Opinion
Civil Action No:01-1187, Bankruptcy Case No. 00-10993 through 00-10995, Adversary Proceeding No. 01-1143(B), Section: "R" (5)
July 2, 2001.
ORDER AND REASONS
Before the Court is the motion by Certain Underwriters at Lloyd's, London and by Turegum Insurance Co. (collectively "Underwriters") to withdraw the reference of a certain adversary proceeding pursuant to 28 U.S.C. § 157 (d). For the following reasons, the motion is GRANTED.
I. BACKGROUND
On April 6, 2001, Underwriters filed an adversary proceeding in the United States Bankruptcy Court for the Eastern District of Louisiana seeking a declaratory judgment to resolve questions concerning their obligations to indemnify Babcock Wilcox Company ("Debtor") for asbestos-related bodily injury claims and other latent disease claims. One day earlier, Underwriters filed a declaratory judgment action in this Court against the Debtor's parent company, McDermott International, seeking essentially the same relief.
Underwriters claim that from February 6, 1950 until April 6, 1986. Underwriters and certain other insurers issued excess liability policies in favor of the Debtor and McDermott. Underwriters claim that in the late 19805, it was apparent that the cumulative amount paid by the Debtor or on its behalf on asbestos claims would exceed the aggregate products liability limits of the Debtor's primary insurance policies. At that time, the Debtor and McDermott International approached Underwriters and requested that Underwriters begin to reimburse the Debtor for payments on asbestos claims once the underlying primary policies were exhausted. Underwriters claim that McDermott, the Debtor and Underwriters entered into a coverage-in-place agreement (CIP) to provide a mechanism for the payment of the asbestos claims, which became effective April 25, 1990. Underwriters claim that they dutifully paid claims pursuant to the CIP. They assert that after the Debtor filed for relief under Chapter 11, the Debtor and McDermott breached the CIP. The asserted breaches include disclosing coverage information to representatives of the asbestos claimants and proposing in a plan of reorganization to assign the management of claims under the policies to a trust.
In the declaratory judgment actions against the Debtor and McDermott, Underwriters specifically request in Count I that the Court declare that the Debtor and McDermott are in material breach of the CIP that they cannot assign personal duties under the CIP, that the Debtor cannot assume or assign the CIP in bankruptcy, and that Underwriters owe no further obligations to the Debtor or McDermott under the CIP. Underwriters seek damages against McDermott but not against the Debtor for violating the CIP. In Count II of the declaratory complaints, Underwriters seek a declaration regarding the extent of coverage under the 1980-86 policies. Specifically, Underwriters request that the Court make the following declarations:
1. Louisiana law governs the applicability of the 1980-86 policies;
2. Subject to all other terms, conditions, and endorsements, the 1980-86 policies only provide coverage for "personal injuries" arising from an "occurrence";
3. the 1980-86 policies do not provide coverage in the absence of a claim for actual "personal injuries," as that term is defined in those policies;
4. pursuant to applicable Louisiana law, the 1980-86 policies are triggered only if a claimant can prove BW/McDermott are liable for his or her inhalation exposure to asbestos-containing materials in a product of BW/McDermott during the period of the 1980-86 policies;
5. the claims are subject to the "Products Liability" aggregate limit of liability stated in the 1980-86 policies;
6. the 1980-86 policies do not provide coverage to the extent BW/McDermott expected or intended the "personal injuries" at issue;
7. the 1980-86 policies do not provide coverage to the extent the dangers associated with exposure to asbestos-containing materials was a risk known to BW/McDermott at or prior to the inception of the 1980-86 policies;
8. BW/McDermott are responsible for any of the claims that trigger years in which they did not purchase liability insurance or when insurance is exhausted;
9. to the extent that certain claims are successfully characterized as "non-products" claims, then the per-occurrence limit of liability in the primary policies underlying the 1980-86 policies apply separately to each individual asbestos claim, and the 1980-86 policies do not respond to any such "non-products" claims until the limits of the underlying policies are exhausted on a per claimant, per year exposure basis;
10. to the extent there is coverage under the 1980-86 policies for any of the claims, underwriters only agreed to accept the coverage for their respective proportionate shares thereof and not for that of any other subscribing syndicate or company; thus, Underwriters are not responsible for the proportionate share of any syndicate or company subscribing the 1980-86 policies that is insolvent or otherwise unable to respond in judgment; and
11. BW has breached the duty if cooperation that it owes to Underwriters under the 1980-86 policies.
Underwriters demand a jury trial of the claims in both declaratory actions. Underwriters now move this Court to withdraw the reference on the proceeding against the Debtor on the grounds that the matters presented in the declaratory judgment action are non-core proceedings and entitle Underwriters to a jury trial.
