Hough v. Margulies et al

UNITED STATES BANKRUPTCY COURT 	FOR PUBLICATION
SOUTHERN DISTRICT OF NEW YORK
------------------------------------------------------X
In re: 	:
:
JOSHUA SIMON MARGULIES, 	: 	Chapter 7
: 	Case No. 10-14012 (SMB)
Debtor. 	:
------------------------------------------------------X
DENNIS HOUGH, 	:
:
Plaintiff, 	:
:
‒ against ‒ 	: 	Adv. Proc. No. 10-04050
:
JOSHUA SIMON MARGULIES and 	:
USAA CASUALTY INSURANCE 	:
COMPANY, 	:
:
Defendants. 	:
------------------------------------------------------X
MEMORANDUM DECISION DENYING USAA MOTION TO DISMISS
FOR LACK OF SUBJECT MATTER JURISDICTION, FOR PERMISSIVE
ABSTENTION TO STAY THIS ADVERSARY PROCEEDING
AND TO DISMISS FOR FAILURE TO STATE A CLAIM
A P P E A R A N C E S:
STANLEY K. SHAPIRO, ESQ.
225 Broadway, Suite 1803
New York, New York 10007
Attorney for Plaintiff Dennis Hough
OLSHAN GRUNDMAN FROME ROSENZWEIG
& WOLOSKY LLP
Park Avenue Tower
65 East 55th Street
New York, New York 10022
Thomas J. Fleming, Esq.
Fredrick J. Levy, Esq.
Howard J. Smith, Esq.
Of Counsel
‒ and ‒
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 1 of 17

2
ROBERT M. SPADARO, ESQ.
17 Battery Place, Suite 1103
New York, New York 10004
Attorneys for Defendant USAA Casualty
Insurance Company
SHAFFERMAN & FELDMAN LLP
286 Madison Avenue, Suite 502
New York, New York 10017
Joel M. Shafferman, Esq.
Of Counsel
Attorneys for Defendant Joshua Simon Margulies
STUART M. BERNSTEIN
UNITED STATES BANKRUPTCY JUDGE:
The plaintiff Dennis Hough was injured when he was struck by a car driven by the
debtor, Joshua Simon Margulies. He recovered a judgment against Margulies which Margulies’
liability insurer, defendant USAA Casualty Insurance Company (“USAA”), refuses to pay.
Hough has brought this adversary proceeding to declare the judgment non-dischargeable under
11 U.S.C. § 523(a)(6), or alternatively, to recover the unsatisfied judgment from USAA up to the
policy limits. USAA moved to dismiss for lack of subject matter jurisdiction, for permissive
abstention, to stay this adversary proceeding, or to dismiss the complaint for failure to state a
claim for relief. The Court concludes that it enjoys subject matter jurisdiction over Hough’s
claim against USAA, and declines to abstain in the exercise of discretion, stay this proceeding or
dismiss the complaint.
BACKGROUND
A. 	The State Court Proceedings
The relevant facts are not in dispute. Margulies struck Hough with his automobile on
August 3, 2000, (Complaint Objecting to Dischargeability Pursuant to 11 U.S.C. § 523(a)(6), for
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 2 of 17

3
Judgment Pursuant to Section 3420 of the New York State Insurance Law, and for Declaratory
Relief Pursuant to 11 U.S.C. § 105(a), dated Oct. 25, 2010 (“Adversary Complaint”), at ¶ 14
(ECF Doc. # 1)),1 and eventually pleaded guilty to misdemeanor assault in the third degree under
New York Penal Law § 120.00(2).2 (Id. at ¶ 17.) Three years later, Hough sued Margulies in
New York state court contending that Margulies negligently operated his vehicle. (Id. at ¶ 18.)
USAA failed to appear or answer on Margulies’ behalf, or commence a declaratory judgment
action that it did not have the duty to defend or indemnify. 3 (Id. at ¶¶ 19-20.) USAA also failed
to serve Hough with a notice of disclaimer pursuant to New York State Insurance Law §
3420(d)(2).4 (Id. at ¶ 21.) The state court entered a judgment on default on November 16, 2005
in the total amount of $4,868,263.56, inclusive of interest, costs and disbursements (the
“Judgment”). (Id. at ¶¶ 22, 24.)
The Judgment was never paid, and on May 4, 2007, Hough commenced a direct action
against USAA in New York state court to recover the unpaid Judgment up to the limits of the
1 	Citations to “ECF” refer to the docket in adversary proceeding no. 10-4050.
2 	A person is guilty of misdemeanor assault in the third degree when he “recklessly causes physical injury to
another person.” N.Y. P ENAL LAW § 120.00(2).
3 	USAA had issued an automobile insurance policy to insure Margulies and his automobile for injury to
another for up to $300,000, (Adversary Complaint at ¶¶ 6, 8), and an umbrella policy that insured Margulies for up
to $1 million. (Id. at ¶¶ 7, 9.) The two policies are referred to collectively as the “Policies,” and both were in effect
on August 3, 2000. (Id. at ¶ 10.)
4 	Section 3420(d)(2) provides as follows:
If under a liability policy issued or delivered in this state, an insurer shall disclaim liability or
deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type
of accident occurring within this state, it shall give written notice as soon as is reasonably possible
of such disclaimer of liability or denial of coverage to the insured and the injured person or any
other claimant.
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 3 of 17

