Affiliate Servs. v. Stratford Ins. Co. (In re Affiliate Servs.)

IN RE: AFFILIATE SERVICES, LLC Debtor.

AFFILIATE SERVICES, LLC, Plaintiff, v. STRATFORD INSURANCE COMPANY, Defendant.

MISCELLANEOUS ACTION NO. 2:20-mc-00155

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF WEST VIRGINIA CHARLESTON DIVISION

Entered: June 9, 2021

May 24, 2021

MEMORANDUM OPINION AND ORDER

Pending before the Court is Defendant Stratford Insurance Company's ("Stratford") Motion to Withdraw the Reference. (ECF No. 1.) For the reasons more fully explained below, the motion is DENIED.¹

I. BACKGROUND

This action arises out of a dispute over the scope of coverage, defense and indemnification in a commercial insurance policy. Because the background of the instant dispute is a snarl of procedural and jurisdictional issues, the Court will briefly recite only the portions relevant to these particular proceedings.

On August 1, 2019, Richard M. Rashid ("Rashid") filed a lawsuit (the "Underlying Action") against Affiliate Services, LLC ("Affiliate"), and several other individuals and entities in the Circuit Court of Kanawha County, West Virginia. (ECF No. 2 at ¶ 2.) Affiliate is insured under a large commercial insurance policy (the "Policy"), which was issued to Affiliate's parent company. (ECF No. 16 at ¶ 3.) The Policy covers certain companies, executives, and employees under the "Monarch umbrella." (Id.)

Shortly after Rashid filed the Underlying Action, Affiliate and certain other defendants co-insured under the Policy (the "Co-Insureds") submitted requests to Stratford for defense and indemnification under the Policy. (Id. at ¶ 4.) Stratford responded that Affiliate and the Co-Insureds were only entitled to a fraction of the coverage they believed themselves entitled to. (Compare ECF No. 2 at ¶¶ 3-4 with ECF No. 3 at 2.) Affiliate and the Co-Insureds disputed this amount and notified Stratford of its alleged errors. (ECF No. 16 at ¶ 5.)

In May 2020, Stratford filed a coverage action against Affiliate and the Co-Insureds in the United States District Court for the Northern District of Georgia (the "Georgia Action"). (Id. at ¶ 16.) The Georgia Action sought to determine the scope of Stratford's obligations to continue defending the Underlying Suit, as well as any indemnification owed to Affiliate and the Co-Insureds. (ECF No. 2 at ¶ 5.)

Then, in July 2020, Affiliate and the Co-Insureds filed a third-party complaint (the "Insurance Action") against Stratford in the Circuit Court of Kanawha County. (ECF No. 16 at ¶ 7.) The Insurance Action sought a declaratory judgment that Stratford had an obligation to provide the full coverage under the Policy, and Affiliate and the Co-Insureds also asserted claims for breach of contract, bad faith, and unfair trade practices against Stratford. (Id. at ¶ 8.)

These several litigations and the eroding funds provided by Stratford under the Policy, as well as other financial burdens and pressures, forced Affiliate to file for Chapter 11 protection in the United States Bankruptcy Court for the Southern District of West Virginia on July 28, 2020. (Id. at ¶ 9.) The Underlying Action was removed to the Bankruptcy Court where it became Adversary Proceeding No. 2:20-ap-02009 ("AP 2009"). (Id.) Affiliate also sought to join its disputes with Stratford in the Bankruptcy Court, where it filed Adversary Proceeding No. 2:20-ap-02011 ("AP 2011"). (Id. at ¶ 10.) The claims asserted against Stratford in AP 2011 were substantially like those in the Circuit Court in the Insurance Action. (Id.) The Co-Insureds moved to intervene in AP 2011 to file their own complaint against Stratford. (Id. at ¶ 11.)

In response, Stratford moved to transfer or dismiss AP 2011, and argued that the "first-to-file" rule dictated that the Bankruptcy Court must allow the Georgia Action to proceed first. (Id. at ¶ 12.) Stratford near-simultaneously filed the instant Motion to Withdraw, initiating the proceedings in this Court. (Id. at 13; see ECF No. 1.) The Bankruptcy Court stayed ruling on the Co-Insureds' motion to intervene in AP 2011 and Stratford's motion to dismiss until this Court resolved the motion to withdraw. (Id. at ¶ 14.) During the pendency of those motions, Rashid sought to remand AP 2009—the Underlying Action—to the Circuit Court. (Id. at ¶ 15.) After initially granting the motion, the Bankruptcy Court stayed the remand upon a motion to reconsider. (Id.)

Then, in late November 2020, Affiliate filed its initial disclosure and plan in the Bankruptcy Court. (Id. at ¶ 18.) Affiliate sought to determine its coverage under the Policy first, with a stay put in place that would limit further expenditures in the other actions until the coverage dispute was resolved. (Id.) However, shortly after Affiliate filed its plan, the Northern Districtof Georgia dismissed the Georgia Action for lack of personal jurisdiction. (See ECF No. 5-1.) The Georgia Court's dismissal mooted Stratford's motion to transfer, which had been stayed in the Bankruptcy Court. (ECF No. 16 at ¶ 19.)

