JCF AFFM Debt Holdings. L.P. v. Affirmative Ins. Holdings, Inc. (In re Affirmative Ins. Holdings, Inc.)

Decision Date29 March 2017
Docket NumberAdv. Proc. Case No. 16–50425 (CSS),Case No. 15–12136 (CSS) (Jointly Administered)
Citation565 B.R. 566
Parties IN RE AFFIRMATIVE INSURANCE HOLDINGS, INC., et al., Debtors. JCF AFFM Debt Holdings. L.P., Plaintiffs, v. Affirmative Insurance Holdings, Inc., Affirmative Management Services, Inc., Affirmative Services, Inc., Affirmative Underwriting Services, Inc., Affirmative Insurance Services, Inc., Affirmative General Agency, Inc., Affirmative Insurance Group, Inc., Affirmative L.L.C., Anne Melissa Dowling, Acting Director of Insurance of the State of Illinois, solely as Liquidator of Affirmative Insurance Company, and Don A. Beskrone, solely as Trustee, Defendants. Anne Melissa Dowling, Acting Director of Insurance of the State of Illinois, solely as Liquidator of Affirmative Insurance Company, Counterplaintiff, v. JCF AFFM Debt Holdings L.P., Counterdefendant. Anne Melissa Dowling, Acting Director of Insurance of the State of Illinois, solely as Liquidator of Affirmative Insurance Company, Crossplaintiff, v. Affirmative Insurance Holdings, Inc., and Don A. Beskrone, solely as Trustee, Crossdefendants.
CourtU.S. Bankruptcy Court — District of Delaware

SAUL EWING LLP, Mark Minuti, 1201 North Market Street, Suite 2300, Wilmington, DE 19899, -and- QUARLES & BRADY LLP, Faye B. Feinstein, Christopher Combest, Lauren Beslow, 300 North LaSalle Street, Suite 4000, Chicago, IL 60654, Counsel to Anne Melissa Dowling, Acting Director of Insurance of the State of Illinois, in her capacity as Statutory and Court-affirmed, Liquidator of Affirmative Insurance Company

BAKER & McKENZIE LLP, Debra A. Dandeneau, Jacob M. Kaplan, 452 Fifth Avenue, New York, NY 10018, -and- RICHARD, LAYTON & FINGER, P.A., Paul N. Heath, Zachary I. Shapiro, Andrew M. Dean, 920 North King Street, Wilmington, DE 19801, Counsel for Plaintiff JCF AFFM Holdings, L.P.


Sontchi, J.


Before the Court are two related motions to dismiss the remaining claims and counterclaims in this adversary proceeding. Ultimately, beyond the comprehensive arguments, this matter is simple. The parties put forward antithetic theses to justify their priority entitlement to the funds in the bank account at issue here. Those funds are a portion of the proceeds from the sale of the Debtors' managing general agencies. On the one hand, Anna Melissa Dowling (the "AIC Liquidator"), the court-appointed liquidator of Affirmative Insurance Company ("AIC"), a non-debtor subsidiary of Affirmative Insurance Holdings, Inc. ("AIH"), asks the Court to impose a constructive trust or resulting trust, for the benefit of AIC, over all funds held in the bank account. Additionally, the AIC Liquidator argues that the outcome of this dispute will have no effect on the administration of the Debtors' estates and contends that it should instead be heard by an Illinois state court as part of AIC's ongoing rehabilitation proceeding. On the other hand, JCF AFFM Debt Holdings, L.P. ("JCF"), a major lender to AIH, seeks a judgment of this Court declaring, inter alia , that it has a validly perfected security interest in and a lien on the deposit account. For the reasons set forth below, the Court concludes that resolving this matter requires, first and foremost, to determine whether the funds in the bank account in dispute are property of the estate or not. Such a decision reflects a traditional function of the bankruptcy court in which the debtor case is pending. Thus, the Court finds that it has jurisdiction over this matter and that permissive abstention is not appropriate. Furthermore, the Court concludes that each count in the counterclaims also goes to whether the funds held in the DACA 2 Account are property of the estate. As such, it is apparent that there is a dispute of a material fact between the parties. Since the Court finds that the counterclaims contain specific factual allegations, taken they are true, to suggest that the AIC Liquidator is entitled to the funds, the Court holds that dismissal is not appropriate at this time.


The question of the Court's jurisdiction over this adversary proceeding is central to this motion. A bankruptcy court has authority to determine whether it has subject matter jurisdiction over an adversary proceeding filed in a case before the court.2 The motion to dismiss for lack of subject matter jurisdiction is filed under Federal Rule of Civil Procedure 12(b), which applies to adversary proceedings pursuant to Federal Rule of Bankruptcy Procedure 7012(b). Accordingly, this Court may determine whether to dismiss JCF's complaint for lack of subject matter jurisdiction. If this Court does have jurisdiction, venue is proper in this district pursuant to 28 U.S.C. § 1409(a).

