In re: Patriot National, Inc. et al
Filing
40
MEMORANDUM OPINION. Signed by Judge Richard G. Andrews on 9/30/2020. (nms)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELA WARE
In re :
PATRIOT NATIONAL, INC. , et al.,
Chapter 11
Case No. 18-10189 (CSS)
Jointly Administered
Debtors.
HONORABLE TRINIDAD NAVARRO,
INSURANCE COMMISSIONER OF THE STATE
OF DELAWARE, in his capacity as RECEIVER
OF ULLICO CASUALTY COMPANY IN
LIQUIDATION,
Appellant,
Civ . No . 18-751 (RGA)
V.
PATRIOT NATIONAL, INC . and CERBERUS
BUSINESS FINANCE, LLC,
Appellees .
MEMORANDUM OPINION
Neil B. Glassman, GianClaudio Finizio, Sophie E. Macon, Bayard, P .A. , Wilmington, Delaware,
attorneys for the Appellant.
Adam G. Landis, Landis Rath & Cobb LLP, Wilmington, Delaware; Michael L . Cook, Adam C.
Harris, William H. Gussman, Jr. , Schulte Roth & Zabel LLP, New York, New York; attorneys
for Appellees Guardia, LLC and Cerberus Business Finance, LLC.
September 30, 2020
Isl Richard G. Andrews
ANDREWS, UNITED ST ATES DISTRICT JUDGE:
This matter involves two insolvency estates - one bankruptcy and one insurance - in two
different forums . The appeal has been filed in the bankruptcy cases of Patriot National, Inc.
("PNI") and certain affiliates ("Debtors") by the Honorable Trinidad Navarro, Insurance
Commissioner of the State of Delaware, in his capacity as receiver ("Receiver") of Ullico
Casualty Company. The Ullico estate was created on May 30, 2013 when the Court of Chancery
of the State of Delaware entered its Liquidation and Injunction Order with Bar Date
("Liquidation Order") pursuant to the Delaware Uniform Insurers Liquidation Act, 18 Del. C. §
5901-5944 ("DUILA"). 1 The Debtors' bankruptcy estate was created years later upon the filing
of their chapter 11 petitions on January 30, 2018 . Under the authority of the Liquidation Order,
which requires the Receiver to marshal and recover assets and administer Ullico ' s estate for the
benefit of creditors, the Receiver filed a petition to compel accounting and turnover of collateral
from non-debtor Patriot Underwriters, Inc. n/k/a Guarantee Underwriters, Inc. ("GUI") on March
13, 2015. 2 The parties dispute whether a proper accounting was provided, and the Receiver
sought to preserve his rights in connection with the Debtors' plan.
The Receiver objected to confirmation on the basis that the proposed plan would impair
his rights under DUILA and the Liquidation Order in violation of the McCarran-Ferguson Act,3
1
The docket of the Chapter 11 cases, captioned In re Patriot National, Inc., No. 18-10189-CSS
(Bankr. D. Del.), is cited herein as "B.D.I. _." The appendix (D.I. 26-31) filed in support of the
Receiver's opening brief is cited herein as "A_. " "Appellees" are Guardia LLC, the reorganized
Debtor, as successor to PNI, and secured lender Cerberus Business Finance, LLC.
2
Although the Petition was commenced against a non-Debtor affiliated entity, the scope of the
accounting relates to the entire UllicolPatriot Program (defined below) for which the Debtors
produced bank records including the Patriot/Ullico Account (defined below). (D.1. 38 at 5 n.2).
3
The McCarran-Ferguson Act provides, in relevant part: "No Act of Congress shall be construed
to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the
2
that abstention was required under various statutes and doctrines,4 and that the plan was not
proposed in good faith in accordance with§ 1129(a)(3) of the Bankruptcy Code. The Receiver
further objected to a provision contained in the proposed plan which provided that the
Bankruptcy Court would have "exclusive jurisdiction" to adjudicate claims and litigation
"arising out of, and related to, the Chapter 11 Cases and the Plan." (D.I. 1-1 , Art. X).
At the April 24, 2018 confirmation hearing, the Bankruptcy Court issued a bench ruling
determining that the McCarran-Ferguson Act did not apply and that abstention was not
warranted. (Al065-68). Following supplemental briefing on the retention of exclusive
jurisdiction provision, on May 2, 2018, the Court entered a separate order (D.I. 1-2)
("Jurisdiction Order"), which determined that the Bankruptcy Court's retention of exclusive
jurisdiction provision "does not, at the moment, prejudice any party" and ordered that the
Confirmation Order contain language making it subject to objection by any party which believes
its rights are being infringed upon. Thereafter, on May 4, 2018, the Court entered an order
confirming the Debtors' plan (DJ. 1-1) ("Confirmation Order"). The Receiver has appealed the
Confirmation Order and Jurisdiction Order on the basis that they unlawfully impede and interfere
with his rights under the Liquidation Order and DUILA. For the reasons set forth below, the
Court will affirm both orders.
business of insurance, or which imposes a fee or tax upon such business, unless such Act
specifically relates to the business of insurance." 15 U.S.C. § 1012(b). "Congress carved out
insurance companies from the purview of federal bankruptcy law. As a result, the states have
primary responsibility for regulating insurance, including insurance company insolvency
proceedings." In re Freestone Ins. Co. , 143 A.3d 1234, 1242-43 (Del. Ch. 2016) (cleaned up).
4
The Receiver asserted that the Bankruptcy Court was required to abstain, or should exercise its
discretion to permissively abstain, from abrogating the Receiver' s rights under 28 U.S.C. §
1334(c), as well as under the abstention doctrines set forth in Younger v. Harris, 401 U.S. 37
(1971) and in Burford v. Sun Oil Co. , 319 U.S. 315 (1943).
3
I.
BACKGROUND
A.
The Parties
In 2009, insurance company Ullico entered into relationships with non-debtor Patriot
Underwriters, Inc., now known as GUI, to provide workers' compensation insurance through a
program marketed and operated by GUI (the "Ullico/Patriot Program"). GUI provided "turnkey" insurance services to Ullico, which allowed its capital to be used to backstop losses from
covered workers compensation risk. Virtually all other aspects of the insurance operation were
handled by the non-insurer service providers, including sales, marketing, management,
underwriting, policy issuance, administration, accounting, claims handling, premium collection
and disbursement, collateral collection and disbursement, and subrogation (collectively, the
"Ullico/Patriot Program Services"). (See A0233 , 0278). Numerous Ullico large-deductible
workers compensation insurance policies were issued through the Ullico/Patriot Program.
