Ames Dep't Stores, Inc. v. Lumbermens Mut. Cas. Co. (In re Ames Dep't Stores, Inc.), Case No. 01–42217 (REG) Jointly Administered

CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York
Citation542 B.R. 121
Parties In re: Ames Department Stores, Inc., et al., Debtors. Ames Department Stores, Inc., Plaintiff, v. Lumbermens Mutual Casualty Co., Defendant.
Decision Date07 December 2015
Docket NumberCase No. 01–42217 (REG) Jointly Administered,Adversary No. 06–01890 (REG)

542 B.R. 121

In re: Ames Department Stores, Inc., et al., Debtors.

Ames Department Stores, Inc., Plaintiff,
Lumbermens Mutual Casualty Co., Defendant.

Case No. 01–42217 (REG) Jointly Administered
Adversary No. 06–01890 (REG)

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

Signed December 7, 2015

STORCH AMINI & MUNVES PC, Counsel for Plaintiffs Debtors and Debtors in Possession, 2 Grand Central Tower, 140 East 45th Street, 25th Floor, New York,

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New York 10017, By: Bijan Amini, Esq. (argued), Avery Samet, Esq., John W. Brewer, Esq.

TORRE, LENTZ, GAMELL, GARY & RITTMASTER, LLP, Counsel for Defendant, 100 Jericho Quadrangle, Suite 309, Jericho, New York 11753, By: Mark S. Gamell, Esq. (argued), Robert Beau Leonard, Esq.



In this adversary proceeding under the umbrella of the chapter 11 cases of Ames Department Stores, Inc. ("Ames ") and its affiliates, the district court has directed me1 to provide a report and recommendation on the resolution of Ames' motion for an order confirming that the bankruptcy court (and hence the district court) has exclusive jurisdiction to hear this adversary proceeding against Defendant Lumbermens Mutual Casualty Company ("Lumbermens ").2 Lumbermens opposes the Jurisdictional Motion, contending that all of the issues in this dispute should instead be heard by an Illinois state court as part of Lumbermens' ongoing insolvency proceeding.3

This adversary proceeding, commenced in 2006—long before the commencement of Lumbermens' Illinois insolvency proceeding—centers on the question of ownership of approximately $8 million currently held in a trust account. But it involves considerably more than that, including issues of particular importance to the bankruptcy system—most significantly, serious allegations of interference with the Debtors' property, of two separate types, each of which is subject to the Court's in rem jurisdiction and the protection of the Bankruptcy Code's automatic stay.4 While the parties have addressed the merits of the substantive issues in their briefs and oral arguments (including the assertions and denials of interference with estate property), currently at issue is solely the extent to which this Court5 has jurisdiction

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over the issues Ames raised and whether that jurisdiction is exclusive—and, to the extent federal and state courts might have concurrent jurisdiction over the issues Ames raised, whether this Court must nevertheless channel issues pending here to an Illinois rehabilitation court, under the McCarran–Ferguson Act.6

For the reasons explained below, I determine, and recommend that the district court determine, that:

(1) this Court has jurisdiction over all of the remaining issues in the adversary proceeding,7 and has exclusive jurisdiction over three of them—Claims # 4 (for violation of the automatic stay and contempt); # 6 (marshaling); and # 10 (equitable subordination);

(2) the McCarran–Ferguson Act does not dictate that an Illinois state court resolve the Ames–Lumbermens dispute instead of this Court (but would bar this Court from ruling on the allowance and priority of Ames' claims, if any, against Lumbermens' insolvent estate); and

(3) the "First Assuming Jurisdiction Doctrine", which, if applicable, would bolster Ames' arguments in favor of determining all of the issues here, does not apply to claims over which this Court has only in personam jurisdiction (Claims ## 1, 2, 3, and 5), and need not be applied to claims over which this Court has in rem jurisdiction (Claims ## 4, 6, and 10, and Lumbermens' claims against the Ames estate) because, as to the latter set of claims, this Court has exclusive jurisdiction in any event. But to the extent it matters, this Court's in rem jurisdiction over the latter claims causes application of the First Assuming Jurisdiction Doctrine to such claims to be proper.

My recommended Findings of Fact and Conclusions of Law in connection with this determination follow.


