Court Held That Post-Confirmation Suit for Breach of Two Reinsurance Agreements and Bad faith Refusal to Pay Claims Was Non-Core

Posted on September 2, 2011 by Morris James Delaware

 Logan v. Westchester Fire Insurance Company (In re PRS Insurance Group, Inc.), Case No. 00-4070 (MFW), Adv. Pro. No. 11-50467 (MFW) (March 30, 2011) (J. Walrath)

PRS Insurance Group, Inc. (“PRS”), along with certain of its subsidiaries, commenced cases under Chapter 11 of the Bankruptcy Code on January 19, 2001. Sean C. Logan serves as Trustee in the cases and, subsequent to the initial filing, the Trustee commenced chapter 11 cases on behalf of certain off-shore affiliates of PRS, including Enterprise Group Insurance Company Ltd. (“EGIC”). On March 2, 2007, the Court entered an order confirming the Joint Debtors’ Plan of Liquidation, which became effective on August 24, 2007.

On March 16, 2010, the Trustee, on behalf of EGIC, filed suit in the District Court for the Northern District of Ohio against Westchester Fire Insurance Company and ACE INA Holdings, Inc. (the “Defendants”) for breach of two reinsurance agreements and bad faith refusal to pay claims. The action was transferred to the District Court for the District of Delaware on October 28, 2010. The Trustee filed a motion to refer the action to the Bankruptcy Court on December 12, 2010, and the District Court granted the Trustee’s request but limited the referral to the determination of whether the action constitutes a core proceeding under the Bankruptcy Code. Though the Trustee asserted that the matter was a core proceeding under 28 U.S.C. § 157(b)(2)(E) because it is an “[order] to turn over property of the estate,” the Bankruptcy Court agreed with the Defendants that the matter was non-core.

Discussion:

Bankruptcy court jurisdiction is divided into “core” and “non-core” jurisdiction. Cases under title 11, proceedings arising under title 11, and proceedings arising in a case under title 11 are core proceedings. However, proceedings that are merely “related to” a case under title 11 are non-core. The Defendants argued, and the Court agreed, that the proceeding at bar was not within the Court’s jurisdiction “under” title 11 or “arising under” title 11 as the action was separate from the bankruptcy petitions and did not involve any steps in the bankruptcy cases.

Defendants further argued, and the Court again agreed, that the cause of action did not fall within the Court’s “arising in” jurisdiction, citing numerous courts that had held that an action by a debtor or trustee against the debtor’s insurer is a non-core proceeding. See, e.g., In re United States Brass Corp., 110 F.3d 1261, 1268 (7th Cir. 1997); Allied Prod. Corp. v. Hartford Accident & Indem. Co., 2003 U.S. Dist. LEXIS 2596, *5 (N.D. Ill. Feb. 24, 2003); In re Ramex Int’l, Inc., 91 B.R. 313, 315 (E.D. Pa. 1988); G-1 Holdings, Inc. v. Hartford Accident & Indem. Co. (In re G-1 Holdings, Inc.), 278 B.R. 376, 380 (Bankr. D.N.J. 2002). Reasoning that the action was for breach of two reinsurance agreements and bad faith refusal to pay claims – neither of which involved a dispute that could arise only in the context of a bankruptcy case – the Court declined to find core jurisdiction.

Finally, the Court was unpersuaded by the Trustee’s argument that the action may impact the size of the liquidating trust and remarked that “the Court may not even have ‘related to’ jurisdiction over the Trustee’s action” because “a court may only exercise jurisdiction [post-confirmation] where a claim has ‘a close nexus to the bankruptcy plan or proceeding’ and the matter at issue ‘affects the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement.’” “The mere potential to increase the assets of a post-confirmation trust is insufficient to establish the required ‘close nexus.’”

Accordingly, for the reasons set forth above, the Court held that the proceeding was non-core.

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Third Circuit Reverses Bankruptcy Court's Exercise of Jurisdiction Over Non-Debtors

Posted on September 30, 2008 by Morris James LLP

In re Exide Techs., No. 07-2230, __ F.3d __ (3d Cir. Sept. 19, 2008)

The persistent question of when a bankruptcy court can exercise “core” jurisdiction over nondebtor vs. nondebtor disputes received close examination in a precedential opinion issued by the Third Circuit Court of Appeals on September 19, 2008.

In a pre-bankruptcy state court lawsuit, Pacific Dunlop Holdings (USA), Inc. and its affiliated foreign entities asserted state law claims against Exide Technologies and its affiliated foreign subsidiaries, arising from their sale of their respective interests in a global battery business. Over a year after the lawsuit was commenced, Exide Technologies, but not its foreign subsidiaries, filed for Chapter 11 bankruptcy protection. The Illinois state court was prepared to allow the claims of the foreign Pacific Dunlop entities against the nondebtor foreign Exide entities to proceed, but Exide removed the lawsuit to federal court, where it was transferred to the Delaware bankruptcy court overseeing Exide’s chapter 11 case. The Pacific Dunlop foreign entities sought a remand back to state court of their claims in the lawsuit against the nondebtor Exide foreign entities, based on mandatory or discretionary abstention and based on the forum selection clause in the parties’ agreements. Meanwhile, a claims bar date had already been set in that case, and all the Pacific Dunlop entities filed proofs of claim. The proofs of claim filed by the Pacific Dunlop foreign entities against Exide were contingent on not being able to collect from the respective Exide foreign entities to which they had sold their businesses.

Exide argued that (1) the operative contracts between the parties unambiguously made Exide the “sole indemnitor” of all the claims against its nondebtor foreign subsidiaries; (2) the fact that the Pacific Dunlop entities had all filed proofs of claim meant that the entire lawsuit had to be dealt with in the bankruptcy court as a core matter, and (3) even if the claims of the foreign plaintiffs against the nondebtor defendants might otherwise be considered “non-core” matters, they were so intertwined with the claims of Pacific Dunlop (USA) against the debtor, Exide, and with the contingent claims of the Pacific Dunlop foreign entities against the debtor in their proofs of claim, that all the nondebtor vs. nondebtor claims had to be treated as “core” ones over which the Bankruptcy Court should retain jurisdiction. The Bankruptcy Court agreed with Exide, and the District Court agreed with the Bankruptcy Court. The Court of Appeals reversed those lower court rulings.

The Court rejected Exide’s broad arguments about the effect of filing proofs of claim as expanding to the level of “core” jurisdiction a Bankruptcy Court’s authority over claims between and among nondebtors. The Court did find, however, that it was appropriate for the bankruptcy court in the first instance to review the underlying contracts for purposes of determining whether the contract claims at issue were core or non-core. Having rejected the Bankruptcy Court’s finding that the underlying contract “unambiguously” made Exide the sole indemnitor of the claims against the Exide foreign subsidiaries, the Court remanded the case to the Bankruptcy Court for an evidentiary hearing on whether the claims in the lawsuit were core or non-core.

In vacating or directing to be vacated two Bankruptcy Court rulings and the District Court’s affirmance of those rulings, and remanding the dispute back to bankruptcy court for further proceedings, the Court of Appeals expressly overruled the “intertwinement” theory espoused in In re RBGSC Inv. Corp., 253 B.R. 369 (E.D. Pa. 2000), under which otherwise non-core disputes among non-debtors could be treated as core bankruptcy matters based on the extent of their intertwinement with core disputes between those parties and the debtor. Representing the successful appellants in the case, the Pacific Dunlop Holding entities, were Douglas N. Candeub and Brett D. Fallon of Morris James LLP.
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