United States District Court, N.D. Illinois, Eastern Division
June 18, 2004.
IN RE: COMDISCO VENTURES, INC., et al., Debtors. COMDISCO VENTURES, INC. Plaintiff,
FEDERAL INSURANCE COMPANY, VIGILANT INSURANCE COMPANY, ABD INSURANCE AND FINANCIAL SERVICES, HAMPSON MOWRER KREITZ AGENCY, INC., SUMMIT PARTNERS OF TEXAS, INC., CRIST ELLIOT MACHETTE INSURANCE SERVICES, and ACCORDIA OF CALIFORNIA INSURANCE SERVICES, INC., Defendants.
The opinion of the court was delivered by: JOAN H. LEFKOW, District Judge
MEMORANDUM OPINION AND ORDER
Defendants Federal Insurance Company ("Federal") and Vigilant
Insurance Company ("Vigilant"), joined by defendant Summit Global
Partners of Texas, Inc. ("Summit") and ABD Insurance and
Financial Services ("ABD"), have filed a Motion to Withdraw the
Reference of this proceeding to the United States Bankruptcy
Court for the Northern District of Illinois. Defendant Accordia
of California Insurance Services, Inc. ("Accordia"), joined by
ABD, has filed a separate motion seeking withdrawal of the reference. The
debtor opposes the motion. For the reasons stated below, the
motions are granted.
On July 16, 2001, Comdisco, Inc. ("Comdisco") filed a Voluntary
Bankruptcy petition in the United States Bankruptcy Court of the
Northern District of Illinois (the "Bankruptcy Court") for
reorganization relief under Chapter 11 of the Bankruptcy Code,
11 U.S.C. § 101 et seq. On July 30, 2002, the Bankruptcy Court
entered an order confirming the First Amended and Joint Plan of
Reorganization of Comdisco, Inc. and its Affiliate Debtors in
Possession dated June 13, 2002. The Reorganization Plan became
effective on August 12, 2002. Comdisco continues to operate its
business and manage its properties as a reorganized debtor
pursuant to 11 U.S.C. § 1107(a) and 1108 of the Bankruptcy
Code. Plaintiff, Comdisco Ventures, Inc. ("CVI") is a wholly
owned subsidiary of Comdisco formed pursuant to the
Reorganization Plan. CVI holds all of the assets constituting the
former Venture Finance Division of Comdisco. For purposes of the
pending motion, the parties treat CVI as synonymous with the
debtor, Comdisco, and the court does as well.
At all relevant times, CVI was in the business of leasing
computer equipment, office furniture, and other office equipment
to various venture capital backed "dot.com" companies. According
to CVI, the dot.com companies were responsible for obtaining
insurance for such equipment and adding CVI as an additional
insured and loss payee under the policies. CVI claims that the
dot.com companies instructed and authorized their insurance
brokers, including but not limited to defendants Accordia, ABD,
Summit, Hampson Mowrer Kreitz Agency, Inc., and Crist Elliqt
Machette Insurance Services (collectively referred to as the
"Broker Defendants"), to procure the required insurance policies and to
have CVI named as an additional insured and loss payee under the
policies. CVI claims that the necessary policies were obtained
from Federal and Vigilant. Subsequently, the dot.com companies
went out of business and the leased equipment disappeared. CVI
alleges that it notified Federal and Vigilant of the losses and
that Federal and Vigilant have denied coverage on the grounds
that CVI is not named as an additional insured or loss payee
under the policies.
On or about February 18, 2004, CVI filed an Adversary
Proceeding against defendants in the Bankruptcy Court. In its
Complaint, CVI alleges that the Broker Defendants issued
Certificates of Insurance or Evidence of Insurance to CVI,
representing to CVI that it had been added as an additional
insured and/or loss payee under policies issued by Federal and
Vigilant. CVI alleges that it sustained $12,117,100.53 in
equipment-related losses during the effective dates of those
policies. CVI seeks recovery against the Broker Defendants for
professional negligence, negligent misrepresentation, and
intentional misrepresentation. In the alternative, CVI seeks
recovery against Federal and Vigilant for breach of contract and
breach of the covenant of good faith and fair dealing.
Accordia and ABD have demanded a jury trial and have refused to
consent to the Bankruptcy Court's hearing the case.