4
Policies pursuant to § 3420 of the New York State Insurance Law (the “3420 Action”).5 Hough
moved for summary judgment, (id. at ¶ 31), and USAA opposed the motion arguing that the
Policies did not cover the Judgment because Margulies intentionally caused Hough’s injuries.
(Id. at ¶ 32.) Initially, the state court concluded that USAA had breached its duty to defend, and
could not, therefore, go behind the default judgment to raise defenses to Hough’s claim against
Margulies. (Decision & Order, dated July 1, 2010 (“July 2010 Order”), at 2.)6 However, the
defense to coverage did not implicate a defense to Hough’s claim against Margulies, whether
Margulies acted intentionally was never litigated and collateral estoppel did not bar USAA from
raising the intentional nature of Margulies’ conduct in the 3420 Action. (Id.) Finally,
Margulies’ plea to a crime with a criminal intent of recklessness did not foreclose a finding that
his actions fell within the Policies’ intentional actions exclusions. (Id.) In the end, whether
5 	Insurance Law § 3420 provides in pertinent part as follows:
(a) No policy or contract insuring against liability for injury to person, except as provided in
subsection (g) of this section, or against liability for injury to, or destruction of, property shall be
issued or delivered in this state, unless it contains in substance the following provisions or
provisions that are equally or more favorable to the insured and to judgment creditors so far as
such provisions relate to judgment creditors:
. . . .
(2) A provision that in case judgment against the insured or the insured’s personal representative
in an action brought to recover damages for injury sustained or loss or damage occasioned during
the life of the policy or contract shall remain unsatisfied at the expiration of thirty days from the
serving of notice of entry of judgment upon the attorney for the insured, or upon the insured, and
upon the insurer, then an action may, except during a stay or limited stay of execution against the
insured on such judgment, be maintained against the insurer under the terms of the policy or
contract for the amount of such judgment not exceeding the amount of the applicable limit of
coverage under such policy or contract.
. . . .
(b) Subject to the limitations and conditions of paragraph two of subsection (a) of this section, an
action may be maintained by the following persons against the insurer upon any policy or contract
of liability insurance that is governed by such paragraph, to recover the amount of a judgment
against the insured or his personal representative:
(1) any person who, or the personal representative of any person who, has obtained a judgment
against the insured or the insured’s personal representative, for damages for injury sustained or
loss or damage occasioned during the life of the policy or contract . . . .
6 	The July 2010 Order is attached as Exhibit A to the Adversary Complaint.
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 4 of 17

