Home Ins. Co. v. Cooper & Cooper, Ltd.

• Decision Date: 13 November 1989
• Docket Number: No. 88-3389,88-3389
• Citation: 889 F.2d 746
• Parties: , Bankr. L. Rep. P 73,156 The HOME INSURANCE COMPANY, Plaintiff-Appellant, v. COOPER & COOPER, LTD., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 746

889 F.2d 746

19 Bankr.Ct.Dec. 1688, Bankr. L. Rep. P 73,156

The HOME INSURANCE COMPANY, Plaintiff-Appellant, v. COOPER & COOPER, LTD., et al., Defendants-Appellees.

No. 88-3389.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 26, 1989.

Decided Nov. 13, 1989.

John J. Lynch, Donald M. Haskell, Daniel P. Caswell, Haskell & Perrin, Chicago, Ill., for plaintiff-appellant.

Ronald R. Peterson, Jenner & Block, John B. Kalish, Kalish & Associates, Chicago, Ill., Thomas Davis, Zion, Ill., David R. Brown, Arkin & Brown, River Forest, Ill., Green & Holmstrom, Lake Forest, Ill., Marvin Glassman, Rabens, Formusa & Glassman, Stacy Baygood, Small Business Admin., Philip E. Howard, Chicago, Ill., Harry Cooper, Pompano Beach, Fla., David Sokolow, Mundelein, Ill., for defendants-appellees.

David P. Leibowitz, Schwartz, Cooper, Kolb & Gaynor, Chicago, Ill., for Cooper & Cooper, Ltd.

Before COFFEY and EASTERBROOK, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

EASTERBROOK, Circuit Judge.

Attorney Lawrence M. Cooper embezzled from accounts held by his firm, Cooper & Cooper, Ltd., of which he was sole shareholder. For his sins he is doing time, and his firm has been cast into bankruptcy--a fitting denouement, for Cooper stole money he held as trustee in other people's bankruptcies. Cooper & Cooper employed 12 other lawyers, and to protect their interests (as well as his own), Cooper sought malpractice insurance from The Home Insurance Company. The application form asked: "Does any lawyer [in the firm] know of any circumstances, act, error or omission that could result in a professional liability claim against him or his predecessors in business?" On behalf of the firm, Cooper answered "No." A truthful answer would have led any (sane) insurer to balk, but relying on Cooper's lie Home issued a "claims made" policy providing $1 million of coverage ($500,000 per occurrence) for the period April 18, 1986, to June 18, 1987. During that time Cooper's crimes came to light; he and his firm filed bankruptcy petitions.

Home commenced an adversary proceeding in the law firm's bankruptcy, naming as defendants Cooper, the twelve other attorneys employed by the firm, and the plaintiffs in two suits filed in state court (one against Cooper and the other against both Cooper and associate Elliott Dunn). The insurer sought a declaratory judgment that the policy of insurance is invalid because of Cooper's deceit. Bankruptcy Judge Ginsberg held that Cooper's lie vitiated the policy with respect to Cooper's delicts, whether the plaintiffs named him or the firm; the court concluded that the other 12 lawyers (and the firm, in the event of vicarious liability) were entitled to coverage. The district judge affirmed.

Cooper & Cooper's bankruptcy is ongoing; the order is not "final" in the traditional sense, and under 28 U.S.C. Sec. 158(d) an appeal lies in a bankruptcy case only from a "final decision". We asked the parties for supplemental briefs on appellate jurisdiction and the jurisdictional problems discussed below. After considering these submissions, we conclude that the declaratory judgment wrapped up a dispute that would be a stand-alone case outside of bankruptcy; actions to determine the validity and coverage of a policy of insurance are common. So the decision was "final" in the practical sense that term takes in bankruptcy law. E.g., In re Morse Electric Co., 805 F.2d 262 (7th Cir.1986); In re Berke, 837 F.2d 293 (7th Cir.1988). Appellate jurisdiction is secure; subject-matter jurisdiction is dubious.

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. Home wanted to resolve more than its entitlements vis-a-vis Cooper & Cooper, however. It named as parties the firm's 12 associates and the plaintiffs in two tort suits pending in state court. The only apparent basis of subject-matter jurisdiction is 28 U.S.C. Sec. 157(c), which provides:

(1) A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.

(2) Notwithstanding the provisions of paragraph (1) of this subsection, the district court, with the consent of all the parties to the proceeding, may refer a proceeding related to a case under title 11 to a bankruptcy judge to hear and determine and to enter appropriate orders and judgments, subject to review under section 158 of this title.

Congress enacted Sec. 157(c) in 1984 in response to Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), which held that bankruptcy judges, lacking the tenure and salary protections of Article III, may not adjudicate contract and tort claims arising under state law. Home's request for a declaratory judgment settling the rights of Cooper & Cooper's employees and of plaintiffs in tort cases unrelated to the law firm's bankruptcy would fall within Marathon unless the new Sec. 157(c) provides for jurisdiction in the bankruptcy court, and is constitutional as so applied.

A controversy is not "related" to the bankruptcy within the meaning of Sec. 157(c) unless its resolution "affects the amount of property available for distribution or the allocation of property among creditors". In re Xonics, Inc., 813 F.2d 127, 131 (7th Cir.1987). See also In re Kubly, 818 F.2d 643 (7th Cir.1987); In re Kilgus, 811 F.2d 1112, 1117-18 (7th Cir.1987). We have read Sec. 157(c) narrowly not only out of respect for Article III but also to preserve the jurisdiction of state courts over questions of state law involving persons not party to the bankruptcy. Overlap between the bankrupt's affairs and another dispute is insufficient unless its resolution also affects the bankrupt's estate or the allocation of its assets among creditors. Although the request for declaratory relief concerning the employees of Cooper & Cooper and the plaintiffs in state court has a nexus with the bankruptcy--in the sense that it would be convenient, and promote consistency, to resolve all questions concerning the policy at one go--it does not necessarily have a financial effect on the estate (or the apportionment among its creditors).

"Relatedness", even if present, is not enough to permit a bankruptcy judge to issue a decision binding unless reversed on appeal. Anything less than a de novo decision by an Article III judge leaves the Marathon problem. Under Sec. 157(c)(1) bankruptcy judges make not decisions but recommendations to the district judge, so that the initial decision comes from an Article III officer, cf. United States v. Raddatz, 447 U.S. 667, 100 S.Ct. 2406, 65 L.Ed.2d 424 (1980) (system of recommendations subject to de novo review is constitutional); alternatively the district judge may refer a proceeding on the parties' consent, Sec. 157(c)(2), which effectively waives the entitlement to the benefits of an initial Article III decisionmaker. See Geras v. Lafayette Display Fixtures, Inc., 742 F.2d 1037 (7th Cir.1984) (28 U.S.C. Sec. 636(c), which allows parties to consent to final decision by a magistrate, complies with Article III)....