Hough v. Margulies (In re Margulies)

• Decision Date: 13 August 2012
• Docket Number: Bankruptcy No. 10–14012 (SMB).,Adversary No. 10–04050.
• Citation: 476 B.R. 393
• Parties: In re Joshua Simon MARGULIES, Debtor. Dennis Hough, Plaintiff, v. Joshua Simon Margulies and USAA Casualty Insurance Company, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

476 B.R. 393

In re Joshua Simon MARGULIES, Debtor.Dennis Hough, Plaintiff,

v.Joshua Simon Margulies and USAA Casualty Insurance Company, Defendants.

Bankruptcy No. 10–14012 (SMB).

Adversary No. 10–04050.

United States Bankruptcy Court,

S.D. New York.

Aug. 13, 2012.

Stanley K. Shapiro, Esq., New York, NY, for Plaintiff Dennis Hough.

Olshan Grundman Frome Rosenzweig & Wolosky, LLP, Thomas J. Fleming, Esq., Fredrick J. Levy, Esq., Howard J. Smith, Esq., of Counsel, Robert M. Spadaro, Esq., New York, NY, for Defendant USAA Casualty Insurance Company.

Shafferman & Feldman, LLP, Joel M. Shafferman, Esq., New York, NY, for Defendant Joshua Simon Margulies.

MEMORANDUM DECISION DENYING USAA MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION, FOR PERMISSIVE ABSTENTION TO STAY THIS ADVERSARY PROCEEDING AND TO DISMISS FOR FAILURE TO STATE A CLAIM

STUART M. BERNSTEIN, Bankruptcy Judge.

The plaintiff Dennis Hough was injured when he was struck by a car driven by the debtor, Joshua Simon Margulies. He recovered a judgment against Margulies which Margulies' liability insurer, defendant USAA Casualty Insurance Company (“USAA”), refuses to pay. Hough has brought this adversary proceeding to declare the judgment non-dischargeable under 11 U.S.C. § 523(a)(6), or alternatively, to recover the unsatisfied judgment from USAA up to the policy limits. USAA moved to dismiss for lack of subject matter jurisdiction, for permissive abstention, to stay this adversary proceeding, or to dismiss the complaint for failure to state a claim for relief. The Court concludes that it enjoys subject matter jurisdiction over Hough's claim against USAA, and declines to abstain in the exercise of discretion, stay this proceeding or dismiss the complaint.

BACKGROUND

A. The State Court Proceedings

The relevant facts are not in dispute. Margulies struck Hough with his automobile on August 3, 2000, ( Complaint Objecting to Dischargeability Pursuant to 11 U.S.C. § 523(a)(6), for Judgment Pursuant to Section 3420 of the New York State Insurance Law, and for Declaratory Relief Pursuant to 11 U.S.C. § 105(a), dated Oct. 25, 2010 (“ Adversary Complaint ”), at ¶ 14 (ECF Doc. # 1)),¹ and eventually pleaded guilty to misdemeanor assault in the third degree under New York Penal Law § 120.00(2).² ( Id. at ¶ 17.) Three years later, Hough sued Margulies in New York state court contending that Margulies negligently operated his vehicle. ( Id. at ¶ 18.) USAA failed to appear or answer on Margulies' behalf, or commence a declaratory judgment action that it did not have the duty to defend or indemnify. ³ ( Id. at ¶¶ 19–20.) USAA also failed to serve Hough with a notice of disclaimer pursuant to New York State Insurance Law § 3420(d)(2). ⁴ ( Id. at ¶ 21.) The state court entered a judgment on default on November 16, 2005 in the total amount of $4,868,263.56, inclusive of interest, costs and disbursements (the “Judgment”). ( Id. at ¶¶ 22, 24.)

The Judgment was never paid, and on May 4, 2007, Hough commenced a direct action against USAA in New York state court to recover the unpaid Judgment up to the limits of the Policies pursuant to § 3420 of the New York State Insurance Law (the “3420 Action”).⁵ Hough moved for summary judgment, ( id. at ¶ 31), and USAA opposed the motion arguing that the Policies did not cover the Judgment because Margulies intentionally caused Hough's injuries. ( Id. at ¶ 32.) Initially, the state court concluded that USAA had breached its duty to defend, and could not, therefore, go behind the default judgment to raise defenses to Hough's claim against Margulies. (Decision & Order, dated July 1, 2010 (“ July 2010 Order ”), at 2.) ⁶ However, the defense to coverage did not implicate a defense to Hough's claim against Margulies, whether Margulies acted intentionally was never litigated and collateral estoppel did not bar USAA from raising the intentional nature of Margulies' conduct in the 3420 Action. ( Id.) Finally, Margulies' plea to a crime with a criminal intent of recklessness did not foreclose a finding that his actions fell within the Policies' intentional actions exclusions. ( Id.) In the end, whether Margulies intentionally caused Hough's injuries was a question of fact that precluded summary judgment. ( Id.)

Hough appealed from the July 2010 Order,⁷ and also moved to renew and reargue his motion for summary judgment. ( Adversary Complaint at 7, n.1.) The state court granted reargument and vacated the July 2010 Order, although for the most part, reaffirmed its prior determination denying the motion for summary judgment. ( See Decision & Order, filed May 13, 2011 (“ May 2011 Order ”), at 2–3.) ⁸ The one exception is that it granted summary judgment to the extent of dismissing USAA's defense that Margulies failed to cooperate. ( Id. at 3.) The Appellate Division affirmed the May 2011 Order earlier this year. See Hough v. USAA Cas. Ins. Co., 93 A.D.3d 405, 940 N.Y.S.2d 41, 42 (N.Y.App.Div.2012).