5
Margulies intentionally caused Hough’s injuries was a question of fact that precluded summary
judgment. (Id.)
Hough appealed from the July 2010 Order,7 and also moved to renew and reargue his
motion for summary judgment. (Adversary Complaint at 7, n.1.) The state court granted
reargument and vacated the July 2010 Order, although for the most part, reaffirmed its prior
determination denying the motion for summary judgment. (See Decision & Order, filed May 13,
2011 (“May 2011 Order”), at 2-3.)8 The one exception is that it granted summary judgment to
the extent of dismissing USAA’s defense that Margulies failed to cooperate. (Id. at 3.) The
Appellate Division affirmed the May 2011 Order earlier this year. See Hough v. USAA Cas. Ins.
Co., 940 N.Y.S.2d 41, 42 (N.Y. App. Div. 2012).
B. 	The Bankruptcy Case
Margulies filed this chapter 7 case on July 26, 2010, and received his discharge on March
17, 2011. In the interim, Hough filed this adversary proceeding asserting a single claim for
alternative relief. He contends that Margulies caused his injuries willfully and maliciously, and
the Judgment is not dischargeable under 11 U.S.C. § 523(a)(6). Alternatively, Margulies did not
intentionally cause his injuries, and Hough is entitled to recover under the Policies to the extent
of their limits. Margulies moved for judgment on the pleadings and for summary judgment, and
the Court denied his motion. Margulies has moved to reargue the denial of his motion for
judgment on the pleadings, and that motion will be addressed in a separate decision.
7 	The Appellate Division dismissed this appeal as abandoned. See Hough v. USAA Casualty Ins. Co., 940
N.Y.S.2d 41, 42 (N.Y. App. Div. 2012).
8 	The May 2011 Order is attached as Exhibit 1 to Defendant USAA Casualty Insurance Company’s Support
for and Response to the Debtor-Defendant’s Motion for Judgment on the Pleadings and Summary Judgment
Dismissing the Complaint, dated Dec. 14, 2011 (ECF Doc. # 27).
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 5 of 17

6
USAA filed its own motion to dismiss for lack of subject matter jurisdiction, for
permissive abstention, to stay this adversary proceeding and to dismiss for failure to state a
claim. Its principal contention is that the resolution of the insurance litigation between itself and
Hough will not affect the administration of the case. Even if jurisdiction exists, the Court should
abstain from deciding the insurance coverage dispute as part of the adversary proceeding, and
stay this adversary proceeding pending the resolution of the 3420 Action. Finally, USAA
contends that the complaint is legally insufficient.
DISCUSSION
A. 	Subject Matter Jurisdiction
When considering a motion to dismiss for lack of subject matter jurisdiction under FED.
R. CIV. P. 12(b)(1), a court must accept the material factual allegations in the complaint as true,
but need not draw inferences favorable to the plaintiff. J.S. v. Attica Cent. Schs., 386 F.3d 107,
110 (2d Cir. 2004), cert. denied, 544 U.S. 968 (2005); Shipping Fin. Servs. Corp. v. Drakos, 140
F.3d 129, 131 (2d Cir. 1998). A court may also consider materials outside of the pleadings to
resolve any jurisdictional disputes, but cannot rely on conclusory or hearsay evidence. J.S., 386
F.3d at 110; Zappia Middle East Constr. Co. v. Emirate of Abu Dhabi, 215 F.3d 247, 253 (2d
Cir. 2000). The party asserting that the court has subject matter jurisdiction bears the burden of
proving it. Robinson v. Overseas Military Sales Corp., 21 F.3d 502, 507 (2d Cir. 1994); Truong
v. Litman, No. 06 Civ. 1431(SHS), 2006 WL 3408573, at *3 (S.D.N.Y. Nov. 22, 2006), aff’d,
312 Fed. Appx. 377 (2d Cir. 2009). Where the court “relies solely on the pleadings and
supporting affidavits, the plaintiff need only make a prima facie showing of jurisdiction.”
Robinson, 21 F.3d at 507; accord CutCo. Indus., Inc. v. Naughton, 806 F.2d 361, 364 (2d Cir.
1986).
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 6 of 17

7
Consideration of the bankruptcy court’s subject matter jurisdiction begins with 28 U.S.C.
§ 1334. Subsection (a) grants the district court exclusive jurisdiction over bankruptcy cases.
Subsection (b) grants the district court “original but not exclusive jurisdiction of all civil
proceedings arising under title 11, or arising in or related to cases under title 11.” The district
court may refer its bankruptcy jurisdiction to the bankruptcy court. 28 U.S.C. § 157(a). The
United States District Court for the Southern District of New York has referred its bankruptcy
jurisdiction to this Court pursuant to its Amended Standing Order of Reference, 12 Misc. 00032
(S.D.N.Y. Jan. 31, 2012).
Proceedings that arise under title 11, or arise in a case under title 11 correspond to the
Court’s “core” jurisdiction. See 28 U.S.C. § 157(b)(1) (“Bankruptcy judges may hear and
determine . . . all core proceedings arising under title 11, or arising in a case under title 11 . . . .”);
Wood v. Wood (In re Wood), 825 F.2d 90, 96 (5th Cir. 1987) (“[S]ection 157 apparently equates
core proceedings with the categories of ‘arising under’ and ‘arising in’ proceedings.”).
Generally, a core proceeding is one that invokes a substantive right under title 11, or could only
arise in the context of a bankruptcy case. Binder v. Price Waterhouse & Co., LLP (In re Resorts
Int’l, Inc.), 372 F.3d 154, 162-63 (3d Cir. 2004); Wood, 825 F.2d at 97; Liberty Mut. Ins. Co. v.
Lone Star Indus., Inc., 313 B.R. 9, 16 (D. Conn. 2004).
A proceeding is “related to” a case under title 11, and falls within its non-core
jurisdiction,9 if the outcome might have a “conceivable effect” on the estate. Publicker Indus.
Inc. v. United States (In re Cuyahoga Equip. Corp.), 980 F.2d 110, 114 (2d Cir. 1992); see U.S.
Brass Corp. v. Travelers Ins. Group, Inc. (In re U.S. Brass Corp.), 301 F.3d 296, 304 (5th Cir.
9 	“Related to” proceedings correspond to the Court’s non-core jurisdiction. Resorts Int’l, 372 F.3d at 162;
see Wood, 825 F.2d at 97.
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 7 of 17