II. DISCUSSION
A. Bankruptcy Jurisdiction
The bankruptcy jurisdiction of district courts is conferred by 28 U.S.C. § 1334. Section 1334(a) provides for exclusive jurisdiction "of all cases under title 11." 28 U.S.C. § 1334(a). Under Section 1334(b), the district courts have original, but not exclusive, jurisdiction "of all proceedings arising under title 11, or arising in or related to cases under title 11." Id. § 1334(b). Bankruptcy jurisdiction thus extends to four classes of cases: cases under title 11; proceedings arising under title 11; proceedings arising in title 11 cases; and proceedings related to cases under title 11. See In re Wood, 825 F.2d 90, 92 (5th dir. 1987). The Fifth Circuit has explained that in determining whether jurisdiction exists, it is necessary to determine only whether a matter is at least "related to" the bankruptcy:
For the purpose of determining whether a particular matter falls within bankruptcy jurisdiction, it is not necessary to distinguish between proceedings "arising under", "arising in a case under", or "related to a case under", title 11. These references operate conjunctively to define the scope of jurisdiction. Therefore, it is necessary only to determine whether a matter is at least "related to" the bankruptcy. The Act does not define "related" matters. Courts have articulated various definitions of "related", but the definition of the Court of Appeals for the Third Circuit appears to have the most support: "whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy."Id. at 93.
The controversies at issue here are at a minimum related to a case under Title 11. Underwriters seek to establish that the Debtor breached the CIP agreement and to define the scope of their coverage obligations under the 1980-86 insurance policies. Insurance coverage will significantly affect the Debtor's estate. Therefore, there is bankruptcy jurisdiction over this action. See Id. at 93-94 (explaining that to fall within bankruptcy jurisdiction a claim must have a "conceivable effect" on the debtor's estate).
B. Withdrawal of the Reference
The standard for when a district court may withdraw a reference from a bankruptcy court is outlined in Title 28, United States Code, Section 157(d). Section 157(d) provides for both mandatory and permissive withdrawal, as follows:
The district court may withdraw, in whole or in part, any case or proceeding referred [to the bankruptcy court], on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both Title 11 and other laws of the United States regulating organizations or other activities affecting interstate commerce.28 U.S.C. § 157 (d).
Courts generally interpret this provision restrictively, granting mandatory withdrawal of the reference when the claim and defense entail material and substantial consideration of non-Bankruptcy Code federal law. See, e.g., Lifemark Hosps. of La., Inc. v. Liljeberg Enters., Inc., 161 B.R. 21, 24 (E.D. La. 1993) (withdrawing reference when case necessarily involved a determination of antitrust claims); U.S. Gypsum Co. V. Nat'1 Gypsum Co., 145 B.R. 539, 541 (N.D. Tex. 1992) (withdrawing reference when case necessarily involved a determination of patent claims); In re Johns-ManVille Corp., 63 B.R. 600, 603 (S.D.N.Y. 1986) (withdrawing reference when case necessarily involved a determination of Comprehensive Environmental Response Compensation and Liability Act issues); In re White Motor Corp., 42 B.R. 693, 704 (N.D. Ohio 1984) (no withdrawal of reference based on speculation about issues under Employee Retirement Income Security Act and Internal Revenue Code which may or may not be germane to the core proceeding). Underwriters do not seek mandatory withdrawal. Rather, they seek permissive withdrawal under 28 U.S.C. § 157 (d) "for cause shown."
