In re Pettibone Corp.

• Decision Date: 27 January 1992
• Docket Number: Bankruptcy No. 86 B 1563-71,Adv. No. 89 A 871,91 A 381.
• Citation: 135 BR 847
• Parties: In re PETTIBONE CORPORATION, et al., Debtor. The OFFICIAL CREDITORS' COMMITTEE OF PRODUCTS LIABILITY AND PERSONAL INJURY CLAIMANTS, Plaintiff, v. INTERNATIONAL INSURANCE COMPANY and Granite State Insurance Company, Defendants. PORT TERMINAL RAILROAD ASSOCIATION, Plaintiff, v. PETTIBONE CORPORATION, International Insurance Company and Granite State Insurance Company, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

135 B.R. 847 (1992)

In re PETTIBONE CORPORATION, et al., Debtor.

The OFFICIAL CREDITORS' COMMITTEE OF PRODUCTS LIABILITY AND PERSONAL INJURY CLAIMANTS, Plaintiff, v. INTERNATIONAL INSURANCE COMPANY and Granite State Insurance Company, Defendants.

PORT TERMINAL RAILROAD ASSOCIATION, Plaintiff, v. PETTIBONE CORPORATION, International Insurance Company and Granite State Insurance Company, Defendants.

Bankruptcy No. 86 B 1563-71, Adv. Nos. 89 A 871, 91 A 381.

United States Bankruptcy Court, N.D. Illinois, E.D.

January 27, 1992.

David E. Bennett, Vedder, Price, Kaufman & Kammholz, Chicago, Ill., for Official Creditors' Committee of Products Liability and Personal Injury Claimants.

Richard C. Clark, Clausen, Miller, Gorman, Caffrey & Witous, P.C., Chicago, Ill., for Granite State Ins. Co.

Fritz K. Huszagh, Hinshaw & Culbertson, Chicago, Ill., for Intern. Ins. Co.

Robert S. Blanc, Sewell & Riggs, Houston, Tex., for Port Terminal R.R. Ass'n.

Kevin T. Keating, Richard P. Klaus, McDermott, Will & Emery, Chicago, Ill., for Pettibone Corp.

MEMORANDUM OPINION ON MOTION TO DISMISS INTERNATIONAL INSURANCE COMPANY'S CROSS-CLAIMS AGAINST GRANITE STATE INSURANCE COMPANY

JACK B. SCHMETTERER, Bankruptcy Judge.

INTRODUCTION

The two cases of Creditors' Committee v. International Insurance Company and Port Terminal Railroad Association v. Pettibone arise from the same operative facts and have been consolidated for trial. In each case, International Insurance Company ("International") cross-claimed against Granite State Insurance Company ("Granite State"). Granite State moved to dismiss the cross-claims for lack of subject matter jurisdiction. It alternatively moves for abstention under 28 U.S.C. § 1334(c). For reasons stated below, Granite State's primary motions are each granted and the cross-claims are dismissed.

FACTUAL BACKGROUND¹

The underlying Adversary proceedings alleged that defendants breached Pettibone's Plan of Reorganization, through their activities resulting in International's paying three million dollars to personal injury claimants known as the Reicherts. The payment was made in cash directly to the Reicherts rather than being made available for pro-rata distribution to all creditors in the sub-class of personal injury claimants under procedures provided in the confirmed Plan. Defendants have denied violating the Plan and otherwise contest liability.

International has filed identical cross-claims in both cases, claiming that if it is found to have any liability to plaintiffs, then Granite State is liable to it to the same extent. Each cross-claim contains three counts centered around Granite State's conduct vis-a-vis International. Granite State entered into a "Step-up" Agreement with Pettibone after its primary insurer Northumberland Insurance Company became insolvent and Pettibone filed its Chapter 11 petition. Pursuant to that Agreement, Granite State, which was the secondary carrier, undertook to defend Pettibone against certain personal injury claims. International provided the third layer of coverage. When International evaluated its exposure on the eve of trial of the Reichert case, it paid cash directly to the plaintiffs to settle that case. The nature of participation by International, Granite State, and Pettibone in that settlement process is disputed, and will be the subject of a trial in this Court on the underlying Adversary complaint.

International alleges in Count I of its cross-claim that Granite State breached duties owed to International under the "Step-up" Agreement by failing to inform International about the state of the Reichert litigation, and by failing to defend or settle that litigation in good faith pursuant to the Plan.

International alleges in Count II of its cross-claim that Granite State impliedly contracted to reimburse International for its payment to the Reicherts, and asserts that denying International reimbursement would unjustly enrich Granite State. International further alleges in Count III that it is entitled to equitable contribution from Granite State because the settlement discharged Granite State's liability to the Reicherts.

