The Hammocks LLC v. Harleysville Mutual Insurance Company

Filing 5

MEMORANDUM OF DECISION and ORDER (1.) In Civil Case No. 1:10cv22, 1 Motion to Withdraw Reference as to Adversary Proceeding No. 09-10135 of Harleysville Mutual Ins. Co. is GRANTED and reference of this action to US Bankruptc y Court is WITHDRAWN. (2.) In Civil Case No. 1:09cv411, (Doc. 12) Debtor-in-Possession's Motion to Dismiss the Appeal as Moot is GRANTED and the appeal is DISMISSED. (3.) In Civil Case No. 1:09cv377, Deft's (Doc. 17) Motion to Transfer is D ENIED as moot. (4.) Time periods within which to file Answer or make other response to Complaint in Civil Case No. 1:10cv22 are hereby held in abeyance pending further order of this Court. (5.) On or before (15) days from entry of this Order, parties shall file response not to exceed (5) double-spaced pages addressing issue of whether Civil Case No. 1:09cv377 and Civil Case No. 1:10cv22 should be consolidated. Signed by District Judge Martin Reidinger on 9/28/10. (nll) Modified text on 9/28/2010 (nll).

T h e Hammocks LLC v. Harleysville Mutual Insurance Company

Doc. 5

IN THE DISTRICT COURT OF THE UNITED STATES F O R THE WESTERN DISTRICT OF NORTH CAROLINA ASHEVILLE DIVISION H A R L E Y S V IL L E MUTUAL IN S U R AN C E COMPANY, P l a i n t if f , vs . R IC H M O N D HILL, INC., D e fen d a n t. ) In re: TH E HAMMOCKS, LLC, d /b /a Richmond Hill Inn, D e b to r. ) TH E HAMMOCKS, LLC, d/b/a R ic h m o n d Hill Inn, Debtor-inP o s s e s s io n , P l a i n t if f , vs . H A R L E Y S V IL L E MUTUAL IN S U R AN C E COMPANY, D e fen d a n t. ) M E M O R AN D U M OF DECISION and ORDER ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

C ivil Case No. 1:09cv377 D e c la ra to ry Judgment Action

C ivil Case No. 1:09cv411 B a n k ru p tc y Appeal

C ivil Case No. 1:10cv22 Ad ve rs a ry Proceeding

Dockets.Justia.com

TH IS MATTER is before the Court on the following: 1. In Civil Case No. 1:09cv377, the Defendant's Motion to Transfer [Doc. 1 7 ]; 2. In Civil Case No. 1:09cv411, the Debtor-in-Possession's Motion to D is m is s the Appeal as Moot [Doc. 12]; 3. In Civil Case No. 1:10cv22, the Motion to Withdraw Reference as to A d ve rs a ry Proceeding No. 09-10135 of Harleysville Mutual Insurance C o m p a n y [Doc. 1].

P R O C E D U R AL HISTORY O n October 10, 2009, Harleysville Mutual Insurance Company (H a rle ys ville ) filed a declaratory judgment action in this Court. [Civil Case No. 1 :0 9 c v3 7 7 (the Declaratory Judgment Action)1, at Doc. 1]. In the Complaint,

This matter presents the Court with a record consisting of no fewer than five separate court dockets, two from the Bankruptcy Court and three in this Court. 1) Civil Action no. 1:09cv377 is a declaratory judgment action originally filed in this Court. It is referred to herein as "the Declaratory Judgment Action." 2) Bankruptcy Case no. 09-10332 is the underlying bankruptcy proceeding of The Hammocks, LLC. It is referred to here in the Bankruptcy Case or Bkr. Case. 3) Harleysville filed a motion for relief from stay in the Bankruptcy Case, which was denied. Harleysville then filed an appeal therefrom to this Court, which is docketed as Civil Case no. 1:09cv411 and is referred to herein as the Bankruptcy Appeal. 2

