Drexel Burnham Lambert Group, Inc. v. Vigilant Ins. Co.

• Decision Date: 05 August 1991
• Docket Number: No. 90 Civ. 6565 (DNE).,90 Civ. 6565 (DNE).
• Citation: 130 BR 405
• Parties: The DREXEL BURNHAM LAMBERT GROUP, INC. and Drexel Burnham Lambert Incorporated, as debtors-in-possession, Plaintiffs, v. VIGILANT INSURANCE COMPANY, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

130 B.R. 405 (1991)

The DREXEL BURNHAM LAMBERT GROUP, INC. and Drexel Burnham Lambert Incorporated, as debtors-in-possession, Plaintiffs, v. VIGILANT INSURANCE COMPANY, et al., Defendants.

No. 90 Civ. 6565 (DNE).

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

August 5, 1991.

Rosenman & Colin, New York City, Peter F. Nadel, Alan I. Raylesberg, Barry Michael Okun, for plaintiff.

D'Amato & Lynch, New York City, Alfred A. D'Agostino, Jr., Jerome Murray, Gregory Bitterman, of counsel, for defendants Nat. Fire Ins. Co. of Pittsburgh, Pa., Reliance Ins. Co. and Reliance Ins. Co. of New York.

Bingham, Englar, Jones & Houston, New York City, Alfred J. Morgan, Jr., Jeffrey M. Winn, of counsel for the Burnhope defendants.

Sedgwick, Detert, Moran & Arnold, New York City, Robert B. Budelman, Jr., Kevin M. Mattessich, of counsel for defendants Vigilant Ins. Co., Federal Ins. Co., Chubb and Son, Inc., and McAteer & Fitzgerald, Inc.

Gottesman, Wolgel, Smith & Secunda, New York City, Harold H. Wolgel, for defendant The Home Ins. Co.

MEMORANDUM & ORDER

EDELSTEIN, District Judge:

Plaintiffs The Drexel Burnham Lambert Group Inc. ("DBL Group") and Drexel Burnham Lambert Incorporated ("DBL Inc.") (collectively "Drexel") have moved to remand this action to the New York State Supreme Court for New York County. For the reasons stated below, plaintiffs' motion is granted.

I. BACKGROUND

Drexel has pleaded guilty to criminal charges, entered into a consent decree with the Securities and Exchange Commission, and has had numerous claims and lawsuits filed against it based on charges of employee misconduct. DBL Group, DBL Inc., and seventeen of their affiliates have cases pursuant to Chapter 11 of the Bankruptcy Code pending in the Bankruptcy Court for the Southern District of New York. These Chapter 11 cases have been consolidated for procedural purposes under case number 90 B 10421 before Bankruptcy Judge Conrad. In In re The Drexel Burnham Lambert Group., et al., No. 90 Civ. 6954 (MP), Chapter 11 Case No. 90 B 10421 (FGC), Judge Milton Pollack entered an order on February 19, 1991, which withdraws the reference of the Drexel Bankruptcy case to the Bankruptcy Court, "re-refers" the core portions of the Drexel Bankruptcy case to Bankruptcy Judge Conrad, and orders that the non-referred portions of the Drexel Bankruptcy case now be administered jointly by Judge Pollack and Bankruptcy Judge Conrad.

This action is a state-law declaratory judgment action and breach of contract suit commenced by Drexel in the New York State Supreme Court against forty defendant insurance companies who provided Drexel with insurance coverage under various "fidelity bond" insurance policies during the years 1986 to the present. Plaintiffs seek a declaration of its rights under those policies, together with not less than $140,000,000 in damages based on defendants' refusal to pay certain claims under those bonds. This action was removed by three of the forty defendants, National Union Fire Insurance Company of Pittsburgh, Pa., Reliance Insurance Company, and Reliance Insurance Company of New York (collectively the "removing defendants").

II. DISCUSSION

The removing defendant's argue that this action "arises in or is related to" Drexel's Chapter 11 cases now pending in the Bankruptcy Court, and therefore that the instant action is within the Federal Court's original jurisdiction pursuant to 28 U.S.C. § 1452(a). Drexel has moved to remand this action on "equitable grounds" pursuant to § 1452(b). The removing defendants and an additional defendant, Home Insurance Company, oppose Drexel's motion to remand this action to State Court. Defendant James Burnhope and others (the "Burnhope defendants")¹ support Drexel's motion to remand. Defendants Vigilant Insurance Company, Federal Insurance Company, Chubb & Son, Inc., Pacific Indemnity Company, and McAteer & Fitzgerald, Inc. (collectively, the "Vigilant defendants"), expressly do not oppose remand. Other defendants have not taken a position on the instant motion.