Pursuant to the "Large Deductible Endorsement" attached to the policies, Ullico was authorized
to advance part or all of the applicable deductible amounts, and the insured was required to
reimburse Ullico for payments made by the company that were within the deductible. (See
A0339; A0368; A0380). In order to secure repayment of the deductible and other payments
which became due from the insured to Ullico, the insured was required to provide collateral prior
to the issuance of the policy. (A0380). GUI entered into program agreements with Ullico
insureds that required the insureds to deposit collateral with GUI. (A0385; A0406; A0428).
B.
The Liquidation
On May 30, 2013 , the Court of Chancery entered the Liquidation Order placing Ullico
into liquidation pursuant to §§ 5905 and 5906 of DUILA. The Receiver is vested with "all right,
title and interest in, of or to, all of the property of [Ullico ]" (A0027-0030, ,r,r 1-3 and 7); see also
18 Del. C. § 5913(b). The Liquidation Order includes a number of provisions authorized by 18
4
Del. C. § 5904(b) to assist the Receiver in one of his core functions : to marshal the assets and
possible assets of the estate. The Liquidation Order prevents the dissipation of Ullico ' s assets or
assets that it may have an interest in; requires the person or entity in possession of the assets to
file an accounting of those assets with the Receiver; and mandates that all assets be turned over
to the Receiver. (A0031-0032 at ,i,i 8- 10). Paragraph 9 of the Liquidation Order provides:
9. Except as otherwise indicated elsewhere in this Order or except as excluded by
express written notice provided by the Receiver, all persons or entities holding
Assets of, or on behalf of, ULLICO CASUAL TY shall file with the Receiver
within ten (10) calendar days of the entry of this Order an accounting of those
Assets, regardless of whether such persons or entities dispute the Receiver's
entitlement to such Assets.
(A0031 at ,i 9). The Liquidation Order prohibits all persons or entities from "exercising any
right adverse to the right ofULLICO CASUALTY to or in the Assets, or in any way interfering
with the Receiver, the Deputy Receiver(s), or the Designees either in their possession and control
of the Assets or in the discharge of their duties hereunder. " (A0032 at ,i 11). Through the
Liquidation Order, estate assets are marshaled for the purpose of administering them, including
distributing assets consistent with DUILA and the Liquidation Order. See DUILA § 5918.
C.
The Petition to Compel Accounting and Turnover
Within months of Ullico being placed into liquidation, GUI and its affiliates began an
operational restructuring which took place between 2013 and 2015 . The operational
restructuring was purportedly designed to separate the insurance-risk-taking business ("Guaranty
Silo") from the Debtors ' non-risk-bearing insurance-services business ("Patriot Silo"). (See
A0076 ,i 18). The restructuring is reflected in the 2013-2015 organization charts contained in the
regulatory filings of Guaranty Insurance Company ("GIC") with the Florida Office of Insurance
Regulation. (A0227-0232). The charts also reflect the restructuring of the Ullico/Patriot Service
Providers from the Guaranty Silo to the Patriot Silo; Patriot Risk Services was part of the Patriot
5
Silo in 2013, and Patriot Claims Services moved from the Guaranty Silo to the Patriot Silo
between 2013 and 2014. Id. Each of the Ullico/Patriot Service Providers are debtors in the
chapter 11 cases.
On March 13, 2015, the Receiver filed the Petition to Compel Accounting and Turnover
(A0043), 5 which included a demand for the accounting and turnover of over $26,000,000 of
Ullico Collateral which GUI reported, as of March 12, 2013, was being held in connection with
the Ullico/Patriot Program (the "Ullico Collateral"). (A0059-0060). The Receiver alleges that
the Debtors transferred Ullico Collateral by moving it from the Guaranty Silo to the Patriot Silo,
consistent with the movement of the Ullico/Patriot Service Providers, and that the Ullico/Patriot
Service Providers, consistent with their insurance-services business roles, were likely to have
possessed and controlled the Ullico Collateral.
The parties dispute whether a proper accounting has been provided. In response to
discovery requests, Debtors provided some bank account statements for account 5225 titled
"Patriot Risk Services, Inc. Ullico Casualty" (the "Patriot/Ullico Account") for the period
January 1, 2012 through August 31 , 2017 (A0485-0525). The Patriot/Ullico Account is
designated as a "restricted account" by the Debtors. (See A0l 70 (identifying account 5225 as a
"restricted account")). The Debtors' restricted accounts hold collateral in trust for the benefit of
third parties. Debtors acknowledge that property held in restricted accounts (of which there were
over two hundred as of the Petition Date) did not constitute property of the Debtors' bankruptcy
estate and will not be transferred pursuant to the reorganization. (AO 130-0131 at 1 8; A0901 at
92: 13-24). According to the Receiver, the activity reflected in the Patriot/Ullico Account reflects
5
C.A. No. 8392-VCS, D.I. 87 ("Petition to Compel Patriot Underwriters, Inc., Now Purportedly
Known as Guarantee Underwriters, Inc., to File an Accounting with the Receiver and to
Turnover Certain Collateral Held on Behalf of Ullico Casualty Company to the Receiver).
6
ongoing deposits and withdrawals of millions of dollars during the period when the
Ullico/Patriot Program was active, and during the period immediately following entry of the
Liquidation Order. (A0485). Debtors have argued that it was impossible that they had any
involvement with Ullico because no Debtor existed at the time Ullico was placed into liquidation
in 2013 . The Receiver argues that this is contradicted by records and statements dating Debtors'
origins back to 2003 and supporting an affiliation through common ownership. (See A0076).
Even if the Debtors were correct, the Receiver asserts, this would not absolve the Debtors of
their obligation to comply with the Liquidation Order and provide an accounting.
D.
Confirmation Order
On April 2, 2018, the Receiver objected to the plan's discharge, injunction, and
exculpation provisions on the basis that those provisions impair the Receiver' s rights under the
Liquidation Order and under DUILA in contravention of the McCarran Ferguson Act (A07060710) ("Plan Objection"). On April 12, 2018, the Receiver filed a motion seeking abstention and
relief from the automatic stay (A0597) ("Abstention Motion"). At bottom, the relief sought by
the Receiver was the insertion of "carve out" language stating that nothing in the plan would
modify or restrict his rights. (A0941 at 132: 17-24).
