The Roman Catholic Diocese of Rockville Centre v. Arrowood Indemnity Company

Background

The Diocese filed for Chapter 11 bankruptcy protection on October 1, 2020. On the same day, it began an adversary proceeding in bankruptcy court against several insurance companies, including Arrowood. The Diocese sought a declaratory judgment—an order defining the parties’ rights under the insurance policies—and damages for alleged breaches of contract. It claimed that Arrowood had refused to indemnify it for liability arising from claims under New York’s Child Victims Act and had not fully reimbursed its defense costs. Arrowood disputed its obligations for some claims.

Arrowood moved under 28 U.S.C. § 157(d) to withdraw the bankruptcy reference. A bankruptcy reference is the district court’s referral of bankruptcy-related matters to the bankruptcy court. The Diocese and the Official Committee of Unsecured Creditors opposed the motion.

Legal framework

The court applied the Second Circuit’s factors for deciding whether there was cause to withdraw a bankruptcy reference. Those factors, as modified by the Supreme Court’s decision in Stern v. Marshall, required the court to consider: (1) whether the bankruptcy court had constitutional authority to enter a final judgment; (2) whether the claims were core or non-core bankruptcy claims; and (3) judicial efficiency, uniformity, jury-trial rights, and possible forum shopping.

Bankruptcy court’s authority

The court held that the bankruptcy court lacked constitutional authority to enter a final judgment on the Diocese’s claims against Arrowood. Arrowood had not filed a claim against the bankruptcy estate, the parties had not consented to final judgment by the bankruptcy court, and the claims involved private contract rights rather than public rights. If the claims had remained in bankruptcy court, that court could have prepared proposed findings and conclusions for de novo review—meaning fresh review—by the district court.

Core and non-core claims

The court classified the claims as non-core. The claims required interpretation of insurance policies that existed independently of the bankruptcy case and were entered into before the Diocese filed for bankruptcy. They concerned who would bear financial responsibility for certain tort claims, not whether the underlying tort claims were valid.

The Diocese relied on precedent involving insurance policies that were the only potential source of funds and contained pay-first provisions. The court distinguished that precedent because the Diocese acknowledged that the Arrowood policies were not the estate’s only asset, and the Arrowood policies did not contain pay-first provisions. The court also rejected the Diocese’s arguments that Arrowood’s consent-to-settlement provisions or the separate dispute involving other insurers made the Arrowood claims core. The court expressly took no position on whether the claims involving those other insurers were core or non-core.

Other factors

Judicial efficiency favored withdrawal. Because the bankruptcy court could not enter a final judgment, keeping the claims there would likely require duplicative review by the district court. The claims were recently filed, the bankruptcy case was relatively new, and the dispute involved ordinary contract issues rather than specialized bankruptcy-law questions.

Uniformity was neutral. The court found that the Arrowood policies, the relevant policy periods, and the facts differed from those involving the other insurers. Arrowood’s jury-trial demand slightly favored withdrawal, although the case was not ready for trial and might be resolved through settlement or dispositive motions. Forum-shopping concerns were neutral because the court found no indication that Arrowood’s motion was motivated by forum shopping.

Disposition

The court concluded that Arrowood had shown cause for permissive withdrawal of the Diocese’s claims against it. Judge Valerie Caproni therefore granted Arrowood’s motion to withdraw the bankruptcy reference. The withdrawal applied only to the Diocese’s claims against Arrowood; the court did not withdraw the reference for other parties or claims. The opinion did not resolve the parties’ underlying insurance-coverage or breach-of-contract dispute.