A. Removal

Defendants base their removal of this action on 28 U.S.C. § 1452(a), the "bankruptcy removal" provision. Section 1452(a) provides:

A party may remove any claim or cause of action in a civil action . . . to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under section 1334 of this title.

28 U.S.C. § 1452(a). The jurisdictional basis for bankruptcy removal pursuant to § 1452(a) is provided in 28 U.S.C. § 1334(b). Section 1334(b) provides for federal jurisdiction over proceedings "arising under title 11 or arising in or related to a case under title 11."

Section 1334(b) therefore provides for federal jurisdiction of three different types of proceedings: those that "arise under" title 11, those "arising in" a case under title 11, and those "related to" a case under title 11. Actions that "arise under" title 11 involve claims "predicated on a right created by a provision of title 11." World Travel Vacation Brokers, Inc. v. The Bowery Savings Bank (In re Chargit Inc.), 81 B.R. 243, 247 (Bankr.S.D.N.Y.1987). "`Arising in' proceedings are those that are not based on any right expressly created by title 11, but nevertheless, would have no existence outside of the bankruptcy." Id. (citation omitted). An action is "related to" a case under title 11 if "`the outcome of the action could conceivably have any effect on the estate being administered in bankruptcy.'" Id. (citation omitted) (emphasis in original).

This action does not "arise under" title 11. This action also does not "arise in" a case under title 11. This action consists of Drexel's insurance coverage claims against the defendants and is not dependent for its existence on Drexel's Chapter 11 cases, and can exist outside of those cases. This action is, however, "related to" a case under title 11 for purposes of § 1334(b). The outcome of this action could conceivably have an effect on the Drexel's bankruptcy estate because the claims in this action constitute potential assets of the estate.

B. Remand

While § 1452(a) provides the grounds for the removal of claims or causes of action arising under, arising in, or related to bankruptcy cases, § 1452(b) provides: "The court to which such a claim or cause of action is removed may remand such claim or cause of action on any equitable ground." 28 U.S.C. § 1452(b). Courts consider a number of factors in deciding whether to remand under this section. These factors include: (1) the effect on the efficient administration of the bankruptcy estate; (2) the extent to which issues of state law predominate; (3) the difficulty or unsettled nature of the applicable state law; (4) comity; (5) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case; (6) the existence of the right to a jury trial; and (7) prejudice to the involuntarily removed defendants. See In re Republic Readers Service, Inc., 81 B.R. 422, 429 (Bankr. S.D.Tex.1987); Browning v. Navarro, 743 F.2d 1069, 1076 n. 21 (5th Cir.1984); In re Wild Oaks Utilities, Inc., 18 B.R. 959, 963 (Bankr.S.D.N.Y.1982).

The removing defendants' primary argument is that this action is truly based on federal law. Although this action involves only state law claims, the removing defendants argue that the coverage Drexel seeks from defendants depends on federal actions against Drexel and former employees of Drexel involving violations of federal securities law. In addition, the removing defendants make a number of arguments for why the efficient administration of the estate militate against an equitable remand.

While this action is sufficiently related to Drexel's bankruptcy cases for jurisdictional purposes under § 1334(b), it is not sufficiently related to warrant retention of federal jurisdiction over the state law claims it presents. The removing defendants are not creditors of Drexel's estate or parties otherwise involved in the bankruptcy proceeding. The only relation of this action to Drexel's bankruptcy cases is that the claims asserted herein are potential assets of the estate. Because every claim of a debtor in possession is an asset of the estate, this is not sufficient to warrant the retention of federal jurisdiction over these claims. See Borne v. New Orleans Health Care, Inc., 116 B.R. 487, 495 (E.D.La.1990) (remanding debtor's state-law action removed by defendant because, "as an action by a debtor seeking to recover damages under state law for prepetition injuries, this action does not invoke any particular right under title 11 and can certainly exist outside the context of the bankruptcy"). Indeed, the removing defendants essentially concede that there is no significant relationship between this action and the Drexel's bankruptcy actions and instead opposes remand on the ground that this action is related to the federal securities actions. Such a "relationship" would not have been a ground for removal and does not provide a basis for the retention of federal jurisdiction.

The pending federal securities law actions have been brought by creditors against Drexel. In the instant action, Drexel, the debtor, has brought state law claims in State Court against its insurers. While portions of Drexel's claimed losses may have a relationship to federal securities law actions, the instant action involves Drexel's state law claims for a declaratory judgment regarding its rights under the policies at issue and for money damages for defendants' breach of their contractual obligations under these policies.

By this action Drexel seeks a declaration of the parties' contractual rights under the insurance policies at issue, including a judgment that Drexel is not required to prove its loss or sue at this time in order to preserve its rights to indemnification. The determination of this state law issue has nothing to do with issues of federal securities law. As far as Drexel's...