DISCUSSION

The key issue presented in Granite State's motions to dismiss is whether this Court has subject matter jurisdiction over the cross-claims. Bankruptcy Judges comprise a unit of the District Court under 28 U.S.C. § 151, and the subject matter jurisdiction of District Courts over bankruptcy matters is provided in 28 U.S.C. § 1334. District courts are authorized to refer all matters within the jurisdictional grant of § 1334 to the Bankruptcy Judges for the district. 28 U.S.C. § 157(a). In this jurisdiction, all such matters have been referred pursuant to Local District Rule 2.33. A Bankruptcy Judge may issue final orders in "core" proceedings under § 157(b)(2), or submit proposed findings of fact and conclusions of law in "related" but non-core proceedings under § 157(c)(1). In determining jurisdiction, Bankruptcy Judges must first determine whether jurisdiction exists under § 1334 and then determine what powers they may constitutionally exercise under § 157.

Section 1334(b) provides that "district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." Relationship of the dispute to the Pettibone estate and confirmed Plan (or lack of such relationship) determines whether the cross-claims here fall within the scope of § 1334(b). In re Xonics, Inc., 813 F.2d 127, 131 (7th Cir. 1987) ("it is the relationship of the dispute to estate, and not of party to estate, that establishes jurisdiction"). "Related to" jurisdiction is the broadest grant of authority, albeit not one under which final judgments may be entered without consent of the parties. In re Spaulding & Co., 131 B.R. 84 (N.D.Ill.1990). Therefore, the Court will first consider whether the cross-claims are related to the Pettibone case. See In the Matter of Wood, 825 F.2d 90, 93 (5th Cir. 1987) (". . . it is necessary only to determine whether a matter is at least "related to" the bankruptcy.").

"Related to" Jurisdiction

In a series of opinions, the Seventh Circuit has defined the scope of "related to" jurisdiction under § 1334(b). See Home Insurance Co. v. Cooper & Cooper, Ltd., 889 F.2d 746 (7th Cir.1989); In re Kubly, 818 F.2d 643 (7th Cir.1987); In re Xonics, Inc., 813 F.2d 127; and In re Chicago, Rock Island & Pacific R.R. Co. (Sanborn II), 794 F.2d 1182 (7th Cir.1986). The dispute between International and Granite State can only be "related to" the Pettibone bankruptcy if its resolution "affects the amount of property available for distribution or the allocation of property among the creditors." Home Insurance, 889 F.2d at 749. This test would embrace issues that affect implementation of a confirmed Plan.

International argues that the test for jurisdiction is "whether the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy," citing In re GF Corp., 127 B.R. 384, 386 (Bankr.N.D.Ohio 1991). While that is the prevailing standard in the Sixth Circuit, the Seventh Circuit construes "related to" jurisdiction more narrowly. See discussion in In re Spaulding & Co., 111 B.R. 689, 692 (Bankr.N.D.Ill.1990) (the Seventh Circuit formulation of the "related to" test denies jurisdiction where the dispute is only "conceivably" related to the bankruptcy estate in a remote way). This Court is of course bound by the narrower Seventh Circuit test to determine whether it has jurisdiction over the cross-claims.

International's cross-claim has no effect on the amount of estate property available or to become available to any creditors, or on implementation of the confirmed Plan. International is claiming that Granite State is liable to it to the extent that it is liable to the plaintiffs or creditors. Assuming arguendo that International and Granite State are found liable to the plaintiffs or creditors for damages in the underlying Adversary proceedings, the amount of property available to creditors would increase. However, the only effect of successful cross-claims would be to change the ultimate source of any damages that must be paid. The amount of recovery by creditors of this estate would not be changed in any way. Plaintiffs' source of collection would not at all be affected by results of the cross-claims. Moreover, the cross-claims would not affect the allocation of property among creditors. International and Granite State provide insurance that comprise assets of the estate; they are not creditors.

Bankruptcy Judges frequently lack "related to" jurisdiction to hear third-party complaints which arise from Adversary proceedings. In In re Spaulding & Co., 111 B.R. 689 (Bankr.N.D.Ill.1990), aff'd, 131 B.R. 84 (N.D.Ill.1990), the debtor filed an Adversary Complaint against a secured creditor seeking to set aside a preference under 11 U.S.C. § 547(b). The creditor filed a third party complaint against debtor's former counsel based on counsel's involvement in previous litigation. However, the creditor's claim against the law firm did not affect that creditor's claim in bankruptcy, and was merely a remedy it could pursue elsewhere should its defenses fail in the § 547(b) action. The third party complaint was dismissed. 111 B.R. at 689.

In In re Peterson, 104 B.R. 94 (Bankr. E.D.Wisc.1989), creditors filed an Adversary Complaint requesting that debtors' obligation to them be declared nondischargeable under 11 U.S.C. § 523(a). Debtors moved for leave to file a third party complaint claiming a right of indemnification or contribution from the third party defendant. That motion was denied because the proposed third party complaint "would have no effect on the amount of property in the estate available for distribution to creditors, nor would it affect any other creditors." Id. at 97.

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