Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_05-cv-02693/USCOURTS-azd-2_05-cv-02693-0/pdf.json

Nature of Suit Code: 423
Nature of Suit: Bankruptcy Withdrawal 28 USC 157
Cause of Action: 28:0157 Motion for Withdrawal of Reference

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

In re: )

)

BCE WEST, L.P., et al., )

) No. CIV 05-2693-PHX RCB

Debtors, )

______________________________) O R D E R

Gerald K. Smith, as Plan )

Trustee, et al., )

)

Plaintiffs, )

)

vs. ) 

)

ACE Insurance Company, Ltd., ) 

et al., )

)

Defendants. ) )

On July 26, 2005, Defendants filed a motion to withdraw the

reference to the Bankruptcy Court in an adversary proceeding filed

by Plaintiffs Gerald K. Smith, et al. (the "Plan Trustee"). Mot.

(doc. 1); Bankruptcy Case No. B98-12547-ECF-CGC through 98-12570-

ECF-CGC (Adversary No. 2:05-ap-00299-CGC). Plaintiffs filed a

response to Defendants' motion on August 10, 2005. (doc. 3). 

Defendants' reply was filed on August 22, 2005, and thereafter, on 

Case 2:05-cv-02693-RCB Document 12 Filed 09/01/06 Page 1 of 14
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1 On September 16, 2005, Defendants filed a motion requesting

oral argument on this matter. Motion Hearing (doc. 4). Finding oral

argument unnecessary, the Court shall deny this request.

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August 26, 2005, Plaintiffs filed a Supplemental Response. (doc.

3). Upon an appeal of this matter to the United States District

Court, copies of these filings were transmitted to the Court for

review. (doc. 3). On September 16, 2005, Defendants filed a

Supplemental Reply in this matter. Supp. Reply (doc. 5). Having

carefully considered the arguments raised, the court now rules.1

I. Background Facts

ACE Bermuda Insurance Ltd., formerly A.C.E. Insurance Company,

Ltd., ("ACE"), is an insurance company incorporated and

headquartered in Bermuda. It is not registered to sell insurance

or otherwise do business in any state of the United States. ACE

has no employees in the United States and United States companies

seeking to purchase insurance from ACE may do so only through nonUnited States brokers.

ACE issued Directors and Officers Liability Insurance Policy

Number BOST-7925D (the "Policy") in favor of insured Boston Chicken

Inc. for the period of December 5, 1995 to December 5, 1999. The

Policy provides coverage for certain claims made against the

Directors and Officers of Boston Chicken. The Policy also includes

an arbitration clause providing, in part, as follows:

Any dispute arising under or relating to this

policy, or the breach thereof, shall be finally

and fully determined in Hamilton, Bermuda under

the provisions of the Bermuda Arbitration Act of

1986, as amended and supplemented, by an

Arbitration Board composed of three arbitrators

who shall be disinterested and active or retired

business executives having knowledge relevant to

the matters in dispute...

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Mot. (doc. 1) at 4-5. 

Beginning in 2001, Gerald K. Smith (as Plan Trustee for and on

behalf of the Estates of Boston Chicken, Inc.; BC Real Estates

Investment Inc. and all Boston Chicken Affiliates) filed a series

of actions in the United States District Court, District of

Arizona, against a variety of defendants, including former

directors and officers of Boston Chicken Scott Beck and Peter

Pedersen. The Trustee's federal actions were ultimately

consolidated before United States District Court Judge Paul

Rosenblatt in the action styled Gerald K. Smith v. Arthur Andersen,

et al., Case No. 01-CV-00218 (the "Action"). In or about September

2001, ACE advised individual insures Beck and Pedersen that the

Action was excluded from coverage pursuant to the Policy's "Insured

v. Insured" exclusion. 

In 2004, Beck and Pedersen entered into separate settlement

agreements with the Plan Trustee, whereby the Action against Beck

and Pedersen was resolved, in part, by Beck and Pedersen assigning

their rights under the Policy to the Plan Trustee. The Plan

Trustee, as assignee, then demanded payment from ACE. ACE again

denied coverage. 

ACE notified the Plan Trustee that the dispute over ACE's

obligations under the policy must be resolved in a Bermuda

arbitration, as defined by the Policy's arbitration clause. 

