AMERICAN INTERN. SPECIALTY LINES INS. v. Towers, 94 Civ. 2727 (WK) (AJP).

• Decision Date: 31 May 1996
• Docket Number: 94 Civ. 2727 (WK) (AJP).
• Parties: AMERICAN INTERNATIONAL SPECIALTY LINES INS. CO., et al., Plaintiffs, v. TOWERS FINANCIAL CORPORATION et al., Defendants.
• Court: U.S. District Court — Southern District of New York

198 B.R. 55 (1996)

AMERICAN INTERNATIONAL SPECIALTY LINES INS. CO., et al., Plaintiffs, v. TOWERS FINANCIAL CORPORATION et al., Defendants.

94 Civ. 2727 (WK) (AJP).

United States District Court, S.D. New York.

May 31, 1996.

John J. Patterson, D'Amato & Lynch, New York City, for plaintiffs.

Bill Boyd, Boyd Veigel, McKinney, TX, for defendants.

MEMORANDUM AND ORDER

WHITMAN KNAPP, Senior District Judge.

Before us is Magistrate Judge Peck's Report and Recommendation recommending that we deny the motion of Ben Barnes ("defendant"), a Towers' director, to dismiss the Amended Complaint of American International Specialty Lines Insurance Company and National Union Fire Insurance Company ("plaintiffs" or "the insurers") against the Towers Financial Corporation and individual directors thereof. For the reasons that follow, we adopt the Report and Recommendation in its entirety.

BACKGROUND

The Magistrate Judge describes the facts underlying this action. See Report and Recommendation at pp. 2-6. For our purposes, then, the facts briefly are as follows:

The insurers brought the complaint as a "non-core" action, related to the Towers bankruptcy proceeding. They seek a declaratory judgment that the "Directors and Officers Insurance and Company Reimbursement Policies" ("the policies") issued by plaintiffs to Towers¹ were cancelled for non-payment of premium before notice of claim such that there is no coverage for the underlying lawsuits;² or alternatively, that the policies are null and void from inception or that the underlying lawsuits are excluded from coverage by virtue of policy exclusions. In other words, plaintiffs are seeking a declaratory judgment that they are not going to have to indemnify the individual directors and officers of Towers for whatever damages result from the underlying lawsuits.

Ben Barnes is one of the Towers directors named individually in the instant action. He has moved to dismiss the complaint for lack of subject matter jurisdiction, pursuant to Rule 7012(b) of the Federal Rules of Bankruptcy and Rule 12(b)(1) of the Federal Rules of Civil Procedure.

The Magistrate Judge, in a characteristically careful and thorough Report and Recommendation, finds that the plaintiffs' action is "related to" the Towers bankruptcy proceeding and therefore recommends that we deny defendant's motion to dismiss.

Defendant has filed objections to the Magistrate Judge's Report and Recommendation, which, after consideration, we reject.

DISCUSSION

The Magistrate Judge found that plaintiffs' action is "related to" the Towers bankruptcy proceeding because the outcome of this action — ie the declaratory judgment that the insurance policies either cover the underlying lawsuits, or do not cover the underlying lawsuits — could conceivably have an effect on the Towers estate being administered in bankruptcy, which is how New York law defines "relate to." See Report and Recommendation at pp. 6-7.

It could have such an effect for two reasons. First, if the court were to determine that the policies cover any indemnity claims by Towers officers and directors, that holding would reduce the total amount of damage claims that could be lodged against the estate. If, on the other hand, the court were to find coverage lacking, the directors and officers seeking indemnity would join the other general creditors seeking to be paid, and each creditor would receive a "smaller share of the Towers' pie." Report and Recommendation at p. 11. Second, the plaintiff insurers seek — as an alternative to a declaratory judgment that their policies don't cover the claims in the underlying lawsuits — rescission of those policies. If plaintiffs prevail, Towers would receive refunds of its insurance premiums for four years. Thus, rescission could provide over $1 million to the Towers bankruptcy estate.

It is difficult to imagine how a case could be more "related to" the Towers bankruptcy than this one.

The defendant doesn't agree. He appears to argue two things in opposition to the Magistrate Judge's finding. He argues first that the insurers have failed to allege that a "loss" has occurred as defined in the policies, and thus the action cannot have an effect on the Towers estate. By this, we understand him to mean that without an allegation that a "loss" has actually occurred, there is no "case or controversy." Second, defendant challenges the Magistrate Judge's finding that this action, if successful, could provide substantial sums of money to the Towers bankruptcy estate. For these reasons, he urges us to reject the Magistrate Judge's recommendation and grant his motion to dismiss for lack of subject matter jurisdiction.

