The United States District Court for the District of New Jersey has abstained from hearing a dispute between a primary and an excess professional liability insurer related to a bankruptcy settlement based on the mandatory abstention doctrine. Royal Indemn. Co. v. Admiral Ins. Co., Inc., 2007 WL 4171649 (D.N.J. Nov. 19, 2007). After the insured corporation declared bankruptcy, the bankruptcy trustee settled claims with the insured's primary professional liability insurer.
Under the settlement, the primary policy was deemed exhausted, and the primary insurer received an assignment of rights to seek recovery of certain amounts from the bankruptcy estate. Based on the primary's asserted exhaustion, the bankruptcy trustee also settled with the excess insurer. The excess insurer then sued the primary insurer in New Jersey state court, arguing that the primary insurer's policy was not exhausted because of the assignment of recovery rights, and asserting that the excess carrier was entitled to any amounts the primary carrier recovered as a result of the assignment. The primary insurer then removed the state court action to federal court and moved to transfer the action to the bankruptcy court that had approved the settlements with the carriers. Although the district court concluded that it had subject matter jurisdiction under the Third Circuit's broad test for "related to" bankruptcy jurisdiction, it held that the mandatory abstention was required under 28 U.S.C. § 1334(c)(2) because (1) the excess carrier's cause of action was based on a state law claim; (2) that claim did not arise under Title 11; (3) there was no federal jurisdiction but for the case's relation to the bankruptcy; (4) the action was commenced in state court; and (5) the action could be timely adjudicated in the state forum. Accordingly, the district court remanded the case to the New Jersey state court.