QA3 Financial Corp. v. Feliciana Bank and Trust Company et al.

Filing 17

MEMORANDUM AND ORDER - The Bankruptcy Court's July 1, 2011, Relief from Stay Order (bankr. ct. filing 150) and August 22, 2011, Reconsideration Order (bankr. ct. filing 173) are affirmed. A separate Judgment will be entered in accordance with this Memorandum and Order. Ordered by Senior Judge Richard G. Kopf. (AOA)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEBRASKA
QA3 FINANCIAL CORP.,

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Appellant,
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v.
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CATLIN SPECIALTY INSURANCE )
COMPANY,
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Appellee.
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)
)
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IN RE:
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QA3 FINANCIAL CORP.,
)
)
Debtor.
)
)

8:11CV327

MEMORANDUM
AND ORDER

Bankruptcy Case No. 11-80297

Debtor QA3 Financial Corp. (“QA3”) appeals the order of the United States
Bankruptcy Court for the District of Nebraska (“Bankruptcy Court”) that granted
Catlin Specialty Insurance Company’s (“Catlin”) motion for relief from stay. For the
reasons that follow, I affirm.
I. BACKGROUND
QA3, a broker/dealer engaged in the sale of securities, possesses a
Broker/Dealer and Registered Representative Professional Liability Policy ( “Policy”)
issued by Catlin. (Bankr. Ct. Case Number 11-80297 (“Bankr. Ct.”) Filing 139-1.)
Catlin issued this Policy from its underwriting office in New York, New York. (Id.)
In 2009, investors filed a significant number of Financial Industry Regulatory
Authority (“FINRA”) arbitration actions against QA3. (Bankr. Ct. Filing 150; Filing
12 at CM/ECF p. 2.) In turn, QA3 submitted several claims to Catlin as its insurance

provider. (Bankr. Ct. Filing 150 at p. 1.) However, a dispute arose between Catlin
and QA3 regarding the value of the policy limits under the Policy. (Id. at p. 1; Filing
12 at CM/ECF p. 7.)
On November 23, 2010, Catlin filed a complaint for declaratory judgment
regarding policy limits against QA3 in the United States District Court for the
Southern District of New York (“New York Proceeding”). (S.D.N.Y. Case No. 10-cv8844, Filing 1.) On February 1, 2011, QA3 filed an answer to the complaint, asserted
counterclaims and demanded a jury trial. (S.D.N.Y. Case No. 10-cv-8844, Filing 13.)
Ten days later, QA3 filed a voluntary petition under Chapter 11 of the Bankruptcy
Code in the Bankruptcy Court, which automatically stayed the New York Proceeding.
(Bankr. Ct. Filing 1; S.D.N.Y. Case No. 10-cv-8844, Filing 14.)
On April 28, 2011, Catlin filed a motion for relief from the automatic stay so
that the New York Proceeding could continue. (Bankr. Ct. Filing 68.) On June 17,
2011, QA3 filed an adversary proceeding against Catlin in the Bankruptcy Court.1
(Bankr. Ct. Filings 99-2 and 139.) The Bankruptcy Court held a hearing, and on July
1, 2011, entered an order that granted Catlin relief from the automatic stay (“Relief
from Stay Order”). (Bankr. Ct. Filing 150.)
On July 14, 2011, QA3 filed a motion for reconsideration and motion for
amendment and/or alteration of judgment, asking the Bankruptcy Court to reconsider
its Relief from Stay Order (“Reconsideration Motion”). (Bankr. Ct. Filing 159.) On
August 22, 2011, the Bankruptcy Court denied the Reconsideration Motion
(“Reconsideration Order”). (Bankr. Ct. Filing 173.) On August 25, 2011, QA3
appealed the Bankruptcy Court’s Relief from Stay Order and Reconsideration Order
to this court. (Bankr. Ct. Filing 181; Filing 3.)

1

The claims in the adversary proceeding are virtually identical to the
counterclaims asserted by QA3 in the New York Proceeding. (Compare Bankr. Ct.
Filing 99-2 with 139-1.)
2

II. STANDARD OF REVIEW
“A decision to grant or deny a motion for relief from the automatic stay is
within the discretion of the bankruptcy court and is reviewed for an abuse of
discretion.” In re Crossroads Ford, Inc., 449 B.R. 366, 367 (8th Cir. BAP 2011).
“An abuse of discretion will be found if the court’s judgment was based on clearly
erroneous factual findings or on erroneous legal conclusions.” Id. “In its application,
the abuse of discretion standard is nearly indistinguishable from the clearly erroneous
standard.” Id.
III. DISCUSSION
Generally, when a party files a Chapter 11 bankruptcy petition, all proceedings
“against the debtor” are stayed. See 11 U.S.C. § 362(a). However, § 362(d) provides
certain exceptions to this rule, including relief “for cause.”

Id. § 362(d)(1).

