De Lisser v. Lockton Companies, LLC - Pacific Series

Background

Cred, Inc. offered CredEarn, a program through which individuals lent cryptocurrency to Cred for a fixed period in exchange for a predetermined return. According to the allegations, Cred and Lockton Companies, LLC - Pacific Series made representations that the loans were comprehensively insured and that investors would be made whole if losses occurred.

After Cred’s bankruptcy, a reorganization plan took effect on April 19, 2021, and transferred Cred’s assets to a Trust. The trustees later acquired many investors’ claims through individual negotiations. On December 22, 2022, the trustees filed the lawsuit in San Francisco state court on behalf of CredEarn investors who had assigned their customer claims to the Trust. Lockton removed the case to federal court, and the trustees moved to remand it, meaning to return it to state court.

Legal Standard

The court explained that the party removing a case must establish federal jurisdiction. Federal courts have jurisdiction over civil proceedings that arise in or relate to a bankruptcy case. Under Ninth Circuit precedent, a proceeding is related to a bankruptcy case if its outcome could conceivably affect the bankruptcy estate. If the federal court lacks subject-matter jurisdiction, it must remand the case to state court.

Reasons for the Decision

Lockton offered three grounds for bankruptcy-related jurisdiction: that the claims belonged to the bankruptcy estate, that the Trust could not acquire them under the bankruptcy plan and confirmation order, and that the lawsuit required interpretation or enforcement of bankruptcy court orders.

The court rejected the first argument. It said the claims did not seek insurance coverage and did not depend on the validity of the insurance contract between Cred and Lockton. Instead, the trustees alleged that Lockton was liable for fraud and misrepresentation and for aiding and abetting Cred’s fraud and misrepresentation. The alleged harm resulted from the representations about insurance coverage, not from a lack of insurance coverage itself. The court also noted that the investors’ claims were direct rather than derivative and that the Bankruptcy Court had reached the same conclusion.

The court rejected Lockton’s argument that the Trust was not permitted to acquire the claims. Lockton conceded that the Bankruptcy Court’s February 27, 2023 order resolved that issue in the Trust’s favor. The district court found that order clarified the situation that existed when Lockton removed the case; it did not create a new jurisdictional fact after removal. The Trust was permitted to acquire the third-party claims without additional bankruptcy court approval.

The court also rejected the argument that the lawsuit involved interpreting or enforcing the Bankruptcy Court’s orders. The claims against Lockton were for fraud and misrepresentation, and the court concluded that the claims had been properly acquired from the individual investors. It found no need for further clarification from the Bankruptcy Court to resolve the dispute.

Disposition

The court granted the Trust’s motion to remand and ordered the Clerk to remand the matter to the Superior Court of California for the County of San Francisco. The court held that the issue of equitable remand was moot because it had already determined that federal bankruptcy-related jurisdiction was absent. Judge Araceli Martinez-Olguin stated that the order disposed of ECF No. 29.