UNITED STATES DEPARTMENT OF LABOR, Appellant, -against- KENNETH KIRSCHENBAUM, Chapter 7 Trustee of the Estate of the Robert Plan Corporation, et al., Appellees.
UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NEW YORK
2014 U.S. Dist. LEXIS 45809
March 31, 2014, Decided
March 31, 2014, Filed
COUNSEL: For US Department of Labor, Appellant: Leonard H. Gerson, LEAD ATTORNEY, U.S. Department of Labor, Washington, NY.
For Kenneth Kirschenbaum, Trustee, Appellee: Kenneth Kirschenbaum, Steven B. Sheinwald, LEAD ATTORNEYS, Kirschenbaum & Kirschenbaum, P.C., Garden City, NY.
JUDGES: Sandra J. Feuerstein, United States District Judge.
OPINION BY: Sandra J. Feuerstein
OPINION AND ORDER
Pursuant to this Court's April 9, 2013 order granting leave to appeal to the Secretary of the United States Department of Labor (the "Secretary"), the Secretary appeals from the interlocutory portions of an order of the Honorable Robert E. Grossman, United States Bankruptcy Judge, dated August 20, 2012 (the "Compensation Order"), which authorized the payment of fees to the Chapter 7 trustee and his retained professionals from the assets of an employee benefit plan. For the reasons that follow, the decision of the Bankruptcy Court is reversed.
A. The Bankruptcy
On August 25, 2008, The Robert Plan Corporation ("RPC") and The Robert Planf New York (collectively, the "Debtors") each filed a petition for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court, Eastern District of New York (the "Bankruptcy
Court"). Compensation Order, at 3. On January 19, 2010, the Bankruptcy Court converted the Chapter 11 cases to cases under Chapter 7 of the Bankruptcy Code,1 and appointed Kenneth Kirschenbaum as Chapter 7 trustee ("Kirschenbaum" or "Chapter 7 Trustee"). Id. at 3-4.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -1 The
Debtors' cases were substantively consolidated on September 8, 2010. [Docket
Entry No. 13-9].
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Upon his appointment, Kirschenbaum, as the Chapter 7 Trustee, assumed responsibility for administering the RPC Plan, as required by section 704(a)(11) of the Bankruptcy Code ("Section 704(a)(11)"). See 11 U.S.C. § 704 ("(a) The trustee shall. . . (11) if, at the time of the commencement of the case, the debtor . . . served as the administrator (as defined in . . . the Employment Retirement Income Security Act of 1974 ("ERISA")) of an employee benefit plan, continue to perform the obligations required of the administrator.").2
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -2 Section
704(a)(11) was added to the Bankruptcy Code pursuant to the Bankruptcy Abuse and Prevention Consumer Protection Act of 2005, creating an additional obligation for Chapter 7 trustees in order to "streamline the appointment of an ERISA administrator for an employee benefit plan, under certain circumstances, to minimize the disruption that results when an employer files for bankruptcy
relief." H.R. Rep. 109-31(I) (2005), reprinted in 2005 U.S.C.C.A.N. 88, 105.- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
B. The Robert Plan Corporation Retirement Savings Plan
RPC sponsored an employee benefit plan, entitled The Robert Plan Corporation Retirement Savings Plan (the "RPC Plan"), for the benefit of its employees. Compensation Order, at 4. The RPC Plan is governed by the terms of an adoption agreement, a basic plan document, and a trust agreement (collectively, the "RPC Plan Documents") [Docket Entry Nos. 1-14, 1-15, 1-16, 1-17]3, as well as ERISA,
29 U.S.C. § 1001, et. seq.
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Plan Documents are cited throughout this opinion as "RPC Plan."
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Pursuant to the RPC Plan Documents, RPC is the administrator of the RPC Plan ("Administrator" or "RPC Plan Administrator").4 The RPC Plan Documents identify the Administrator as a "named fiduciary" "for purposes of ERISA Section 402(a)(1)," RPC Plan § 19.04, which provides that the fiduciary "shall have authority to control and manage the operation and administration of the plan." 29 U.S.C. § 1102(a)(1). ERISA requires a fiduciary to exercise a "prudent man standard of care," and to "discharge his duties for the exclusive purpose of . .. providing benefits to participants and their beneficiaries," and "defraying reasonable expenses of administering the plan." 29 U.S.C. § 1104(a)(1).
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2.01(c) of the Basic Plan Document defines "Administrator" as "the Employer adopting this Plan, as listed in Subsection 1.02(a) of the Adoption Agreement," which lists "The Robert Plan Corporation" as the employer. RPC Plan §§ 1.02(a), 2.01(c).
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The RPC Plan Documents grant the Administrator "the full power and the full responsibility to administer the Plan in all of its details, subject, however, to the requirements of ERISA." RPC Plan § 19.01. The RPC Plan Documents further provide that "[i]n addition to the powers and authorities expressly conferred upon it in the Plan, the Administrator shall have all such powers and authorities as may be necessary to carry out the provisions of the Plan, including the discretionary power and authority to interpret and construe the provisions of the Plan." Id. The Administrator is expressly permitted to "terminate the Plan at any time . . . by written notice delivered to the [Plan] Trustee."5 RPC Plan § 16.06. The RPC Plan Documents further provide that "[t]he Administrator may, by written instrument, allocate and delegate its fiduciary responsibilities in accordance with ERISA Section 405," id., which permits "named fiduciaries to designate persons other than named fiduciaries to carry
out fiduciary responsibilities . . . under the plan." 29 U.S.C. § 1105(c)(1).
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Pursuant to the RPC Plan Documents, Fidelity Management Trust Company is the trustee of the RPC Plan. RPC Plan § 2.01(zz).
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Under ERISA, a fiduciary is entitled to "receiv[e] any reasonable compensation for services rendered, or for the reimbursement of expenses properly and actually incurred, in the performance of his duties with the plan." 29 U.S.C. § 1108(c)(2). The RPC Plan Documents expressly authorize the Administrator to pay "all reasonable expenses (including legal, accounting, and employee communication fees) incurred by the Administrator and the [Plan] Trustee in administering the Plan and Trust . . . from the forfeitures (if any) resulting under Section 11.08, or from the remaining Trust Fund." RPC Plan § 19.05.
C. Applications to the Bankruptcy Court
On May 6, 2010, June 10, 2010, and August 6, 2010 (the "2010 Applications"), Kirschenbaum sought authorization from the Bankruptcy Court to: (1) terminate the RPC Plan; (2) retain Kirschenbaum & Kirschenbaum, P.C. ("K&K"), as attorneys for Kirschenbaum, Travis L. Whitfield ("Whitfield") as an independent auditor for Kirschenbaum, and David Witz ("Witz") as a pension consultant to Kirschenbaum (collectively, the "professionals"); and (3) pay the professionals from the RPC Plan funds. Compensation Order, at 4-5. In order to pay for the administration of the RPC Plan, including the professionals' fees, Kirschenbaum applied a three percent (3.00%) surcharge to the account of each participant in the RPC Plan and segregated the proceeds of the surcharge in the "Pguy Account." Id. at 5. The Secretary objected to the 2010 Applications, arguing that the bankruptcy court lacked jurisdiction over Kirschenbaum in his capacity as administrator of the RPC Plan, and thus, could not authorize either the
retention of the professionals or the payment of their fees from the Pguy Account. Id. at 4-5.
On October 26, 2010, the Bankruptcy Court overruled the Secretary's objections and held that Kirschenbaum, as Administrator of the RPC Plan pursuant to Section 704(a)(11) of the Bankruptcy Code, is subject to the Bankruptcy Court's core jurisdiction (the "October 2010 Decision"). October 2010 Decision, at 2 ("Because [Kirschenbaum] is fulfilling his duties imposed by the Bankruptcy Code pursuant to 11 U.S.C. § 704(a)(11), [he] is subject to this Court's core jurisdiction while performing these duties."). The Bankruptcy Court further held that it "has jurisdiction over any request by [Kirschenbaum] to retain and pay professionals to assist [him] in carrying out his duties as [RPC] Plan administrator." Compensation Order, at 5 (summarizing October 2010 Decision). The Bankruptcy Court stated that "[w]hether the Trustee seeks to collect payment from the Plan or from the Debtor's estate has no bearing on the Court's core jurisdiction over the Trustee as Administrator, including a request for an award of fees and expenses in connection with his administration of the Plan." October 2010 Decision, at 24. The Bankruptcy Court declined to rule on whether the Chapter 7 Trustee may use RPC Plan funds to pay the fees, but noted it would "depend upon whether the services performed are compensable under the relevant ERISA statutes and the Plan documents." Id. at 26. The October 2010 Decision did not authorize the payment of any fees, but stated that "any order [awarding fees] would direct [Kirschenbaum] to first seek to satisfy the award from [ERISA] Plan funds." Id. The Secretary did not appeal the October 2010 Decision.
