California Bankruptcy Court Holds Coverage Action is Core Bankruptcy Proceeding U.S. Bankruptcy Court, Northern District of California, August 25, 2017

CFB Liquidating Corporation emerged from the Chapter 11 bankruptcy of Chicago Fire Brick Co. (CFB), a company that manufactured products containing asbestos. Asbestos-related claims overwhelmed the company, and the Plan of Reorganization that was confirmed in the bankruptcy proceedings essentially directs the Trustee to administer the company’s remaining assets to pay asbestos-related claims.

CFB’s remaining assets included several insurance policies. While most of CFB’s insurers settled with the bankruptcy estate and made payments, Continental Casualty Company elected to file a proof of claim and negotiate a claims settlement process, which was incorporated into CFB’s Plan of Reorganization after years of negotiation. A dispute arose about several claims submitted to Continental pursuant to that process, and the Trustee filed an adversary proceeding against Continental in the bankruptcy court. The bankruptcy court denied Continental’s motion for summary judgment in the adversary proceeding, and Continental first asked the court to issue judgment rather than set a trial date. However, Continental then reversed course, citing allegedly new evidence, and sought to file a declaratory judgment complaint against the Trustee in state court regarding coverage for the disputed asbestos claims.

The bankruptcy court denied Continental permission to file the state court complaint. Continental argued that the bankruptcy court had no jurisdiction to hear the coverage dispute, because coverage disputes are non-core proceedings. The court admitted that, viewed in isolation, coverage disputes might be non-core. But the coverage complaint at issue here had a “close nexus” to the bankruptcy proceeding because coverage issues were raised in Continental’s original proof of claim; because a method for resolving coverage disputes was incorporated into the confirmed Chapter 11 Plan; and because Continental raised coverage issues in the adversary proceeding that Continental sought to curtail by filing the coverage complaint.

In short, Continental’s fraught history of contesting coverage within the bankruptcy proceeding precluded it from seeking declaratory relief on coverage issues outside bankruptcy court. The bankruptcy court would not allow Continental to make the Trustee re-litigate coverage issues the parties had spent years determining in the Chapter 11 case.

Read the full decision here.

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