The Plan Objection and the Abstention Motion were heard in conjunction with the plan
confirmation hearing on April 24, 2018. At the conclusion, the Bankruptcy Court rendered a
decision on the record, overruling the Plan Objection and denying the Abstention Motion. (See
Al065-1068, 256-259). The Bankruptcy Court declined to abstain, because, among other things,
the PNI reorganization case "does not in any way invalidate the [Receiver' s] authority" and
because confirmation of the Plan was a "core proceeding to which mandatory abstention does not
apply. " (Al066 at 257:10-11 ; 257:20-21). The Bankruptcy Court ruled that "federal .. .
bankruptcy issues .. . are involved," not "only state law issues." (A1067 at 258 :6-7). Any state
7
proceedings, said the Bankruptcy Court, "simply do not afford an adequate opportunity to raise
the federal claims." (Id. at 258: 15-16). It further noted that a bankruptcy court "has exclusive
jurisdiction to determine" the Receiver' s asserted "property rights ." (Id. at 258:21-22).
E.
Jurisdiction Order
At the conclusion of the plan confirmation hearing, the Bankruptcy Court requested
supplemental letter briefs (Al 118-1133) regarding the proposed exclusive jurisdiction provision
contained in the plan, which provides in pertinent part:
... the Bankruptcy Court shall retain exclusive jurisdiction over all matters
arising out of, and related to, the Chapter 11 Cases and the Plan to the fullest
extent permitted by law, including, without limitation, jurisdiction to:
[ ... ]
5. hear and determine any and all adversary proceedings, motions, applications,
and contested or litigated matters arising out of, under, or related to, the Litigation
Claims or the Chapter 11 Cases ....
(D.I. 1-1 , Art. X) . On May 2, 2018, the Bankruptcy Court entered the Jurisdiction Order
authorizing the Plan' s exclusive jurisdiction provision. (D.I. 1-2 ,r A). The Bankruptcy Court
declined to "order in advance that it retains exclusive subject matter jurisdiction over claims and
litigation not yet commenced[.]" (Id. ,r B (citing Zambelli Fireworks Mtg. v. Wood, 592 F.3d
412, 418 (3d Cir. 2010) (" [A] federal court always has jurisdiction to determine its
jurisdiction.")). The Bankruptcy Court noted its inability "to assume jurisdiction it otherwise
does not have[.] " (D.I. 1-2 ,r B (citing In re Resorts Int'!, Inc., 372 F. 3d 154, 161 (3d Cir. 2004)
(" If there is no jurisdiction under 28 U.S.C. § 1334 or 28 U.S.C. § 157, retention of jurisdiction
provisions in a plan ... are fundamentally irrelevant.")). The Bankruptcy Court stressed that the
plan's "retention of exclusive jurisdiction does not, at the moment, prejudice any party" and
ordered that its "retention of jurisdiction is subject to objection" by any party. (D.I. 1-2). The
Bankruptcy Court reasoned that the Receiver' s jurisdictional challenge was "premature" because
there was no pending "litigation" between the parties (D.I. 1-2 ,r C). The Bankruptcy Court
8
would "address" a jurisdictional challenge "if litigation is commenced." The Jurisdiction Order
was entered on May 2, 2018, and the Confirmation Order was entered on May 4, 2018.
On May 16, 2018, the Receiver filed a timely notice of appeal with respect to both orders.
(D.1. 1). The appeal is now fully briefed. (D.I. 25 , 37, 38, 39). The Court did not hear oral
argument because the facts and legal arguments are adequately presented in the briefs and
record, and the decisional process would not be significantly aided by oral argument.
II.
JURISDICTION AND STANDARD OF REVIEW
This Court has jurisdiction under 28 U.S .C. § 158(a)(l) over "final judgments, orders,
and decrees." Bullardv. Blue Hills Bank, 135 S. Ct. 1686, 1692-93 (2015) (bankruptcy court
order final, appealable if it "alters the status quo and fixes the rights and obligations of the
parties"; order confirming plan is "final"). Appellees argue that the portion of the Confirmation
Order denying the Abstention Motion was an interlocutory ruling, which may only be heard with
leave of the Court, which the Receiver failed to address in his opening brief. (D.I. 37 at 2-3). As
the Receiver correctly points out, however, the record reflects that the contested matters
comprising the Abstention Motion and Plan Objection presented related arguments focused on
the plan's impact on the Receiver's rights under DUILA and the Liquidation Order. The parties
and the Bankruptcy Court agreed that the Receiver's contested matters would be presented and
considered at the Confirmation Hearing as one contested matter, and these matters were
consolidated by oral order. (See A0830 at 21:9-13; A0927-28 at 118:22-119:1). Consolidation
of contested matters is consistent with Federal Rule of Civil Procedure 42 (applicable to
contested matters through Bankruptcy Rules 9014 and 7042). The Confirmation Order (which
includes the Bankruptcy Court's oral rulings) denied and overruled the Receiver' s consolidated
Abstention Motion and Plan Objection, and it is a final determination of the contested matter,
appealable as ofright in accordance with 28 U.S.C. § 158(a)(l).
9
This appeal seeks review of the Bankruptcy Court's legal conclusions regarding (i) the
applicability of the McCarran-Ferguson Act and its preemption of the Bankruptcy Court' s
jurisdiction, (ii) the applicability of mandatory or permissive abstention, and (iii) the
appropriateness of abstention pursuant to the Younger and Burford doctrines. Where the appeal
presents mixed questions of law and fact, I accept the Bankruptcy Court's finding of historical or
narrative facts unless clearly erroneous, but exercise plenary review of the Bankruptcy Court's
choice and interpretation of legal precepts and its application of those precepts to the historical
facts . In re SemCrude, L.P., 526 B.R. 556, 559 (D. Del. 2014).
III.
