United States District Court, N.D. Illinois
March 22, 2004.
In re: HA 2003, INC., formerly known as HA-LO INDUSTRIES, INC., et al. Debtor HA 2003, INC., Plaintiff,
FEDERAL IN SURANCE COMPANY, NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., ST. PAUL MERCURY IN SURANCE COMPANY, ZURICH AMERICAN INSURANCE COMPANY, and GULF INSURANCE COMPANY, Defendants
The opinion of the court was delivered by: WILLIAM J. HIBBLER, District Judge
MEMORANDUM OPINION AND ORDER
Before the Court is Defendants', St. Paul Mercury Insurance Company,
Zurich American Insurance Company, and Gulf Insurance Company
(collectively, "Moving Defendants"), motion to withdraw the reference to
the Bankruptcy Court of the above-captioned adversary proceeding.
In July 2001, HA-LO Industries, Inc. ("IIA-LO") filed its Chapter 11
Petition after a string of poor business decisions by its former CEO,
John Kelley, put HA-LO into financial distress. In response, HA-LO filed
suit against Kelley on August 30, 2002, seeking recovery for his alleged
breach of fiduciary duty that gave rise to HA-LO's bankruptcy. The
District Court referred the
matter to the U.S, Bankruptcy Court for the Northern District of
Illinois. Moving Defendants, each excess insurers, subsequently reserved
their rights with respect to the complaint against Kelley, asserting that
the policies' "insured versus Insured exclusion," which bars coverage for
claims "brought by or on behalf of an insured," potentially precluded
coverage under the policy, as did other terms and conditions of coverage.
HA-LO contends that its directors' and officers' liability policies
should nevertheless provide coverage to Kelley for any liabilities,
On November 10, 2003, HA-LO initiated the present proceeding in the
Bankruptcy Court, seeking a declaration that the Insured versus Insured
exclusion is inapplicable to its suit against Kelley and that the
insurers' policy proceeds are available to satisfy any judgment HA-LO
obtains against its former CEO. Subsequently, on December 12, 2003,
Moving Defendants filed this motion to withdraw the reference of this
proceeding to the Bankruptcy Court, contending that the current proceeding
presents only state law issues of insurance contract interpretation that
are more appropriately considered by the District Court.
Although federal district courts have original jurisdiction over all
bankruptcy proceedings, such proceedings may be referred to the
bankruptcy courts pursuant to 28 U.S.C. § 157(a), as the Court did in
this case. Any such reference may be withdrawn, however, where the issue
raised in the case is more properly decided by the district court. See
28 U.S.C. § 157 (d); F.R.Bankr.P. 5011, The Bankruptcy Code provides, in
relevant part, that: "The district court may withdraw, in whole or in
part, any case or proceeding referred under this section, on its own
motion or on timely motion of any party, for cause shown." 28 U.S.C. § 157
Although section 157(d) does not define "cause," case
law from this Circuit suggests that the following
factors may be considered: judicial economy, promotion
of uniformity and efficiency in bankruptcy
administration, reduction of forum shopping, delay and
costs to the parties, the particular court's
familiarity with the case, and whether the adversary
proceeding is core or non-core,
In re Coe-Truman Tech., Inc., 214 B.R. 183, 187 (N.D. Ill. 1997) (citing
In re Sevko, Inc., 143 B.R. 114, 117 (N.D. Ill. 1992); Matter of J.
O'Brien Leasing, Inc., No. 97 C 3821, 1997 WL 414099 (N.D. Ill. July 17,
Permissive withdrawal of reference is the exception, not the rule.
"Withdrawal of a reference is not intended to be an escape hatch from
bankruptcy to district court. Thus, the reference should only be
withdrawn in a limited class of proceedings, and the movant bears the
burden of establishing that this relief is appropriate." In re Pro-Pak
Services, Inc., Nos. 02 C 5528, 00 B 37030, 02-1-927, 2002 WL 31915808,
at *1 (N.D. Ill. Dec. 31, 2002) (internal citations omitted).
The express language and legislative history of §
157(d) make clear that Congress intended to have
bankruptcy proceedings adjudicated in the bankruptcy
court unless withdrawal was essential to preserve a
higher interest. Accordingly, courts have been
cautious in applying § 157(d) so that the exception
does not swallow the rule. Withdrawal, even
discretionary withdrawal, is permitted only in a
limited number of circumstances.
