In a recent adversary proceeding in the chapter 11 case involving Ames Department Stores, Inc. (“Ames”), Lumbermens Mutual Casualty Company (“Lumbermen’s”) argued that under the McCarran-Ferguson Act, the issues in dispute between it and Ames should be decided in Illinois state court as part of Lumbermens’ insolvency proceedings.

The procedural history and the issues in the case between Ames and Lumbermens can be found here. In short, Ames filed a Chapter 11 bankruptcy in New York in 2001. In 2006, a dispute between Lumbermens and Ames commenced, which centered around the ownership of an approximate $8 million trust account. By 2012, Lumbermens entered state rehabilitation proceedings in Illinois. Lumbermens’ rehabilitator challenged the bankruptcy court’s jurisdiction over the adversary proceeding in New York federal court, arguing for the issues to be addressed in Illinois state court as part of Lumbermens’ ongoing insolvency proceeding. The court granted the rehabilitator’s motion to withdraw reference, and requested a report and recommendation on Lumbermens’ jurisdictional motion from a New York federal bankruptcy court.

The New York bankruptcy court first found that it had authority to hear all the claims at issue. Next, it determined whether the McCarran-Ferguson Act applied to “reverse – preempt” federal law. The court utilized a three part analysis to determine whether the McCarran-Ferguson Act applies and whether a federal statute can be reverse preempted by a state law. First, the court considered whether the Bankruptcy Code, the federal law at issue, specifically relates to the business of insurance, and concluded that it does not. Next, the court considered whether the state law at issue relates to the business of insurance, finding that the Illinois statute, relegating jurisdiction to the Illinois state court, was to ensure orderly and predictable liquidations of insurance companies. Thus, the court found that the state law at issue was enacted for the purpose of regulating the business of insurance. Finally, with respect to the third prong, whether allowing the case to proceed in federal bankruptcy court would “impair, invalidate, or supersede” Illinois state law, the court found that the bankruptcy court’s jurisdiction would not contravene Illinois law in any meaningful way, because any bankruptcy court judgment would remain subject to the priority scheme of the Illinois insurance insolvency proceeding. Therefore, the court held that hearing the adversary proceeding in federal bankruptcy court would not impair, invalidate or supersede Illinois insurance law, and thus, found that the Bankruptcy Code was not reverse – preempted by McCarran-Ferguson.

In re Ames Department Stores Inc., et al., No. 01-42217 (REG) (Bankr. S.D.N.Y. Dec. 7, 2015).