ANALYSIS
While the Receiver raises several issues on appeal , the crux of his arguments is that the
effect of the Jurisdiction Order and the Confirmation Order was to "eliminate the Receiver' s
ability to compel the Debtors' compliance with the Liquidation Order, denuding the Court of
Chancery's jurisdiction and ability to exercise oversight of the Ullico estate and the assets
composing same." (D.I. 25 at 27). Specifically, the Receiver argues that the Court of Chancery
should be the court to enforce its own Liquidation Order and determine consequences, if any, for
violations of its provisions requiring the accounting and turnover of Ullico ' s collateral and
enjoining actions detrimental to the Ullico estate. Conversely, Appellees argue that the orders
were properly entered, as the Bankruptcy Court has exclusive jurisdiction over the Debtors'
property and the exercise of that jurisdiction does not impair DUILA. Appellees further assert
that the Receiver has never filed a proof of claim or initiated an adversary proceeding, so the
Bankruptcy Court properly ruled that the Plan Objection was premature and declined to issue an
advisory opinion. Finally, Appellees assert, the Jurisdiction Order protects the Receiver' s
asserted rights.
10
In my view, the parties largely argue past each other. Under the Liquidation Order, the
Receiver has a right to the accounting. The accounting serves a fundamental role in
administering the liquidation of Ullico in accordance with DUILA. To the extent that the
Jurisdiction Order and Confirmation Order would preclude the Receiver from compelling the
accounting, those orders would impair his rights under DUILA. That is not my reading,
however, of either the Jurisdiction Order or the Confirmation Order. The Jurisdiction Order
appears to preserve, rather than preclude, the Receiver' s right to argue for enforcement of the
Liquidation Order in "another forum ," including, presumably, the Court of Chancery. The
Bankruptcy Court declined to "order in advance that it retains exclusive subject matter
jurisdiction over claims and litigations not yet commenced." (D.1. 1-2). The Jurisdiction Order
specifically notes, "Retention of jurisdiction provisions in plan of reorganization do not permit a
bankruptcy court to assume jurisdiction it otherwise does not have." (Id.) . Indeed, the
Jurisdiction Order specifically provides that the Bankruptcy Court "will be able to address th~
substance of the [Plan Objections] iflitigation is commenced and a party objects to the Court's
jurisdiction." (Id.)
To the extent that a claim or action for determination of ownership over the funds in the
Debtors' restricted accounts is filed, however, Appellees are correct to argue that such a
determination is within the Bankruptcy Court's subject matter jurisdiction and would not impair
DUILA. Case law is clear that the McCarran-Ferguson Act does not deprive a federal court of
its valid jurisdiction, and that "a federal court's determination ofrights to that property, without
more, does not invalidate, impair or supersede state insurance law -
even if the federal court
later decides that the property never becomes property of the insurer's estate." See In re A mes
Dep 't Stores, Inc., 542 B.R. 121 , 151 (Bankr. S.D.N.Y. 2015). As no such claim or action to
determine ownership of funds in the restricted accounts was before the Bankruptcy Court at the
11
time of plan confirmation, however, the Bankruptcy Court correctly declined to make a
premature ruling on the Plan Objection. (D.I. 1-2 1 C).
A.
The Bankruptcy Court Properly Exercised Jurisdiction in Confirming the
Plan
The Receiver asserts that the Bankruptcy Court "err[ed] in exercising subject matter
jurisdiction by confirming" the Plan because the Plan Injunction Provisions, including the
retention of exclusive jurisdiction, impaired his rights. (D.I. 25 at 2). This contention ignores
established federal bankruptcy jurisdiction. See In re Midstate Mortg. Inv 'rs, Inc., 105 F. App'x
420, 421 (3d Cir. 2004) (rejecting jurisdictional challenge; '" [W]here there is a close nexus to
the bankruptcy plan or proceeding, as when a matter affects the interpretation, implementation,
consummation, execution, or administration of a confirmed plan ... retention of postconfirmation bankruptcy court jurisdiction is normally appropriate. ' That nexus existed here
where the dispute focused on the content and meaning of the Plan, issues over which the
bankruptcy court had properly retained jurisdiction.") (quoting Resorts Int'!, 372 F.3d at 16869); see also In re Marcus Hook Dev. Park, Inc. , 943 F.2d 261 , 266 (3d Cir. 1991) (bankruptcy
court has "undisputed" jurisdiction to enforce own order).
Article X of the plan retains the Bankruptcy Court's jurisdiction over matters related to
the recovery of property of the estate. The Bankruptcy Court has exclusive jurisdiction over
matters related to the determination of property of the Debtors' estates and has jurisdiction to
determine what is property of the estate. See 28 U.S.C. § 1334(e)(l); 28 U.S.C. §§ 157(b)(2)(A),
(E) and (0). In this case, the Receiver, admitting the litigation is "not yet commenced," intends
to assert a "potential" claim to certain funds allegedly held in trust by PNI. (D.I. 25 at 3). In
essence, the Receiver wants the Court of Chancery to determine ownership of property held by
the Debtors instead of the Bankruptcy Court. The ascertaining and marshalling of the Debtor' s
12
estate is, however, a core function of the bankruptcy process over which Congress gave the
Bankruptcy Court "exclusive jurisdiction." The Receiver's "potential" claim "stems from the
bankruptcy itself," Stern v. Marshall, 564 U.S. 462, 499 (2011), and is within the Bankruptcy
Court's exclusive power to adjudicate.
According to the Receiver, as "the Debtors have confirmed on numerous occasions, the
property held in the Restricted Accounts is not part of the Debtors' estates." (A0130-0131 at~ 8;
A0901 at 92 :20-23 (Debtors' counsel addressing the Bankruptcy Court " . . . we have
consistently taken the position ... that funds held in restricted accounts do not belong to any
Patriot entity and are not and never were and never will be property of the estate."). The relief
the Receiver seeks has nothing to do with property of the Debtors' estate, he contends. Rather,
with respect to any potential claim, the Receiver asserts, "the only determination to be made
pertaining to property is whether certain property belongs to the Ullico Estate." (Id. at 32).
