In Re Dph Holdings Corp.

• Decision Date: 09 September 2010
• Docket Number: Bankruptcy No. 05-44481 (RDD).,Adversary No. 09-01510-r.
• Citation: 437 B.R. 88
• Parties: In re DPH HOLDINGS CORP., Reorganized Debtors. Ace American Insurance Company and Pacific Employers Insurance Company, Plaintiffs-Appellees/Cross-Appellants, v. DPH Holdings Corp., Defendant-Appellee, and State of Michigan Workers' Compensation Insurance Agency and State of Michigan Funds Administration, Defendants-Appellants/Cross-Appellees.
• Court: U.S. District Court — Southern District of New York

437 B.R. 88

In re DPH HOLDINGS CORP., Reorganized Debtors.

Ace American Insurance Company and Pacific Employers Insurance Company, Plaintiffs-Appellees/Cross-Appellants,

v.DPH Holdings Corp., Defendant-Appellee,andState of Michigan Workers' Compensation Insurance Agency and State of Michigan Funds Administration, Defendants-Appellants/Cross-Appellees.

Bankruptcy No. 05-44481 (RDD).

Adversary No. 09-01510-r.

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

Sept. 9, 2010.

COPYRIGHT MATERIAL OMITTED.

Lawrence J. Kotler, Margery N. Reed, Wendy M. Simkulak, Duane, Morris & Heckscher LLP, Philadelphia, PA, Lawrence J. Kotler, Wendy M. Simkulak, William Heuer, Duane Morris LLP, Martin G. Bunin, Alston & Bird LLP, New York, NY, Robert G. Kamenec, Plunkett Cooney, Bloomfield Hills, MI, for Plaintiffs-Appellees/Cross-Appellants.

Delphi Corporation, pro se.

Susan Przekop-Shaw, Dennis Jay Raterink, Michigan Dept. of Attorney General, Lansing, MI, for Defendants-Appellants/Cross-Appellees.

DECISION AND ORDER

VICTOR MARRERO, District Judge.

Pursuant to this Court's Order, dated April 13, 2010 (the “April 13 Order”), granting leave for a limited interlocutory appeal, the State of Michigan Workers' Compensation Insurance Agency (the “Agency”) and Funds Administration (the “Funds,” together with the Agency, the “Michigan Defendants”), appeal an order of the United States Bankruptcy Court of the Southern District of New York (the “Bankruptcy Court”) dated January 26, 2010 (the “January 26 Order”). The January 26 Order denied the Michigan Defendants' joint motion to dismiss an adversary complaint filed against them and defendant debtor Delphi Corporation and its predecessor Delphi Automotive Systems (“Delphi”) ¹ by plaintiffs Ace American Insurance Company and Pacific Employers Insurance Company (“Ace/Pacific”). ² The Michigan Defendants argue that: (1) they are entitled to sovereign immunity, and (2) the Bankruptcy Court lacks subject matter jurisdiction over the proceeding. Pursuant to the April 13 Order, Ace/Pacific cross-appeals, seeking affirmance of the January 26 Order with respect to the Michigan Defendants' sovereign immunity defense on two alternative bases: (1) that the Michigan Defendants voluntarily engaged in litigation conduct and waived sovereign immunity; and (2) that the Agency and the Funds act as a unitary creditor, and that both waived their sovereign immunity when the Funds filed claims in the Delphi bankruptcy case. For the reasons stated below, the Court AFFIRMS the January 26 Order.

I. BACKGROUND ³

Delphi filed its Chapter 11 petition in the Bankruptcy Court on October 8, 2005. On December 16, 2005, Delphi filed a motion to assume certain insurance contracts with Ace/Pacific, including retention policies, providing excess workers' compensation coverage (the “Retention Policies”), and deductible policies (the “Deductible Policies,” collectively, the “Policies”), which, according to Delphi and Ace/Pacific, insure certain of Delphi's affiliates not authorized as self-insurers under the Michigan Worker's Disability Compensation Act (the “Act”). By order dated January 6, 2006 (the “January 6 Order”), the Bankruptcy Court authorized Delphi to assume the Policies and enter into post-petition policies and agreements, which continue to bind Ace/Pacific and Delphi. Pursuant to the January 6 Order, obligations owing to Ace/Pacific from Delphi under the Policies are accorded administrative expense priority.

The Bankruptcy Court confirmed Delphi's plan of reorganization in January 2008. On July 15, 2009, Delphi proposed certain modifications to the reorganization plan. The Michigan Defendants opposed those modifications, noting that Delphi was self-insured under the Act, and that the proposed modifications did not indicate how Delphi would continue to meet its workers' compensation obligations. In their objection, the Michigan Defendants also indicated that they had discovered the existence of workers' compensation coverage by Ace/Pacific and that they intended to provide notice to Ace/Pacific of their responsibility for coverage of the claims.

