Certain Underwriters at Lloyds London Syndicate 1861 v. Daileader

Background

The plaintiffs are insurers that issued excess director-and-officer insurance policies to Oaktree Medical Center, LLC, Oaktree Medical Centre PC, and Labsource, LLC. Timothy Daileader was a former director and officer of those entities. After the entities filed Chapter 7 bankruptcy cases, the bankruptcy trustee brought adversary proceedings alleging that Daileader breached fiduciary duties and committed other wrongdoing.

The insurers filed a declaratory-judgment action under New York law seeking a declaration that they had no duty to defend or indemnify Daileader because their policies contained bankruptcy and insolvency exclusions. Daileader removed the case from New York Supreme Court to the Southern District of New York, asserting bankruptcy jurisdiction and federal-question jurisdiction. The insurers moved to remand, meaning they asked the federal court to send the case back to state court.

Federal-Question Jurisdiction

The court applied the well-pleaded-complaint rule, which generally asks whether a federal issue appears in the plaintiff’s own claim rather than only in a defense. The court concluded that the insurers’ claims sought interpretation of insurance policies under state law. The bankruptcy cases and the trustee’s allegations were factual predicates for applying the policy exclusion, not federal legal claims.

Daileader argued that the exclusion might be unenforceable as an unlawful “ipso facto” provision under the Bankruptcy Code. The court treated that issue as a possible defense to the insurers’ claims, not an element of those claims. It therefore held that the complaint did not establish federal-question jurisdiction under 28 U.S.C. § 1331 or bankruptcy jurisdiction under 28 U.S.C. §§ 1334 and 1452.

Mandatory Abstention and Remand

The court alternatively considered mandatory abstention under 28 U.S.C. § 1334(c)(2). Mandatory abstention requires a federal court to decline to hear certain state-law proceedings that are related to a bankruptcy case, but are not core bankruptcy proceedings, when the matter can be timely adjudicated in a state forum and there is no other basis for federal jurisdiction.

The court held that this was a non-core proceeding. It was a state-law insurance-coverage dispute concerning rights under policies that existed outside bankruptcy, and the opinion found no allegation that the policies were the estates’ most important assets or the only source of funds for creditors. The possibility that a defense might require interpretation of the Bankruptcy Code did not make the case a core bankruptcy proceeding.

The court also found that the New York state court could timely adjudicate the dispute. The issues primarily involved insurance-policy and contract interpretation, matters the state court could decide; the bankruptcy cases were Chapter 7 proceedings; and Daileader had not shown that remand would delay administration or liquidation of the bankruptcy estates. The court further found no diversity jurisdiction because complete diversity was absent when the case was removed.

Disposition

Judge Paul G. Gardephe granted the plaintiffs’ motion to remand. The Clerk was directed to remand the case to the Clerk of the Supreme Court of the State of New York, New York County, terminate all pending motions, and close the federal case. The order resolved the federal court’s jurisdiction and did not decide the underlying insurance-coverage dispute.