The Court finds this argument unavailing. "Various courts have concluded that matters
requiring a declaration of whether certain property comes within § 541 's definition of ' property
of the estate' are core proceedings." In re New Century Holdings, Inc., 387 B.R. 95 , 105
(Bankr. D. Del. 2008). Here, the disputed funds are purportedly held in the Debtors' restricted
accounts. Even if the funds were held in trust, as the Debtors assert, it would still be within the
jurisdiction of the Bankruptcy Court to make the determination of whether property held by the
Debtors would come within § 541 's definition of "property of the estate. " And the Debtors
apparently do not concede that funds held by the Debtors are subject to turnover under the
Petition to Compel Accounting and Turnover. Thus, in the event of litigation brought by the
Receiver, ownership would still need to be determined. As the Bankruptcy Court noted at the
confirmation hearing, "whether it's estate property ... or property that rightfully belongs to
Ullico ... those are just flipsides of the same question. If it's not property of the estate, perhaps
13
it's property ofUllico. If it's property of the estate, then it's not property ofUllico. Isn't it the
same .. . question, just in two different courts?" (A0947).
In any event, the issue of jurisdiction is reserved for later determination if in fact
litigation over the funds is commenced. The Third Circuit has been very clear that retention of
jurisdiction provisions in plans of reorganization cannot confer jurisdiction upon a bankruptcy
court that it does not otherwise have. Resorts Int'!, 372 F .3d at 161. This proposition is clearly
recognized in the Jurisdiction Order. The retention of jurisdiction provision simply preserves, to
the maximum extent possible, the Bankruptcy Court' s jurisdiction over the matters listed in
Article X.A of the plan. In the course of any future litigation involving the Reorganized Debtors
and the Receiver, the Receiver may still raise the issue of jurisdiction, and nothing in the plan or
the Confirmation Order forecloses that right. As set forth below, however, the question of
whether to commence litigation is a decision the Receiver should not have to make until he
receives the accounting.
B.
The Bankruptcy Court Properly Found that the Plan Was Proposed in Good
Faith
Following a lengthy evidentiary hearing with live testimony and documentary evidence,
the Bankruptcy Court made the finding that the plan had been proposed in good faith, having
"examined the totality of the circumstances surrounding the filing of the Chapter 11 cases, the
Plan itself, and the process leading to the Plan's formulation." (D.1. 1-1 at 18-19). In re
Cpmbustion Eng'g, Inc., 391 F.3d 190, 246 (3d Cir. 2004) ("Although the Code does not define
'good faith' in the context of§ 1129(a)(3), we have stated that '[f]or purposes of determining
good faith under section 1129(a)(3) ... the important point of inquiry is the plan itself and
whether such a plan will fairly achieve a result consistent with the objectives and purposes of the
Bankruptcy Code. "') (quoting In re PWS Holding Corp., 228 F.3d 224,242 (3d Cir. 2000)). A
14
bankruptcy court's "determinations of fact on good faith are reviewed for clear error[.]"
Combustion Eng'g., 391 F. at 246 n.67. A finding is clearly erroneous only when "the reviewing
court on the entire evidence is left with a definite and firm conviction that a mistake has been
committed." Anderson v. City of Bessemer, 470 U.S. 564,573 (1985).
The Receiver offers no evidence of collusion, misconduct, or abuse of the bankruptcy
process. (See D.I. 1-1 at 19 ("The facts and record, the Disclosure Statement, the record of the
Confirmation Hearing [with live testimony], other proceedings held in the Chapter 11 Cases, and
arm's-length negotiations among the Debtors and their key creditor constituencies provide
independent evidence of the Debtors' good faith, serve the public interest, and assure fair
treatment of creditors and shareholders consistent with the overriding purpose of chapter 11 , with
the legitimate purpose of reorganizing, and consistent with applicable law.") (edited and cleaned
up). The Receiver asserts that "the Plan violates§ 1129(a)(3) because it has not been proposed
in good faith and not by any means forbidden by law in that it violates the [McCarran-Ferguson
Act] and the Younger and Burford abstention doctrines. " (A0462-63; see also D.I. 25 at 47).
Conversely, Appellees argue that the McCarran-Ferguson Act is inapplicable, and the
Bankruptcy Court properly declined to abstain.
1. The McCarran-Ferguson Act Is Not Implicated by the Orders
Under the supremacy clause and rules of statutory construction, a federal statute would
ordinarily preempt a state law insofar as the state law contravened the federal statute. Ames, 542
B.R. at 146 (citing Stephens v. American Intern. Ins. Co. , 66 F.3d 41, 43-44 (2d Cir. 1995)). In
passing the McCarran-Ferguson Act, Congress created an exception to the standard preemption
rules in certain instances involving state statutes regulating the insurance industry. The
McCarran-Ferguson Act provides in relevant part: "No Act of Congress shall be construed to
invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the
15
business of insurance ... unless such Act specifically relates to the business of insurance. " For
this reason, when it applies, the McCarran- Ferguson Act is said to "reverse preempt" federal
law. Ames, 542 B.R. at 146. In determining whether the Act "precludes application of a feder~l
statute in face of state law," most courts consider whether (1) the state law was enacted "for the
purpose of regulating the business of insurance," (2) the federal statute "does not specifically
relate to the business of insurance," and (3) the federal statute would "invalidate, impair, or
supersede the State' s law." Humana Inc. v. Forsyth, 525 U.S. 299, 307 (1999) (citation and
quotation marks omitted); In re MF Global Holdings Ltd., 469 B.R . 177, 194 n. 17 (Bankr.
S.D.N.Y. 2012). The parties do not dispute that Bankruptcy Court properly concluded that the
first two prongs were satisfied here. (A1065 at 256:14-17).
With respect to the third prong, whether plan confirmation would have invalidated,
impaired, or superseded the state insurance insolvency laws, the Supreme Court has defined the
terms "invalidate," "impair" and " supersede." See Humana, 525 U.S. at 307-10. "The term
'invalidate' ordinarily means ' to render ineffective, generally without providing a replacement
rule or law. ' And the term ' supersede' ordinarily means ' to displace (and thus render
ineffective) while providing a substitute rule. "' Id. at 307 (citations omitted) . The Supreme
Court has applied the following test to determine whether a state' s law was impaired: "When
federal law does not directly conflict with state regulation, and when application of the federal
law would not frustrate any declared state policy or interfere with a State's administrative regime,
the McCarran-Ferguson Act does not preclude its application." Id. at 310.