B. The Bankruptcy Case

Margulies filed this chapter 7 case on July 26, 2010, and received his discharge on March 17, 2011. In the interim, Hough filed this adversary proceeding asserting a single claim for alternative relief. He contends that Margulies caused his injuries willfully and maliciously, and the Judgment is not dischargeable under 11 U.S.C. § 523(a)(6). Alternatively, Margulies did not intentionally cause his injuries, and Hough is entitled to recover under the Policies to the extent of their limits. Margulies moved for judgment on the pleadings and for summary judgment, and the Court denied his motion. Margulies has moved to reargue the denial of his motion for judgment on the pleadings, and that motion will be addressed in a separate decision.

USAA filed its own motion to dismiss for lack of subject matter jurisdiction, for permissive abstention, to stay this adversary proceeding and to dismiss for failure to state a claim. Its principal contention is that the resolution of the insurance litigation between itself and Hough will not affect the administration of the case. Even if jurisdiction exists, the Court should abstain from deciding the insurance coverage dispute as part of the adversary proceeding, and stay this adversary proceeding pending the resolution of the 3420 Action. Finally, USAA contends that the complaint is legally insufficient.

DISCUSSION

A. Subject Matter Jurisdiction

When considering a motion to dismiss for lack of subject matter jurisdiction under Fed.R.Civ.P. 12(b)(1), a court must accept the material factual allegations in the complaint as true, but need not draw inferences favorable to the plaintiff. J.S. v. Attica Cent. Schs., 386 F.3d 107, 110 (2d Cir.2004), cert. denied,544 U.S. 968, 125 S.Ct. 1727, 161 L.Ed.2d 616 (2005); Shipping Fin. Servs. Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir.1998). A court may also consider materials outside of the pleadings to resolve any jurisdictional disputes, but cannot rely on conclusory or hearsay evidence. J.S., 386 F.3d at 110;Zappia Middle East Constr. Co. v. Emirate of Abu Dhabi, 215 F.3d 247, 253 (2d Cir.2000). The party asserting that the court has subject matter jurisdiction bears the burden of proving it. Robinson v. Overseas Military Sales Corp., 21 F.3d 502, 507 (2d Cir.1994); Truong v. Litman, No. 06 Civ. 1431(SHS), 2006 WL 3408573, at *3 (S.D.N.Y. Nov. 22, 2006), aff'd,312 Fed.Appx. 377 (2d Cir.2009). Where the court “relies solely on the pleadings and supporting affidavits, the plaintiff need only make a prima facie showing of jurisdiction.” Robinson, 21 F.3d at 507;accord CutCo. Indus., Inc. v. Naughton, 806 F.2d 361, 364 (2d Cir.1986).

Consideration of the bankruptcy court's subject matter jurisdiction begins with 28 U.S.C. § 1334. Subsection (a) grants the district court exclusive jurisdiction over bankruptcy cases. Subsection (b) grants the district court “original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” The district court may refer its bankruptcy jurisdiction to the bankruptcy court. 28 U.S.C. § 157(a). The United States District Court for the Southern District of New York has referred its bankruptcy jurisdiction to this Court pursuant to its Amended Standing Order of Reference, 12 Misc. 00032 (S.D.N.Y. Jan. 31, 2012).

Proceedings that arise under title 11, or arise in a case under title 11 correspond to the Court's “core” jurisdiction. See28 U.S.C. § 157(b)(1) (“Bankruptcy judges may hear and determine ... all core proceedings arising under title 11, or arising in a case under title 11....”); Wood v. Wood (In re Wood), 825 F.2d 90, 96 (5th Cir.1987) (“[S]ection 157 apparently equates core proceedings with the categories of ‘arising under’ and ‘arising in’ proceedings.”). Generally, a core proceeding is one that invokes a substantive right under title 11, or could only arise in the context of a bankruptcy case. Binder v. Price Waterhouse & Co., LLP (In re Resorts Int'l, Inc.), 372 F.3d 154, 162–63 (3d Cir.2004); Wood, 825 F.2d at 97;Liberty Mut. Ins. Co. v. Lone Star Indus., Inc., 313 B.R. 9, 16 (D.Conn.2004).

A proceeding is “related” to a case under title 11, and falls within its non-core jurisdiction,⁹ if the outcome might have a “conceivable effect” on the estate. Publicker Indus. Inc. v. United States (In re Cuyahoga Equip. Corp.), 980 F.2d 110, 114 (2d Cir.1992); see U.S. Brass Corp. v. Travelers Ins. Group, Inc. (In re U.S. Brass Corp.), 301 F.3d 296, 304 (5th Cir.2002); Pacor, Inc. v. Higgins (In re Pacor, Inc.), 743 F.2d 984, 994 (3d Cir.1984), overruled on other grounds by Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 116 S.Ct. 494, 133 L.Ed.2d 461 (1995). Thus, “[a]n action is related to the bankruptcy case if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.” Pacor, 743 F.2d at...