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In re Ames Dep't Stores, Inc.

United States District Court, S.D. New York

July 3, 2014

In re AMES DEPARTMENT STORES INC., Debtor, AMES DEPARTMENT STORES INC., Plaintiff,
v.
LUMBERMENS MUTUAL CASUALTY COMPANY, Defendant

Page 737

For Ames Department Stores, Inc., Plaintiff: Avery Daniel Samet, Storch Amini & Munves, P.C., New York, NY.

For Lumbermens Mutual Casualty Company, Defendant: Mark Steven Gamell, Torre, Lentz, Gamell, Gary & Rittmaster, Jericho, NY.

OPINION

Page 738

OPINION & ORDER

ANDREW L. CARTER, JR., United States District Judge.

This Court is presented with the question of whether, under 28 U.S.C. § 157(d), it must withdraw from Bankruptcy Court the reference of an adversary proceeding involving a dispute between the Plaintiff-bankruptcy trustee and the Defendant-insurance company over ownership of $8 million in trust. Defendant argues that withdrawal is mandatory because the Bankruptcy Court's resolution of Defendant's challenge to its jurisdiction would necessarily involve significant interpretation of non-bankruptcy federal law. For the reasons stated below, Defendant's motion is granted. However, the Court respectfully directs the Bankruptcy Court to issue a Report and Recommendation on the matter before the reference is withdrawn.

Page 739

I. BACKGROUND

On November 1, 2000, Lumbermens Mutual Casualty Company (" Lumbermens" or " Defendant" ), an Illinois insurance company, issued a $14.35 million surety bond (the " bond" ) on behalf of Ames Department Stores (" Ames" or " Plaintiff'), as principal, to Travelers Indemnity Company (" Travelers" ), as obligee. ( See Second Am. Compl. ¶ ¶ 2-3, Adv. Pro. No. 06-01890 (Bankr. S.D.N.Y.) (" Am. Compl." ).) Ames filed a petition for bankruptcy protection in the Southern District of New York on August 20, 2001. ( See Am. Compl. ¶ 4.) Travelers subsequently demanded payment of the bond from Lumbermens and, after the parties were unable to resolve the matter, brought suit against Lumbermens in the United States District Court for the District of Connecticut in June 2003. (Am. Compl. ¶ ¶ 5-6, 46.) That lawsuit was settled in November 2003. (Am. Compl. ¶ 47.) Under the terms of the settlement, Lumbermens agreed to place $8 million in a trust account at the Bank of New York for the sole benefit of Travelers (the " trust" ). ( See Am. Compl. ¶ ¶ 8, 47-52.) Travelers, in turn, agreed that in satisfying Ames's debts it would first use two letters of credit that Ames had provided as collateral before turning to the funds in the trust or to the bond. ( See id .)

Almost three years later, on November 4, 2006, Ames commenced the present adversary proceeding, before the Honorable Robert E. Gerber, against both Lumbermens and Travelers seeking, inter alia , a declaratory judgment that Ames's obligations to Travelers should be satisfied from the bond prior to any demand on the letters of credit. (Am. Compl. ¶ 62.) Lumbermens answered asserting that the bankruptcy court lacked subject-matter jurisdiction over the dispute, that the proceedings were " not core," and that the reference to the Bankruptcy Court should be withdrawn. ( See Def.'s Mot. at 6.)

In December 2008, the Bankruptcy Court approved a settlement between Travelers and Ames. (Am. Compl. ¶ 72.) After that settlement, Ames amended its complaint against Lumbermens, and the parties then engaged in discovery, which concluded in 2011. In July 2012, however, Lumbermens' board of directors consented to enter the company into an Illinois state court insolvency proceeding. ( See Ex. N to Def.'s Mot. at 1.) Pursuant to the Illinois Insurance Code, the Illinois Circuit Court of Cook County subsequently entered an order against Defendant which appointed a rehabilitator and created a rehabilitation estate (hereinafter " Rehabilitation Order" and " Rehabilitator" ). ( See id .) The Rehabilitation Order also contained an anti-suit injunction, barring the prosecution of any litigation against Defendant and mandating that disputes related to its assets be heard in the rehabilitation court. ( See id . at 2.)[1]

Soon afterwards, Ames filed a motion in Bankruptcy Court seeking a declaration that that court had exclusive jurisdiction over the dispute in the adversary proceeding (the " Jurisdictional Motion" or the " Motion" ). The Bankruptcy Court thereafter issued an order allowing the Rehabilitator, as the representative for Lumbermens, forty-five days to become familiar with the case posture and to convey its position on the Jurisdictional Motion to the Bankruptcy Court, and Plaintiff another forty-five days afterwards to seek any relief in response. ( See Ex. R to Def.'s ...


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