1. Permissive Withdrawal
The Fifth Circuit has held that in determining whether to withdraw the reference for cause shown, district courts should consider whether the matter at issue is a core or a non-core proceeding. See Holland America Ins. Co. v. Succession of Shepherd J. Roy, 777 F.2d 992, 999 (5th Cir. 1985). See also In re Babcock Wilcox Co., 2000 WL 422372, *3 (E.D. La. April 17, 2000). Additionally, courts should consider whether the proceedings involve a jury demand and whether withdrawal would further the goals of promoting uniformity in bankruptcy administration, reducing forum shopping and confusion, fostering the economical use of the debtor's and creditors' resources, and expediting the bankruptcy process. See id.
a. Nature of proceeding
A non-exhaustive list of core proceedings is set forth in 28 U.S.C. § 157(b)(2). The list includes allowance or disallowance of claims against the estate, estimation of claims, and counterclaims by the estate against persons filing claims against the estate. See 28 U.S.C. § 157(b)(2)(B), (C). Other than by listing examples, the statute does not define "core proceedings." Courts consider matters that arise under the Bankruptcy Code to be core. See Liljeberg Enters, Inc. v. Lifemark Hosps. of La., 2000 WL 63307, at *3 (E.D. La. Jan. 21, 2000). Additionally, courts consider a proceeding to be core if it involves substantive rights provided by Title 11 or if by its nature the proceeding could only arise in the context of a bankruptcy case. See In re Wood, 825 F.2d at 97.
Here, the parties dispute whether the issues presented are core proceedings. Underwriters claim that this dispute is simply over a right to insurance coverage that could be resolved in a breach of contract suit if the Debtor were not bankrupt. The Debtor relies on In re United States Lines, Inc., 197 F.3d 631, 638 (2d dir. 1999), to support its claim that an insurance coverage dispute is a core proceeding. The Debtor also argues that Underwriters assert a post-petition breach of contract which, it claims, is a core proceeding. The Debtor also asserts that the relief requested makes Underwriters' claim a core claim. The Court finds that the contract action is a not a core proceeding.
In In re United States Brass Corp., 110 F.3d 1261 (7th Cir. 1997), the Seventh circuit held that declaratory judgment actions against bankrupts to determine insurance coverage were not core proceedings. The court reasoned that "the right to insurance coverage is a creation of state contract law and one that could be vindicated in an ordinary breach of contract suit if [the insured] were not a bankrupt." Id. at 1268. The court held that "core proceedings are actions by or against the debtor that arise under the Bankruptcy Code in the strong sense that the Code itself is the source of the claimant's right or remedy, rather than just the procedural vehicle for the assertion of a right conferred by some other body of law, normally state law." Id. The Seventh Circuit was unpersuaded by arguments that the insurance coverage was an important right to the bankrupt. "The fact that it is an important right to the bankrupt [involving $500 million in coverage) is irrelevant." Id. (emphasis in original). The Court finds the Seventh Circuit's reasoning applicable here. This contract action is a creature of state law and does not involve rights created by bankruptcy law. Hence, it is not a core proceeding.
In re United States Lines, relied upon by the Debtor, is distinguishable and to the extent that it is not, the Court finds the Seventh Circuit's decision in United States Brass more persuasive. In United States Lines, the court emphasized that the insurance contracts represented the only potential source of cash available to personal injury creditors. 197 F.3d at 639. While there is apparently a sizable amount of insurance in controversy here, there is no indication that insurance is the only available source of payment to Babcock Wilcox's personal injury creditors. Thus, the United States Lines rationale is not applicable.
The Debtor also argues that this matter involves postpetition breach of contract claims, which makes it a core proceeding. See In re Century Brass Prods., Inc., 1992 WL 22191, *2 (D. Conn. 1992) (holding that post-petition cause of action on pre-petition contract concerns the administration of the estate and is a core proceeding under 28 U.S.C. § 152(b)(2)(A)); Valley Forge Plaza Assoc. v. Fireman's Fund Ins. Companies, 107 B.R. 514, 517 (E.D. Pa. 1989) (holding post-petition breach of contract claim as a core proceeding under 28 U.S.C. § 152(b)(2)(A)). The Court has found no Fifth Circuit authority holding that a post-petition breach of a pre-petition contract gives rise to a core proceeding. Indeed, United States Lines, which the Debtor relies upon for other reasons, abjured such a rule. The court noted that while the bankruptcy court has core jurisdiction over claims derived from a contract formed postpetition, "a dispute arising from a pre-petition contract will usually not be rendered core simply because the cause of action could only arise post-petition." United States Lines, 197 F.3d at 639. In fact, in In re Orion Pictures, 4 F.3d 1095, 1102 (2d Cir. 1993), the Second Circuit held that a cause of action for anticipatory breach of a pre-petition contract was non-core even though the event triggering the claim arose post-petition. The Court therefore declines to follow the contrary, non-controlling district court authority cited by the Debtor.