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it is alleged that on October 19, 2008, Harleysville issued an insurance policy to The Hammocks, LLC (The Hammocks) which was at the time doing b u s in e s s as the Richmond Hill Inn. [Id., at 2]. The policy provided coverage fo r a one year period for the Richmond Hill Inn, a bed and breakfast located in Asheville, North Carolina. [Id., at 2]. The Hammocks purchased the bed a n d breakfast from the Defendant Richmond Hill, Inc. (RHI) in 2005 and its in d e b te d n e s s to RHI was manifested by a promissory note which was secured b y a deed of trust. [Id., at 3]. The Hammocks defaulted in its payments on th e note and RHI initiated foreclosure proceedings in state court in November 2 0 0 8 . [Id., at 3-4]. The foreclosure sale was ultimately scheduled for April 11, 2 0 0 9 . [Id.]. On March 19, 2009, the Richmond Hill Inn, specifically the main h o u s e thereof, sustained substantial damage as a result of fire. [Id., at 5]. T h e Asheville Buncombe Arson Task Force determined the fire was the result o f arson. [Id.]. Six days later, The Hammocks (Debtor) filed a voluntary

4) The Bankruptcy Debtor, The Hammocks, LLC, filed an Adversary Proceeding against Harleysville, which bears Adversary Proceeding No. 09-10135. It is referred to herein as the Adversary Proceeding or Adv. Proc. 5) Harleysville has moved for the reference of the Adversary Proceeding to be withdrawn from the Bankruptcy Court and disposed of in this Court. This motion is pending in this Court and bears Civil Case no. 1:10 cv 22 and is referred to herein as the Adversary Proceeding Withdrawal or Adv. Proc. W/D. 3

p e titio n in bankruptcy pursuant to Chapter 11.2 [Id.]. In September 2009, RHI "d e m a n d [e d ] coverage be provided" by Harleysville for its losses arising from th e fire. [Id., at 6]. In the Declaratory Judgment Action, Harleysville alleges that the policy a ffo rd s no coverage to RHI because it is not named as a loss payee or m o rtg a g e e under the terms thereof and the insurance application did not d is c lo s e any mortgagee. [Id., at 2-6]. The sole relief sought in the

D e c la ra to ry Judgment Action is a declaration that RHI is "not entitled to c o ve ra g e " under the Harleysville policy. Any coverage afforded to The

H a m m o c k s is not at issue in the Declaratory Judgment Action. RHI has m o ve d to have the Declaratory Judgment Action against it transferred from th is Court to Bankruptcy Court. [Id., at Doc. 17]. Prior to filing the Declaratory Judgment Action, Harleysville moved for re lie f from the stay in The Hammocks' bankruptcy proceeding so that it could p ro s e c u te a separate declaratory judgment action against The Hammocks. [Id., at Doc. 15; Doc. 15-1]. In the proposed complaint submitted to the B a n k ru p tc y Court, Harleysville sought a declaration that it had no duty to

The parties do not dispute that The Hammocks is not owned or controlled by RHI. [Id., at Doc. 14]. They also do not dispute that RHI is not owned or controlled by The Hammocks. [Id.]. The relationship between The Hammocks and RHI is that of debtor and creditor. 4

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p r o v id e

coverage

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The

Hammocks

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m is re p re s e n ta tio n s in the insurance application, and seeking rescission of the c o n tra c t due to those misrepresentations and other violations of North C a r o lin a insurance statutes. [Id.]. On October 28, 2009, the Bankruptcy Court d e n ie d Harleysville's motion for relief from the stay to allow it to pursue such d e c la ra to ry relief against the debtor, The Hammocks. [In re The Hammocks, L L C , Bkr. Case No. 09-10332, (Bkr. Case) at Doc. 82]. On November 12, 2 0 0 9 , Harleysville filed an appeal from that ruling, thus initiating its second a c tio n in this Court, In re The Hammocks, LLC, Civil Case No. 1:09cv411 (the B a n k ru p tc y Appeal). In denying the motion for relief from the stay in The Hammocks' b a n k ru p tc y proceeding, the Bankruptcy Judge ruled that the fire loss claim is a n asset of the Chapter 11 Estate, the prosecution of which is a core matter. [B k r. Case at Doc. 82]. He further concluded that communications from H a rle ys ville to the debtor, The Hammocks, could be deemed to be a denial of th e insurance claim sufficient to allow The Hammocks to pursue a claim on th e policy for the loss by filing a civil action. [Id.]. The Bankruptcy Judge