1. The Bond

In November 2000 (before the filing of Ames' chapter 11 case), Lumbermens and Ames entered into a contract (the "Bond Agreement ")9 under which Lumbermens provided a surety bond for payment of up to $14.35 million (the "Bond ") to backstop Ames' obligations to Travelers Indemnity Company ("Travelers "), Ames' workers' compensation insurer, under a number of insurance policies and related agreements. Among other things, the Bond Agreement required Lumbermens to pay Travelers within seven business days of a demand by Travelers for payment, unconditionally and irrespective of the merits of Travelers' demand.10

Lumbermens had the right to be reimbursed by Ames for any amounts Lumbermens expended under the Bond. But importantly, none of Ames' obligations to reimburse Lumbermens for amounts Lumbermens might have to pay under the Bond Agreement was secured. Thus,

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while Lumbermens would have the right to reimbursement from Ames for any sums Lumbermens might have to lay out incident to its unconditional duty to pay Travelers under the Bond, Lumbermens' right to reimbursement from Ames for such sums was unsecured, and in the event of a future Ames bankruptcy, would be an unsecured claim.

2. Events During the Ames Bankruptcy

Ames filed a chapter 11 bankruptcy petition in this Court in August 2001.11 In the early stages of its chapter 11 case, Ames attempted to continue in business, and incident to that, needed to continue to provide workers compensation coverage for its workers. Travelers continued to administer the workers compensation program. Later that year, for that reason, Ames obtained two letters of credit (the "Letters of Credit ") for the benefit of Travelers in the aggregate amount of $26.85 million. The Letters of Credit, originally issued by First Union National Bank and subsequently transferred to Wachovia Corporation ("Wachovia "), provided additional security for Ames' obligations to Travelers. Pursuant to Ames' secured DIP financing agreement with General Electric Capital Corporation ("GECC "), GECC required Ames to fully collateralize—and indeed cash collateralize—the Letters of Credit to secure Ames' reimbursement obligations to Wachovia (the "LC Collateral "). As a result, like Lumbermens with respect to Lumbermens' Bond, Wachovia, as beneficiary of the Letters of Credit, had the right to repayment if its Letters of Credit were drawn upon. But unlike Lumbermens, Wachovia's reimbursement rights were secured. A draw by Travelers on the Letters of Credit would result in a corresponding impact on Ames' property—its cash—the collateral Ames had posted to secure the Letters of Credit.

In March 2002, Lumbermens filed a proof of claim (the "Proof of Claim ") in Ames' bankruptcy case. That Proof of Claim asserted, in relevant part, an unsecured contingent claim for $14.35 million based on Lumbermens' reimbursement right consistent with a separate indemnity agreement between Lumbermens and Ames if Lumbermen's Bond were called by Travelers.12 The Proof of Claim was for an unsecured claim, since Lumbermens' reimbursement right was unsecured.

In May 2003, Travelers made a demand on Lumbermens for payment of $14.35 million under the Bond Agreement. But Lumbermens did not make the payment to Travelers within the contractual seven business days. Travelers sued Lumbermens in a lawsuit in Connecticut state court (the "Connecticut Action ") to compel payment under the Bond Agreement.

3. The Letter Agreement

In November 2003, Lumbermens, Travelers and The Bank of New York, as Trustee, entered into a letter agreement to settle the Connecticut Action (the "Letter Agreement ").13 The essential and relevant terms of the Letter Agreement were as follows:

(i) Lumbermens would deposit $8 million into a trust account, established
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at The Bank of New York,14 for the sole benefit of Travelers (the "Trust Monies ");

(ii) Travelers would be required to draw on the Letters of Credit before looking to satisfy Ames' obligations from the Trust Monies;

(iii) After both the cash collateralizing the Letters of Credit and the Trust Monies were exhausted, Travelers could then make a demand on Lumbermens for any remaining amounts owed under the Bond; and

(iv) Travelers agreed to return to Lumbermens any unused or surplus portion of the Trust Monies, with two exceptions.15

In essence, then, the Letter Agreement at least temporarily absolved Lumbermens for its failure to honor $6.35 million of its obligations to Travelers; reduced the potential amount that Lumbermens would have to pay Travelers under the Bond Agreement (and for which Lumbermens' reimbursement right would be only an unsecured claim); and substituted, with respect to the remaining $6.35 million Lumbermens owed Travelers under the Bond, a likely or certain draw upon Ames' cash collateral. And thereafter, Ames' cash collateral was indeed drawn upon when the Letters of Credit were tapped.

Neither Lumbermens nor Travelers sought approval...

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