In Determining Whether a Claim is Core, the Focus Should Be on the Nature of the Dispute, Not Its Significance (Economic or Otherwise) to the Debtors and Their Estates

Longview Power, LLC v. First Am. Title Ins. Co. (In re Longview Power, LLC), Adv. No. 14-50369 (BLS), Memorandum Order, Adv. Docket No. 57 (Bankr. D. Del. Aug. 12, 2014)

In the Longview Power bankruptcy proceedings, the debtors (the “Debtors”) have proposed a chapter 11 plan of reorganization that contemplates satisfying, if ultimately allowed, certain mechanics’ lien claims asserted in the aggregate amount of over $335 million from the proceeds of a title insurance policy (the “Title Insurance Policy”) issued by First American Title Insurance Co. (“First American”).  The policy was issued in the amount of $825 million to the first-lien collateral agent under the Debtors’ prepetition secured credit agreement (the “Collateral Agent” and together with the Debtors, the “Plaintiffs”) for the benefit of the lenders.  To effectuate the proposed plan, the Collateral Agent agreed to assign the Title Insurance Policy’s cash proceeds (not the policy or any claims asserted thereunder) to a trust for the benefit of the claimants.  Additionally, the Plaintiffs commenced an adversary proceeding against First American to obtain a determination from the Court that coverage exists under the Title Insurance Policy on account of the mechanics’ lien claims and that the proceeds of the Title Insurance Policy are property of the Debtors’ estates under section 541 of the Bankruptcy Code.

First American quickly sought a determination from the Court as to the core/non-core status of the insurance coverage determination claim.  While it conceded that the property of the estate claim was core, it did not do so with respect to the coverage determination claim.  In support, First American noted that the claim involves pure state law and a prepetition contract between two non-debtors.  To the contrary, the Plaintiffs argued that the feasibility of the proposed plan, and thus, the Debtors’ entire reorganization, depends upon the coverage determination question.  Moreover, they asserted that the policy proceeds, if realized, would represent the largest liquid asset of the estates and that the determination will necessarily involve the Debtors and an examination of their actions during the course of the bankruptcy proceedings.  In sum, the Plaintiffs asserted that the coverage dispute affects the administration of the cases, could only have arisen in the context of the bankruptcy, and thus, was core.

Despite the convincing arguments posited in support of a core finding, the Court determined that the coverage determination claim is non-core.  To begin, the Court cited to In re Exide Techs., 544 F.3d 196, 206 (3d Cir. 2008) and noted that the existence of the core property of the estate claim did not make the coverage determination claim core, a point contested by the Plaintiffs.  The Court then examined and categorized the nature of the claim, a step necessary under the Third Circuit’s directive in Halper v. Halper, which requires that a core claim either satisfy one of the illustrative examples under 28 U.S.C. § 157(b)(2), invoke a substantive right provided by the Bankruptcy Code, or be one that can arise only in the context of a bankruptcy proceeding.  164 F.3d 880, 836 (3d Cir. 1999).

Here, none of Halper’s requirements was found fulfilled.  According to the Court, the coverage determination claim is one that seeks an answer as to whether First American must perform under the Title Insurance Policy.  In answering that question, state law rights and defenses will be implicated only as between two non-debtors (i.e., First American and the Collateral Agent).  The policy itself is not property of the estate, the proceeds themselves will only be assigned to the estates once the proposed plan is confirmed, and the events and actions of the Debtors during the bankruptcy proceedings may be relevant but will not be the exclusive focus.  Importantly, while the feasibility of the Debtors’ proposed plan rests upon a determination of coverage, this fact alone was held insufficient to create a core claim.  Indeed, if it was, the Court noted that it would “give debtors unfettered license to confer core status to proceedings by requiring their favorable adjudication in order to confirm a plan.”  The possibilities would be limitless.  In the end, the Court recognized the significance (economically and otherwise) of this dispute to the Debtors and their estates, but stressed that the focus in determining a court’s core jurisdiction lies with the nature of the dispute before it and that, in this case, the insurance coverage dispute was “clearly ‘related to’” the bankruptcy proceedings, but not core.

**Please note that while Ashby & Geddes serves as Delaware counsel to Foster Wheeler North American Corp. in the Longview Power bankruptcy proceedings, all information contained in the foregoing blog post is based on publicly available information.  Please refer to our Disclaimer and Privacy Policy for more information.