The Bankruptcy Court concluded that the third factor had not been satisfied because, in
the event of litigation, "what the Court will be determining is property rights, interpretation of
contracts, interpretation of state statutes, and that does not impair state law." (Al065 at 256:2225). The Bankruptcy Court was further "satisfied that this bankruptcy proceeding does not in
16
any way invalidate the Ullico receiver's authority. And Ullico may file a claim in this Court; it
may commence an adversary proceeding if it believes that the debtors are in possession of its
property." (Al066). The Receiver argues that the Bankruptcy Court erred in ruling that the third
prong was not satisfied, as the plan "eliminates the Receiver's right to seek enforcement of the
Accounting pursuant to the Liquidation Order" thereby invalidating and impairing his rights
under DUILA (D.I. 25 at 32). Conversely, Appellees argue that the Bankruptcy Court has
exclusive jurisdiction to determine issues of property ownership and that such exercise does not
impair the Receiver's rights or frustrate any goal of DUILA.
The Court agrees with Appellees inasmuch as a long line of cases holds that a bankruptcy
court' s retention of, and potential exercise of, exclusive jurisdiction over determinations related
to property of the estate does not support reverse preemption under the McCarran-Ferguson Act.
See, e.g., Ames, 542 B.R. at 150 ("A federal court' s determination ofrights to [the property of an
insolvent insurer] , without more, does not invalidate, impair or supersede state insurance laweven if the federal court later decides that the property never becomes property of the insurer' s
estate"); In re Agway, Inc. , 357 B.R. 195, 203-04 (Bankr. N.D.N.Y. 2006) (bankruptcy court' s
jurisdiction over liquidator's claim against bankruptcy estate did not impair state insurance
liquidation proceeding); In re PRS Ins. Grp. , Inc ., 331 B.R. 580, 588 (Bankr. D. Del. 2005)
(finding that an exercise of a bankruptcy court's exclusive jurisdiction does not interfere with a
state insurance receivership or support reverse preemption under the McCarran-Ferguson Act);
In re Frontier Ins. Grp. , LLC, 517 B.R. 496, 506 (Bankr. S.D.N.Y. 2014) ("[A] federal court's
ordinary determination of property rights, interpretation of contracts, or interpretation of state
statutes does not 'impair' state law, even when a federal court's decision has a financial impact
on the insolvent insurer' s estate.").
17
Here, however, there is no pending proof of claim or proceeding for a determination of
property rights. Nevertheless, Appellees ' arguments faulting the Receiver for not having filed a
proof of claim or initiated a proceeding puts the cart before the horse. The Receiver filed the
Petition to Compel Accounting and Turnover under the authority of DUILA. Compliance with
the accounting provision of the Liquidation Order is necessary to obtain information critical to
the Receiver and the Court of Chancery ' s efforts to accomplish an effective, orderly liquidation
of the Ullico estate. The accounting requirement is standard in every insurance company
liquidation proceeding commenced in Delaware, and the information obtained through the
accounting, and the related requirement to turn over assets identified by the accounting, serves a
critical function in collecting and marshalling assets of an insolvent insurance company in an
efficient manner to effectively administer the insurance liquidation estate consistent with both
the provisions and the underlying purpose of DUILA. The question of whether to file a proof of
claim or commence litigation against the Debtors carries financial and jurisdictional implications
which are highly consequential in the context of an insurance liquidation. The Receiver should
not have to make that decision in the absence of the accounting, nor should it have to file an
adversary proceeding in order to obtain the accounting. The Court agrees with the Receiver that
any order that would impair the Receiver' s rights or ability to obtain an accounting would
necessarily frustrate the purpose of DUILA.
That said, neither the Confirmation Order nor the Jurisdiction Order preclude the
Receiver's rights to seek an accounting. The Receiver asserts that the Orders gave the
Bankruptcy Court exclusive jurisdiction to adjudicate not-yet-commenced potential claims and
litigation. (D.I. 25 at 3). In my view, the Receiver has misread the protective terms of the
Jurisdiction Order. Recognizing the Receiver's concerns, the Bankruptcy Court declined to
"order in advance" of any later litigation with the Receiver that it had jurisdiction. (D.I. 1-2 1 B).
18
Stressing that the Bankruptcy Court had no intention to "prej udice any party," it preserved the
parties' right to challenge jurisdiction if and when litigation ensued, stressing that it would
"address" the issue at the appropriate time. (Id. at 3). The Confirmation Order "shall contain
language making it clear that that the Court's retention of jurisdiction is subject to objection by a
party which believes ... its rights to institute claims or litigation in other forums, is being
infringed upon. " (Id.) The Receiver does not address these provisions.
2.
The Bankruptcy Court Properly Declined to Issue an Advisory Ruling
Absent a case or controversy, the Bankruptcy Court had no authority to issue the relief
sought by the Receiver, and the Bankruptcy Court properly declined to issue an advisory
opinion. The Plan Objection stemmed from the Receiver's concern that "[t]he Plan . .. through
the discharge, injunction, release and exculpation provisions ... prevent[s] the Receiver's
authority to carry out his DUILA obligations by preventing the Receiver from pursuing possible
claims and causes of actions to recover and administer Assets ofUllico Casualty." (A453-54
(emphasis added); see D.I. 25 at 54 ("Debtors have enjoined the Receiver's ability, through
confirmation of the Plan and application of the Plan Injunction Provisions against the Receiver,
to recover Ullico Collateral by pursuing potential causes of action ... ") (emphasis added)). The
Receiver asked the Bankruptcy Court to "abstain from taking any action in these chapter 11
cases that may interfere with [his] ability to exercise his rights or fulfill his obligations in
connection with the DUILA Insolvency Proceedings." (A599 (emphasis added)); A0941 at
132:11-17 (Receiver's counsel: "What we are asking Your Honor to do is to ensure that through
confirmation of the plan, that Your Honor abstains from taking any action through that
confirmation that will affect our rights to go [to] Chancery Court to enforce the liquidation order
and claims against this estate for violations of the liquidation order").
19
Appellees argue that the Receiver never asserted claims against PNI in state court or
elsewhere and therefore the Receiver effectively asked the Bankruptcy Court for an opinion
concerning unasserted causes of action relating to purported trust funds. (See A1068 at 258 :2021) (the Bankruptcy Court recognizing that the "Ullico receiver intends to pursue property
claims"). The Receiver therefore failed to present a "legal controversy that is real and not
hypothetical," or one that presently "affects" the Receiver "in a concrete manner." Int '! Bhd. of
Boilermakers, Iron Ship Builders, Blacksmiths, Forgers & Helpers v. Kelly, 815 F.2d 912, 915
(3d Cir. 1987).