fu rth e r ruled that judicial economy dictated that only one civil action be filed c o n c e rn in g the fire loss asset of the estate and that action should be filed only b y The Hammocks. [Id.]. Harleysville would then be entitled to submit its
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p o s itio n and defenses in that action. [Id.]. The Court required The Hammocks to file its civil action "forthwith and no later than January 20, 2010." [Id.]. In the e ve n t that it did not do so, the Court would reconsider Harleysville's request fo r relief from the stay to allow it to prosecute a declaratory judgment action a g a in s t the Debtor. [Id.]. O n December 2, 2009, The Hammocks filed an adversary proceeding in Bankruptcy Court, thus meeting the Bankruptcy Judge's requirement that it commence a civil action no later than January 20, 2010. [The Hammocks, L L C v. Harleysville Mutual Insurance Company, Adversary Proceeding No. 0 9 -0 1 0 3 5 , (the Adv. Proc.) at Doc. 1]. In that proceeding, The Hammocks a s s e rte d claims for breach of contract, bad faith refusal to pay a claim and u n fa ir trade practices arising out of Harleysville's purported denial of the in s u ra n c e claim stemming from the fire loss at the Richmond Hill Inn. [Id.]. On D e c e m b e r 28, 2009, Harleysville moved in the Bankruptcy Court for an order with d ra win g the reference of the adversary proceeding. [Adv. Proc, at Doc. 6]. O n the same date, it moved the Bankruptcy Court to stay the adversary p r o c e e d in g in that court. [Adv. Proc, at Doc. 8]. The Bankruptcy Court

g ra n te d the motion to stay the proceeding and transmitted the motion to with d ra w the reference to this Court on January 20, 2010. [Adv. Proc, at Doc. 1 2 ; In re The Hammocks, Civil Case No. 1:10cv22 (the Adversary Proceeding
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W ith d ra wa l) at Doc. 1]. D I S C U S S IO N T h e Court will first consider the motion to withdraw the reference of the a d ve rs a ry proceeding since disposition of that motion has the potential to re n d e r moot the motion to transfer as well as the appeal from Bankruptcy C o u r t. Th e motion to withdraw the reference of the Adversary Proceeding, Civil C a s e No. 1:10cv22. S e c tio n 157(d) of Title 28 provides in pertinent part that "[t]he district c o u rt may withdraw, in whole or in part, any case or proceeding referred [to th e Bankruptcy Court], ... for cause shown." This section provides for the d is c re tio n a ry withdrawal of the reference when good cause has been shown.3 9 Collier on Bankruptcy, ¶5011.01[1][b][i] (Alan N. Resnick & Henry J. S o m m e r eds., 15 th ed. rev.). The first step in determining whether good c a u s e exists involves consideration of whether the matter is a core proceeding o r a non-core proceeding.4 Id.

The Complaint in the Adversary Proceeding alleges diversity jurisdiction. [Adv. Proc., Doc. 1 at 1]. In any event, "the 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." 28 U.S.C. §1334(b). Bankruptcy judges may hear and determine all core proceedings. 28 U.S.C. §157. Unless the parties consent, a bankruptcy judge may only recommend findings of fact and conclusions of law as to non-core proceedings. Id. 7
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In the Complaint in the Adversary Proceeding, The Hammocks alleges th a t Harleysville made a post-petition breach of the pre-petition insurance c o n tra c t by failing to pay the insurance claim for the fire loss. [Adv. Proc. at D o c . 1]. It also alleges a claim for bad faith refusal to settle an insurance c la im . [Id.]. Its third claim against Harleysville is for unfair and deceptive trade p ra c tic e s in violation of N.C.Gen.Stat. §75-1.1. [Id.]. The parties do not

