In re Reliance Group Holdings, Inc.
| Decision Date | 22 February 2002 |
| Docket Number | Adversary No. 01-558-KJC.,Bankruptcy No. 01-13404.,Adversary No. 01-559-KJC. |
| Citation | 273 B.R. 374 |
| Parties | In re RELIANCE GROUP HOLDINGS, INC., et al., Debtor. M. Diane Koken, etc., Plaintiff, v. Reliance Group Holdings, Inc., Defendant. M. Diane Koken, etc., Plaintiff, v. Reliance Insurance Company, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Hillary C. Steinberg, James M. Matour, Philadelphia, PA, Lorna Schofield, Steven Gross, Carl Micarelli, Leigh Schachter, DeBevoise & Plimpton, New York City, for Debtor.
Lawrence J. Tabas, Philadelphia, PA, Daniel Wheeler, Ann Laupheimer, Blank, Rome, Comisky & McCauley, Philadelphia, PA, for Plaintiff.
Barbara Moses, Laurie Dix, Arnold Culkowitz, Thomas Kent, Orrick, Herrington & Sutcliffe, New York City, for Unofficial Unsecured Creditors Committee.
Reliance Group Holdings, Inc. ("RGH" or the "Debtor") is a Delaware corporation that owns all the stock of Reliance Financial Services Corporation ("Reliance Financial"), which, in turn, owns all the stock of Reliance Insurance Company ("RIC"). RIC is a property and casualty insurer organized under the laws of the Commonwealth of Pennsylvania.2 RIC is domiciled in Pennsylvania and has its principal place of business in New York.3
In past years, RGH's largest source of operating income came from RIC, through Reliance Financial.4 RGH also owns all the stock of Reliance Development Group, Inc., a real estate development company. As the owner of RIC, RGH is an "insurance holding company," subject to the regulatory authority of Pennsylvania pursuant to the Pennsylvania Insurance Holding Company Act, 40 P.S. § 991.1401 et seq.
M. Diane Koken is the Insurance Commissioner of the Commonwealth of Pennsylvania (the "Commissioner"). Pennsylvania law grants to the Commonwealth Court of Pennsylvania (the "Commonwealth Court") original jurisdiction over insurance company insolvencies. 40 P.S. § 221.4(d).5 By Order of the Commonwealth Court dated May 29, 2001, the Commissioner was appointed Rehabilitator of RIC pursuant to Article V of the Pennsylvania Insurance Department Act, 40 P.S. §§ 221.1-231 ("Article V"). The May 29, 2001 Rehabilitation Order also placed, by its terms, all assets of RIC under the control of the Commissioner and the Commonwealth Court. On October 3, 2001, upon further petition of the Commissioner, the Commonwealth Court entered an order terminating the rehabilitation of RIC, placing RIC into liquidation and appointing the Commissioner as Liquidator, pursuant to Article V.6
On June 4, 2001, the Commissioner filed an action entitled "Emergency Petition for Preservation of Insurance Policy Assets" in the Commonwealth Court (the "Emergency Petition"). In the Emergency Petition, the Commissioner seeks (among other things) a declaration that RIC's assets include certain insurance policies which provide comprehensive coverage up to an aggregate amount of $125 million to RGH, its subsidiaries and controlled entities, and their respective directors and officers (the "Lloyds Policies"), and the proceeds of those policies.7 If determined to be assets of RIC, the Lloyds Policies would be subject to the RIC Orders. In the Emergency Petition, the Commissioner alleges that RGH and its officers and directors were planning to use proceeds from the Lloyds Policies, in the approximate amount of $17 million, to settle certain class action litigation.8 The Commissioner also alleges that the use of the Lloyds Policies' proceeds for the proposed settlement violates the terms of the RIC Orders.
On June 11, 2001, the Commissioner filed a Complaint in Equity in the Commonwealth Court (the "Trust Action") asking the court to impose a constructive trust or resulting trust upon $95,651,000 in cash held by the Debtor.9 The Commissioner argues that the cash is an asset of RIC that was transferred improperly to the Debtor under the "pretext" of payments due pursuant to the terms of a Tax Allocation Agreement between the Debtor (then known as "Leasco Data Processing Equipment") and RIC dated October 1, 1968 (the "Tax Allocation Agreement").10 The Debtor, on the other hand, argues that it properly possesses the cash under the Tax Allocation Agreement and any claims RIC has against the Debtor under that same agreement must be treated in accordance with the priorities established by the federal Bankruptcy Code.