Compensation Order, at 6.
On January 5, 2011, Kirschenbaum and the professionals filed applications for interim fee compensation. Id. On March 1, 2011, over the Secretary's objection, the Bankruptcy Court granted the applications, but "refrained from specifying whether the awards were to be paid from the [RPC] Plan assets, assets of the Debtors' estate, or some combination of both." Id. at 6-7. Pursuant to the March 1, 2011 order, Kirschenbaum paid himself thirty-four thousand dollars ($34,000.00) as interim compensation and seven hundred forty dollars and forty-two cents ($740.42) as reimbursable expenses from the Pguy Account, and eleven thousand three hundred dollars ($11,300.00) in interim compensation using funds from the Debtors' estates. Id. at 7. The professionals' fees were paid with funds from the Pguy Account. Id.
On November 9, 2011, Kirschenbaum and K&K again filed interim fee applications, and Witz and Whitfield filed final fee applications. Id. at 4, 7. On August 20, 2012, the Bankruptcy Court, again over the Secretary's objections, issued the Compensation Order, granting: interim fee awards of one hundred
thirty-two thousand three hundred seventy-eight dollars and twenty-four cents ($132,378,24) to Kirschenbaum, and forty-seven thousand six hundred twenty-eight dollars and seventy-seven cents ($47,628.77) to K&K (subject to a twenty percent (20%) holdback); and final fees awards of forty-four thousand sixty-eight dollars and seventy-five cents ($44,068.75) and three thousand seven hundred
fifty-five dollars ($3,755.00) in expenses to Witz, and fifty-three thousand dollars ($53,000.00) in fees and one thousand one hundred eleven dollars and sixty-four cents ($1,111.64) in expenses to Whitfield. Compensation Order, at 33.
The Bankruptcy Court authorized the payment of these awards from the funds in the Pguy Account, noting that the account was not part of the Debtors' estates, and that the one hundred forty-six thousand three hundred eighty-two dollars and one cent ($146,382.01) in the Pguy Account was insufficient to pay the awards in full. Id. at 1, 7-8, 33. The Bankruptcy Court authorized the use of funds from the Debtors' estates to satisfy the remainder. Id. at 33. The Bankruptcy Court held that "[t]he fact that the Plan assets administered by the Trustee are not property of the Debtors' estate has no bearing on the Court's jurisdiction over the Trustee when acting as the Plan administrator" because the Bankrtupcy Court "has core jurisdiction to award fees to the Trustee and his duly retained professionals in connection with the Trustee's acts as Plan administrator," "[w]hether the payments are made from the Plan assets or Bankruptcy estate assets." Id. at 2-3.
On September 4, 2012, the Secretary filed an application pursuant to 28 U.S.C. § 158(a)(3) and Rules 8001 and 8003 of the Federal Rules of Bankruptcy Procedure, seeking leave to file an appeal from the interlocutory portions of the Compensation Order ("Motion for Leave to Appeal"). [Docket Entry No. 1-118].
On April 9, 2013, this Court granted the Secretary's application for leave to appeal only insofar as it sought a determination of "whether the bankruptcy court has jurisdiction to order the fee awards be paid from an ERISA plan."
April 9, 2013 Order [Docket Enty No. 5], at 7. On April 30, 2013, the Secretary filed an appellate brief seeking reversal of the Compensation Order. [Docket Entry No. 6]. On May 15, 2013, Kirschenbaum filed an appellate brief seeking to affirm the Bankruptcy Court's authorization of the payment of fees from the Pguy Account. [Docket Entry No. 7].
A. Standard of Review
This Court has jurisdiction to hear appeals from judgments, orders, and
decrees of a bankruptcy court. 28 U.S.C. § 158(a). On appeal, the district court
reviews a bankruptcy court's findings of fact for clear error. Fed. R. Bankr. P.
8013. Issues of law, as well as "mixed questions of law and fact," are reviewed
de novo. In re Vebuliunas, 332 F.3d 85, 90 (2d Cir. 2003). "On appeal the
district court. . . may affirm, modify, or reverse a bankruptcy judge's
judgment, order or decree or remand with instructions for further proceedings."
Fed. R. Bankr. P. 8013; see also In re Moreo, 437 B.R. 40, 50 (E.D.N.Y. 2010).
B. The Secretary's Standing to Appeal the Compensation Order
Kirschenbaum challenges the Secretary's standing to appeal the Bankruptcy
Court's Compensation Order. See Opposition to Motion for Leave to Appeal ("Opp.
to Mot. for Leave to Appeal"), at 7-9.6 In order to have standing to appeal a
ruling from a bankruptcy court, an appellant must be a "person aggrieved." In re
DBSD North America, Inc., 634 F.3d 79, 89 (2d Cir. 2011) (quoting Int'l Trade
Admin, v. Rensselear Polytehnic Inst., 936 F.2d 744, 747 (2d Cir. 1991)).
Kirschenbaum argues that the Secretary lacks a "direct pecuniary interest in the
Plan assets," and thus, is not an "aggrieved person" with standing to appeal the
Bankruptcy Court's Compensation Order. Opp. to Mot. for Leave to Appeal, at 7.7
However, "[w]hile the 'pecuniary interest' formulation is an often used and
often useful test of standing in the bankruptcy context, it is not the only
test." In re Zarnel, 619 F.3d 156, 162 (2d Cir. 2010) (internal quotation marks
and citation omitted). "Instead, even absent a direct pecuniary interest in the
litigation, a public interest may also give a sufficient stake in the outcome of
a bankruptcy case to confer appellate standing." Id. (internal quotation marks
and citation omitted); see also In re DBSD North America, 634 F.3d at 89 n.3.
Congress has explicitly recognized that employee benefit plans "are affected
with a national public interest." 29 U.S.C. § 1101(a). In this appeal, the
Secretary seeks to "monitor employee benefit plans and deter violations of the
law." H. Rep. No. 101-386, at 431-32 (1989), reprinted in 1989 U.S.C.C.A.N.
3018, 3035. Therefore, this Court finds that the Secretary represents the public
interest and has standing to appeal the Compensation Order.
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Kirschenbaum's opposition to the Secretary's Motion for Leave to Appeal is not
included in the appellate record filed under case number 13-cv-2682, which was
opened upon the filing of the appellate record. However, it is available on the
docket of case number 12-mc-608, which was opened upon the Secretary's filing of
the Motion for Leave to Appeal and was closed following this Court's order on
that motion. [12-mc-608, Docket Entry No. 1-7]. The Secretary responded to
Kirschenbaum's standing arguments in its appellate brief. Kirschenbaum's
appellate brief contains no further argument on this issue.
7 In his opposition to the Secretary's Motion for Leave to Appeal,
Kirschenbaum also argued that "the Department of Labor explicitly chose not to
object to, or even address, the issue of whether the Bankruptcy Court has the
jurisdiction to authorize the Trustee and his professionals to satisfy any
awards of reasonable compensation out of Plan assets." Opp. to Mot. for Leave to
Appeal, at 10. As the Secretary correctly notes in his appellate brief, "from
the very beginning of the Secretary's participation in this case, the Secretary
has made the Bankruptcy Court's lack of jurisdiction over the ERISA Plan assets
an issue of fundamental importance." Secretary Br. [Docket Entry No. 6], at 15,
However, even if the Secretary had not previously objected to the Bankruptcy
Court's jurisdiction, that would not preclude this Court from considering
whether the Bankruptcy Court had jurisdiction to issue the Compensation Order.