8
2002); Pacor, Inc. v. Higgins (In re Pacor, Inc.), 743 F.2d 984, 994 (3d Cir. 1984), overruled on
other grounds by Things Remembered, Inc. v. Petrarca, 516 U.S. 124 (1995). Thus, “[a]n action
is related to the bankruptcy case if the outcome could alter the debtor’s rights, liabilities, options,
or freedom of action (either positively or negatively) and which in any way impacts upon the
handling and administration of the bankrupt estate.” Pacor, 743 F.2d at 994; accord Beebe Int’l,
Inc. v. French Am. Banking Corp. (In re Wedtech Corp.), 72 B.R. 313, 315-16 (Bankr. S.D.N.Y.
1987). If the action between third parties will have a collateral estoppel effect on the debtor, the
third party action is “related to” the bankruptcy case for jurisdictional purposes. Mich. Emp’t
Sec. Comm’n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132, 1143 (6th Cir.
1991). Conversely, the bankruptcy court lacks “related to” jurisdiction over proceedings that
have no effect on the debtor. Celotex Corp. v. Edwards, 514 U.S. 300, 308 n.6 (1995).
It is well settled that “the debtors’ rights under its insurance policies are property of a
debtor’s estate under § 541(a) of the Code.” St. Clare’s Hosp. & Health Ctr. v. Ins. Co. of N. Am. (In
re St. Clare’s Hosp. & Health Ctr.), 934 F.2d 15, 18-19 (2d Cir. 1991); accord MacArthur Co. v.
Johns-Manville Corp., 837 F.2d 89, 92 (2d Cir.) (“Numerous courts have determined that a
debtor’s insurance policies are property of the estate, subject to the bankruptcy court’s
jurisdiction.”), cert. denied, 488 U.S. 868 (1988). A suit by a third-party insured against the
insurer asserting derivative rights based on the conduct of the debtor-insured is inseparable from
the debtor’s own coverage and “well within the Bankruptcy Court’s jurisdiction over [the
debtor’s] assets.” Manville, 837 F.2d at 92-93. The bankruptcy court also has jurisdiction over
third-party non-debtor claims that affect the estate’s rights in its insurance policies. Quigley Co.,
Inc. v. Law Offices of Peter G. Angelos (In re Quigley Co.), 676 F.3d 45, 53 (2d Cir. 2012).
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 8 of 17