On June 12, 2001, RGH and Reliance Financial filed voluntary chapter 11 bankruptcy petitions in the United States Bankruptcy Court for the Southern District of New York (the "New York Bankruptcy Court"). The cases are being jointly administered by that court.
On June 29, 2001, the Debtor removed the Emergency Petition and Trust Action (the "State Court Actions") to this court. The Emergency Petition was removed pursuant to 28 U.S.C. § 1452 and was docketed as adversary number 01-559. The Trust Action was removed pursuant to 28 U.S.C. §§ 1441 and 1452 and was docketed as adversary number 01-558.11
On July 2, 2001, the Debtor filed motions for change of venue in both adversary proceedings, seeking to transfer the removed State Court Actions to the New York Bankruptcy Court pursuant to 11 U.S.C. § 1412 (the "Venue Motions").
On July 12, 2001, the Commissioner filed motions for remand and abstention in both adversary proceedings (the "Remand Motions"). Hearings on the Venue Motions and Remand Motions were postponed, pending resolution of the Commissioner's motion to dismiss the Debtor's and Reliance Financial's bankruptcy cases in the New York Bankruptcy Court. On or about September 26, 2001, the Commissioner withdrew her motion to dismiss the chapter 11 cases and other motions pending before the New York Bankruptcy Court.
On October 19, 2001, the parties filed briefs in support of their respective positions on the Venue and Remand Motions. The Commissioner filed a reply brief on November 2, 2001; the Debtor filed its reply brief on November 5, 2001. A hearing to consider the Venue and Remand Motions was held on November 7, 2001, at which the parties presented oral argument.12
For the reasons which follow, the Commissioner's Remand Motions will be granted, in part, as to the Trust Action and denied as to the Emergency Petition. The Debtor's Venue Motions will be granted, in part, as to the Trust Action and granted in toto as to the Emergency Petition, which will be transferred to the New York Bankruptcy Court.
The Debtor removed the Emergency Petition and the Trust Action from the Commonwealth Court pursuant to 28 U.S.C. § 1452, which provides, in relevant part:
§ 1452 Removal of claims related to bankruptcy cases.
(a) A party may remove any claim or cause of action in a civil action other than a proceeding before the United States Tax Court or a civil action by a governmental unit to enforce such governmental unit's police or regulatory power, 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.
(b) The court to which such claim or cause of action is removed may remand such claim or cause of action on any equitable ground....
The Trust Action also was removed pursuant to 28 U.S.C. § 1441. Section 1441 concerns the removal of state court actions to federal court generally, and provides, in relevant part, as follows:
§ 1441 Actions removable generally
(a) Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants to the district court of the United States for the district and division embracing the place where such action is pending. For purposes of removal under this chapter, the citizenship of defendants sued under fictitious names shall be disregarded.
(b) Any civil action of which the district courts have original jurisdiction founded on a claim or right arising under the Constitution, treaties or laws of the United States shall be removable without regard to the citizenship or residence of the parties. Any other such action shall be removable only if none of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought.
The Commissioner first argues that the State Court Actions are an enforcement of her "police or regulatory power" and cannot be removed under § 1452. Moreover, she argues that § 1452 is the exclusive means for removal of bankruptcy related matters, rendering § 1441 removal of the Trust Action improper. The Debtor responds by arguing that (1) the Commissioner is not acting as a "governmental unit" in her pursuit of the State Court Actions; (2) the State Court Actions do not involve enforcement of a "police or regulatory power;" and (3) that the Trust Action was also properly removed pursuant to § 1441, an independent basis for removal, which does not contain an exception prohibiting removal of actions to enforce a governmental unit's police or regulatory power.
The Commissioner's first argument against removal of the Emergency Petition is that the Debtor is not a "party" to the Emergency Petition, since the only named defendant in that action was RIC, and § 1452 permits only "a party" to remove a claim or cause of action.13 In the Emergency Petition, however, the Commissioner seeks an order "ordering and directing that Reliance Parent [the Debtor and...
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