See In re Trans-Indus., Inc., 419 B.R. 21, 28 (Bankr. E.D.Mich. 2009) ("Federal
courts are courts of limited jurisdiction and have a continuing obligation to
examine their subject matter jurisdiction throughout the pendency of every
matter before them. Parties can neither waive nor consent to subject matter
jurisdiction." (quoting Mich. Emp't Sec. Comm'n v. Wolverine Radio Co., Inc.,
930 F.2d 1132, 1137-38 (6th Cir. 1991))).
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C. Bankruptcy Court Jurisdiction
1. "Core" and "Non-Core" Jurisdiction
The bankruptcy court's jurisdiction is governed by 28 U.S.C. §§ 1334 and
157(a). The district court has "original and exclusive jurisdiction of all cases
under title 11," 28 U.S.C. § 1334(a), and has "original but not exclusive
jurisdiction of all civil proceedings arising under title 11, or arising in or
related to cases under title 11." 28 U.S.C. § 1334(b). Pursuant to 28 U.S.C. §
157(a), the district court may refer to the bankruptcy court "any or all cases
under title 11 and any or all proceedings arising under title 11 or arising in
or related to a case under title 11." 28 U.S.C. § 157(a). The Eastern District
of New York has a standing order that provides for automatic reference. See
Eastern District Standing Order, dated Dec. 5, 2012.
A bankruptcy court's power to adjudicate matters in a bankruptcy case depends
upon whether the proceeding is "core" or "non-core." 28 U.S.C. § 157(b), (c).
Core proceedings are those "arising under title 11" or "arising in a case under
title 11." 28 U.S.C. § 158(b)(1). A proceeding "aris[es] under" title 11, and
therefore invokes the bankruptcy court's core jurisdiction, if it "invoke[s]
substantive rights created by bankruptcy law." In re Housecraft Indus. USA, Inc
., 310 F.3d 64, 70 (2d Cir. 2002). A proceeding "arising in" title 11 "covers
claims that are not based on any right expressly created by Title 11, but
nevertheless, would have no existence outside of the bankruptcy." Baker v.
Simpson, 613 F.3d 346, 350-51 (2d Cir. 2010) (internal quotation marks and
citations omitted). In core proceedings, the bankruptcy court has the power to
hear and enter a final order. 28 U.S.C. § 157(b)(1). Core proceedings include
"matters concerning the administration of the estate." 28 U.S.C. § 157(b)(2)(A).
A bankruptcy court has "non-core" jurisdiction over proceedings that are
"related to" the bankruptcy case. 28 U.S.C. § 157(c)(1); see also In re EMS Fin.
Servs., LLC, 491 B.R. 196, 201 (E.D.N.Y. 2013) ("[N]on-core proceedings are
those that are related to the bankruptcy case but do not arise under Title 11 .
. . ."). A proceeding is "related to" a bankruptcy case where "the outcome might
have any 'conceivable effect' on," or "'any significant connection' with the
bankruptcy estate." In re Cuyahoga Equip. Corp., 980 F.2d 110, 114 (2d Cir.
1992). In non-core proceedings, the bankruptcy court may only "submit proposed
findings of fact and conclusions of law to the district court" for final
determination following a de novo review. 28 U.S.C. § 157(c)(1).
2. Existing Case Law on the Bankruptcy Court's Jurisdiction Over Chapter 7
Trustee's Obligations as ERISA Plan Administrator
The case law on bankruptcy court jurisdiction to order fee awards to be paid
from non-estate ERISA plan fund assets, is "scant and inharmonious." In re
Franchi Equip. Co., 452 B.R. 352, 356 (Bankr. D.Mass. 2011) ("Franchi"). In
addition to the October 2010 Decision and the Compensation Order, this Court is
aware of six (6) cases addressing a bankruptcy court's jurisdiction with respect
to a Chapter 7 trustee's ERISA obligations. Two (2) of the six (6) cases held
that the bankruptcy court lacked jurisdiction to award compensation from the
non-estate assets. See In re AB & C Grp., Inc., 411 B.R. 284 (Bankr. N.D.W.Va.
2009) ("AB & C Group"); In re Mid-States Express, Inc., 433 B.R. 688 (Bankr.
N.D.Ill. 2010) ("Mid-States Express"); the other four (4) cases held that the
bankruptcy court had jurisdiction over the Chapter 7 trustee's ERISA
obligations. See In re Trans-Indus., Inc., 419 B.R. 21 (Bankr. E.D.Mich. 2009)
("Trans-Industries"); In re NSCO, Inc., 427 B.R. 165 (Bankr. D.Mass. 2010)
("NCSO"); Franchi, 452 B.R. 352 (Bankr. D.Mass. 2011); In re Negus-Sons, Inc.,
No. BK09-82518, 2013 WL 4674917 (Bankr. D.Neb. Aug. 30, 2013) ("Negus-Sons").
In AB & C Group, the bankruptcy court held that it lacked both "arising
under" and "arising in" jurisdiction to authorize the payment of professional
services from ERISA plan funds, despite its jurisdiction to approve the
trustee's request, pursuant to Section 327 of the Bankruptcy Code, to employ
professionals because "§ 327 provides no authority for this court "to declare
that the [professional's] compensation is payable from the Plan, a non-estate
asset. 411 B.R. at 290-91. The bankruptcy court stated that the "resolution of
disputes over the payment of administrative costs from Plan assets under ERISA"
"does not depend upon bankruptcy for its existence, nor does it involve an
administrative matter that arises only in bankruptcy cases." Id. at 292. The
bankruptcy court also found that "the Trustee's duty under § 704(a)(11) is too
tangential to make the [requested relief] related to the administration of the
bankruptcy case." Id. at 292. Thus, the bankruptcy court held that it lacked
"related to" jurisdiction. Id.
In Mid-States Express, the bankruptcy court held that "[S]ection 704(a)(11)
does not confer 'arising under' jurisdiction" "over the trustee acting as the
plan administrator distributing non-estate assets to non-creditors" "because the
substantive rights at issue are provided by ERISA and not the Bankruptcy Code."
433 B.R. at 693, 696. The bankruptcy court explained that Section 704(a)(11)
only places "the trustee in the shoes of the ERISA administrator," whose "rights
and obligations are found in ERISA," and not in the Bankruptcy Code. Id. at 696.
Similarly, the bankruptcy court held that it had no "arising in" jurisdiction to
"adjudicate underlying non-bankruptcy rights governed by ERISA." Id. at 698. The
bankruptcy court noted that while the trustee is "a creature of the Bankruptcy
Code," "[t]he trustee does not carry around 'arising in' jurisdiction with him."
Id. at 697 (citation omitted). The bankruptcy court explained that "the trustee
is not requesting this court to authorize anything that he cannot already do,"
since the ERISA plan gave the trustee "the choice to have either the Plan or the
estate pay the expenses associated with administering the Plan." Id. at 699-700.
Therefore, the bankruptcy court held that it lacked "related to" jurisdiction
because the "trustee's requested order can have no effect on the amount of
estate property or the allocation thereof because it does not change the
trustee's abilities." Id.
In Trans-Industries, the Chapter 7 trustee/administrator brought claims
against the pre-petition administrators of the debtor's pension plan for breach
of fiduciary duties imposed by ERISA, as well as a breach of contract claim
based on state common law. 419 B.R. at 30. The bankruptcy court concluded that
it lacked "arising under" jurisdiction because the claims asserted are not
created by the Bankruptcy Code. Id. The bankruptcy court further concluded that
it lacked "arising in" jurisdiction because the "ERISA and contract claims, of
course, can exist outside of bankruptcy." Id. Pursuant to prior authorizations
by the bankruptcy court, the Chapter 7 trustee used funds from the bankruptcy
estate to pay for expenses and fees of administering the ERISA plan in
accordance with Section 704(a)(11) because the plan was "effectively bankrupt."
Id. at 32, 35. The bankruptcy court held it had "related to" jurisdiction over
the adversary proceeding against the pre-petition administrators because "[t]he
ultimate distribution to creditors of the bankruptcy estate, of course, will be
directly affected by the extent to which the ERISA Plan reimburses the
bankruptcy estate for the fees and expenses the estate has paid to enable the
Trustee to administer the Plan." Id. at 33.
