Titan Energy, Inc., In re

• Decision Date: 19 January 1988
• Docket Number: No. 86-2426,86-2426
• Citation: 837 F.2d 325
• Parties: 18 Collier Bankr.Cas.2d 717, Bankr. L. Rep. P 72,183 In re TITAN ENERGY, INC. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Appellant, v. TITAN ENERGY, INC., et al., Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 325

837 F.2d 325

18 Collier Bankr.Cas.2d 717, Bankr. L. Rep. P 72,183

In re TITAN ENERGY, INC.

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Appellant, v. TITAN ENERGY, INC., et al., Appellees.

No. 86-2426.

United States Court of Appeals,

Eighth Circuit.

Submitted Oct. 13, 1987.

Decided Jan. 19, 1988.

Benjamin F. Mann, Kansas City, Mo., for appellant.

James O. Castagnera, W. Jeffrey Garson, Philadelphia, Pa., for appellees.

Before FAGG, Circuit Judge, BRIGHT, Senior Circuit Judge, and MAGILL, Circuit Judge.

BRIGHT, Senior Circuit Judge.

This case has its genesis in a suit by insurer National Union to absolve itself of its responsibilities under certain insurance policies issued to Titan Energy, Inc. (Titan), the debtor now under Chapter 7. The policies indemnify Titan against all losses Titan might suffer as a result of claims arising from the performance of seven ethanol plants. One plant purchaser, Butcher Capital Market, Inc. (Butcher), has sought collection of the policy proceeds in Louisiana state court, and its suit is currently pending. Subsequent to Butcher's filing, National Union brought an action in bankruptcy court for declaratory and injunctive relief, alleging that the policies are void due to misrepresentation, and requesting that Butcher's state court action be stayed pursuant to the Bankruptcy Code's automatic stay provision. The bankruptcy court dismissed National Union's action for lack of jurisdiction and the district court affirmed on the same ground. National Union appeals the bankruptcy and district courts' jurisdictional rulings, arguing that its action both arises under, and is related to, Titan's bankruptcy proceeding, and thus falls within the ambit of the bankruptcy court's jurisdiction pursuant to 28 U.S.C. Sec. 1334 (Supp. II 1984).

Butcher, the party filing the opposing brief, claims no jurisdiction exists in the bankruptcy court to adjudicate the insurer's contentions. We hold that the bankruptcy court does possess jurisdiction over National Union's action, but that abstention principles validate that court's refusal to hear the case. Thus, we reverse the district and bankruptcy courts' jurisdictional ruling and remand with instructions that the bankruptcy court abstain pending disposition of these issues in Butcher's state court action.

I. BACKGROUND

On December 30, 1983, Titan sold seven ethanol alcohol plants located in Iberia Parish, Louisiana (Iberia Plants), to three limited partnerships formed by and managed by Park Ryan Development Company, Inc. (Park Ryan) and Butcher Capital Markets, Inc. (Butcher). Hereinafter we refer to the partnerships as Butcher because the record indicates that, as managing partner, Butcher is the real party in interest in this lawsuit. ¹

Prior to the sale, appellee National Union issued third-party liability policies termed "product guarantee legal liability policies" (policies) indemnifying Titan for all losses it may incur as a result of claims arising from the performance of the Iberia Plants. The policies insured against claims made during the policy period for damages due to defects in the Iberia Plants. Under the terms of the policies, a plant defect includes "the failure of the plants to perform the function for which they were maintained, sold or distributed."

Butcher and Park Ryan purchased the Iberia Plants on December 30, 1983. In June 1985, Butcher filed an action in Louisiana state court alleging that the plants were defective in that they "failed to perform the functions for which they were manufactured, sold, or distributed." Butcher predicated Titan's liability on several theories: negligence, misrepresentation, the sale of goods containing redhibitory defects, and breach of contract. Butcher argued that Titan's misfeasance in selling the uncompleted Iberia Plants came within the coverage of the policies and that National Union breached its obligation under the policies in failing to respond to Butcher's damage claims. Butcher thus sought to collect $6,000,000, ² plus interest, directly from National Union pursuant to the Louisiana Direct Action Statute. See La.Rev.Stat.Ann. Sec. 22:655 (West 1978).

II. PROCEEDINGS BELOW

In July 1985, National Union filed a five-count complaint in bankruptcy court seeking various forms of relief regarding the liability policies issued to debtor Titan. In its complaint, Union sought (1) rescission of the policies; (2) a declaratory judgment regarding the scope of coverage; and (3) a declaration that any proceeds under the policies constitute property of Titan's estate. Additionally, Counts IV and V requested the court stay Butcher's Louisiana state court action.

