In re: Gacn, Inc.
CC-15-1424-KuFKi
| 9th Cir. BAP | Aug 25, 2016Background
- GACN, a debtor in a Chapter 11 case, faced a state-court wrongful termination judgment (about $5.6M) after former employees prevailed; plaintiffs filed claims > $11M in the bankruptcy.
- GACN (debtor-in-possession) negotiated a postpetition settlement with the wrongful-termination plaintiffs conditioned on insurer (Lloyd’s) approval; insurer refused consent and asserted breach of policy provision (Section X.B.) as an affirmative defense in the state action.
- GACN filed a declaratory-relief adversary proceeding in bankruptcy court seeking a judgment about parties’ rights under the prepetition insurance policy and whether GACN’s postpetition settlement conduct forfeited coverage.
- The insurer moved to abstain (mandatory and discretionary); the bankruptcy court denied both abstention requests, concluding the adversary was a "core" proceeding and included bankruptcy law issues and was urgent for reorganization.
- The insurer appealed the denial of abstention; the BAP granted leave to appeal (interlocutory) and reviewed whether the bankruptcy court erred on core status and abstention analyses.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the bankruptcy court erred in treating the declaratory‑relief action as a core proceeding | GACN: the suit arises from its postpetition estate-administration conduct and is inextricably intertwined with the bankruptcy, so it is core | Insurer: the dispute is about a prepetition insurance contract governed by state law and is noncore | Held: Reversed — the action is noncore (prepetition contract governed by state law); Ninth Circuit precedents narrowly construe "core" jurisdiction |
| Whether mandatory abstention should have been granted | GACN: federal/bankruptcy interests and urgency justify bankruptcy adjudication; action affects administration and Rule 9019 settlement approval | Insurer: requirements for mandatory abstention are met (state-law claims, noncore, state forum available, state court can adjudicate timely) | Held: Reversed in part and remanded — bankruptcy court erred on core and law-type findings; mandatory abstention depends now solely on timeliness (remand to reassess considering §157(c)(1) district-court review delays) |
| Whether discretionary abstention should have been granted | GACN: bankruptcy policy and estate administration needs weigh against abstention given large impact on reorganization | Insurer: discretionary factors favor abstention because state law predominates and it's noncore | Held: Vacated and remanded — bankruptcy court abused discretion by failing to account for noncore status and predominance of state-law issues; court must reweigh factors on remand |
Key Cases Cited
- Wilshire Courtyard v. California Franchise Tax Bd., 729 F.3d 1279 (9th Cir. 2013) (defining "arising under" and "arising in" bankruptcy jurisdiction)
- Marshall v. Stern (In re Marshall), 600 F.3d 1037 (9th Cir. 2010) (statutory core/noncore framework and §157(b)(2) list discussed)
- Battle Ground Plaza, LLC v. Ray (In re Ray), 624 F.3d 1124 (9th Cir. 2010) (prepetition contract claims against reorganized debtor not "arising in" bankruptcy)
- Harris v. Wittman (In re Harris), 590 F.3d 730 (9th Cir. 2009) (postpetition claims against estate actors can be core when inextricably intertwined with estate administration)
- Piombo Corp. v. Castlerock Props. (In re Castlerock Props.), 781 F.2d 159 (9th Cir. 1986) (narrow construction of §157(b)(2) catchalls for state-law contract claims)
- Continental Ins. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011 (9th Cir. 2012) (bankruptcy policy and estate-administration weight in abstention analysis)
- Marathon Pipe Line Co. v. United States, 458 U.S. 50 (1982) (Supreme Court decision prompting post-Marathon statutory jurisdictional scheme)
- Catlin v. United States, 324 U.S. 229 (1945) (finality standard for appealability of interlocutory orders)