Finally, the Court is not persuaded by the Debtor's argument that some of the declaratory relief sought involves whether the Debtor has the right to assume and assign the insurance contracts as "executory contracts" under 12. U.S.C. § 365. Even if this were true, Count I also involves contract claims arising under state law, and none of the claims in Count II derives from the Bankruptcy Code. Thus, the Court concludes that Underwriters' action against the Debtor is not a core proceeding.
b. Forum Shopping
Underwriters filed this declaratory action against the Debtor in bankruptcy court while also filing a similar declaratory judgment action in the district court against McDermott. Underwriters have been consistent in their position that both of these actions belong in the district court. The Debtor has consistently asserted that these actions should be in the bankruptcy court. If there is forum shopping, neither side is any more guilty of it than the other.
c. Judicial Economy
Granting the motion to withdraw will serve the interests of judicial economy. The issues before the bankruptcy court are non-core issues, with which the bankruptcy court has no greater familiarity than does this Court. In addition, the action against the non-debtor McDermott involves nearly identical facts and issues. Resolution of the insurance issues in one proceeding before this Court will obviate the inevitable appeal of the bankruptcy court's ruling and will bring the matter to a more expeditious resolution. Therefore, the Court finds that withdrawing the reference would promote judicial economy.
d. Demand for a Jury Trial
The parties also dispute whether Underwriters are entitled to a jury trial of this declaratory action. Bankruptcy courts in this district are not authorized to conduct jury trials. Generally, the inability of a bankruptcy court to hold a jury trial in a related matter is a ground for a district court to withdraw the reference from a bankruptcy court. See 1 COLLIER ON BANKRUPTCY § 3.04[1][b] (15th Ed. 1992) [hereinafter "COLLIER"].
The Debtor only half-heartedly argues that Underwriters are not entitled to a jury trial. The Court finds good reason for the Debtor's to be circumspect in its arguments, since it is clear that Underwriters are entitled to a jury trial. The Court finds that the claims in Count I require the interpretation of the CIP and whether the parties have breached the CIP. Breach of contract claims are legal actions that entitle the parties to a trial by jury. See Simler v. O'Connor, 372 U.S. 221, 223, 83 S. Ct. 609, 611 (1963) (suit to enforce contract rights was legal action even though it was brought as declaratory judgment action); In re Tastee Donuts, Inc., 137 B.R. 204, 206 (E.D. La. 1992). The Fifth Circuit has ruled that when a contract is ambiguous, interpretation of the contract is a question reserved for the jury. See Ham Marine, Inc. v. Dresser Indust., Inc., 72 F.3d 454, 458 (5th Cir. 1995); Lyxell v. Vautrin, 604 F.2d 18, 20 (5th Cir. 1979); Ingalls Iron Works v. Fruchauf Corp., 518 F.2d 966, 969 (5th dir. 1975); Greenberg v. General Mills Fun Group, 478 F.2d 254, 256 (5th Cir. 1973). Further, the majority of the claims in Count II require interpretation of the 1980-86 policies.
Instead of its typically staunch advocacy, the Debtor meekly asserts that "it is not clear that Underwriters are entitled to a jury trial."
The Seventh Amendment right to a jury trial exists where: (a) the cause of action is analogous to actions that could only have been brought in courts of law, rather than equity, in the courts of l8th century England; and (b) the remedy sought is legal, rather than equitable, in nature. See Granfinanciera v. Nordberg, 492 U.S. 33, 42, 109 S.Ct. 2782, 2790 (1989). If, on balance, these two factors indicate that a party is entitled to a trial by jury, the court must then consider whether Congress may assign and has assigned resolution of the relevant claim to a non-Article III adjudicative body that does not use a jury as a factfinder. See id.
While the Debtor characterizes the cancellation remedy sought by Underwriters in Count I as equitable, it does not dispute that Count II seeks legal relief. Under these circumstances, the Supreme Court has held that when both legal and equitable claims are presented in a single case, "only under the most imperative circumstances ... can the right to a jury trial of legal issues be lost through prior determination of equitable claims." Beacon Theaters, Inc. v. Westover, 359 U.S. 500, 510-11, 79 S.Ct. 948, 957 (1959). Accordingly, Underwriters do not lose their right to a jury trial even if one of their claims could be characterized as equitable.
III. CONCLUSION
For the foregoing reasons, the Court GRANTS Underwriters' motion to withdraw the reference from the bankruptcy court.
New Orleans, Louisiana, this 2nd day of July, 2001.