Document Page 1 of 8 UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF NORTH CAROLINA CHARLOTTE DIVISION Chapter 11 In re: Kaiser Gypsum Company, Inc., Debtor(s). Case No. 16-31602 (JCW) (Jointly Administered) BRIEF IN SUPPORT OF FIRST STATE S MOTION FOR RELIEF FROM AUTOMATIC STAY First State Insurance Company, London & Edinburgh Insurance Co., Ltd., New England Reinsurance Corporation and Twin City Fire Insurance Company (collectively, First State ) respectfully move this Court, pursuant to 11 U.S.C. 362(d), to lift the automatic stay to permit the parties to proceed in the state law insurance coverage action captioned Certain Underwriters at Lloyd s, London v. Kaiser Cement and Gypsum Corp., et al., Case No. BC 635906 (Cal. Super. Ct., Los Angeles Cty.) (the London Action ). INTRODUCTION Debtors Kaiser Gypsum Company and Hanson Permanente Cement (collectively, Kaiser ) have filed in this adversary proceeding two motions -- a motion to remand and a motion for mandatory and permissive abstention -- intended to permit Kaiser to proceed with litigation regarding insurance coverage for its alleged environmental liabilities in Oregon state court. Other insurers have opposed that relief. First State takes no position on whether the Court should grant that relief. If, however, the Court does abstain and/or remand this action to Oregon
Document Page 2 of 8 state court, the Court should also grant stay relief to permit the insurers to proceed with the London Action filed in California state court. This adversary proceeding -- filed on September 29, 2016 in Oregon state court -- and the London Action -- filed on September 30, 2016 in California state court -- both seek declarations of the parties rights and obligations with respect to insurance coverage for Kaiser s alleged environmental liabilities. 1 Indeed, both actions address the same alleged rights to coverage for Kaiser s alleged liabilities at a manufacturing facility in St. Helens, Oregon, and a former cement and gypsum manufacturing facility located along the Lower Duwamish River in Seattle, Washington. In light of this significant overlap, outside of bankruptcy, the Oregon and California state courts would be left to decide where the environmental insurance coverage dispute should be litigated as between them (i.e., whether one yields to the other or whether both actions proceed). There is no reason why Kaiser should be entitled to a tactical advantage in this non-bankruptcy venue dispute as a result of its bankruptcy filing. Accordingly, if the Court abstains and/or remands this adversary proceeding to Oregon state court, First State respectfully requests that this Court also lift the automatic stay for the limited purpose of allowing the London Action to proceed, thus permitting the state courts to resolve the venue question in the same manner that they would have resolved it absent the bankruptcy. ARGUMENT A bankruptcy court has full discretion to lift the automatic stay and allow litigation against the debtor to go forward in another forum. See In re Claughton, 140 B.R. 861, 867 (Bankr. W.D.N.C. 1992). The purpose of the Section 362 automatic stay is two-fold: to preserve the relative positions and rights of creditors and to protect the debtor from financial 1 Kaiser s complaint in Oregon also includes a breach of contract claim against the insurers, while London s complaint in California includes two additional environmental sites. 2
Document Page 3 of 8 pressure during the pendency of the bankruptcy, offering the debtor a breathing spell from having to defend multiple cases in different forums and the time to reorganize in an orderly manner. In re Garner, Case. No. 09-81998, 2010 WL 890406 (Bankr. M.D.N.C. Mar. 9, 2010). In this case, however, the purpose behind the automatic stay is inapplicable, as Kaiser itself has asked that the environmental coverage claims be decided in state court. Lifting the automatic stay to allow the London Action to proceed is therefore appropriate. cause : Section 362(d)(1) provides that a court shall grant relief from the automatic stay for On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay-- (1) for cause, including the lack of adequate protection of an interest in property of such party in interest... To determine whether sufficient cause exists to lift the automatic stay and allow litigation to go forward in a non-bankruptcy forum, the bankruptcy court must balance the potential prejudice to the debtor s estate against the hardships that would result if the party seeking relief from stay is denied. In re Claughton, 140 B.R. at 867 (citing In re Peterson, 116 B.R. 247 (Bankr. D.C. Colo. 1990)). This balancing test calls for a bankruptcy court to evaluate four factors, any one of which can form the proper foundation for lifting the stay: (i) Whether modification of the stay to allow litigation to conclude in a different forum will promote judicial economy; (ii) Whether the issues in the pending litigation involve only state law so that the expertise of the bankruptcy court is unnecessary; (iii) Whether relief from stay would interfere with the bankruptcy case; and 3