O'Brien Leasing, 1997 WL 414099, at *2 (internal citations omitted).
A. The State Law Insurance Coverage Claim Is Non-Core,
At least one court in this district has held that the most important of
the factors to consider in determining whether permissive withdrawal is
appropriate is whether the adversary proceeding sought to be withdrawn is
core or non-core. See Coe-Truman, 214 B.R. at 187. "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." Matter of U.S. Brass
Corp., 110 F.3d 1261, 1268 (7th Cir. 1997) (citing 28 U.S.C. § 157(b)(2)).
In Brass v. the Seventh Circuit held that a declaratory judgment action
to establish insurance coverage is a creation of state contract law and
thus non-core. Brass., 110 F.3d at 1268. The instant case is not
distinguishable in any meaningful way from the non-core claim in Brass.
HA-LO argues that its declaratory judgment action is based on the effect
of HA-LO's bankruptcy on the "Insured versus Insured" exclusion in its
insurance policies. HA-LO claims that because there is an exception to
this exclusion in the event of bankruptcy, this legal question could
arise only in the context of a bankruptcy. In addition, the issue
involves questions of whether 11A-LO is a person authorized under the
Bankruptcy Code to act on behalf of the debtor and its creditors in
pursuing claims against insured persons. Moving Defendants respond that
there arc several other non-bankruptcy related exclusions under which
they seek to withhold coverage. Although one aspect of HA-LO's claim
arises from the fact of its bankruptcy and at least one question under
the Bankruptcy Code may be at issue, this does not mean that "the Code
itself is the source of the claimant's right or remedy." Brass, 110 F.3d
at 1268. Therefore, the Court finds that IIA-LO's action seeking a
declaration of insurance coverage is non-core.
B. The Additional Factors Do Not Support Permissive Withdrawal.
The other factors that a district court may consider in determining
whether to the withdraw the reference, however, do not support withdrawal
in this case. Other factors that may be considered include: judicial
economy, promotion of uniformity and efficiency in bankruptcy
administration, reduction of forum shopping, delay and costs to the
parties, and the particular court's
familiarity with the case. Coe-Truman, 214 B.R. at 187. Moving Defendants
argue that judicial efficiency will be promoted by withdrawing the
reference because the Bankruptcy Court does not have authority to enter a
final judgment resolving the insurance dispute, and this Court would have
to review de nova any proposed findings of fact and conclusions of law to
which a party objects, See 28 U.S.C. § 157 (c)(1). Under this reasoning,
however, "the exception [would] swallow the rule" because judicial
economy and efficiency would then never be promoted when a bankruptcy
court hears a non-core issue. O'Brien Leasing, 1997 WL 414099, at *2.
In this case, judicial economy and efficiency would be hindered by
withdrawing the reference to the Bankruptcy Court. First, the Bankruptcy
Court already is familiar with the parties, the factual core of this
case, and many of the coverage issues involved here. Second, the
post-petition compensation plan, which the Bankruptcy Court approved for
Kelley, was raised by the insurer defendants in their defense of this
coverage dispute. And, third, the Bankruptcy Court is already overseeing
discovery in this and related adversaries.
Moreover, the efficiency and uniformity in the administration of
Bankruptcy Court proceedings would be harmed by withdrawing the
reference. Although not core, HA-LO's insurance coverage claims do raise
important issues of Bankruptcy Code interpretation: whether HA-LO is a
person authorized under the Bankruptcy Code to act on behalf of the debtor
and its creditors in pursuing claims against insured persons and whether
this provides an exception to the Insured versus Insured exclusion, as
well as other potential bankruptcy issues. Although other non-bankruptcy
related policy exclusions may also apply as Moving Defendants contend,
splitting up the case will not serve the purposes of efficiency and
uniformity. Furthermore, this Court is not uniquely qualified to resolve
issues of state insurance contract law, In Brass, the case primarily
relied upon by Moving Defendants, the stale law issues were remanded to
state court, not to the federal district court. Brass, 110 F.3d 1261.
This Court docs not have any special expertise with regard to state law
claims. Therefore, the Court agrees with HA-LO that the case will be most
promptly and efficiently resolved by the Bankruptcy Court, which is
overseeing the administration of the bankruptcy proceeding and is
familiar with the facts and players and adversary actions.
For the foregoing reasons, Moving Defendants' motion to withdraw the
reference is DENIED.
IT IS SO ORDERED.