On January 21, 2021, the Bankruptcy remanded AP 2009 to the Circuit Court and lifted the automatic stay to allow Rashid to litigate the action. (Id. at ¶ 20.) This was contrary to Affiliate's filed plan, and without a feasible way forward, Affiliate moved to voluntarily dismiss its Chapter 11 case. (Id. at ¶ 21.)

Notably, only days after Affiliate moved the Bankruptcy Court for a voluntary dismissal, Stratford filed an answer and counterclaim to Affiliate's AP 2011 complaint in this Court, along with an answer and counterclaim to the Co-Insureds' motion to intervene in AP 2011 and attached complaint. (See ECF Nos. 6, 7.) Stratford took these actions even though the instant motion remained pending, and the motion to intervene in AP 2011 similarly remained stayed.

The Bankruptcy Court granted Affiliate's motion for voluntary dismissal on February 2, 2021. (Id. at ¶ 24.) The very next day, the Co-Insureds withdrew their motion to intervene in AP 2011. (Id.) The remand of AP 2009 took effect on February 4. (Id. at ¶ 25.) On February 5, Affiliate and the Co-Insureds moved for a stay in the Underlying Action to allow the Insurance Action to proceed against Stratford. (Id.) That same day, this Court entered an order directing the parties to provide a status update as to Stratford's motion to withdraw in light of the dismissal of Affiliate's Chapter 11 case from the Bankruptcy Court. (ECF No. 11.)

Stratford filed its motion to withdraw on September 30, 2020. (ECF No. 1.) Affiliate responded in opposition on October 13, 2020. (ECF No. 3.) Stratford filed its reply on October 20, 2020. (ECF No. 4.) The parties' filed their respective status updates on February 15, 2021.(ECF Nos. 16, 17.) Affiliate filed a reply to Stratford's status update on February 22, 2021. (ECF No. 19.) With the briefing complete, Stratford's motion to withdraw is ripe for adjudication.

II. LEGAL STANDARD

This Court's local rules provide that "all proceedings arising under Title 11 or arising in or related to a case under Title 11, are referred to the Bankruptcy Court for disposition." L.R. Civ. P. 83.13 (citing 28 U.S.C. § 157(a)). The Bankruptcy Court is authorized to enter orders and judgments on all core bankruptcy matters and to submit proposed findings and recommendations to this Court on all non-core matters. 28 U.S.C. § 157(b), (c). It is within the Court's discretion, however, to withdraw the reference "on its own motion or on timely motion of any party, for cause shown." Id. at § 157(d). This is known as permissive withdrawal. Withdrawal is mandatory in other contexts not relevant here. See 28 U.S.C. § 157(d) ("The district court shall . . . withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.").

"Cause" is not defined in the statute and there is little guidance from the Fourth Circuit as to the requisite type or degree of cause that must be demonstrated. A survey of decisions from other circuits reveals there is substantial agreement that the following six factors are relevant to the analysis of good cause:

(1) whether the proceeding is core or non-core; (2) the uniform administration of bankruptcy law; (3) promoting judicial economy; (4) the efficient use of the parties' resources; (5) the reduction of forum shopping; and (6) the preservation of the right to a jury trial.

Allen v. Nat'l. City Mortg. Co., 2:04-mc-188, 2006 WL 3899997 at *2 (S.D. W.Va. July 13, 2006) (Goodwin, J.) (citing In re U.S. Airways Group, Inc., 296 B.R. 673, 682 (E.D.Va.2003)).

The first factor—whether the matter is core or non-core—generally is afforded more weight than the others. See, e.g., Security Farms v. Int'l. Bhd. of Teamsters, 124 F.3d 999, 1008 (9th Cir. 1997); In re Orion Pictures Corp., 4 F.3d 1095, 1101 (2d Cir. 1993); In re Coe-Truman Techs., Inc., 214 B.R. 183, 187 (N.D. Ill. 1997). Although the presence of core proceedings strongly militates against the withdrawal of the reference, it is not dispositive. It is within the Court's discretion to withdraw the reference even when core proceedings are involved. See United States v. Miller, 5:02-cv-168-c, 2003 WL 23109906 at *4-5 (N.D. Tex. Dec. 22, 2003).

III. DISCUSSION

Stratford's motion to withdraw poses a unique issue to the Court as to the effect the Bankruptcy Court's dismissal of the underlying bankruptcy case has on the pending motion to withdraw. Affiliate urges this Court to "relinquish jurisdiction" because the underlying bankruptcy case has been dismissed. (ECF No. 16 at 7.) Accordingly, Affiliate suggests applying a four-factor test for deciding whether a federal court should surrender jurisdiction. (Id.) The Court declines this invitation, as the test originating in Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 353 (1988), and adopted in Porges and Querner, infra, appears to only apply to remaining pendent state law claims.² See Querner v. Querner...