Document Page 4 of 8 (iv) Whether the estate can be protected properly by a requirement that creditors seek enforcement of any judgment through the bankruptcy court. Id. at 867-68 (citing numerous cases); In re Revco D.S., Inc., 99 B.R. 768, 777 (Bankr. N.D. Ohio 1989) (affirming bankruptcy court s lifting the automatic stay where action involved state law claims and did not prejudice the estate). 2 When pending litigation involves solely issues of state law, a bankruptcy court should favor relief from stay to allow the litigation to go forward in state court. In re Claughton, 140 B.R. at 868. Moreover, cause may be found to exist whenever the stay harms the party seeking relief and lifting the stay will not unduly harm the debtor or the debtor s estate. In re Turner, 161 B.R. 1, 3 (Bankr. D. Me. 1993). In this case, there is no prejudice at all to Kaiser (who has asked that this action be litigated in state court), and all four factors support a finding of good cause to grant relief from the automatic stay and allow the London Action to proceed. First, lifting the automatic stay and allowing the London Action to proceed would promote fairness and judicial economy, and First State and the other insurers would be harmed if that action cannot proceed. Kaiser s conduct here was plainly tactical: it filed its bankruptcy petition the day after filing its complaint in Oregon state court. It thus converted the automatic stay from a shield to a sword. Rather than leaving Kaiser and the insurers to engage in a standard venue dispute, with each side arguing where the environmental coverage action should proceed, Kaiser sought to obtain, by virtue of its bankruptcy, sole control over the forum in which the coverage matters would be resolved. No principle of bankruptcy law countenances that result. Leaving the parties here to their chosen 2 Under Section 362(g), the party seeking relief from the stay has the initial burden of production or going forward with the evidence to establish a prima facie case for relief, but the burden of proof rests on the party opposing relief on all issues except the existence of equity. See In re Busch, 294 B.R. 137, 140-41 (10th Cir. BAP 2003); In re Property Technologies, Ltd., 263 B.R. 750, 753-54 (Bankr. E.D. Va. 2001); In re Self, 239 B.R. 877, 880 (Bankr. E.D. Tex. 1999); In re 234-6 West 22nd St. Corp., 214 B.R. 751, 756 (Bankr. S.D.N.Y. 1997). 4
Document Page 5 of 8 forums -- Oregon and California -- is appropriate to ensure that no party is disadvantaged solely as a result of Kaiser s strategic filings. 3 See S. Rep. No. 989, 95th Cong., 2d Sess. 50 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5836 ( [I]t will often be more appropriate to permit proceedings to continue in their place of origin, when no great prejudice to the bankruptcy estate would result, in order to leave the parties to their chosen forum... ); see also In re Robbins, 964 F.2d 342, 345 (4th Cir. 1992) ( While Congress intended the automatic stay to have broad application, the legislative history to section 362 clearly indicates Congress recognition that the stay should be lifted in appropriate circumstances. ). This is especially true where the relief sought in both actions is essentially identical: declarations of the parties rights and obligations under insurance policies issued to Kaiser for Kaiser s alleged environmental liabilities at certain sites. Moreover, while neither this action nor the London Action has proceeded past the initial pleading stages, the London Action is pending in California Superior Court, the same court in which the parties litigated insurance coverage issues relating to Kaiser s asbestos liabilities under California law to final judgment on September 13, 2016. 4 The parties are therefore familiar with the California court and the appropriate ways to resolve coverage disputes in that court. Indeed, allowing the California court an opportunity to resolve this coverage dispute makes sense in light of California s strong connections to the dispute, including the prior asbestos litigation and the fact that the insurance policies to be interpreted were issued to Kaiser in California. See In re 3 Although Kaiser chides London in its motions for forum shopping, noting that London filed the London Action in California the day after Kaiser filed this action in Oregon and only minutes before the Bankruptcy cases were filed, there can be no doubt that Kaiser s filings were equally strategic. Despite the fact that the insurance policies at issue were issued to Kaiser in California, Kaiser admits it filed [this action] in Oregon because... the State of Oregon has enacted a statute that is expressly applicable to insurance coverage actions involving contaminated property in Oregon, and that statute is highly favorable to policyholders. Motion for Abstention at 2. 4 That judgment currently is on appeal and Truck has indicated it intends to move to lift the stay and allow the appeal to go forward. 5