d is p u te that each of these claims arises under state law. It is also undisputed th a t Harleysville has never filed a claim in the bankruptcy action. "T h e bankruptcy court has core jurisdiction over claims arising from a c o n tra c t formed post-petition[.] But a dispute arising from a pre-petition c o n tra c t will usually not be rendered core simply because the cause of action c o u ld only arise post-petition." In re U.S. Lines, Inc., 197 F.3d 631, 637-38 (2 nd Cir. 1999), certiorari denied 529 U.S. 1038, 120 S.Ct. 1532, 146 L.Ed.2d 3 4 7 (2000). A "breach-of-contract action by a debtor against a party to a prep e titio n contract, who has filed no claim with the bankruptcy court, is nonc o re ." In re Orion Pictures Corp., 4 F.3d 1095, 1102 (2 nd Cir. 1993), certiorari d is m is s e d 511 U.S. 1026, 114 S.Ct. 1418, 128 L.Ed.2d 88 (1994). "The S u p re m e Court has ruled that a bankruptcy court judge does not have the a u th o rity to adjudicate a state-law breach of contract claim arising out of a p re -p e titio n contract brought by the debtor against a [party] who has not filed
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a claim in the bankruptcy proceeding." In re Pisgah Contractors, Inc., 215 B .R . 679, 681 (W.D.N.C. 1995), appeal dismissed 117 F.3d 133 (4 th Cir. 1 9 9 7 ), citing Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U .S . 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) [T h e debtor's] contract claim is grounded in state law (not rights c re a te d by federal bankruptcy law), and arises from [the] prep e titio n contract[ ] with [Harleysville], namely, its insurance c o n tra c t[ ] covering [fire]-related [loss]. [Harleysville] has not filed a proof of claim, and thus it has not consented to the jurisdiction o f th[e] [Bankruptcy] Court. It is conceivable that a resolution of th e contract dispute with [Harleysville] may have an impact on the a d m in is tra tio n of the estate. However, treating this contract d is p u te as a "core proceeding" would create an exception ... that w o u ld "swallow the rule," as any contract action that the [debtor] wo u ld pursue against a defendant would likely be expected to in u re to the benefit of the estate and thus "concern" its " a d m in is tr a tio n ." In re Porter-Hayden Co., 304 B.R. 725, 731 (D.Md. 2004); In re Nichols & A s s o c ia te s Tryon Properties, Inc., 36 F.3d 1093 (4 th Cir. 1994), certiorari d e n ie d 514 U.S. 1016, 115 S.Ct. 1359, 131 L.Ed.2d 216 (1995) (adversary p ro c e e d in g to recover proceeds of fire insurance policy issued pre-petition b a s e d on post-petition breach was non-core); In re National Enterprises, Inc., 1 2 8 B.R. 956 (E.D.Va. 1991); Daewoo Motor Am. v. Gulf Ins. Co., 302 B.R. 3 0 8 , 309, 313 (C.D.Cal. 2003).5 The Court therefore concludes that the
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The Debtor cited In re Griffin Services, Inc., 2005 WL 1287920 (M.D.N.C. 2005), in support of its position. That case involved post-petition conduct which directly interfered with the sale of a business which was in bankruptcy. There is also no 9

b re a c h of contract claim is non-core. T h e Debtor's claim that Harleysville acted in bad faith by refusing to s e ttle or pay the insurance claim is also a non-core matter. In re Hettick, 413 B .R . 733 (D.Mont. 2009); In re Payroll Express Corp., 186 F.3d 196, 202 (2 nd C ir. 1999), certiorari denied sub nom Pereira v. Aetna Casualty & Surety Co., 5 2 9 U.S. 1019, 120 S.Ct. 1419, 146 L.Ed.2d 312 (2000) (noting district court g ra n te d motion to withdraw reference of claim for bad faith denial of coverage u n d e r insurance policies); accord, In re Lawrence Group, Inc., 285 B.R. 784 (N .D .N .Y.2 0 0 2 ) (insurance coverage dispute arising under pre-petition policy n o n -c o re ); Northwestern Institute of Psychiatry, Inc. v. Travelers Indem. Co., 2 7 2 B.R. 104 (E.D.Pa. 2001) (even if a core proceeding, reference should be with d ra wn ) ; In re Dayton Title Agency, Inc., 264 B.R. 880 (S.D.Oh. 2000) (a d ve rs a ry proceeding by debtor to recover from insurer for breach of contract a n d bad faith denial of coverage non-core). L ik e wis e , any claim based on unfair or deceptive trade practices is a s ta te law claim which is non-core. In re Smith, 866 F.2d 576 (3 rd Cir. 1989) (u n fa ir trade practice claim was "related to" bankruptcy proceeding); City of C lin to n , Ark. v. Pilgrim's Pride Corp., 2009 W L 4884430 (N.D.Tex. 2009) (u n fa ir trade practice claim became core because a proof of claim had been
indication whether the defendant in that case had filed a claim in the bankruptcy. 10