9
These principles lead to the conclusion that the Court has subject matter jurisdiction over
the coverage dispute between Hough and USAA asserted in this adversary proceeding. First, the
Policies are property of the estate notwithstanding Margulies’ failure to list them in his schedule
of personal property (Schedule B). Second, Hough stands in Margulies’ shoes; his rights against
USAA are derivative, no more and no less than Margulies’ rights against USAA. See D’Arata v.
New York Cent. Mut. Fire Ins. Co., 564 N.E.2d 634, 637 (N.Y. 1990); Wenig v. Glen Falls
Indem. Co., 61 N.E.2d 442, 443 (N.Y. 1945).
Third, the disposition of the coverage question may have a collateral estoppel effect on
the dischargeability issue. To prove that Margulies acted willfully under 11 U.S.C. § 523(a)(6),
Hough must demonstrate that Margulies deliberately intended to injure Hough and not merely
that Margulies committed an intentional act that unintentionally inflicted injuries on Hough. See
Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). In order to establish malice, Hough must prove
that Margulies acted wrongfully and “without just cause or excuse, even in the absence of
personal hatred, spite or ill will.” Navistar Fin. Corp. v. Stelluti (In re Stelluti), 94 F.3d 84, 87
(2d Cir. 1996); accord Ball v. A.O. Smith Corp., 451 F.3d 66, 69 (2d Cir. 2006). Malice may be
implied from the acts and conduct of the debtor in the context of the surrounding circumstances.
Stelluti, 94 F.3d at 88. If Margulies drove his vehicle into Hough with the intent to injure him,
one can reasonably infer that he did it without “just cause.”
The answer to the coverage question will depend, in the first instance, on the terms of the
Policies; they have not been provided to the Court so the precise inclusionary or exclusionary
language remains a mystery. Nevertheless, the May 2011 Order acknowledged that the Policies
excluded intentional acts, and this is consistent with the public policy of New York. See
Messersmith v. Am. Fidelity Co., 133 N.E. 432, 433 (N.Y. 1921) (Cardozo, J.) (An insurance
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 9 of 17

10
liability policy cannot be read to cover willful injuries because “the fundamental principle that no
one shall be permitted to take advantage of his own wrong would import the limitation.”). The
“willful and malicious” language is closely related to the concept of “intentional” torts which
“generally require that the actor intend ‘the consequences of an act,’ not simply ‘the act itself,’”
Kawaauhau, 523 U.S. at 61-62 (quoting RESTATEMENT (SECOND) OF TORTS § 8A cmt. a at 15
(1964) (emphasis added in Kawaauhau)), and courts have read terms like “accident” and
“occurrence” in liability policies to exclude intentional torts, i.e., conduct intended to cause an
injury, but to cover intentional conduct that causes an unintended injury. E.g., Cowan v. Ernest
Codelia, P.C., No. 98 Civ. 5548 (JGK), 1999 WL 1029729, at *7 (S.D.N.Y. Nov. 10, 1999)
(“There is a difference between intentional acts and intentional injuries: Intentional acts may
result in unintended injuries, and such injuries may be covered, even though the act that caused
the injury was intentional.”); Miller v. Cont’l Ins. Co., 358 N.E.2d 258, 259-60 (N.Y. 1976)
(decedent’s intentional act of introducing a fatal heroin overdose into his body was an “accident”
covered under an accidental death policy); Allegany Co-op Ins. Co. v. Kohorst, 678 N.Y.S.2d
424, 425 (N.Y. App. Div. 1998) (“In deciding whether a loss is the result of an accident, it must
be determined, from the point of view of the insured, whether the loss was unexpected, unusual
and unforeseen . . . . Accidental results can flow from intentional acts. The damage in question
may be unintended even though the original act or acts leading to the damage were intentional . .
. . There is coverage if the damages alleged in the complaint arise out of a chain of unintended
though foreseeable events that occurred after the intentional act.”) (citations and internal
quotation marks omitted); Salimbene v. Merchants Mut. Ins. Co., 629 N.Y.S.2d 913, 916 (N.Y.
App. Div. 1995) (“[W]hen the damages alleged in the complaint ‘are the intended result which
flows directly and immediately from [the insured’s] intentional act, rather than arising out of a
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 10 of 17