In re Cubic Energy, Inc. is helpful. In that case, certain parties sought "interpretation and
enforcement of [the] provisions of the [debtors' reorganization plan] concerning the possible
release, discharge, and injunction of claims and causes of action, particularly any claims against
the [m]ovants." The bankruptcy court held that the requested relief would constitute "an
impermissible advisory opinion." 587 B.R. 849, 850-51 (Bankr. D. Del. 2018). The movants in
Cubic Energy, like the Receiver here, " [d]id not ask the Court to ... prevent ongoing litigation,
or force the parties to do something." Id. at 856. Rather, the requested relief turned on whether
certain unasserted claims would "fall within certain exceptions to the [debtors' reorganization
plan]," but the bankruptcy court found that "these exceptions may very well hinge on the nature
of the claims brought ... and the factual and legal grounds surrounding them"; accordingly, the
bankruptcy court held that "to decide on the [requested relief] at this stage would be to indulge in
appraising a hypothetical set of facts ." Id. at 857. The Bankruptcy Court here faced the same
20
procedural posture.
3. The Bankruptcy Court Properly Determined Abstention Is Unwarranted
(a)
Mandatory abstention under 28 U.S.C. § 1334(c)(2)
Abstention is mandatory under 28 U .S.C. § 1334(c)(2) in "a proceeding based upon a
State law claim or State law cause of action, related to a case under title 11 but not arising under
title 11 or arising in a case under title 11 ... if an action is commenced, and can be timely
adjudicated, in a State forum of appropriate jurisdiction." Mandatory abstention does not apply
to "core" proceedings, such as proceedings to enforce debtors' reorganization plans. Midstate
Mortg., 105 F. App'x at 422 (" [T]he bankruptcy court [did not] err in refusing to abstain . ..
[when] the bankruptcy court considered arguments regarding Plan terms involving releases and
discharges, as well as the confirmation itself, making this a core proceeding."). The Receiver
argues, "The rights and actions most likely to be initiated by the Receiver -
e.g., to compel an
accounting, and for turnover of identified property- are non-core proceedings." (A0613
These allegations, however, are objections to Plan confirmation. (A0609
~
~
35).
29 ("[T]he Receiver
seeks entry of an order . .. abstaining from taking any actions, through confirmation of the Plan
or otherwise, that will restrict or otherwise impede the Receiver's exercise of his rights or
fulfillment of his duties and obligations")). As Appellees correctly argue, the Receiver never
sought turnover or any other affirmative relief, and if he did, that request would have been a
"core" proceeding. 28 U.S.C. §§ 157 (b)(2)(A), (E).
Because plan "[c ]onfirmation is a core proceeding to which mandatory abstention does
not apply," the Bankruptcy Court properly held that mandatory abstention was not required.
(A1066 at 257:18-23); see Midstate Mortg, 105 F. App 'x at 422; 28 U.S.C. §§ 157(b)(2)(I), (J),
21
(L).
(b)
Permissive abstention under 28 U.S.C. § 1334(c)(l)
Permissive abstention is left to a bankruptcy court's discretion "in the interest of justice,
or in the interest of comity with State courts or respect for State law." 28 U.S.C. § 1334(c)(l);
see In re Petrie Retail, Inc ., 304 F.3d 223 , 232 (2d Cir. 2002). Although courts evaluate twelve
factors when determining whether to abstain permissively, "three factors are given more weight
than the others: (1) the effect on the administration of the estate; (2) whether the claim involves
only state law issues; and ([3]) whether the proceeding is core or non-core. " In re Welded
Constr., L.P. , 609 B.R. 101 , 112 (Bankr. D. Del. 2019).
With respect to the first factor -
the effect on the administration of the estate - the
Bankruptcy Court found that abstention would have vitiated plan confirmation and impaired the
administration of PNI ' s estate. (A1065 at 256:20-21) ("First of all, ifl do abstain, I'm basically
denying confirmation. I think that's clear.")); see also Welded Constr. , 609 B.R. at 113 ("A
bankruptcy court has an inherent responsibility to exercise its jurisdiction to effectuate one of the
core features of the bankruptcy process itself[); In re FAH Liquidating Corp., 567 B.R. 464, 472
(Bankr. D. Del. 2017) (" [S]eeking interpretation and enforcement of the Plan" weighs in favor of
not abstaining); In re AstroPower Liquidating, 335 B.R. 309, 330 (Bankr. D. Del. 2005)
(declining to abstain because the matter before the court was "intrinsically connected to the
Plan"). Because plan confirmation (or denial thereof) would have had a significant impact on the
administration of the estate, the first factor weighs in favor of denying abstention.
The second factor -
"whether the claim involves only state law issues" -
is relevant
because the Receiver asserted no claims; the only state law matter is the ongoing Delaware
insurance insolvency proceeding. (D.1. 25 at 49) (" [T]he state court proceeding at issue broadly - is the DUILA Insolvency Proceeding"). The potential turnover claim articulated by
22
the Receiver is within the Bankruptcy Court' s exclusive jurisdiction, as it will impact what is and
is not property of the Bankruptcy Estate.
The third factor -
whether the proceeding is core or non-core -
also weighs in favor of
denying of abstention. The Receiver' s motion for abstention is related to Plan confirmation, a
core proceeding. See In re Venoco, LLC, 596 B.R. 480,493 (Bankr. D. Del. 2019) ("The Court
has found that the adversary proceeding is core which therefore gives the advantage to Debtors.
However, even if the adversary proceeding is non-core, the relationship to the Chapter 11 case is
[of] such strength that the advantage remains with Debtors."). Moreover, the Receiver' s
potential claim for turnover is a core proceeding. 28 U.S.C. §§ 157 (b)(2)(A), (E). In light of the
foregoing, the Bankruptcy Court properly exercised its "broad discretion" when it declined to
abstain from assuming jurisdiction over plan confirmation. Welded Constr. , 609 B.R. at 112.