Document Page 6 of 8 Westwood, 35 B.R. 47, 48-49 (Bankr. D. Haw. 1983) (granting motion for relief from automatic stay to allow state court to adjudicate all issues among the plaintiffs, debtors, and nondebtors relating to breach of contract), see also In re Aquarius Disk Svcs., 254 B.R. 253, 260 (Bankr. N.D. Cal. 2000) (efficiency and conservation of resources justified lifting stay to allow two-year old litigation to proceed). Second, Kaiser agrees that the insurance coverage questions at issue in both this adversary proceeding and the London Action are state law questions that do not require the particular expertise of the bankruptcy court. Indeed, in support of both its motion to remand and motion for abstention, Kaiser repeatedly emphasizes the state law nature of this action, that this adversary proceeding is based solely on state law claims, and that [t]his state law action belongs in state court. Motion to Remand at 3, 9, 1; Motion for Abstention at 6 ( Both claims [in this action] are governed by state law ; The Action involves no bankruptcy issues or federal questions. ); see also In re GACN, Inc., 555 B.R. 684, 699 (B.A.P. 9th Cir. 2016) (complaint for declaratory judgment regarding parties rights and liabilities under an insurance contract was wholly governed by state law ). Accordingly, the state law nature of the insurance coverage issues favors lifting the automatic stay and allowing the London Action to proceed. See, e.g., Kadlecek v. Schwank USA, Inc., 486 B.R. 336, 341-42 (Bankr. M.D.N.C. 2013) (fact that issues involved exclusive application of state law weighed in favor of annulling the automatic stay ); In re Joyner, 416 B.R. 190, 192 (Bankr. M.D.N.C. 2009) (lifting stay was appropriate where claims alleged... all involve solely state law issues ). Third, lifting the automatic stay would not interfere with the bankruptcy proceedings. First State s motion is conditional: First State seeks relief from the automatic stay to allow the London Action to proceed only if this Court concludes it must abstain and/or remand this 6
Document Page 7 of 8 adversary proceeding to Oregon state court. In that situation, the environmental coverage issues -- the subject of this adversary proceeding -- will be litigated outside of the bankruptcy, regardless of whether they are litigated in Oregon or California. Allowing the London Action to proceed has no greater impact on the bankruptcy proceedings than does allowing the environmental coverage issues to proceed in Oregon state court. 5 See also In re New York Medical Group, 265 B.R. 408, 413 (Bankr. S.D.N.Y. 2001) (finding that no interference existed despite potential for foreign litigation to affect ultimate distributions to creditors). Cf. Motion to Remand at 8 (emphasizing that it would be more efficient for the administration of the estates if this litigation proceeded in the state court ). The fourth and final factor -- whether the estate can be protected by a requirement that creditors seek enforcement of any judgment through the bankruptcy court -- is irrelevant here because the London Action is a declaratory judgment. London seeks a declaration as to the parties rights and obligations under certain insurance policies in connection with Kaiser s alleged environmental liabilities; London does not seek any damages from Kaiser. Accordingly, because no monetary relief is sought, Kaiser s estate will not be harmed (and thus is not in need of protection) by allowing the London Action to proceed. 5 Kaiser also has argued that it would be prejudiced if the coverage issues were litigated in the bankruptcy court and that the environmental coverage issues are independent and remote from the bankruptcy. See Motion to Remand at 3, 13 ( litigation of this action in the North Carolina Bankruptcy Court (and District Court) would be more costly and less convenient for the Debtors ). 7
Document Page 8 of 8 CONCLUSION For the foregoing reasons, First State respectfully requests that, pursuant to 11 U.S.C. 362(d), if the Court abstains and/or remands this adversary proceeding to Oregon state court, the Court also lift the automatic stay and allow the London Action to proceed. This the 21 st day of February, 2017. Respectfully submitted, /s/ _ Christine L. Myatt Christine L. Myatt N.C. State Bar No. 10444 NEXSEN PRUET, PLLC 701 Green Valley Road, Suite 100 Post Office Box 3463 Greensboro, NC 27402 (336) 373-1600 cmyatt@nexsenpruet.com - and - James P. Ruggeri (admitted pro hac vice) Katherine M. Hance (admitted pro hac vice) SHIPMAN AND GOODWIN LLP 1875 K Street NW Washington, DC 20006 (202) 469-7750 Craig Goldblatt (admitted pro hac vice) Nancy L. Manzer (admitted pro hac vice) WILMER CUTLER PICKERING HALE AND DORR LLP 1875 Pennsylvania Avenue, NW Washington, DC 20006 (202) 633-6000 Counsel to First State Insurance Company, London & Edinburgh Insurance Co., Ltd., New England Reinsurance Corporation and Twin City Fire Insurance Company 8