623 B.R. 696
D. Del.2020Background
- Ullico Casualty Company was placed into liquidation in Delaware in 2013; the Liquidation Order vested the Receiver with authority to marshal assets and required third parties to file accountings and turn over assets.
- GUI (formerly Patriot Underwriters) and related non-debtor service providers ran the Ullico/Patriot program; the Receiver alleged millions in collateral were held in accounts controlled by Patriot entities.
- Patriot National and affiliated service companies (the Debtors) filed chapter 11 in 2018 and proposed a plan that included an Article X retention of exclusive jurisdiction clause and broad injunction/exculpation provisions.
- The Receiver objected to confirmation, arguing the plan would impair his DUILA rights and violate the McCarran-Ferguson Act, and moved for abstention (including under Younger and Burford). He also sought an accounting and turnover under the Liquidation Order.
- The Bankruptcy Court confirmed the plan, issued a Jurisdiction Order declining to rule in advance on jurisdiction over future litigation (preserving parties’ rights to object later), and denied the Receiver’s abstention and McCarran-Ferguson-based objections.
- The District Court affirmed: it held the McCarran-Ferguson Act did not bar the Bankruptcy Court, abstention was unwarranted, the Bankruptcy Court properly refused to issue an advisory ruling, and the plan was proposed in good faith.
Issues
| Issue | Receiver's Argument | Debtors' Argument | Held |
|---|---|---|---|
| Whether confirmation and plan retention of exclusive jurisdiction unlawfully impaired Receiver's DUILA rights under McCarran-Ferguson | Plan and injunction impair Receiver's ability to enforce the Liquidation Order and reverse-preemption under McCarran-Ferguson prevents federal interference | Federal courts may determine property rights; such determinations do not “invalidate, impair, or supersede” state insurance law; the Jurisdiction Order preserves Receiver's ability to litigate in state court or object later | McCarran-Ferguson does not bar the Bankruptcy Court; jurisdiction exercise was proper and the orders do not preclude the Receiver from pursuing accounting or asserting rights later |
| Whether mandatory abstention under 28 U.S.C. § 1334(c)(2) was required | Claims arise under state law and can be timely adjudicated in state court, so mandatory abstention applies | Plan confirmation is a core bankruptcy proceeding; mandatory abstention does not apply to core matters | Mandatory abstention not required; confirmation is a core proceeding |
| Whether permissive abstention, Younger, or Burford abstention warranted | State liquidation implicates important state interests and federal court should defer (Younger/Burford) | Younger has been narrowed; Receiver's potential property claims fall squarely within bankruptcy jurisdiction; Burford only applies to extraordinary state regulatory questions, not ordinary property disputes | Abstention under Younger and Burford is not warranted |
| Whether the plan was proposed in good faith under §1129(a)(3) | Confirmation lacks good faith because it violates McCarran-Ferguson and abstention doctrines | Plan resulted from arm's-length negotiations, evidentiary hearing and was fairly formulated to reorganize the debtors | Bankruptcy Court's finding of good faith affirmed |
Key Cases Cited
- Sprint Commc'ns, Inc. v. Jacobs, 571 U.S. 69 (2013) (narrowed Younger abstention to three exceptional categories)
- Malhan v. Sec'y United States Dep't of State, 938 F.3d 453 (3d Cir. 2019) (explains Younger scope post-Sprint)
- Humana Inc. v. Forsyth, 525 U.S. 299 (1999) (McCarran-Ferguson reverse-preemption test)
- In re Resorts Int'l, Inc., 372 F.3d 154 (3d Cir. 2004) (plan retention clauses cannot create jurisdiction a court does not have)
- Stern v. Marshall, 564 U.S. 462 (2011) (limits on bankruptcy adjudicatory authority)
- Middlesex Cty. Ethics Comm. v. Garden State Bar Ass'n, 457 U.S. 423 (1982) (Younger abstention framework)
- Quackenbush v. Allstate Ins. Co., 517 U.S. 706 (1996) (Burford abstention is narrow, exceptional)
- Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976) (abstention principles regarding federal-state comity)
- In re Marcus Hook Dev. Park, Inc., 943 F.2d 261 (3d Cir. 1991) (bankruptcy court has jurisdiction to enforce its own orders)