However, the Plan Trustee refused to consent to arbitration and

threatened to sue ACE in the United States in an attempt to have

the arbitration clause nullified. Consequently, ACE sought and

obtained an injunction from the Supreme Court of Bermuda, directing

the Plan Trustee to abide by the arbitration clause.

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In response, the Plan Trustee filed an Adversary Complaint

against ACE and ACE's Bermuda and United States attorneys. The

Adversary Complaint states five claims for relief: (1) for an

injunction against all defendants preventing them from proceeding

with the litigation and arbitration in Bermuda; (2) for sanctions

against all defendants for having violated the Barton Doctrine; (3)

for damages against ACE for breach of contract based on ACE's

failure to make a payment under the Policy; (4) for a declaratory

judgment against ACE setting out ACE's obligations under the

policy; and (5) for damages against ACE for bad faith denial of

claims. Mot. (doc. 1) at 6. Now, in the motion currently before

the Court, ACE asserts that the Court should withdraw the reference

of the adversary proceeding, in its entirety, to the Bankruptcy

Court, because the "adversary complaint raises novel issues of

federal and international law, and requires the Court to reconcile

an apparent conflict between principles of bankruptcy law and the

Federal Arbitration Act and other federal law[.]" Mot. (doc. 1) at

2. 

II. Discussion

For cause shown, a district court may withdraw the reference

of a proceeding to the bankruptcy court. 28 U.S.C. § 157(d). A

district court may, in its discretion, withdraw the reference on

any appropriate case, however, it must withdraw the reference when

the moving party demonstrates in a timely manner that the case

"requires consideration of both title 11 and other laws of the

United States regulating organizations or activities affecting

interstate commerce." Id. The non-bankruptcy federal question

must not be merely incidental; rather, the case must turn on

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"substantial and material" consideration of the non-bankruptcy

federal law. Matter of Vicars Ins. Agency, Inc., 96 F.3d 949, 952

(7th Cir. 1996); In re White Motor Co., 42 B.R. 693, 704 (N.D. Ohio

1984). "[M]andatory withdrawal is required only when [the federal]

issues require the interpretation, as opposed to mere application,

of the non-title 11 statute, or when the court must undertake

analysis of significant open and unresolved issues regarding the

non-title 11 law." Matter of Vicars, 96 F.3d at 954; see also In

re Atteberry, 164 B.R. 668, 670 (D. Kan. 1994).

In the case at bar, ACE argues only for mandatory withdrawal

of the reference. Mot. (doc. 1). In their motion, ACE asserts

that the reference to the Bankruptcy Court must be withdrawn on the

entire adversary proceeding, because such proceeding requires

interpretation of the Barton Doctrine, and consideration of the

principles of international comity and the limits of United States

jurisdiction. Id. at 8. In particular, ACE contends that the

following issues must be analyzed in the adversary proceeding and,

thus, satisfy the requirements for mandatory withdrawal. Id.

(1) As a principle of federal common law, the

Barton Doctrine cannot override the policy in

favor of enforcement of arbitration clauses

embodied in the Federal Arbitration Act and the

United Nations Convention on the Recognition and

Enforcement of Foreign Arbitral Awards...

(2) The Barton Doctrine cannot be extended

internationally to strip a foreign litigant of its

right to be heard in its own courts, particularly

not when the contract at issue contains a valid

choice of forum clause selecting the foreign

jurisdiction...

(3) Principles of the comity of laws require the

United States courts to defer to Bermuda law to

determine the enforceability of the arbitration

clause and the jurisdiction of a Bermuda court

over this dispute.

(4) Principles of the comity of courts require the

United States courts to defer to Bermuda courts to

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determine the enforceability of the arbitration

clause.

Id. Lastly, ACE asserts that their motion is timely because the

Bankruptcy Court has not ruled on any substantive issue in the

case. Id. at 9. In addition, ACE notes that withdrawal of the

reference need not cause any significant delay in the proceedings

because the briefing on the Motion to Dismiss can be transferred

from the Bankruptcy Court to the District Court. Id. 

In contrast, the Plan Trustee opposes ACE's motion to withdraw

by arguing that the adversary proceeding does not present issues

requiring interpretation of non-title 11 law and that, in any

event, the motion is untimely. Resp. (doc. 3) at 2. At the

outset, the Plan Trustee maintains that the Adversary Complaint

does not raise any "novel" issues that require interpretation of

non-title 11 law to revolve. Id. at 4-11. "The issues that

Defendants contend are "novel" and conflicted are issues that have

been visited by other courts, and thus a body of settled law exists

to guide the Bankruptcy Court in its determination." Id. at 4. 