As to the first argument, the underlying lawsuits were brought against individual defendants, and certain of them purported to give notice thereof under the relevant insurance policy, thus potentially triggering coverage obligations. The insurers did not agree that coverage existed and believed the policies to be null and void, so they brought the instant action seeking a clarification of their rights and obligations. As the Magistrate Judge notes, at p. 12 of the Report and Recommendation, "there clearly is a live controversy as between the plaintiffs and those defendants seeking indemnity under the policies."

Nor can it be said that the dispute with the individuals concerning the validity of the policies cannot have an effect on the Towers estate. There is indeed an effect: if the policies are upheld, it might relieve the Towers estate of claims which might otherwise burden it and thus affect the distribution to other creditors. In addition, the policies might also insure Towers itself to the extent Towers might be required to indemnify its officers and directors. Defendant argues that the insurers have not alleged that any such claims have been made against the estate. But as the Magistrate Judge observed, there can be no assurance that such claims will not be made. See Report and Recommendation at p. 10, n. 3. As such, there can really be no argument at this point that the outcome of the instant action will not have a "conceivable effect" on the Towers bankruptcy estate.

Defendant's argument that the rescission of the policies would not have a "conceivable effect" on the Towers estate is equally unpersuasive. If rescission is decreed, there is no doubt that substantial sums are involved. Plaintiffs estimate, in fact, that reimbursement for premiums paid since 1989 may result in the Towers estate receiving over $500,000 for potential distribution to creditors. Again, it is hard to imagine a more "conceivable effect" on the estate.

For these reasons, we adopt the Magistrate Judge's Report and Recommendation in its entirety.

SO ORDERED.

REPORT AND RECOMMENDATION

ANDREW J. PECK, United States Magistrate Judge.

Plaintiffs American International Specialty Lines Insurance Company ("American International" or "AISLIC") and National Union Fire Insurance Company of Pittsburgh, Pa. ("National Union"), brought this adversary proceeding as a non-core action, related to Towers Financial Corporation's bankruptcy proceeding. Plaintiffs seek a declaratory judgment that the "Directors and Officers Insurance and Company Reimbursement "D & O" Policies" issued by plaintiffs to Towers was cancelled for nonpayment of premium before notice of claim such that there is no coverage for the "Underlying Lawsuits," or alternatively that the policies are null and void from inception or that the Underlying Lawsuits are excluded from coverage by virtue of policy exclusions. Plaintiff National Union also seeks a declaratory judgment that the "Employed Lawyers Professional Liability "EPL" Policies" issued by plaintiff to Towers covering "in-house lawyers" are null and void from inception. (The D & O and EPL Policies are collectively referred to as the "Policies.")

Presently before the Court is the motion of defendant Ben Barnes, a Towers' director (Amended Complaint hereafter, "Cplt." or "complaint" ¶ 19), to dismiss the complaint for lack of subject matter jurisdiction, pursuant to Rule 7012(b) of the Federal Rules of Bankruptcy Procedure and Rule 12(b)(1) of the Federal Rules of Civil Procedure. None of the other defendants have joined Barnes' motion. For the reasons set forth below, I find that this action is "related to" the Towers' bankruptcy proceeding and therefore recommend that the Court deny defendant Barnes' motion to dismiss.

FACTS

Plaintiffs brought this "action for a declaration of rights and related relief pursuant to 28 U.S.C. § 2201, et seq. and Fed.R.Civ.P. 57." (Cplt ¶ 1.) The complaint asserts that the "Court has jurisdiction pursuant to 28 U.S.C. Sections 157 and 1334 . . ." and that this case "is a non-core adversary proceeding pursuant to 28 U.S.C. § 157." (Cplt. ¶¶ 2-3.) Thereafter, by consent order, the reference to the Bankruptcy Court was withdrawn under 28 U.S.C. § 157(d). (See Plfs' Brief at 2.)

Plaintiffs' action is brought against Towers and the following Towers officers and directors: Steven Hoffenberg, Mitchell Brater, Charles Chugerman, Michael Rosoff, Thomas B. Evans, Jr. and Ben Barnes. (Cplt. ¶¶ 13-20, 22.) The complaint alleges that "certain of the Individual Defendants have purported to give notice of the Underlying Litigations" (Cplt. ¶ 21) — that is, SEC v. Towers, 93 Civ. 0744; the Noteholder class action of In re Towers, 93 Civ. 0810; Shawmut Bank v. Towers, 93 Civ. 1080; and Bank of Cape Verde v. Towers, 93 Civ. 1686, all pending in the Southern District of New York. (Cplt. ¶ 35.)

The complaint alleges that a "dispute exists as to whether the cancellation of the AISLIC D & O Policy was effective, as to whether National Union and AISLIC are entitled to rescission of the Policies, and as to whether coverage exists under the Policies for the Underlying Lawsuits. All of the directors and/or officers of Towers and Persons Insured under the EPL Policies named in the Underlying Lawsuits are...