In NSCO, the Chapter 7 trustee moved the bankruptcy court for entry of an
order terminating the ERISA plan, finding that he had satisfied his Section
704(a)(11) obligations to administer the ERISA plan, and barring any claims
related to his administration of the plan. 427 B.R. at 169-70. The Secretary
challenged the jurisdiction of the bankruptcy court "to determine whether the
Trustee has fulfilled his fiduciary duties under ERISA and to release him from
any liability for breach of his fiduciary duties under ERISA."8 Id. at 172. The
bankruptcy court determined that it had core jurisdiction because "[the
trustee's] duties originate in § 704(a) and only draw in ERISA because of §
704(a)(11)." Id. The bankruptcy court explained that "[w]hen Congress amended
the Bankruptcy Code in 2005 [to include Section 704(a)(11)], that it chose to
place the statutory obligation solely in the Bankruptcy Code, rather than in
ERISA or in both statutes, is some indication that Congress intended ERISA
responsibilities to fit within the framework of the Bankruptcy Code, and not the
other way around." Id. Despite concluding that it had core jurisdiction, the
bankruptcy court held that the requested relief was premature. Id. at 182-83.
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the instant case, the Secretary did not challenge the bankruptcy court's
jurisdiction in NSCO to approve fees incurred in terminating the ERISA plan
because they "would be paid by the bankruptcy estate as the 401(k) Plan has no
funds." Id. at 170. However, the bankruptcy court noted that the "[Secretary's]
pleading suggests it would have challenged this Court's jurisdiction to approve
fees if they were to be paid from the 401(k) Plan's assets. Id. at 171 n.6.
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In Franchi, the Chapter 7 trustee sought approval from the bankruptcy court
to the pay the expenses of administering the ERISA plan using ERISA plan assets.
452 B.R. at 354. As with the instant case, the ERISA plan had insufficient to
funds to pay the requested fees in full. Id. at 360. The bankruptcy court found
"[t]here can be no doubt that the possibility for a pension plan's insufficiency
of assets created the ever-present potential that a bankruptcy estate will be
called upon to compensate a Chapter 7 trustee and his professionals for their
plan administration services." Id. The bankruptcy court concluded that "this
potential confers upon the bankruptcy court at least related-to jurisdiction
over the fee requests." Id. (emphasis added). The bankruptcy court went on to
hold that the oversight and compensation of the Chapter 7 trustee, and his
professionals, for administering the ERISA plan in accordance with Section
704(a)(11) was within the bankruptcy court's "arising under" core jurisdiction,
and not merely its "related to" jurisdiction. Id. The bankruptcy court stated
that by enacting Section 704(a)(11), "Congress chose, quite reasonably, to
confer [the responsibility to administer employee retirement plans] on
bankruptcy trustees who are, body and soul, creatures of the Bankruptcy code."
In Negus-Sons, the bankruptcy court granted the Chapter 7 trustee's
application to use both estate funds and ERISA plan assets to pay expenses
related to the administration of two (2) ERISA plans in accordance with Section
704(a)(11). 2013 WL 4674917, at *1. The bankruptcy court reviewed, inter alia,
the October 2010 Decision and the Compensation Order, and concluded that
"[a]bsent contrary guidance from a higher court, [it] is inclined to follow the
line of cases favoring jurisdiction." Id. at *1-2. The bankruptcy court noted
that "[t]he reasoning of those cases in finding that the trustee is acting under
the authority of the Bankruptcy Code while carrying out his ERISA duties, and is
therefore within the bankruptcy court's jurisdiction, is compelling." Id. at *2.
3. The October 2010 Decision and the Compensation Order
The Bankruptcy Court first addressed the Secretary's objection to the
bankruptcy court's jurisdiction in the October 2010 Decision. The Bankruptcy
Court held that it had core jurisdiction because "§ 704(a)(11), not ERISA, is
the source of the Trustee's obligations" as RPC Plan Administrator, which "are
an essential part of the total administration of the Debtors' cases." October
2010 Decision, at 22. The Bankruptcy Court found that "[t]o the extent that the
Trustee's duties over the Plan arise out of ERISA, they do so only by operation
of § 704(a)(11)," Id. (citing NSCO, 427 B.R. at 180). The Bankruptcy Court
reasoned that "[w]hile the Trustee must now comply with the relevant ERISA
statutes in carrying out this function, the Court still has jurisdiction over
the Trustee's actions as Administrator," because "[t]o find otherwise would
effectively place the Trustee outside the reach of the Bankruptcy Court while
the Trustee is carrying out a duty mandated by the Bankruptcy Code." Id. at
The Bankruptcy Court noted that "[t]he fact that the source of the funds
available for payment of any award under this section may come from the Plan,
which is a non-estate asset, is not central to the determination of the Court's
jurisdiction to award fees for these services." Id. at 25. The Bankruptcy Court
Whether the Trustee may use the Plan funds to pay this award will
depend upon whether the services performed are compensable under the
relevant ERISA statutes and the Plan documents. Any order awarding
fees would contain no determination of whether Plan funds could be
used to satisfy the award. However, any order would direct the Trustee
to first seek to satisfy the award from Plan funds.
Id. at 26.
In the Compensation Order of August 20, 2012, the Bankruptcy Court justified
the October 2010 Decision, stating that the bankruptcy court "has core
jurisdiction to award fees to the Trustee and his duly retained professionals in
connection with the Trustee's acts as Plan administrator," and "[w]hether the
payments are made from the Plan assets or the Bankruptcy estate assets do not in
any way alter the legal analysis supporting the Court's ruling, a ruling that is
now the law of the case." Compensation Order, at 2-3. The Bankruptcy Court
authorized the payment of the awards "using funds in the Pguy Account, and to
the extent the funds in the Pguy Account are insufficient to pay these awards in
full, the Applicants may use funds from the Debtors' estate for the remainder."
Id. at 33.
4. De Novo Review of the Bankruptcy Court's Jurisdiction
a. Core Jurisdiction
Clearly, the Bankruptcy Court has core jurisdiction over the Chapter 7
Trustee in performance of his obligations set forth in the Bankruptcy Code, as
those duties are "matters concerning the administration of the estate," 28
U.S.C. § 157(b)(2)(A), and "would have no existence outside of the bankruptcy."
Baker v. Simpson, 613 F.3d 346, 350-51 (2d Cir. 2010). However, as noted in
Mid-States Express, "[t]he trustee does not carry around 'arising in'
jurisdiction with him." 433 B.R. at 697 (citation omitted).
Although Section 704(a)(11) of the Bankruptcy Code directs the Chapter 7
Trustee to "continue to perform the obligations required of the administrator,"
11 U.S.C. § 704(a)(11), it is ERISA and the RPC Plan Documents that establish
and control the substantive rights and obligations of the RPC Plan
Administrator. See Mid-States Express, 433 B.R. at 696 ("Section 704(a)(11)
stands alone in putting the trustee in the shoes of the ERISA plan
administrator. The plan administrator's rights and obligations are found in
ERISA."). Section 704(a)(11) of the Bankruptcy Code does not modify the rights
and obligations of an ERISA plan administrator, nor does it create additional
obligations. See id. ("The Bankruptcy Code does not alter those right and
obligations."). Kirschenbaum himself recognized this distinction, noting that,
on the one hand, he must "perform his Chapter 7 trustee duties in accordance
with the Bankruptcy Code, while at the same time performing his obligations as
Plan administrator and complying with the relevant ERISA statutes and Plan
documents." Trustee Br. [Docket Entry No. 7], at 9. Unlike Kirschenbaum's duties
as Chapter 7 Trustee, his obligations as RPC Plan Administrator are created by
ERISA and exist outside of the bankruptcy. See AB & C Group, 411 B.R. at 292
("The resolution of disputes over the payment of administrative costs from Plan
assets under ERISA is typically an issue that arises outside bankruptcy.").
Therefore, the Bankruptcy Court lacks core jurisdiction over Kirschenbaum's
obligations as RPC Plan Administrator.
b. Non-Core Jurisdiction
i. Use of RPC Plan Funds
Kirschenbaum correctly contends that "the Trustee did not require an order
prior to paying himself and his professionals from the [RPC] Plan funds."