First, the Plan Trustee contends that, despite ACE's

assertions, the Barton Doctrine does not collide with the Federal

Arbitration Act ("FAA"), the United Nations Convention on the

Recognition and Enforcement of Foreign Arbitral Awards ("UN

Convention"), or public policy favoring arbitration. Id. at 5. 

Specifically, the Plan Trustee argues that the Barton Doctrine does

not attempt to override the obligation to comply with an

international arbitration clause. Id. He maintains that

bankruptcy courts can, and routinely do, review arbitration

provisions in commercial agreements and order parties to proceed to

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arbitration on non-core matters. Resp. (doc. 3) at 5. However, he

asserts that the Barton Doctrine only "require[s] any party who

wishes to enforce an arbitration clause - whether the arbitration

clause against a debtor derives from a domestic or international

commercial agreement - to first obtain relief from the automatic

stay or other orders restraining action against the estate from the

appointing bankruptcy court." Id. The Plan Trustee contends that

nothing about this scheme is inconsistent with the FAA or the UN

Convention. Id. at 6. 

Moreover, the Plan Trustee asserts that courts "have uniformly

concluded that the language, structure and purpose of Title 11

clearly evidence Congress' intent to apply the Bankruptcy Code

beyond domestic borders." Id. at 8. Consequently, he notes that

courts in this circuit and elsewhere have not hesitated to enforce

the automatic stay, discharge injunction or issue other orders

against a defendant who initiates action in a foreign country that

threatens the property of the estate or impugns the court's

jurisdiction. Id. (citing In re Simon, 153 F.3d 991 (9th Cir.

1998); In re Rimsat Ltd., 98 F.3d 956 (7th Cir. 1996); In re

French, 320 B.R. 78 (D. Md. 2004); In re Dow Corning Corp., 287

B.R. 396 (E.D. Mich. 2002); In re Nakash, 190 B.R. 763 (Bankr.

S.D.N.Y. 1996)). 

Second, the Plan Trustee argues that the Adversary Complaint

raises no issues requiring consideration of international comity. 

Resp. (doc. 3) at 9-11. He notes that comity is not a rule of law,

and thus does not require the United States courts to defer to the

Bermuda Supreme Court. Id. Additionally, the Plan Trustee argues

that international comity is only extended to the judgments of

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foreign tribunals, and does not require the court to defer to the

acts of a nonjudicial actor who unilaterally pursues ex parte

litigation against the debtor and the estate. Id. at 10 (citing In

re Nakash, 190 B.R. at 770). Lastly, the Plan Trustee contends

that comity does not come into play in this case, because there are

no competing insolvency proceedings in Arizona and Bermuda. Id.

(citing In re Simon, 153 F.3d at 999). 

Third, the Plan Trustee asserts that ACE's motion is untimely

and, therefore, should be denied. Resp. (doc. 3) at 11-13. He

argues that the motion, filed just three weeks before the

Bankruptcy Court was scheduled to hear oral argument on their

12(b)(6) motions, was filed for the purpose of delay. Id. at 11. 

He notes that ACE filed their motion three and one-half months

after the date the adversary complaint was filed. Id. at 12. 

Hence, the Plan Trustee argues that ACE did not take the "first

reasonable opportunity" to request withdrawal of the reference. 

Id. (citing In re Baldwin-United Corp., 57 B.R. 751, 753 (S.D. Ohio

1985). 

A. The Barton Doctrine

The Barton Doctrine takes its name from Barton v. Barbour, 104

U.S. 126 (1881), in which the Supreme Court ruled that the common

law barred suits against receivers in courts other than the court

charged with the administration of the estate. See In re Crown

Vantage, Inc., 421 F.3d 963, 970 n.4 (9th Cir. 2005). Generally,

the Supreme Court held in Barton that leave of the court, by which

the trustee was appointed, must be obtained before suit is brought

against such a receiver. See Barton, 104 U.S. at 127; In re Crown

Vantage, 421 F.3d at 970 n.4. 

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2 "Trustees, receivers or managers of any property, including

debtors in possession, may be sued, without leave of the court

appointing them, with respect to any of their acts or transactions in

carrying on business connected with such property." 28 U.S.C. §

959(a).