Federal district courts may and this court does, by Internal
Operating Procedure 15(a) refer cases and proceedings involving
or relating to bankruptcy matters to bankruptcy judges.
28 U.S.C. § 157(a). Nevertheless, the district court may withdraw any such
reference "for cause shown." Id.*fn1 Courts consider the following factors to
determine if cause exists: 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." Coe-Truman Technologies,
Inc. v. U.S. Government, 214 B.R. 183 (N.D. Ill. 1997).
Because the bankruptcy judges have specialized expertise in
bankruptcy law, references of core proceedings are seldom
withdrawn in this district. Indeed, the "most important" factor
is "whether the adversary proceeding sought to be withdrawn is
core or non-core." Id. at 187.
"[A] proceeding is core . . . if it invokes a substantive right
provided by title 11 or if it is a proceeding that, by its
nature, could arise only in the context of a bankruptcy case."
Id. (quoting Diamond Mortgage Corp. of Illinois v. Sugar,
913 F.2d 1233, 1239 (7th Cir. 1990), cert. denied,
498 U.S. 1089 (1991)); see also 28 U.S.C. § 157(b)(2) (listing matters
considered core). In slightly different terms, the Seventh
Circuit has stated,
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
In re U.S. Brass Corp., 110 F.3d 1261, 1268 (7th Cir.
1997). By contrast, a proceeding is non-core if it "does not
invoke a substantive right created by federal bankruptcy law and
is one that could exist outside of bankruptcy," Barnett v.
Stern, 909 F.2d 973
, 981 (7th Cir. 1990), such as where the
debtor has a cause of action against a third party that can be
determined without respect to bankruptcy law. Although such a proceeding "may be
related to bankruptcy because of its potential effect, . . . it
is [nonetheless] an `otherwise related' or non-core proceeding."
CVI argues that the court should not withdraw the reference
because "the present adversary proceeding is a core proceeding
. . . because it invokes substantive rights provided by title 11,
namely the right to collect upon an asset of the estate." (CVI's
Memo. in Resp., at 7.), citing U.S. Brass, 110 F.3d at 1268
(citing In re Shondel, 950 F.2d 1301, 1305 (7th Cir. 1991);
The Home Insurance Co. v. Cooper & Cooper, Ltd., 889 F.2d 746
(7th Cir. 1989); In re Vitek, Inc., 51 F.3d 530, 534
(5th Cir. 1995)). This reads "core proceeding" too broadly.
True, a bankruptcy judge may determine that an asset (such as an
insurance policy) is property of the estate as a necessary
threshold to an order to turn over property of the estate, a core
matter under § 157(b)(2)(E), or to an order requiring liquidation
of an asset of the estate, a core matter under § 157(b)(O). But a
claim against a party who is a stranger to the bankruptcy case
(e.g., has not filed a claim), alleging the fact or scope of
coverage that depends on interpretation of state law, is not a
core proceeding, because either the fact or scope of coverage
falls squarely within the definition of non-core proceeding: it
asserts a right that could exist outside of bankruptcy; it is a
cause of action against a third party that can be determined
without respect to bankruptcy law.
This is obvious with regard to CVI's claims against the Broker
Defendants for professional negligence, negligent
misrepresentation, and intentional misrepresentation. Even if we start with the premise that an insurance policy is an asset
(property) of the estate, CVI's claims against the Broker
Defendants are premised on the allegation that CVI was not an
additional insured and loss payee under the insurance policies at
issue. If CVI was not an additional insured or loss payee under
the policies, then those policies were not assets of the estate.
Thus, CVI's claims against the Broker Defendants are purely
creations of state tort law and could be pursued in an ordinary
tort suit. In other words, they are non-core.
CVI's claims against Federal and Vigilant are also non-core,
despite the dicta on which CVI relies. Asserting that the
ownership of the insurance policies, not their scope, is the
issue before the court, CVI relies on Home Insurance Co., 889
F.2d at 746, a case that involved a malpractice insurance policy
issued to a law firm on the basis of false statements made by a
lawyer in the firm. The insurer commenced an adversary proceeding
in the law firm's bankruptcy case, seeking a declaration that the
malpractice insurance policy was void because it was obtained by
fraud, naming as defendants the attorneys in the firm and other
non-debtors. Id. at 748. The Seventh Circuit stated, "A policy
of insurance is an asset of the estate, and a request to
determine its validity with respect to the debtor is a `core
proceeding' over which a bankruptcy judge has jurisdiction."
