542 B.R. 121
Bankr. S.D.N.Y.2015Background
- Ames (debtor) filed chapter 11 in 2001; Lumbermens issued a $14.35M surety bond backing Ames’ workers’ compensation obligations to Travelers. Lumbermens had an unsecured right of reimbursement from Ames.
- Travelers demanded payment in 2003; Lumbermens and Travelers entered a Letter Agreement placing $8M in a trust (Trust Monies) at Bank of New York and ordering that Travelers draw on Ames’ letters of credit before the Trust Monies.
- Ames sued Travelers and Lumbermens in a 2006 adversary proceeding seeking declarations, turnover of excess collateral, and damages; Travelers later settled with Ames and was dismissed from the adversary; the dispute with Lumbermens continued.
- Court-approved intermediate and final settlements with Travelers reserved the Trust Monies dispute for the adversary; bankruptcy court retained jurisdiction to resolve related disputes.
- Lumbermens later entered Illinois rehabilitation/liquidation proceedings (2012). Lumbermens argued the Illinois rehabilitation court should resolve all disputes (invoking McCarran-Ferguson and insurer insolvency exclusivity); Ames moved to confirm federal (bankruptcy) exclusive jurisdiction over the adversary.
- The bankruptcy court (reporting to the district court after withdrawal of the reference) held it has jurisdiction over all remaining claims and exclusive jurisdiction over certain claims tied to in rem bankruptcy interests; it rejected complete McCarran-Ferguson displacement of federal jurisdiction.
Issues
| Issue | Plaintiff's Argument (Ames) | Defendant's Argument (Lumbermens) | Held |
|---|---|---|---|
| 1. Subject-matter jurisdiction over adversary claims | Bankruptcy court has "arising under/ in/related to" jurisdiction over all claims arising from Ames’ chapter 11 and estate property | Illinois rehabilitation court should decide because Lumbermens is in state insolvency and state law governs insurer claims | Federal bankruptcy court has jurisdiction over all remaining claims (arising under/in/related to §1334) |
| 2. Exclusivity of jurisdiction over stay, marshaling, and subordination claims | These claims implicate estate property and in rem functions; bankruptcy jurisdiction should be exclusive | Rehabilitation statute and insolvency process displace federal jurisdiction for insurer-related matters | Exclusive federal jurisdiction found for Claim #4 (automatic stay/contempt), Claim #6 (marshaling), Claim #10 (equitable subordination), and over Lumbermens’ proofs of claim against the Ames estate |
| 3. Ownership of Trust Monies (exclusive federal control) | Trust Monies should be adjudicated in the bankruptcy adversary as they affect estate interests and remedies | Illinois rehabilitation court has exclusive power over assets or any interest of Lumbermens and therefore the trust dispute belongs there | Bankruptcy court has jurisdiction to decide ownership but not exclusive jurisdiction over the Trust Monies because the funds were created post-petition and not estate property as of commencement |
| 4. Applicability of McCarran-Ferguson (reverse preemption) | Bankruptcy Code does not specifically relate to insurance; federal adjudication will not impair state insolvency priorities; federal court may decide and any monetary recovery is later presented to Illinois insolvency forum for allowance | Illinois Insurance Code (Article XIII) was enacted to regulate insurance rehabilitation/liquidation and thus, under McCarran-Ferguson, federal law should yield to the state rehabilitation court; state forum is necessary to protect policyholder priorities | McCarran-Ferguson does not bar federal jurisdiction here; federal rulings will not invalidate/impair/supersede Illinois insolvency law, though any money judgments against Lumbermens must be presented to the Illinois insolvency process for allowance/priority |
Key Cases Cited
- Katz v. United States, 546 U.S. 356 (U.S. 2006) (bankruptcy jurisdiction is principally in rem and ancillary powers protect in rem decrees)
- Stern v. Marshall, 564 U.S. 462 (U.S. 2011) (limits on entry of final judgments by Article I bankruptcy judges for certain common-law counterclaims)
- In re Pacor, Inc., 743 F.2d 984 (3d Cir. 1984) (test for "related to" bankruptcy jurisdiction: conceivable effect on estate)
- In re Cuyahoga Equip. Corp., 980 F.2d 110 (2d Cir. 1992) (Second Circuit’s adoption/usage of Pacor related-to analysis)
- Gross v. Weingarten, 217 F.3d 208 (4th Cir. 2000) (McCarran-Ferguson does not divest federal courts of jurisdiction over every claim against an insurer in state insolvency; federal adjudication can coexist with state liquidation priorities)
- Humana Inc. v. Forsyth, 525 U.S. 299 (U.S. 1999) (interpretive guidance on McCarran-Ferguson: when federal law does not conflict with state regulatory scheme, reverse preemption does not apply)