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The court held that if leave of court were not

obtained, then the other forum lacked subject

matter jurisdiction over the suit. Barton, 104

U.S. at 127. Part of the rationale underlying

Barton is that the court appointing the receiver

has in rem subject matter jurisdiction over the

receivership property.

Id. at 971. "This requirement enables the Bankruptcy Court to

maintain better control over the administration of the estate." In

re DeLorean Motor Co., 991 F.2d 1236, 1240 (6th Cir. 1993). The

Ninth Circuit recognized this doctrine in Kashani v. Fulton (In re

Kashani), 190 B.R. 875, 883-85 (9th Cir. BAP 1995) and In re Crown

Vantage, 421 F.3d at 970. 

We join our sister circuits in holding that a

party must first obtain leave of the bankruptcy

court before it initiates an action in another

forum against a bankruptcy trustee or other

officer appointed by the bankruptcy court for acts

done in the officer's official capacity."

In re Crown Vantage, 421 F.3d at 970. Although 28 U.S.C. § 959(a)

grants the right to sue an operating trustee without leave of the

bankruptcy court,2 the section is silent on whether the same rule

applies to liquidating trustees. See In re DeLorean, 991 F.2d at

1240-41 ("Section 959 serves as a limited exception to the above

described rule (the "Barton Doctrine"), allowing suits against the

trustee for actions taken while 'carrying on business.'").

As noted above, ACE asserts that the reference should be

withdrawn from the bankruptcy court on the adversary proceeding

because, generally, an analysis of the issues will require

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interpretation of the Barton Doctrine. Specifically, ACE argues

that the Bankruptcy Court will have to determine whether the Barton

Doctrine overrides the policies in favor of enforcement of

arbitration clauses, which are embodied in the FAA and the UN

Convention. In addition, ACE maintains that the Bankruptcy Court

would be required to determine whether the Barton doctrine can be

extended internationally. The Court concludes that both of these

issues will not require the Bankruptcy Court to "interpret" nontitle 11 law.

First, the Court does not find that the Barton Doctrine

conflicts with the FAA or the UN Convention. Barton stands for the

concept that, before a lawsuit is brought against a receiver, a

claimant must first request and obtain leave of the court by which

the trustee was appointed. See In re Crown Vantage, 421 F.3d at

969 n.4. ACE asserts that the FAA and the UN Convention express

policies in favor of enforcement of arbitration clauses. Mot.

(doc. 1) at 8. Thus, ACE seems to attempt to raise a conflict on

this issue by calling into question whether the Barton Doctrine,

being a principle of federal common law, is overridden by the FAA,

a federal statute, and the UN Convention, an international treaty. 

Although the principles regarding the hierarchy of law may explain

that, in the presence of a conflict of law, treaties and statutes

may override common law, no such conflict exists here. See

generally, Bradfield v. Trans World Airlines, Inc., 152 Cal. Rptr.

172, 175 (Cal. Ct. App. 1979); U.S. v. Texas, 507 U.S. 529, 533

(1993); NORMAN J. SINGER, 1A SUTHERLAND STATUTORY CONSTRUCTION § 23:23 (6th

ed. 2005). 

Second, the Court finds that the question of whether the

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Barton Doctrine may be applied outside of the United States is not

an issue that requires a mandatory withdrawal of the reference. 

Courts, in this circuit and elsewhere, have held that Congress

intended to apply the Bankruptcy Code beyond domestic borders, and,

thus, have enforced the automatic stay, discharged injunctions and

imposed other orders against defendants who initiated actions in

foreign countries, which threatened the property of the estate or

impugned the court's jurisdiction. See In re Simon, 153 F.3d 991,

996 (9th Cir. 1998); In re Rimsat, 98 F.3d 956, 961 (7th Cir. 1996)

(finding that even though the action in the foreign court did not

threaten to deplete the estate directly, it did imperil the orderly

administration of the bankruptcy proceeding, and by doing so, posed

an indirect threat to the estate); In re French, 320 B.R. 78 (D.

Md. 2004); In re Nakash, 190 B.R. 763 (Bankr. S.D.N.Y. 1996). 

Hence, it is clear that the automatic stay, 11 U.S.C. § 362,

applies extraterritorially. 