Trustee Br., at 17. Pursuant to ERISA and the RPC Plan Documents, Kirschenbaum,
as RPC Plan Administrator, has discretionary power and authority to administer
the RPC Plan. See RPC Plan § 19.01 ("The Administrator has the full power and
the full responsibility to administer the Plan in all of its details, subject,
however, to the requirements of ERISA."); 29 U.S.C. § 1102(a)(1) (granting
administrator, as "named fiduciary," the "authority to control and manage the
operation and administration of the plan"). In addition to this general
discretionary authority, the RPC Plan Documents and ERISA expressly authorize
the RPC Plan Administrator to terminate the RPC Plan, hire professionals to
assist with the administration of the RPC Plan, and to pay "reasonable
compensation" to himself and the retained professionals with funds from the RPC
Plan. See RPC Plan §§ 16.06, 19.05; 29 U.S.C. §§ 1105(c)(1), 1108(c)(2).
"In authorizing the Trustee to satisfy the awards of compensation from the
Plan assets, the [Bankruptcy] Court was doing no more than authorizing the
Trustee to do that which he was already authorized to do under both ERISA and
the Plan documents." Trustee Br., at 19. Thus, Kirschenbaum's application to use
assets of the RPC Plan to pay its administration expenses was superfluous and
could have no conceivable effect on the bankruptcy estate or its allocation. See
Mid-States Express, 433 B.R. at 700 (where "trustee is not requesting this court
to authorize anything that he cannot already do," "trustee's requested order can
have no effect on the amount of estate property or the allocation thereof
because it does not change the trustee's abilities"). Accordingly, the
Bankruptcy Court lacked non-core "related to" jurisdiction to order that the
fees and expenses of the RPC Plan Administrator and his professionals be paid
using assets from the RPC Plan. See AB & C Group, 411 B.R. at 292 (no "related
to" jurisdiction because "Plan administrator's discretion to charge the Plan
with administrative expenses is governed by ERISA" and "all of the [requested]
fees would be paid from the Plan, instead of the estate"); Mid-States Express,
433 B.R. at 700. This is in contrast to an authorization to utilize estate
assets to satisfy fees and expenses related to the discharge of the
Kirschenbaum admits that he sought authorization from the Bankruptcy Court to
pay himself and his professionals using RPC Plan funds for fees and expenses
incurred during the administration of the RPC Plan in order to secure derived
judicial immunity from potential liability. See Trustee Br., at 20-23. Under
ERISA, the Plan Administrator may be held personally liable for "breaches [of]
any of the responsibilities, obligations, or duties imposed upon fiduciaries."
29 U.S.C. § 1109(a). The Secretary has the right to bring a civil action against
the Chapter 7 Trustee, as RPC Plan Administrator, for any breaches of his
fiduciary duties, 29 U.S.C. § 1132(a)(2), including the obligation to pay "no
more than reasonable compensation" for "legal, accounting, or other services
necessary for the establishment or operation of the plan." 29 U.S.C. §
1108(b)(2); see Negus-Sons, 2013 WL 4674917, at *2 (noting Secretary may
challenge reasonableness of fees paid by trustee and seek their disgorgement).
"The doctrine of derived judicial immunity provides a bankruptcy trustee with
immunity in the exercise of his business judgment, where he acts in accordance
with an order of the court, after candid disclosure and on notice to interested
parties." October 2010 Decision, at 11 (citing Bennett v. Williams, 892 F.2d 822
(9th Cir. 1989)); see also AB & C Group, 411 B.R. at 295 ("Where a bankruptcy
trustee acts pursuant to the explicit instructions of the bankruptcy court, he
enjoys complete immunity from suit.") (internal quotation marks and citations
omitted). According to Kirschenbaum, "[b]ecause he is performing Trustee
functions, and acts in accordance with orders of the Bankruptcy Court, the
Trustee is entitled to receive the same immunity in connection with the
performance of his Section 704(a)(11) duties that he would receive in connection
with the performance of any of his other mandated trustee duties." Trustee Br.,
However, "the limited purpose of providing the Trustee with a possible future
defense of immunity does not provide a nexus sufficiently close to a bankruptcy
proceeding upon which this court can find 'related to' jurisdiction." AB & C
Group, 411 B.R. at 295; see also Mid-States Express, 433 B.R. at 700 n.17 ("This
court does not see how a comfort order could ever, by definition, fit within
'related to' jurisdiction," given that "comfort orders merely identify and
reiterate what has already occurred by operation of law." (internal quotation
marks and citations omitted)). The Secretary and RPC Plan participants remain
eligible to bring a civil action against the Chapter 7 Trustee for any breaches
of his fiduciary duties as RPC Plan Administrator. 29 U.S.C. § 1132(a)(2).
ii. Use of Bankruptcy Estate Funds
In the event there are insufficient funds available in an ERISA Plan to pay
the expenses incurred in its administration, the Chapter 7 Trustee, as ERISA
Plan Administrator pursuant to Section 704(a)(11), may look to the bankruptcy
estate to satisfy the remaining expenses. However, unless the ERISA Plan
expressly grants the Plan Administrator authority to use bankruptcy estate
assets to pay administration expenses, the Chapter 7 Trustee, acting as Plan
Administrator in accordance with Section 704(a)(11), must obtain authorization
from the Bankruptcy Court to use funds from the bankruptcy estate. See
Negus-Sons, 2013 WL 4674917, at *3 (overruling objection to use of bankruptcy
estate funds to pay expenses related to ERISA plans because "there is no
question about the [bankruptcy] court's authority to award fees and expenses
from the assets of the bankruptcy estate").9 The outcome of a request to utilize
bankruptcy estate funds to pay the administration expenses of an ERISA plan
would undeniably affect the bankruptcy estate. See Franchi, 452 B.R at 360 ("the
possibility for a pension plan's insufficiency of assets created the
ever-present potential that a bankruptcy estate will be called upon to
compensate a Chapter 7 trustee and his professionals for their plan
administration services"). Accordingly, insofar as the Chapter 7 Trustee, acting
as RPC Plan Administrator pursuant to Section 704(a)(11), requests that a
specified dollar award be paid from the bankruptcy estate funds for expenses
related to the administration of the RPC Plan, the Bankruptcy Court would have
"related to" jurisdiction. However, no application has been made by Kirschenbaum
to the Bankruptcy Court for a specified dollar amount to be awarded from the
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -9 Unlike
the instant case, the plan documents in Mid-States Express expressly granted the
administrator "the choice to have either the Plan or the estate pay the expenses
associated with administering the Plan." 433 B.R. at 699. Under those
circumstances, the administrator would not need approval from the bankruptcy
court to use estate funds to pay ERISA plan expenses. Accordingly, the
bankruptcy court would also lack "related to" jurisdiction to approve the use of
estate funds for ERISA related expenses.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
This Court concludes that the Bankruptcy Court lacked non-core "related to"
jurisdiction to order that the fees and expenses of the RPC Plan Administrator
and his professionals be paid using assets from the RPC Plan. The Bankruptcy
Court does, however, have jurisdiction to grant or deny an application seeking
an award for Plan administration expenses from the bankruptcy estate.
The Court has considered both parties' submissions in their entirety. For the
foregoing reasons, the Compensation Order of the Bankruptcy Court is REVERSED.
/s/ Sandra J. Feuerstein
Sandra J. Feuerstein
United States District Judge
Dated: March 31, 2014
Central Islip, New York
2 of 2 DOCUMENTS
KENNETH KIRSCHENBAUM, as Trustee for the Estate of EMS
Financial Services, LLC, Plaintiff, -against- FEDERAL
INSURANCE COMPANY, WHITE LINES COM, LLC, BRUCE POLLAK and
"JOHN DOE #1" through "JOHN DOE #10", defendants being
unknown to Plaintiff, the parties intended being any party
asserting a claim for coverage under Debtor's errors and
omissions insurance policy (Policy Number 8223-2057) issued
by Federal Insurance Company, Defendant.
UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NEW
505 B.R. 126; 2014 U.S. Dist. LEXIS 15478; 59 Bankr. Ct.
February 6, 2014, Decided
PRIOR HISTORY: Kirschenbaum v. Fed. Ins. Co. (In re Ems Fin. Servs., LLC), 491
B.R. 196, 2013 U.S. Dist. LEXIS 56649 (E.D.N.Y., 2013)
COUNSEL: For Kenneth Kirschenbaum, as Chapter 7 Trustee for the Estate of EMS
Financial Services, LLC, Plaintiff: Steven B. Sheinwald, Esq., Of Counsel,
Kirschenbaum & Kirschenbaum, P.C., Garden City, NY.
For Federal Insurance Company One Penn Plaza, Defendant: Courtney E. Scott,
Esq., Of Counsel, Tressler LLP, New York, NY.
For White Lines Com, LLC, Defendant: Richard B. Podoll, Esq., Robert A.
Kitsmiller, Esq., Of counsel, Podoll & Podoll, P.C., Greenwood Village, CO.
JUDGES: ARTHUR D. SPATT, United States District Judge.
OPINION BY: ARTHUR D. SPATT
MEMORANDUM OF DECISION AND ORDER
SPATT, District Judge.
On March 6, 2012, the Debtor EMS Financial Services, LLC ("EMS" and the
"Debtor") filed a voluntary petition for Chapter 7 bankruptcy in the United
States Bankruptcy Court in the Eastern District of New York before United States
Bankruptcy Judge Alan S. Trust. On May 30, 2012, the Plaintiff Kenneth
Kirschenbaum, Esq., the Chapter 7 Trustee for EMS (the "Trustee"), filed an
adversary proceeding in the Bankruptcy Court against the Defendant Federal
Insurance Company ("Federal") and other parties, including White Lines Com LLC
("White Lines"), an entity allegedly injured by EMS. The Trustee sought a
declaration of the rights, duties, and liabilities of the parties under certain
On August 7, 2012, Federal moved this Court to withdraw the adversary
proceeding. On April 19, 2013, this Court granted Federal's motion to withdraw
White Lines now seeks to amend its answer to assert cross claims against
Federal, including a declaratory judgment as to, among other things, whether
EMS, Federal's insured, is liable to White Lines for negligence in an amount in
excess of $5,000,000. For the following reasons, the Court denies the motion to
A. The Policy
On or about January 5, 2011, an insurance policy was issued to EMS by Federal
under Policy Number 8223-2057 (the "Policy"). The Policy covered a one year
period, from December 27, 2010 through December 27, 2011. The Policy was an
errors and omissions policy, under which EMS and its officers, directors, and
employees were insured for any loss resulting from a claim for wrongful acts
committed by EMS or its agents. The Policy contained a $5,000,000 cap on any
single claim and on all aggregate claims.
B. The Creditor Lawsuits
Prior to the filing of EMS's bankruptcy petition, litigation had been
commenced against the Debtor by White Lines and Bruce Pollak ("Pollak")
(collectively, the "Creditors") in two separate proceedings: (1) White
Lines.Com, LLC, Plaintiff v. EMS Financial Services, LLC, et al., Defendants, in
the Supreme Court of the State of New York, County of New York, Index Number
653221/2011; and (2) Bruce Pollak, Plaintiff, v. EMS Financial Services, LLC,
Defendant, in the United States District Court for the Middle District of
Pennsylvania, Case Number 11-cv-1969(YK) (collectively, the "Creditor
Lawsuits"). Neither White Lines nor Pollak are named insureds under the Policy.
Federal has undertaken the defense of EMS and retained counsel in the Creditor
Lawsuits, subject to Federal's continued investigation and a full reservation of
its rights under the Policy.
In each of the Creditor Lawsuits, the Creditors assert that funds given to
EMS were improperly used. At the time of the bankruptcy filing, both Creditors
had filed motions for a default judgment in their respective courts.
Subsequently, after the bankruptcy case began, the Creditors each filed a
motion pursuant to 11 U.S.C. § 362 seeking an order to vacate the automatic stay
so as to permit each of them to continue the prosecution of their respective
lawsuits. The Bankruptcy Court lifted the automatic stay for the limited purpose
of allowing the Creditors to adjudicate their respective motions for default
judgment, and proceed to an inquest to determine the amount of their claims.
On October 5, 2012, the Supreme Court of the State of New York denied White
Line's motion for a default judgment, and previously, on July 24, 2012, the
United States District Court for the Middle District of Pennsylvania denied
Pollak's motion for a default judgment.
In addition to Creditor Lawsuits, the Creditors each filed a proof of claim
in the Bankruptcy Court proceeding. White Lines filed a proof of claim against
EMS on March 22, 2012 in the sum of $7,840,643, and Pollak filed a proof of
claim against EMS on June 5, 2012 in the sum of $1,325,000. The aggregate amount
of the proofs of claim filed by White Lines and Pollak total $9,165,643.
C. Procedural History of the Bankruptcy Proceeding and the Adversary Proceeding
On or about May 30, 2012, the Trustee commenced an adversary proceeding in
Bankruptcy Court against Federal (the "Adversary Proceeding"), White Lines,
Pollak, and John Doe Defendants # 1-10. The Trustee seeks (1) a determination
that Federal is obligated to indemnify EMS for the damages being sought by the
Creditors, and (2) a declaration that Federal should turn over to the Trustee
the full limits of liability under the Policy.
On August 6, 2012, in lieu of filing an Answer in the Bankruptcy Court,
Federal filed a motion to dismiss the Trustee's Complaint on the grounds, among
other things, that the Adversary Proceeding was not ripe or justiciable.
On August 7, 2012, Federal filed a motion in this Court to withdraw the
Adversary Proceeding from the Bankruptcy Court.
On January 4, 2013, the Bankruptcy Court denied Federal's motion to dismiss
the Trustee's Complaint. Kirschenbaum v. Federal Ins. Co. (In re EMS Fin.
Servs., LLC), 2013 Bankr. LEXIS 139, 2013 WL 64755 (Bankr. E.D.N.Y. Jan. 4,
2013). Of relevance here, the Bankruptcy Court held that "the ultimate issue of
whether White Lines and Pollak are entitled to be paid on those claims, and if
so, by whom, is premature at this juncture, because the Underlying Actions
[including White Lines' state court action] have not yet been resolved by their
respective courts." 2013 Bankr. LEXIS 139, 2013 WL 64755, at *8. The Bankruptcy
Court further held that "the Trustee's claim for turnover is premature at this
stage because, as Federal points out, White Lines and Pollak have not
established their right to payment from EMS, and EMS has not established its
right to payment from the Policy." Id. However, the Bankruptcy Court abated the
Adversary Proceeding pending adjudication or resolution of the Creditor Actions.
The Bankruptcy Court invited White Lines, Pollak, or Federal to file proper
motions for relief from the automatic stay pursuant to 11 U.S.C. 362(d) so as to
prosecute the Creditor actions to judgment, but noted that enforcement of any
judgment required the consent of the Bankruptcy Court.
White Lines subsequently moved before the Bankruptcy Court for relief from
the automatic stay to enable to it proceed with the New York State court action.
By order dated March 6, 2013, the Bankruptcy Court granted this relief. The
Bankruptcy Court further granted Pollak's request for stay relief to file a
motion for change of venue of its federal lawsuit from the United States
District Court of the Middle District of Pennsylvania to the District of Rhode
To date, no determination of liability or damages as against EMS has been
made in the Creditor Lawsuits. No judgment has been entered in either case and
no resolution of the Creditors' claims has been reached. White Lines represents
that substantive discovery has not occurred in either case.
Meanwhile, on April 19, 2013, this Court granted Federal's motion to withdraw
the Adversary Proceeding. In re EMS Fin. Servs., LLC, 491 B.R. 196 (E.D.N.Y.
White Lines now moves to amend its answer to assert a cross claim for a
judgment against Federal declaring, among other things, that EMS is liable to
White Lines for negligence in an amount in excess of $5,000,000 and that such
liability falls within the ambit of the Policy. Pollak has not indicated whether
he opposes the motion to amend. However, the Trustee and Federal oppose the
motion to amend, first contending that permitting White Lines to amend its
answer in this regard would be futile because, under Lang. v. Hanover Ins. Co.,
3 N.Y.3d 350, 787 N.Y.S.2d 211, 820 N.E.2d 855 (2004), White Lines lacks
standing to bring a direct action against Federal until White Lines obtains a
judgment against EMS. White Lines counters that, under Maroney v. New York Cent.