file d in the bankruptcy); Silliman v. General Motors, Corp., 2009 WL 3063371 (N .D .G a . 2009) (unfair trade practice claim non-core); Allen v. J.K. Harris & C o ., LLC, 331 B.R. 634 (E.D.Pa. 2005) (non-core); In re Novak, 116 B.R. 626 (N .D .Ill. 1990). Cf. In re Klingerman, 2009 WL 2423992 (E.D.N.C. 2009) (a d ve rs a ry proceeding to dissolve corporation which was asset of bankrupt e s ta te was core although unfair trade practice claim asserted); In re Mercer's E n te rp ris e s , Inc., 387 B.R. 681 (E.D.N.C. 2008) (property at issue was sole a s s e t of estate). The Court concludes that the causes of action raised in the adversary p ro c e e d in g are non-core claims brought against a party who has not filed a c la im in the bankruptcy proceeding. In re Peanut Corp. of America, 407 B.R. 8 6 2 (W.D.Va. 2009) (action brought by insurer to determine its obligations u n d e r policy non-core). This weighs in favor of withdrawing the reference. In re Lawrence Group, Inc., 285 B.R. at 788. O th e r factors also support withdrawing the reference of this adversary p ro c e e d in g . The Debtor has asserted claims which entitle Harleysville to a ju r y trial and Harleysville has unequivocally stated that it will not consent to h a vin g a jury trial before the Bankruptcy Court.6 [Adv. Proc. Withdrawal, Doc.

The parties do not dispute that Harleysville is entitled to a jury trial on the claims asserted by The Hammocks against it. [Case 1:10cv22, at Doc. 3]. 11

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1 , at 6]; In re Orion, 4 F.3d at 1101 (bankruptcy courts are constitutionally p ro h ib ite d from holding jury trial in non-core matters); 28 U.S.C. §157(e) ( b a n k ru p tc y judge may conduct jury trial "with the express consent of all the p a r tie s " ) . Although The Hammocks argues that this Court may continue the re fe rra l for pre-trial matters and then withdraw reference for the conduct of the tria l, the Court does not find that this is an efficient use of judicial resources. 9 Collier on Bankruptcy, ¶5011.01[1][c]. Such a scenario could lead to

r e p e a te d requests for de novo review by this Court and thus give rise to u n n e c e s s a r y costs and delay. In re Orion, 4 F.3d at 1101; In re Lawrence G r o u p , 285 B.R. at 789 n.3. Because the dispute at issue is a non-core m a tte r, it should have little impact on the uniformity of bankruptcy a d m in is tra tio n . Id., at n.5. At the time Harleysville issued the insurance policy in question, it had no reason to believe that any disputes stemming from it wo u ld be resolved in bankruptcy court; thus, there is no danger of forum s h o p p in g . Id., at n.6. The Court therefore determines, in its discretion, that withdrawal of the re fe re n c e from the Bankruptcy Court should be ordered.

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Th e motion to dismiss the appeal of the Bankruptcy Court's denial of the m o tio n to lift the automatic stay, Civil Case No. 1:09cv411 (the B a n k r u p t c y Appeal). A s previously noted, Harleysville appealed the Bankruptcy Court's d e n ia l of its motion to lift the automatic stay so that it could proceed with a d e c la r a to r y judgment action against the Debtor. Once the adversary

p ro c e e d in g was filed in Bankruptcy Court, the Debtor moved to dismiss that a p p e a l as moot because Harleysville could litigate the same issues in the a d v e r s a r y proceeding. Harleysville objected, noting that the Bankruptcy Court h a d referred to the claims as involving core matters, an issue to be resolved in the appeal. The conclusion of this Court that the adversary proceeding in vo lve s non-core matters renders moot any appeal from that portion of the r u lin g . Harleysville also conceded that "unless the reference is withdrawn with re s p e c t to the Adversary Proceeding, this approach [of bringing its claims in th e adversary proceeding] would not protect Harleysville's rights." [The B a n k ru p tc y Appeal (1:09cv411), Doc. 13, at 4]. Since the reference has been w ith d ra wn , the Court finds that Harleysville may assert its claims for d e c la ra to ry judgment against the Debtor in the withdrawn action. The appeal is therefore moot and will be dismissed.