A. Factual Background Related to the Adversary Proceeding

Founded in 1998, AIH together with each of its wholly-owned direct and indirect subsidiaries provided non-standard personal automobile insurance ("NSPAI") policies for individual consumers in targeted geographic markets.3 NSPAI policies provide coverage to drivers who find it difficult to obtain insurance from standard automobile insurance companies due to their lack of prior insurance, age, driving record, limited financial resources, or other factors.4 AIH's policies were written by its state-regulated insurance subsidiaries, including AIC, which are not Debtors in these Chapter 7 cases.5

Since 2004, AIH and certain of its subsidiaries, including AIC, have agreed to file consolidated federal income tax returns, as memorialized in a Consolidated Tax Allocation Agreement (the "Tax Allocation Agreement").6 As parent of the companies in the affiliated group, AIH would file consolidated income tax returns and either pay the entire income tax liability of the affiliated group or receive any refunds due to the affiliated group. Under the Tax Allocation Agreement, for each tax year in which a subsidiary's net operating losses, net capital losses, foreign tax credits, investments credit, or other deductible or creditable items, were used to offset the income of the affiliated group, the subsidiary was entitled to "cash or securities having a market value equal to the actual tax savings realized by the Consolidated Group...."7

For the affiliated group's tax year ending December 21, 2014, the 2014 return reported an overall net operating loss of $45,172,492, of which $44,436,645 was allocated to AIC. Presumably, AIC was entitled to a related payment pursuant to the Tax Allocation Agreement, which it has not yet received (the "2014 Tax Payment"). The AIC Liquidator believes that the amount of the 2014 Tax Payment owed to AIC is not more than $8,572,000. AIC Liquidator has alleged that the funds earmarked for the 2014 Tax Payment were deposited to, and remain in, a designated bank account. The 2014 Tax Payment was identified by AIH as an unsecured claim in favor of AIC.8

On September 30, 2013, AIH entered into a credit agreement with JCF as lender (the "JCF Credit Agreement") pursuant to which JCF made a loan to AIH (the "JCF Loan").9 JCF alleges that in connection with the JCF Loan, the Debtors granted JCF a security interest in personal property belonging to AIH and other related entities, including all deposits account.10

On June 12, 2015, AIH and certain of its subsidiaries entered into an agreement (the "Purchase Agreement") under which the Debtors sold their owned managing general agencies ("MGAs") to Confine Seguros Holding II Co. (respectively, "Confine" and the "MGA Sale").11 But, while the network of MGAs could sell insurance policies, they were not themselves certified by any state to conduct the business of insurance.12 For our purposes, the MGAs needed AIC to write the policies that the MGAs sold. Therefore, Confine needed AIC to remain an operating insurer in compliance with Illinois law.

As alleged by the AIC Liquidator, it seems that before the MGA Sale, the Director of the Illinois Department of Insurance conveyed the Department's concern that the proceeds of the sale would be used solely to pay off debt holders, including JCF, leaving nothing to satisfy accrued operational expenses, including the 2014 Tax Payment.13 Furthermore, the AIC Liquidator contends that in order to satisfy the concerns of the Illinois Department of Insurance, the Debtors agreed to use a portion from the proceeds of the MGA Sale to, inter alia , set aside funds to make the 2014 Tax Payment to AIC.14

On June 30, 2015, the date of the closing of the MGA Sale to Confine, AIH and JCF entered into a Consent and Waiver to Second Lien Credit Agreement (the "Consent and Waiver") in order to allow certain assets subject to the MGA Sale to be sold free of JCF's asserted interests therein.15 In light of JCF's claim to all of the proceeds of the sale to Confine, JCF had to agree to any use of the MGA Sale proceeds which would not be paid directly to it. As part of this consensual arrangement, on June 30, 2015: (1) Confine wired directly to JCF $3,137,000 of the MGA Sale proceeds, which funds were applied by JCF to pay down the JCF Loan; (2) Confine wired to AIH $10,588,388.61 of the MGA Sale proceeds, which AIH deposited in a bank account at UMB Bank N.A. (respectively, "UMB" and "DACA 1 Account").16 In accordance with the terms of the Consent and Waiver, two days after closing the MGA Sale, on July 2, 2015, AIH withdrew an amount of $8,572,000 from the DACA 1 Account and deposited it into another UMB deposit account created by AIH (the "DACA 2 Account").17 This is the account at the heart of this adversary proceeding.

On September 1, 2015, before the due date of the Debtors' 2014 consolidated tax return,18 JCF sent a written notice to UMB, purporting to transfer sole control and dominion over the funds in the DACA 2 Account.19 To this day, the funds in the DACA 2 Account continue to be held at UMB.20

B. The Illinois Court Rehabilitation Proceeding

On September 16, 2015, the AIC Liquidator, in her capacity as the Acting Director of...

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