The Roman Catholic Diocese of Rockville Centre v. Certain Underwriters at Lloyds

Background

After New York enacted the Child Victims Act, more than 200 previously time-barred lawsuits alleging child sexual abuse were filed against the Diocese and people and organizations affiliated with it. The Diocese later filed for Chapter 11 bankruptcy protection. It identified insurance policies that it says covered periods from the late 1950s through the present and alleged that the policies required the insurers to defend and indemnify it—that is, provide a defense and pay covered losses.

The Diocese filed an adversary complaint in the bankruptcy court against Arrowood, the London Market Insurers (LMI), and other insurers. The complaint sought a declaratory judgment defining the scope of the insurance policies and damages for breach of contract based on the insurers’ alleged refusal to defend and indemnify the Diocese. The value of the insurance policies could affect the bankruptcy estate and the money available to alleged victims.

Motion to Withdraw the Bankruptcy Reference

LMI moved under 28 U.S.C. § 157(d) to withdraw the reference to the bankruptcy court for the Diocese’s claims against LMI. “Withdrawal of the reference” transfers responsibility for the specified bankruptcy-related proceeding from the bankruptcy court to the district court. The court considered only the claims against LMI, not the entire adversary proceeding. LMI filed its motion eight days after answering the adversary complaint, and the court found the motion timely.

The court applied factors from In re Orion Pictures Corp., as modified by Stern v. Marshall. These factors included whether the bankruptcy court had authority to issue a final decision, whether the claims carried a right to a jury trial, judicial efficiency, delay and cost, uniformity of bankruptcy administration, and possible forum shopping.

Final Adjudicative Authority and Core Status

The court held that the Diocese’s claims for declaratory relief and breach of contract involved private rights, not public rights. The claims arose from state-law insurance contracts between private parties, and LMI was not a creditor of the Diocese. The parties also had not consented to final adjudication by the bankruptcy court. Under Stern, the bankruptcy court therefore lacked constitutional authority to finally adjudicate the claims.

The court also concluded that the claims were non-core. The insurance contracts were entered decades before the bankruptcy filing, the claims did not depend on bankruptcy law, and the disputes could proceed in a court without federal bankruptcy jurisdiction. The court rejected the Diocese’s reliance on United States Lines, which treated an insurance dispute as core in circumstances involving policies that were the only potential source of payment and directly affected core bankruptcy administration. Here, the Diocese had other assets, including more than $83.5 million in cash, cash equivalents, and financial assets and more than $93 million in total assets listed on a bankruptcy schedule. The court also rejected the argument that alleged consent-to-settlement provisions made the claims core.

Jury Trial and Other Factors

The court determined that LMI was entitled to a jury trial because the breach-of-contract and declaratory-judgment claims were legal in nature. A bankruptcy court cannot conduct a jury trial in a non-core matter. Because the case was in its early stages and unlikely to reach trial soon, however, the jury-trial factor weighed only slightly in favor of withdrawal.

The court found that judicial efficiency favored withdrawal because the district court would otherwise have to review the bankruptcy court’s proposed findings and legal conclusions from the beginning. The court found delay neutral and costs slightly favorable to withdrawal. Uniformity of bankruptcy administration was neutral because the claims were non-core state-law claims, and the court found no indication of forum shopping.

Other Insurers and Final Disposition

Fireman’s Fund Insurance Company, Interstate Fire & Casualty Company, and National Surety Corporation joined LMI’s motion. The court denied their motion to the extent it sought withdrawal of the reference for claims against insurers other than LMI because the filing did not explain enough about those insurers’ policies, which could differ in important ways from LMI’s policies. The court stated that those insurers could file their own motions.

The court granted LMI’s timely motion for withdrawal of the reference. It denied the motion filed by Fireman’s Fund Insurance Company, Interstate Fire & Casualty Company, and National Surety Corporation. The court also granted, to the extent necessary, LMI’s request for an extension concerning its filings, directed the Clerk to terminate the motions at Docket Numbers 1, 14, and 34, and directed the Clerk to terminate all defendants except Certain Underwriters at Lloyds, London & Certain London Market Companies and amend the caption accordingly.