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Th e motion to transfer the Declaratory Judgment Action, Civil Case No. 1 :0 9 c v3 7 7 . T h e remaining motion is RHI's motion to transfer the Declaratory J u d g m e n t Action against it to Bankruptcy Court. In response to an inquiry fro m the Court, the parties agreed that the automatic stay of the Bankruptcy C o u rt did not apply to this action because Harleysville's claim was against R H I, not the Debtor. [The Declaratory Judgment Action, at Doc. 14; Doc. 15]. R H I nonetheless sought to transfer the action to Bankruptcy Court, arguing th a t it involved core matters. [Id., at Doc. 18]. The Court finds that the withdrawal of the reference of the adversary p r o c e e d in g renders moot the motion to transfer. Since the adversary

p ro c e e d in g involving the Debtor and Harleysville is now pending in this Court, th e r e is no reason to transfer to the Bankruptcy Court the Declaratory J u d g m e n t Action pending between Harleysville and RHI. Judicial economy d ic ta te s that all matters pending among the parties be determined by the s a m e court. Indeed, this was one reason urged by RHI for transfer. Since the c a s e s are now pending before this Court, RHI's motion to transfer has b e c o m e moot. C O N C L U S IO N T h e dismissal of the bankruptcy appeal as moot leaves two actions

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p e n d in g in this Court: (1) Civil Case No. 1:09cv377, Harleysville's Declaratory J u d g m e n t Action against RHI; and (2) Civil Case No. 1:10cv22, The H a m m o c k s ' action against Harleysville alleging breach of contract, bad faith a n d unfair trade practices. There is pending in the declaratory judgment a c tio n a recently filed motion for judgment on the pleadings. Harleysville, h o w e v e r , has indicated that it would seek consolidation of its declaratory ju d g m e n t action (1:09cv377) with The Hammocks' civil action (1:10cv22), re fe re n c e of which has been withdrawn. Harleysville has also indicated that it would assert a declaratory judgment claim against The Hammocks. Since c o n s o lid a tio n may show the pending motion for judgment on the pleadings to b e premature, the Court will provide the parties with an opportunity to address th a t issue. Fed.R.Cvi.P. 42. In the interim, all deadlines for filing answer or o th e r response to The Hammocks' Complaint against Harleysville in Civil C a s e No. 1:10cv22 will be held in abeyance until such time as a ruling on c o n s o lid a tio n is rendered. At that time, a scheduling order will be entered.

ORDER IT IS, THEREFORE, ORDERED as follows: 1. In Civil Case No. 1:10cv22, the Motion to Withdraw Reference as to A d ve rs a ry Proceeding No. 09-10135 of Harleysville Mutual Insurance
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C o m p a n y [Doc. 1] is hereby GRANTED and the reference of this action to the United States Bankruptcy Court is hereby WITHDRAWN. 2. In Civil Case No. 1:09cv411, the Debtor-in-Possession's Motion to D is m is s the Appeal as Moot [Doc. 12] is hereby GRANTED and the a p p e a l is hereby DISMISSED. 3. In Civil Case No. 1:09cv377, the Defendant's Motion to Transfer [Doc. 1 7 ] is hereby DENIED as moot. 4. T h e time periods within which to file Answer or make other response to th e Complaint in Civil Case No. 1:10cv22 are hereby held in abeyance p e n d in g further order of this Court. 5. O n or before fifteen (15) days from entry of this Order, the parties shall file response not to exceed five (5) double-spaced pages addressing th e issue of whether Civil Case No. 1:09cv377 and Civil Case No. 1 :1 0 c v2 2 should be consolidated.
Signed: September 28, 2010

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