Mut. Fire Ins. Co., 5 N.Y.3d 467, 471, 805 N.Y.S.2d 533, 839 N.E.2d 886 (2005)
and its progeny, an injured third-party party joined as a named defendant may
pursue a declaratory judgment on coverage issues, notwithstanding the absence of
a judgment against the insured.
The Trustee and Federal also note that, whereas Federal's defense costs in
the state action erode the liability limit of the Policy, Federal is responsible
for its own defense costs in the instant action. Therefore, Federal argues, it
would suffer undue prejudice if the Court permitted White Lines to add its cross
claims. White Lines counters that Second Circuit case law holds that the
increased costs of litigation do not constitute sufficient prejudice justifying
denying an amendment. White Lines further asserts that it would suffer undue
prejudice by denial of the amendment because, as noted above, resolution of
coverage issues in the state action would erode the limit of the liability limit
of the Policy, and thus, deplete its own potential recovery.
Finally, the Trustee and Federal argue that permitting White Lines to add its
cross claims would (1) constitute an end-run around the Bankruptcy Court
automatic stay and order dated March 6, 2013 and (2) undermine judicial economy
because the proposed cross claims encompass the same issues pending before the
state court. White Lines responds by (1) pointing to cases in which an
underlying proceeding between an injured party and insured was not viewed as an
impediment to resolving coverage issues under the Federal Declaratory Judgment
Act and (2) asserting that judicial economy would be served by resolving
liability and coverage issues in one forum.
A. Legal Standard on Motion to Amend
Federal Rule of Civil Procedure 15 applies to motions to amend the pleadings.
A motion to amend "shall be freely granted when justice so requires." Fed. R.
Civ. P. 15(a). Such a motion should be denied "only for reasons such as undue
delay, bad faith, futility of the amendment or prejudice to the other party."
Crippen v. Town of Hempstead, No. 07-CV-3478 (JFB)(ARL), 2013 U.S. Dist. LEXIS
75096, 2013 WL 2322874, at *1 (E.D.N.Y. May 22, 2013); see also Burch v. Pioneer
Credit Recovery, Inc., 551 F.3d 122, 125 (2d Cir. 2008) (per curiam) ("[M]otions
to amend should generally be denied in instances of futility, undue delay, bad
faith or dilatory motive, repeated failure to cure deficiencies by amendments
previously allowed, or undue prejudice to the non-moving party."). "An amendment
is considered futile if, for example, it could not defeat a motion to dismiss
for failure to state a claim or for lack of subject matter jurisdiction."
Crippen, 2013 U.S. Dist. LEXIS 75096, 2013 WL 2322874, at *1 (citing Chan v.
Reno, 916 F. Supp. 1289, 1302 (S.D.N.Y. 1996)); see also Absolute Activist
Master Value Fund Ltd. v. Ficeto, 677 F.3d 60, 71 (2d Cir. 2012).
"A case is properly dismissed for lack of subject matter jurisdiction under
Rule 12(b)(1) [of the Federal Rules of Civil Procedure] when the district court
lacks the statutory or constitutional power to adjudicate it." Makarova v.
United States, 201 F.3d 110, 113 (2d Cir. 2000). "The plaintiff bears the burden
of proving subject matter jurisdiction by a preponderance of the evidence."
Aurecchione v. Schoolman Transp. Sys., Inc., 426 F.3d 635, 638 (2d Cir. 2005).
However, the court "must accept as true all material factual allegations in the
complaint." J.S. v. Attica Cent. Sch., 386 F.3d 107, 110 (2d Cir. 2004).
A defendant may move for dismissal pursuant to Rule 12(b)(1) if a plaintiff
lacks standing, a jurisdictional issue. See Carver v. City of New York, 621 F.3d
221, 225 (2d Cir. 2010) ("Standing is a federal jurisdictional question
'determining the power of the court to entertain the suit.'")(quoting Warth v.
Seldin, 422 U.S. 490, 498, 95 S. Ct. 2197, 45 L. Ed. 2d 343 (1975)); Manigaulte
v. C.W. Post of Long Island Univ., 659 F. Supp. 2d 367, 378 (E.D.N.Y. 2009) ("As
plaintiff does not have standing to bring a claim under Title III of the ADA on
behalf of learning disabled students, an amendment allowing such a cause of
action would be futile."); see also Thabault v. Sorrell, No. 1:07-CV-166, 2008
U.S. Dist. LEXIS 62919, 2008 WL 3582743, at *2 (D. Vt. Aug. 13, 2008) (denying
leave to re-plead or amend complaint when plaintiff lacked standing to assert
As noted above, Federal and the Trustee dispute White Line's standing to
assert its proposed cross claims. In particular, Federal argues that White Lines
has not satisfied the standing requirements of N.Y. Ins. Law § 3420 and Lang
because White Lines has yet to establish liability against EMS. The question
presented in Lang was whether and under what circumstances an injured party
lacking privity to an insurance policy could bring a direct action against a
tortfeasor's insurance company to recover under the policy. See Lang, 3 N.Y.3d
at 352, 787 N.Y.S.2d 211, 820 N.E. 2d 855. The New York Court of Appeals held
that, pursuant to the plain language of § 3420(a)(2), the injured party must
obtain and enter a judgment against the insured tortfeasor before bringing suit
against the insurer. Id. Once such a judgment is obtained, "the injured party
steps into the shoes of the tortfeasor and can assert any right of the
tortfeasor-insured against the insurance company." Id. at 355, 787 N.Y.S.2d 211,
820 N.E. 2d 855.
"However, the standing requirement is waived in this matter because [the
Trustee] named the [White Lines] as [a] defendant  in the lawsuit; thus, 'as
[a] party defendant in the action, [White Lines is] thereby allow[ed] . . . to
contest the issue of coverage anew in the instant case.'" U.S. Underwriters Ins.
Co. v. Zismopoulos, 07-CV-4684 (CBA)(RLM), 2010 U.S. Dist. LEXIS 32317, 2010 WL
1286221, at *2 (E.D.N.Y. Mar. 31, 2010), quoting 3405 Putnam Realty Corp. V.
Insurance Corp. of N.Y., 36 A.D.3d 565, 828 N.Y.S.2d 394, 2007 N.Y. Slip Op 582,
1 (1st Dep't 2007); see also Maroney, 5 N.Y.3d at 471 n. 1, 805 N.Y.S.2d 533,
839 N.E. 2d 886 (2005) ("Because the insurer joined the insured in seeking a
declaration of its rights . . . Insurance Law § 3420 does not preclude
consideration of the coverage issues in this case"). In other words, "[Federal]
cannot bring suit against [White Lines] and then later assert that [White Lines]
do[es] not have standing in the matter." Zismopoulos, 2010 U.S. Dist. LEXIS
32317, 2010 WL 1286221, at *2.
The reliance by Federal and the Trustee on U.S. Underwriters Ins. Co. v.
Ziering, 06-CV-1130 (JFB)(WDW), 2010 U.S. Dist. LEXIS 88883, 2010 WL 3419666
(E.D.N.Y. Aug. 27, 2010) is misplaced. There, an insurer sued the insured and
multiple other parties, including an allegedly injured third-party defendant.
After the insurer and the insured settled and executed a stipulation of
discontinuance, the third-party defendant moved to add claims against the
insurer. The Court denied the motion, holding that any such claims would be
futile because the third-party defendant had failed to first obtain a judgment
in the underlying state court action against the insured. However, the Court
made clear that if the third party defendant asserted new claims against the
other parties in the case, she would become the plaintiff in that case, as the
insurer was no longer a party to the action. See 2010 U.S. Dist. LEXIS 88883,
[WL] at *6.
Unlike in Ziering, here, the party seeking to amend its pleadings is a
party-defendant, not a plaintiff. Accordingly, under Maroney, the Court finds
that White Lines possesses standing to assert its cross claims, and, therefore,
rejects the argument that White Lines' motion to amend should be denied as
futile on this basis.