“Congress did not define cause; however, it contemplated relief from the automatic
stay to allow litigation involving the debtor to proceed in another forum under
appropriate circumstances.” In re Wintroub, 283 B.R. 743, 745 (8th Cir. BAP 2002);
see also 11 U.S.C. § 362 (historical and statutory notes) (“[A] desire to permit an
action to proceed to completion in another tribunal may provide . . . cause.”). In
determining whether cause exists, a court “must balance the potential prejudice to the
debtor, the bankruptcy estate, and the other creditors associated with a proceeding in
another forum against the hardship to the movant if it is not allowed to proceed in the
other forum.” In re Wintroub, 283 B.R. at 745. “The relevant factors which the court
must consider include judicial economy, trial readiness, the resolution of primary
bankruptcy issues, the movant’s chance of success on the merits, the costs of defense
or other potential burdens to the estate, and the impact of the litigation on other
creditors.” Id.
After considering the Wintroub factors, the Bankruptcy Court concluded that
relief from automatic stay should be granted for cause because:
3

The litigation, both in New York and in Nebraska, relates to the
interpretation of the language of the Policy under controlling New York
law. The movant was the first to file and the Nebraska adversary
proceeding is simply a duplication of the matters already at issue in the
New York case. The Policy provides that the debtor is the representative
of all parties with an interest in the Policy. The litigation concerns a state
law contract dispute which is not a core proceeding. The movant is not
requesting affirmative monetary relief, but only to obtain an
interpretation of the meaning of contractual language. The impact on the
bankruptcy case is contingent and will be the same whether the litigation
is in New York or in Nebraska. If the debtor wins on its interpretation of
the contract, there will be more money available for payment of claims
by the insurance company. If the debtor loses, there will be less money
available from the insurance and perhaps more claims in the bankruptcy
case. Finally, the question whether coverage exists is a separate and
distinct issue from all bankruptcy issues.
(Bankr. Ct. Filing 150 at pp. 2-3.)
On appeal, QA3 argues that the Bankruptcy Court erred in determining that
cause existed to lift the automatic stay. (Filing 12.) Because QA3 does not assert that
the Bankruptcy Court used the incorrect legal standard, its argument hinges on
whether the Bankruptcy Court’s application of the facts to the Wintroub factors was
clearly erroneous. (Id.)
With regard to judicial economy and the costs of defense, QA3 contends that
“motion practice in the New York Lawsuit would subject [QA3’s] bankruptcy estate
to additional costs and fees” because “there is nothing to suggest” that Catlin would
be able to defeat a motion to dismiss or a motion to transfer the case to Nebraska. (Id.
at CM/ECF pp. 5-7.) This argument is speculative. In addition, QA3 failed to submit
any evidence to the Bankruptcy Court showing that resolution of the policy limit issue
in New York, rather than Nebraska, would cost more money. (See Bankr. Ct. Filing
99 and 107.) Further, “[t]he mere cost of defense . . . is ordinarily considered an
insufficient basis for denying relief from the stay.” In re Wiley, 288 B.R. 818, 823
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(8th Cir. BAP 2003); see also In re United Imps., Inc., 203 B.R. 162, 166 (Bankr. D.
Neb. 1996) (“[t]he cost of defense is, standing alone, ordinarily considered an
insufficient basis for denying relief from the stay.”)
With regard to the resolution of primary bankruptcy issues, QA3 contends that
the District of Nebraska has “exclusive jurisdiction” over the policy dispute because
the Policy and its proceeds are property of the bankruptcy estate. (Filing 12 at
CM/ECF pp. 8-10.) In support of this argument, QA3 cites 28 U.S.C. § 1334(e)(1),
which provides that a “district court in which a case under title 11 is commenced or
is pending shall have exclusive jurisdiction . . . of all the property, wherever located,
of the debtor as of the commencement of such case, and of property of the estate.” 28
U.S.C. § 1334(e)(1) (emphasis added). However, section 1334 “has no application
to a dispute between the debtor and its insurers over the scope of coverage.” In the
Matter of U.S. Brass Corp., 110 F.3d 1261, 1268 (7th Cir. 1997); See also Shalom
Torah Ctr. v. Phila. Indem. Ins. Cos., No. 10-6766 (FLW), 2011 WL 1322295, at *2
(D.N.J. March 31, 2011) (acknowledging that an action to determine rights to
insurance coverage does not arise under Title 11). Further, QA3 has admitted that
both jurisdiction and venue are proper in the Southern District of New York. (Bankr.
Ct. Filing 99-2.)2
In short, QA3 disagrees with the Bankruptcy Court’s application of the facts to
the Wintroub factors. Because the Bankruptcy Court’s factual findings were not
clearly erroneous, I find that the Bankruptcy Court did not abuse its discretion in
granting Catlin relief from the automatic stay.

2

QA3 also argues that the New York Proceeding is a “core proceeding.” (Filing
12 at CM/ECF pp. 12-14.) The parties agree that “[w]hether or not a proceeding is
core is not relevant to whether relief from the automatic stay should be granted.” (Id.
at CM/ECF pp. 12-14; Filing 13 at CM/ECF pp. 17-21.) Thus, I will not address this
argument.
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Accordingly,
IT IS ORDERED:
1.

The Bankruptcy Court’s July 1, 2011, Relief from Stay Order (bankr. ct.

filing 150) and August 22, 2011, Reconsideration Order (bankr. ct. filing 173) are
affirmed.
2.

A separate Judgment will be entered in accordance with this

Memorandum and Order.
DATED this 1 st day of February, 2012.
BY THE COURT:
Richard G. Kopf
Senior United States District Judge

*This opinion may contain hyperlinks to other documents or Web sites. The
U.S. District Court for the District of Nebraska does not endorse, recommend,
approve, or guarantee any third parties or the services or products they provide on
their Web sites. Likewise, the court has no agreements with any of these third parties
or their Web sites. The court accepts no responsibility for the availability or
functionality of any hyperlink. Thus, the fact that a hyperlink ceases to work or
directs the user to some other site does not affect the opinion of the court.
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