The Barton Doctrine is analogous to the requirements of 11

U.S.C. § 362(d), which allows that only by request of a party in

interest may the court grant relief from the automatic stay. See

e.g., In re Delorean, 991 F.2d at 1241 (finding that, without the

benefit of the section 959(a) exception, the general rule regarding

stays governs); In re Baptist Medical Center of New York, 80 B.R.

637, 643 (Bankr. E.D.N.Y. 1987) (finding that section 959(a)

"provides an express statutory exception to the blanket stays

inherent to the bankruptcy process"). Here, ACE does not argue

that the exception defined in section 959(a) applies. Therefore,

due to the fact that the Plan Trustee is a liquidating trustee, it

seems irrelevant whether the Barton Doctrine applies

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extraterritorially, even in the face of a contracted choice of

forum clause selecting a foreign jurisdiction, because it is clear

that the Bankruptcy Code, and, thus, the automatic stay of section

342, applies. The parties themselves do not dispute that the

automatic stay applies in this case.

The Court concludes that ACE has failed to show that the

adversary proceeding will require an "interpretation" or

"substantial and material" consideration of the Barton Doctrine. 

Thus, the Court does not find withdrawal of the reference to be

mandatory, under 28 U.S.C. § 157(d), on this basis. 

B. Comity

As noted above, ACE asserts that the reference should be

withdrawn from the bankruptcy court on the adversary proceeding

because, generally, an analysis of the issues will require

interpretation of the principles of the comity of laws and the

comity of courts. "Comity is a doctrine of adjustment, not a

mandate for inaction. In the case of parallel inconsistent

proceedings in domestic and foreign courts, one must yield; there

is no presumption it is the domestic[.]" In re Rimsat, 98 F.2d at

963. "[Comity] is not a rule of law, but one of practice,

convenience, and expediency." Somportex, Ltd. v. Philadelphia

Chewing Gum Corp., 453 F.2d 435, 440 (3rd Cir. 1971). Although

comity is more than mere courtesy and accommodation, it does not

achieve the force of an imperative or obligation. Id. 

Here, ACE argues that, in the adversary proceeding, the

Bankruptcy Court will have to examine whether the principles of

comity require the United States courts to defer to Bermuda law and

courts when determining the enforceability of the arbitration

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clause and the jurisdiction of a Bermuda court over this dispute. 

The Court finds that this issue is not "novel" and shall not

require the Bankruptcy Court to "interpret" non-title 11 law.

Here, the parties do not dispute that bankruptcy courts are

fully able to evaluate and enforce provisions in commercial

agreements, including arbitration clauses. Resp. (doc. 3) at 5;

Reply (doc. 3) at 2 ("If this case involved nothing more than the

enforcement of an arbitration clause, withdrawal of the reference

would not be required.") The Court does not agree with the Plan

Trustee's argument that comity does not come into play in this case

because there are no competing insolvency proceedings. In

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S.

614 (1985), the Supreme Court noted that "concerns of international

comity, respect for the capacities of foreign and transnational

tribunals, and sensitivity to the need of the international

commercial system for predictability in the resolution of disputes"

required, in that case, that the parties' arbitration agreement be

enforced. 473 U.S. at 629. Thus, the principles of comity are

merely factors that the Bankruptcy Court may consider when

determining whether the parties' arbitration clause should be

applied in the case at bar. See, e.g., In re Rimsat, 98 F.3d 956,

963 (7th Cir. 1996) (using comity as one of the factors considered

in determining that the forum of a specific United States

Bankruptcy Court was more appropriate for resolution of certain

disputes in the case than the Court in Nevis). ACE has raised no

clear argument indicating that the Bankruptcy Court would be illprepared to conduct this analysis in its regular review of the

parties' arbitration clause. The Court is not convinced that such

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analysis requires any "interpretation" of non-title 11 law.

In light of the fact that the Court finds no compelling reason

why the reference to the Bankruptcy Court should be withdrawn on

this matter, the Court need not analyze the Plan Trustee's

objection regarding the timeliness of ACE's motion. Finding that

ACE has failed to show that withdrawal of the reference on the

Adversary Complaint is mandatory, the Court shall deny ACE's

motion. 

Therefore,

IT IS ORDERED that Defendants' motion requesting oral argument

on this matter (doc. 4) is DENIED.

IT IS FURTHER ORDERED that Defendants' motion to withdraw the

reference of this case (doc. 1) is DENIED. 

DATED this 31st day of August, 2006.

Copies to counsel of record

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