Id. at 748; see also 27 U.S.C. § 157(b)(2)(A) and (O)
(defining core proceedings to include "proceedings affecting the
liquidation of the assets of the estate"). In U.S. Brass, the
Seventh Circuit did not pause to examine Home Insurance and
seems to permit the inference that when the issue is the
ownership of an insurance policy, rather than its scope, the
proceeding is core. 110 F.3d at 1268. As defendants point out, however, the statement from Home
Insurance is dicta, as is the approving language in U.S.
Brass. The claims in Home Insurance were non-core,*fn3
and the issue on appeal was whether the adversary proceeding was
"related to" the bankruptcy case, making it proper for the
bankruptcy judge to hear the case, albeit he had authority only
to submit proposed findings of fact and conclusions of law to the
district court. 889 F.2d at 749. Had it been a core proceeding,
by definition, the bankruptcy judge could have entered a final
determination. See 28 U.S.C. § 157(b)(1) ("Bankruptcy judges
may hear and determine all . . . core proceedings arising under
title 11. . . ."). Had it been non-core but "unrelated," it would
not have stayed in either district or bankruptcy court because
the district court's original jurisdiction extends only to "civil
proceedings arising under title 11, or arising in or related to
cases under title 11." 28 U.S.C. § 1334(b). In other words, the
issue on appeal in Home Insurance involved not the borderline
between "core" and "non-core" proceedings but the borderline
between "related" and "unrelated proceedings." (Judge Barliant
discusses this point thoroughly in U.S. Brass Corp. v.
California Union Ins. Co. 198 B.R. 940, 946 (N.D.Ill. 1996),
stating, "Even if the statement in Home Insurance were a viable
rule, it would have to be limited to the specific facts of that
case in light of later cases.")
In the U.S. Brass appeal, the issue was whether the
bankruptcy court properly abstained from deciding two diversity
cases concerning the debtors' claim to insurance coverage. It was
undisputed that the cases were "related" to the bankruptcy. The
debtor apparently argued, based on Home Insurance, that the
policies were property of the estate and thus abstention should
not apply under § 1334(d).*fn4 This is the same as arguing that
determination of the debtor's rights under the policies was a
core matter. Conceding that the policies were the debtor's
property (which in a chapter 11 means they are property of the
estate), the Seventh Circuit pointed out that "no one is trying
to take away [the debtor's] property." 110 F.3d at 1268. It
soundly rejected the debtor's argument, ruling that § 1334(d)
"has no application to a dispute between the debtor and its
insurers over the scope of coverage." 110 F.3d at 1261. In other
words, the dispute did not present a core issue, the diversity
cases were non-core related proceedings; and, furthermore, the
bankruptcy judge did not abuse his discretion by abstaining.
Having said all this, the court agrees with defendants that
"the right to collect upon an asset of the estate" is not a
substantive right granted by Title 11. If it were, then any claim
a debtor pursues would properly be an asset of the estate because
pursuit of the claim, if successful, might benefit the estate.
See In re CIS Corp., 172 B.R. 748, 757 (S.D.N.Y. 1994), in
which the court held, "A debtor cannot reclassify what is
essentially a non-core state law cause of action by declaring
that it affects either `the liquidation of assets of the estate'
or `the administration of the estate.'"
Of course, even if this is a core proceeding, as stated above
the court has authority although it likely would not exercise
it to withdraw the reference under § 157(d) for cause shown.
Here, judicial economy provides sufficient cause to withdraw the
reference. As explained above, CVI's claims against the Broker
Defendants are certainly non-core. Two of the broker defendants,
Accordia and ABD, have demanded a jury trial and do not consent
to proceeding before the bankruptcy court. Thus, cause to withdraw
the reference as to these defendants "automatically exists."
See § 157(e) (jury trials in the bankruptcy court must be by
consent of all the parties."). Because the claims and defenses of
CVI with respect to Accordia and ABD are closely intertwined with
its claims and defenses as to the other parties to the
proceeding, it makes little sense to separate the proceedings.
Furthermore, it is likely that it will cost all the parties less
to litigate the claims in one forum rather than two.
For the reasons stated above, the motions to withdraw the
reference to the bankruptcy court are granted [Case No. 04 C
2007, #1; Case No. 04 C 2393, #1].