(c)
Abstention under the Younger doctrine
The Younger doctrine provides that abstention may be appropriate when "(1) there are
ongoing state proceedings that are judicial in nature; (2) the state proceedings implicate
important state interests; and (3) the state proceedings afford an adequate opportunity to raise
federal claims." Middlesex Cty. Ethics Comm. v. Garden State Bar Ass 'n, 457 U.S. 423,432
(1982) (originally delineating the three-part Younger test). But, "much has transpired since
Middlesex was decided almost forty years ago." Malhan v. Sec 'y United States Dep 't ofState ,
938 F.3d 453 , 462 (3d Cir. 2019). The Supreme Court, in Sprint Communications, Inc. v.
Jacobs, 571 U.S. 69 (2013 ), "underscored that Younger abstention conflicts with federal courts '
'virtually unflagging' obligation to exercise their jurisdiction," and accordingly "narrowed
Younger's domain. " Malhan, 938 F.3d at 462 (quoting Sprint, 571 U.S. at 77). The Younger
analysis relied on by the Receiver is "no longer the test for Younger abstention." Malhan , 938
F.3d at 462; see also Sprint, 571 U.S. at 81.
23
The Supreme Court clarified that Younger abstention applies only to "three exceptional
categories" of cases, one of which must be present before the Middlesex factors may be
considered: (1) "ongoing state criminal prosecutions"; (2) "certain civil enforcement
proceedings"; and (3) "civil proceedings involving certain orders . .. uniquely in furtherance of
the state courts ' ability to perform their judicial function. " Sprint, 571 U.S. at 70 ("This Court
has not applied Younger outside these three ' exceptional' categories, and rules ... that they
define Younger's scope."); Malhan, 938 F.3d at 462 ("Only after a court finds 'that a proceeding
fits one of those [three exceptional categories of cases] should it consider Middlesex's additional
factors. ").
I agree with Appellees that DUILA does not fit the first category of criminal cases. Nor
does it fit the second category of "civil enforcement proceedings," which relates to cases that
"are akin to criminal prosecutions" or cases "initiated by the State in its sovereign capacity."
Sprint, 571 U.S. at 70 (citation and quotation marks omitted). The third category relates to cases
"that implicate a State's interest in enforcing the orders and judgments of its courts" (e.g. , civil
contempt); but the Supreme Court stressed "that federal courts ordinarily should entertain and
resolve on the merits an action within the scope of a jurisdictional grant, and should not refuse to
decide a case in deference to the States." Sprint, 571 U.S. at 72-73. The Third Circuit noted,
"Orders of that type are very much ' unique. "' Malhan , 938 F.3d at 463 . The Receiver' s
potential claim here -
ownership of property in the Debtors ' possession -
inarguably falls
within the scope of the Bankruptcy Court' s jurisdiction. The Bankruptcy Court properly found
that abstention under the Younger doctrine was not warranted.
(d)
Abstention under the Burford doctrine
Burford requires a federal court to abstain from jurisdiction when assuming jurisdiction
would be "disruptive of state efforts to establish a coherent policy with respect to a matter of
24
substantial public concern." Colo. River Water Conservation Dist. v. United States, 424 U. S.
800, 814 (1976). Burford, however, "does not require abstention whenever there exists [a
complex state administrative process], or even in all cases where there is a ' potential for conflict'
with state regulatory law or policy." New Orleans Pub. Serv., Inc. v. Council of New Orleans,
491 U.S. 350, 362 (1989) (quoting Colo. River, 424 U.S. at 815-16). Instead, "Burford
represents an extraordinary and narrow exception to the duty of the District Court to adjudicate a
controversy properly before it." Quackenbush v. Allstate Ins. Co. , 517 U.S. 706, 728 (1996); see
also PRS, 331 B.R. at 589 ("Abstention is inappropriate in cases in which federal courts have
exclusive jurisdiction over at least a portion of the claims presented") (quoting Chiropractic Am.
v. Lavecchia, 180 F.3d 99, 108 (3d Cir. 1999)).
" [T]he regulation of insolvent insurance companies is surely an important state interest,"
but the "complex regulations relating to insolvent insurance companies" Burford abstention -
which may mandate
"have to do with [state court] plans ofrehabilitation and payment to policy
holders"; conversely, " [s]imple contract and tort actions that happen to involve an insolvent
insurance company are not matters of important state regulatory concern or complex state
interests." Grode v. Mut. Fire, Marine & Inland Ins. Co. , 8 F.3d 953 , 959, 960-61 (3d Cir. 1993)
("Burford abstention is inappropriate in this case because no important regulatory state interests
are involved in an ordinary action for monies allegedly due the plaintiff [the Pennsylvania
Insurance Commissioner].").
The Receiver' s claim is within the Bankruptcy Court's jurisdiction to resolve pursuant to
28 U.S.C. § 1334(e)(l). (A1067 at 258:20-22) (Bankruptcy Court: " [H]ere, the Ullico receiver
intends to pursue property claims and the Court has exclusive jurisdiction to determine the
property rights of Ullico."). The Court agrees that the Receiver' s unasserted claim therefore falls
outside the scope of the Burford doctrine, the "purpose" of which is to "avoid federal intrusion
25
into matters of local concern and which are within the special competence of local courts." Hi
Tech Trans, LLC v. New Jersey, 382 F.3d 295 , 303-04 (3d Cir. 2004). As Appellees correctly
point out, while the outcome of a claim by the Receiver "may affect the amount of assets in the .
. . liquidation proceeding ... it will not directly impact the state' s regulation of insurers or the
state's ability to establish rules for the orderly rehabilitation or liquidation of insolvent insurers."
In re Reliance Grp. Holdings, Inc., 273 B.R. 374, 402-03 (Bankr. E.D. Pa. 2002) (Burford
inapplicable); Agway, 357 B.R. at 205 (declining to abstain under Burford because " [t]here exist
no difficult questions of state law, or a scintilla of evidence that this Court's ruling on the motion
will disrupt state efforts to establish a coherent policy with respect to a matter of substantial
public concern."). The Bankruptcy Court properly found that abstention under the Burford
doctrine was not warranted.
IV.
CONCLUSION
The Bankruptcy Court did not exceed its subject matter jurisdiction by entering the
Jurisdiction Order or the Confirmation Order. The McCarran-Ferguson Act does not apply and
abstention was not warranted. The Court finds no basis to disturb the Bankruptcy Court's
determination that the plan was proposed in good faith.
A separate order shall be entered.
26
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