• Court Grants Motion to Dismiss for Lack of Subject Matter Jurisdiction and Premature Request for Declaratory Relief
  • October 19, 2012
  • Law Firm: Morris James LLP - Wilmington Office
  • Washington Mutual, Inc. v. XL Specialty Insurance Company (In re Washington Mutual, Inc.), Bankruptcy Case No. 08-12229 (MFW), Adv. No. 12-50422 (MFW) (October 4, 2012) (J. Walrath)

    The background is relatively complex and is summarized in short-form here to include only facts applicable to the adversary proceeding.  Washington Mutual, Inc. (“WMI”) is a bank holding company that formerly owned Washington Mutual Bank (“WMB”).  In early 2008, WMI purchased $250 million of coverage under twelve insurance policies (the “2008-09 Policies”) for WMI and its directors and officers for claims made from May 1, 2008 to May 1, 2009.  Shortly before the seizure of WMB by the Office of Thrift Supervision on September 25, 2008, WMI made a downstream capital contribution of $500 million to WMB (the “September 2008 Downstream”).  WMI and WMI Investment Corp. (collectively, the “Debtors”) filed voluntary petitions for relief on September 26, 2008 under chapter 11 of the Bankruptcy Code.
    The Official Committee of Unsecured Creditors investigated the September 2008 Downstream and, on October 13, 2011, sent a demand letter to the directors and officers of WMI (collectively, the “D&O’s”) asserting claims related to the September 2008 Downstream.  In response to the demand letter, several of the D&O’s and WMI sought coverage for the asserted claims under the 2008-09 Policies, but on December 22, 2011, XL Specialty Insurance Company denied coverage.

    On February 24, 2012, the Court confirmed the Debtors’ Seventh Amended Plan of Reorganization (the “Plan”), which, among other things, established a contingent reserve of $65 million for the D&O’s, of which $55 million was set aside for defense costs associated with the September 2008 Downstream claims.  On March 15, 2012, the Trust filed a Complaint against the issuers of the 2008-09 Policies (the “Defendants”) for (1) breach of contract, (2) tortious breach of the duty of good faith and fair dealing, (3) a declaratory judgment that the Defendants are not subrogated to the indemnity claims of the D&O’s, and (4) equitable subordination of any subrogated claims the Defendants might have.

    On May 7, 2012, the Defendants filed a motion to dismiss, arguing that, inter alia, the Court lacked subject matter jurisdiction over the first two claims and the relief sought in the second two claims was declaratory and premature.  The Court agreed with the Defendants and granted the motion to dismiss.

    First, the Court discussed the jurisdictional issues, finding first that it had jurisdiction to determine whether it possessed subject matter jurisdiction over the adversary proceeding.  The parties were in agreement that, of the types of potential bankruptcy court jurisdiction (cases under title 11, proceedings arising under title 11, proceedings arising in a case under title 11, and proceedings related to a case under title 11), if the Trust’s claims fell within the Court’s jurisdictional grasp, it was only under “related to” jurisdiction.  Noting that the Court’s jurisdictional reach post-confirmation is limited to claims having “a close nexus to the bankruptcy plan or proceeding,” such as one which “affects the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement,” the Court determined that it lacked jurisdiction over the first two claims.

    The Trust argued that: (i) the “close nexus” test was satisfied by virtue of the fact that the creditors would receive more money from the $55 million reserve, (ii) the Defendants’ raising the “insured v. insured” exclusion required the Court to interpret the Confirmation Order, and (iii) the Plan expressly provided that the Court would retain jurisdiction “to determine any and all motions, adversary proceedings, applications, and contested or litigated matters that may be pending on the Effective Date.”

    The Court rejected the Trust’s arguments, holding that (i) the “mere possibility of a gain or loss of trust assets” is insufficient to confer post-confirmation bankruptcy jurisdiction over “related” matters, particularly with respect to the Debtors’ case, in which the Plan provided for payment in full (with interest) to most unsecured creditors through a $7 billion distribution, which would not be substantially affected by the $55 million trust account, (ii) an interpretation such as that potentially required by the Defendants’ asserted “insured v. insured” defense does not rise to the level of “interpretation” required to confer post-confirmation jurisdiction because “the interpretation is not essential to the integrity of the Plan and its implementation” and because the interpretation could be accomplished by other courts of competent jurisdiction, and (iii) the Plan’s failure to specifically describe the cause of action at issue, in conjunction with the lack of required “close nexus,” rendered the general jurisdictional provision in the Plan ineffective.

    Second, the Court held that the Trust could not (at least at this time) assert a claim for subrogation because such claim existed only to the extent of actual payment under the policies, and the Defendants refused to pay under the policies and had yet to file a proof of claim, much less an “allowed” claim subject to equitable subordination under 11 U.S.C. Section 510(c). 

    Accordingly, for the reasons set forth more fully above, the Court granted the motion to dismiss.