i) no substantive rights under the Bankruptcy Code were involved; (ii) the proceedings could have existed outside the bankruptcy case; and (iii) the claims arose pre-petition. The plaintiff countered that this was a post-petition claim, arguing that Century’s alleged failure to defend and indemnify occurred after the debtors’ petition date, although the plaintiffs did not contest that this dispute had been going on long before the petition date. The settlement agreement between the debtors and Southern Union and Narragansett was merely the outcome of this long process. Therefore, the Court held that the claims arose pre-petition. The Court also rejected the plaintiff’s argument that this dispute could only occur inside bankruptcy because it is interrelated with Southern Union and Narragansett’s proof of claim and the settlement agreement. Instead, the Court found, these disputes were unrelated to the actual substantive coverage dispute.
Also, the fact that the Court approved the settlement agreement did not make the dispute core. The same type of settlement could have been effected if the debtors had never filed the bankruptcy petitions. In sum, this was merely a pre-petition breach of contract claim that the U.S. Supreme Court held could not be heard by Non-Article III judges, such as bankruptcy judges. The court also rejected as irrelevant the argument that because the plaintiffs might win and bring a recovery to the estate, the adversary proceeding was core.