C. Prejudice and Judicial Economy
That said, courts may also deny leave to amend if permitting such amendment
would prejudice the other parties. Foman v. Davis, 371 U.S. 178, 182, 83 S. Ct.
227, 9 L. Ed. 2d 222 (1962). To determine whether non-moving parties would be
prejudiced by a proposed amendment to the pleadings, the Court may examine
whether the amendment (1) would require the opponent to expend significant
additional resources to conduct discovery and prepare for trial; (2) would
significantly delay the resolution of the dispute; or (3) would prevent the
plaintiff from bringing a timely action in another jurisdiction. Block v. First
Blood Assocs., 988 F.2d 344, 350 (2d Cir. 1993).
Further, the party opposing the motion for leave to amend carries the burden
of demonstrating that it will be substantially prejudiced by the amendment. Care
Envtl. Corp. v. M2 Techs. Inc., 05 CV 1600 (CPS), 2006 U.S. Dist. LEXIS 55066,
2006 WL 2265036, at *6 (E.D.N.Y. Aug. 7, 2006); Saxholm AS v. Dynal, Inc., 938
F. Supp. 120, 123 (E.D.N.Y. 1996). Any prejudice demonstrated "must be balanced
against the court's interest in litigating all claims in a single action and any
prejudice to the movant which would result from a denial of the motion." Saxholm
AS, 938 F. Supp. at 123.
Here, the Court finds that "[a]llegations that [Federal] is prejudiced by the
time, money, and effort expended defending a lawsuit 'do not arise to the [level
of] 'substantial prejudice' necessary to deny a proposed amendment.'" Lehman
Bros. Commercial Corp. v. Minmetals Int'l Non-Ferrous Metals Trading Co., 94
CIV. 8301 (JFK), 1996 U.S. Dist. LEXIS 8842, 1996 WL 346426, at *3 (S.D.N.Y.
June 25, 1996), quoting Block, 988 F.2d at 351 (citation omitted); accord S.S.
Silberblatt, Inc. v. E. Harlem Pilot Block--Bldg. 1 Hous. Dev. Fund Co., Inc.,
608 F.2d 28, 43 (2d Cir. 1979) ("the burden of undertaking discovery, which
Chemical would have shouldered had the proposed amendment been incorporated in
the complaint as originally filed, hardly amounts to prejudice outweighing the
policy of Rule 15(a) in favor of permitting the parties to obtain an
adjudication of the merits.").
Rather, the Court finds that there would be little, if any, prejudice to
either party by virtue of permitting this amendment. White Lines represents
that, similar to the state court action brought by White Lines, no substantive
discovery has taken place in this case. Further, there is no scheduling order
that needs to be re-worked to permit the amendment nor has there been any motion
practice regarding the substantive issues involved in this case.
Unable to establish prejudice, Federal points to the Policy's "No-Action
Clause" which, it contends, operates to exclude a scenario where Federal must
pay its own attorneys' fees in defending against a third-party's claims against
EMS. This provision provides: "No person or entity shall have any right under
this Policy to join [Federal] as a party to any action against any Insured to
determine such Insured's liability nor shall [Federal] be impleaded by such
Insured or legal representatives of such Insured." (Policy, at 13.) However,
despite the broad language of this provision, White Lines, as a stranger to the
Policy, is not bound by its terms. See e.g., Asoma Corp. v. SK Shipping Co.,
Ltd., 467 F.3d 817, 827 (2d Cir. 2006) (finding that vessel owner and vessel
manager, who were not parties to the contract of charter, were not bound by its
forum selection clause); Kitz Corp. v. Transcon Shipping Specialists, Inc., 221
A.D.2d 261, 261, 634 N.Y.S.2d 75, 76 (1995)("A party that is a stranger to a
contract of carriage is not bound by limitations of liability in that
contract"), aff'd, 89 N.Y.2d 822, 675 N.E.2d 455, 652 N.Y.S.2d 720 (1996).
In addition, as noted above, White Lines contends that judicial economy would
be served if leave to amend were granted. As is currently the case, the issues
relating to the liability of EMS to White Lines are being litigated in state
court. Subsequently, issues relating to Federal's duty to indemnify under the
Policy, the timing of the losses, and applicability of policy exclusions would
be litigated in this forum. Rather than litigate this case in two different
forums, White Lines plausibly states that judicial economy would be served if
the litigation occurred in one forum.
Relying on O'Bannon v. Friedman's, Inc., 437 F. Supp. 2d 490 (D. Md. 2006),
White Lines contends that a pending case between an injured party and the
insured should not be an impediment to a declaratory judgment action in federal
court. In that case, the court stated:
Plaintiffs seek a declaration of the obligations of Friedman's
insurers. Such declaratory relief would undoubtedly be useful in
determining the parties' legal relationship by resolving the issue of
whether or not St. Paul and Federal must indemnify Friedman's for
monetary relief agreed to in a settlement or awarded in litigation.
. . .
As the Fourth Circuit has held with regards to insurer coverage
disputes, "the fact that an injured party has not obtained a judgment
against an insured party does not make the action any less definite
and concrete, nor does it vitiate the adversity of the parties'
interests." White v. Nat'l Union, 913 F.2d at 168.
437 F. Supp. at 495-97. As this language indicates, O'Bannon stands for the
proposition that a pending action between an injured party and the insured does
not deprive (1) an injured party of standing to sue the insurer in federal court
or (2) the court of subject matter jurisdiction to resolve the dispute.
Ultimately, however, it is "within the sound discretion of the court whether
to grant leave to amend." John Hancock Mut. Life Ins. Co. v. Amerford Int'l
Corp., 22 F.3d 458, 462 (2d Cir. 1994). In this case, despite the potential
conservation of judicial resources from conducting the litigation in a single
forum, the Court declines to address issues currently before the state court,
particularly where the party seeking the proposed amendment, White Lines,
commenced the state court action. In this regard, the Court agrees with the
reasoning of the Bankruptcy Court, which also declined to consider EMS's
liability to White Lines. The Bankruptcy Court found that "it would be an
inappropriate use of judicial resources for th[at] Court to determine whether
EMS undertook any actions or failed to undertake any actions that would render
it liable to White Lines, and, if so, in what amounts -- those determinations
will be made by the courts having jurisdiction over the Underlying Actions."
2013 Bankr. LEXIS 139, 2013 WL 64755, at *8. Indeed, of importance, White Lines
acknowledges that a declaration with regard to these issues would be dispositive
in the case pending in New York State court.
The Court further finds that granting White Lines permission to file its
cross claims would constitute an end-run around the Bankruptcy Court automatic
stay, which bars White Lines from asserting claims against EMS or its bankruptcy
estate without leave of the Bankruptcy Court. While the proposed cross claims
for declaratory relief are formally asserted against the Trustee, those claims,
in fact, seek a declaration of EMS's liability to White Lines, the very issue
pending before the state court. The Bankruptcy Court granted limited relief from
the automatic stay to litigate that question in state court, not in federal
The fact that the Trustee commenced this action and named White Lines as a
defendant does not dictate otherwise because the automatic stay provision, 11
U.S.C. § 362(a)(1), "operates to stay prosecution of or recovery in connection
with claims asserted against a debtor only, and, absent unusual circumstances,
its protections are generally not extended to non-debtor co-defendants." Fed.
Nat. Mortgage Ass'n v. Olympia Mortgage Corp., 04-CV-4971 NG MDG, 954 F. Supp.
2d 165, 2013 U.S. Dist. LEXIS 88431, 2013 WL 3168586, at *1 n. 3 (E.D.N.Y. June
21, 2013); see also Teachers Ins. & Annuity Ass'n of Am. v. Butler, 803 F.2d 61,
65 (2d Cir. 1986)("It is well-established that stays pursuant to § 362(a) are
limited to debtors and do not encompass non-bankrupt co-defendants.").
For the foregoing reasons, White Lines' motion to amend its answer to assert
cross claims seeking a judgment against Federal declaring, among other things,
that EMS is liable to White Lines for negligence in an amount in excess of
$5,000,000 and that such liability falls within the ambit of the Policy, is
Dated: Central Islip, New York
February 6, 2014
/s/ Arthur D. Spatt
ARTHUR D. SPATT
United States District Judge