In November 1985, the bankruptcy court sua sponte issued an order to show cause why the action should not be dismissed. Following briefing by the parties, the bankruptcy court dismissed the action, finding that bankruptcy court jurisdiction did not exist over claims brought between strangers to the bankruptcy estate, which relate to matters outside bankruptcy court jurisdiction. The bankruptcy court also discussed abstention and concluded that even if that court did enjoy jurisdiction, it "can and should await the resolution of the state court action." ³

On appeal, the supervising district court affirmed the bankruptcy court's order of dismissal, finding (1) the insurance policies were not part of the debtor's estate, and therefore National Union's action did not come within the jurisdiction of the bankruptcy court; and (2) the bankruptcy court properly refused to stay the Louisiana state court action because the dispute arises out of state law, and its resolution would have no detrimental effect on the debtor's estate. This appeal followed.

III. DISCUSSION

A. Bankruptcy Court Jurisdiction

Section 157(b)(1) of the Bankruptcy Amendments and Federal Judgeship Act of 1984 (B.A.F.J.A.) authorizes bankruptcy judges to hear "all core proceedings arising under title 11," while section 157(c)(1) confers jurisdiction on a bankruptcy judge to hear "a proceeding that is not a core proceeding but that is otherwise related to a case under title 11," subject to de novo review by the district court. ⁴ National Union contends that its request for injunctive relief "arises under title 11" for the purposes of section 157(b)(1), and that its requests for declaratory relief are "related to" debtor Titan's bankruptcy case for the purposes of section 157(c)(1). We discuss these contentions below.

B. Core Jurisdiction--Injunctive and Declaratory Relief

National Union's complaint seeks a declaration that the policies constitute property of debtor Titan's estate; and seeks an injunction, staying Butcher's Louisiana state court action pursuant to section 362 and section 105 of the Bankruptcy Code. ⁵

In support of jurisdiction, National Union argues first that the policies constitute property of Titan's estate as defined by section 541 of the Bankruptcy Code, and, second, that if the policies are property, then Counts III, IV and V are core proceedings "arising under" sections 157(b)(2)(A) and (G). ⁶

Though Titan's interest in the policies is somewhat attenuated, they are the named insured and we hold that the policies are property of Titan's estate under the expansive definition set forth in section 541 of the Bankruptcy Code. That section includes within a debtor's estate "all legal or equitable interest of the debtor in property as of the commencement of the case." 11 U.S.C. Sec. 541(a)(1) (1982).

The Supreme Court recognized the broad scope of section 541(a)(1) in holding that a debtor's estate encompasses property in which a creditor has a secured interest. United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). The Ninth Circuit, in In re Bialac, 712 F.2d 426 (9th Cir.1983), stated that section 541(a)'s definition of property "was intended to be broad and all-inclusive." Id. at 430. More recently, that circuit defined a debtor company's directors and officers liability policy as property of that debtor's estate because the estate "is worth more with them than without them." In re Minoco Group of Companies, Inc., 799 F.2d 517, 519 (9th Cir.1986). The First, Fourth and Fifth Circuits have characterized a debtor's insurance policy as property of a debtor's estate as well. See Tringali v. Hathaway Mach. Co., 796 F.2d 553 (1st Cir.1986) (holding that the language of section 541(a)(1) is broad enough to cover an interest in liability insurance); A.H. Robins Co. v. Piccinin, 788 F.2d 994 (4th Cir.1986); In re Davis, 730 F.2d 176 (5th Cir.1984); see also In re Johns-Manville Corp., 40 B.R. 219 (S.D.N.Y.1984). But see In re Louisiana World Exposition, Inc., 832 F.2d 1391 (5th Cir.1987) (holding that policies covering only the liability exposure of the directors and officers of a debtor company and payable only to the directors and officers themselves and not the corporation are not property of the debtor's estate.)

The cases cited by Butcher in arguing that the policies should not be considered property of Titan's estate are inapposite. In re North American Marketing Corp., 24 B.R. 16 (Bankr.S.D.Fla.1982), concerns a supersedeas bond posted by the debtor to stay execution of a state judgment levied against debtor in favor of a bank. Unlike the policies at issue, which may benefit Titan's general creditors, the bond in North American Marketing required either that the debtor pay over a money market certificate to the bank, or comply with the state judgment. Id. at 18. No possibility existed that the bond would be a factor in the reorganization of debtor's estate. The same can be said for the loan proceeds excluded from debtor's property in In re Castillo, 39 B.R. 45 (Bankr.D.Colo.1984). The loan proceeds, at issue in Castillo, paid to debtor's creditor by the bank as guarantor and co-signer of debtor's note, were "never available to satisfy the claims of general creditors" and thus the...