After July 15, 2009, the Agency sent Ace/Pacific notice of the workers' compensation claims filed by former Delphi employees injured during the time that Ace/Pacific had filed notices of issuance of policy with the Agency, known as Form 400s (the “Notices”). Also at this time, the Funds filed two administrative expense claims in Delphi's case seeking payment of $1,130,191.92 based on Delphi's status as a self-insured employer. In addition, the Michigan Attorney General filed an administrative expense claim in the amount of $5,557,750, and two general unsecured proofs of claims on behalf of the Michigan Self-Insurers' Security Fund, a division of the Funds that is authorized to make payments to injured employees of a self-insurer if that employer is insolvent and unable to continue making payments. The Bankruptcy Court has since found the general claims to be untimely.

The Bankruptcy Court confirmed the modified plan of reorganization in July 2009. Delphi substantially consummated the plan as modified, and emerged from Chapter 11 in October 2009 as DPH Holdings Corp. Ace/Pacific commenced the instant adversary proceeding on October 6, 2009 (the “Adversary Proceeding”) seeking a declaration that the Deductible Policies do not provide coverage for the injured workers' claims and that the Retention Policies provide only excess coverage of the claims. In the alternative, Ace/Pacific asks the Bankruptcy Court to reform the Policies to reflect the parties' shared understanding that Delphi's workers' compensation obligations were self-insured.

Following the commencement of the Adversary Proceeding against Delphi and the Michigan Defendants, on November 4, 2009, Ace/Pacific filed claims for payment of administrative expenses in an amount of $67,311,662.50, equaling the total amount of the Michigan Defendants' claims filed in July 2009. Ace/Pacific based this application on its position that Delphi must reimburse Ace/Pacific for any claims that are paid to the injured workers.

On November 10, 2009, the Michigan Defendants moved to dismiss the Adversary Proceeding for lack of subject matter jurisdiction, sovereign immunity, and failure to state a claim. In the alternative, the Michigan Defendants requested that the Bankruptcy Court abstain to allow the Michigan courts and administrative bodies to resolve the dispute. In its January 26 Order, the Bankruptcy Court did not rule on the motion to dismiss for failure to state a claim, but found that it had jurisdiction over the Adversary Proceeding, and that the Michigan Defendants were not entitled to sovereign immunity. The Bankruptcy Court also denied the Michigan Defendants' motion to dismiss on abstention grounds. By its April 13 Order, this Court granted the Michigan Defendants and Ace/Pacific leave to appeal the January 26 Order as it pertained to the Bankruptcy Court's sovereign immunity and subject matter jurisdiction determinations. The Court denied the Michigan Defendants leave to appeal from the Bankruptcy Court's abstention determinations, as well as from the Bankruptcy Court's decision to exercise jurisdiction under the U.S. Declaratory Judgment Act, 28 U.S.C. § 2201.

II. STANDARD OF REVIEW

On appeal, the district court reviews a bankruptcy court's findings of facts for clear error, see Nova Info. Sys., Inc. v. Premier Operations Ltd. (In re Premier Operations), 294 B.R. 213, 217 (S.D.N.Y.2003), and applies a de novo standard to questions of law. See Bank Brussels Lambert v. Coan (In re AroChem Corp.), 176 F.3d 610, 620 (2d Cir.1999).

III. DISCUSSION

A. SUBJECT MATTER JURISDICTION

The Michigan Defendants assert that the Adversary Proceeding does not arise under or in Title 11 of the United States Code (“Title 11”), and is not related to a case under Title 11. They also argue that the Bankruptcy Court lacks post-confirmation jurisdiction. The Court disagrees. ⁴

1. “Arising Under” or “Arising In” Jurisdiction

The Court's bankruptcy jurisdiction is governed by 28 U.S.C. § 1334 (“§ 1334”). Section 1334(b) grants the Court “original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” 28 U.S.C. § 1334(b). A bankruptcy court may “hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11,” but where a matter is “related to” the Court's bankruptcy jurisdiction, a bankruptcy court may enter only proposed findings of fact and conclusions of law that are subject to de novo review by the district courts. 28 U.S.C. § 157(b)(1), (c)(1).

Proceedings “arising in” or “arising under” Title 11 correspond to the Court's core bankruptcy jurisdiction as defined in 28 U.S.C. § 157 (“§ 157”), whereas those proceedings “related to” a case under Title 11 correspond to the Court's non-core jurisdiction. Congress incorporated this core/non-core distinction when it amended the Bankruptcy Reform Act of 1978 (the “1978 Act”) following the Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., in which a four-justice plurality of the Supreme Court found that the Court lacked bankruptcy jurisdiction over a damages claim against a debtor. See 458 U.S. 50, 71, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). The Supreme Court found that the broad grant of jurisdiction to Article I bankruptcy courts under the 1978 Act violated Article III, and held that “the restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy, must be distinguished from the adjudication of state-created private rights, such as the right to recover contract damages.” Id. at 71, 102 S.Ct. 2858.

The Second Circuit has held that “core proceedings,” as used in § 157, “should be given a broad interpretation that is ‘close to or congruent with constitutional limits' as set...