11
chain of unintended though foreseeable events that occurred after the intentional act’, there is no
accident, and therefore, no coverage.”) (quoting Mary & Alice Ford Nursing Home Co. v.
Fireman’s Ins. Co., 446 N.Y.S.2d 599, 601 (N.Y. App. Div.), aff’d, 439 N.E.2d 883 (1982)). In
short, in light of the circumstances of this case, the definition of “willful and malicious” injuries
under bankruptcy law and “intentional” injuries under state insurance law appear to be identical,
and USAA has not pointed to the language of the Policies or anything else that suggests the
contrary.10
Accordingly, the Court concludes that it has subject matter jurisdiction over the coverage
claim asserted by Hough against USAA in this adversary proceeding.
B. 	Permissive Abstention and Stay
Pursuant to 28 U.S.C. § 1334(c)(1), a court may abstain from hearing a proceeding
within its jurisdiction “in the interest of justice, or in the interest of comity with State courts or
respect for State law.” Permissive or discretionary abstention was intended to codify non-
bankruptcy judicial abstention doctrines, Coker v. Pan Am. World Airways (In re Pan Am.
Corp.), 950 F.2d 839, 845 (2d Cir. 1991), which recognizes “the virtually unflagging obligation
10 As Hough argues, he may be precluded from prosecuting the dischargeability action if the state court
determines that the debtor did not act intentionally within the meaning of the policy’s exclusion. (Plaintiff Dennis
Hough’s Response and Opposition to the Motion of Defendant USAA [], dated Feb. 13, 2012 (“Hough Opposition”)
at 6 (ECF Doc. # 38); see Hinchey v. Sellers, 165 N.E.2d 156, 159 (N.Y. 1959) (by virtue of the indemnitor-
indemnitee relationship between the insurer and the insured, a prior determination in coverage action brought by
victim against insurer that driver was driving vehicle without the insured’s permission collaterally estopped victim
from arguing in subsequent suit against insured that driver had insured’s permission to use vehicle).) He also posits
that because that the debtor and USAA are in privity, see D’Arata, 564 N.E.2d at 664-65; Bonde v. Gen. Sec. Ins.
Co., 285 N.Y.S.2d 675, 678-79 (N.Y. Sup. Ct. 1967), the debtor will be bound in the dischargeability action if the
state court concludes that he acted intentionally in the 3420 Action. (Hough Opposition at 6-7.) Although USAA
correctly asserts that the dischargeability issue will be determined under bankruptcy law while the coverage issue
will turn on state law, it has failed to explain the difference, and there does not appear to be any under the facts
presented.
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 11 of 17

12
of the federal courts to exercise the jurisdiction given them.” Colorado River Water
Conservation Dist. v. United States, 424 U.S. 800, 817 (1976).
The movant bears the burden of establishing that permissive abstention is warranted.
Bickerton v. Bozel S.A. (In re Bozel, S.A.), 434 B.R. 86, 102 (Bankr. S.D.N.Y. 2010). The
factors that inform the Court’s discretion include the following:
(1) the effect or lack thereof on the efficient administration of the estate if a Court
recommends abstention, (2) the extent to which state law issues predominate over
bankruptcy issues, (3) the difficulty or unsettled nature of the applicable state law,
(4) the presence of a related proceeding commenced in state court or other
nonbankruptcy court, (5) the jurisdictional basis, if any, other than 28 U.S.C. §
1334, (6) the degree of relatedness or remoteness of the proceeding to the main
bankruptcy case, (7) the substance rather than form of an asserted ‘core’
proceeding, (8) the feasibility of severing state law claims from core bankruptcy
matters to allow judgments to be entered in state court with enforcement left to
the bankruptcy court, (9) the burden of [the court’s] docket, (10) the likelihood
that the commencement of the proceeding in a bankruptcy court involves forum
shopping by one of the parties, (11) the existence of a right to a jury trial, and (12)
the presence in the proceeding of nondebtor parties.
Peterson v. 610 W. 142 Owners Corp. (In re 610 W. 142 Owners Corp.), No. 94 B 44488(JGH),
1999 WL 294995, at *3 (S.D.N.Y. May 11, 1999) (quoting In re Craft Architectural Metals
Corp., 115 B.R. 423, 432 (E.D.N.Y. 1989)); accord New York City Emps. Ret. Sys. v. Ebbers (In
re Worldcom Secs. Litig.), 293 B.R. 308, 332 (S.D.N.Y. 2003); Masterwear Corp. v. Rubin
Baum Levin Constant & Friedman (In re Masterwear Corp.), 241 B.R. 511, 520 (Bankr.
S.D.N.Y. 1999). “Not all of these factors need be applied, however.” In re Portrait Corp. of
Am., 406 B.R. 637, 642 (Bankr. S.D.N.Y. 2009) (citing Cody, Inc. v. County of Orange & Town
of Woodbury (In re Cody, Inc.), 281 B.R. 182, 190 (S.D.N.Y. 2002)). In addition, the “balance
[of the factors] should be ‘heavily . . . in favor of the exercise of jurisdiction.’” Id. (quoting
Eastern Air Lines, Inc. v. Int’l Assoc. of Machinists & Aerospace Workers, AFL–CIO (In re
Ionosphere Clubs, Inc.), 108 B.R. 951, 954 (Bankr. S.D.N.Y. 1989)).
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 12 of 17

13
USAA has failed to sustain its burden of showing that permissive abstention is
appropriate, and given the Court’s unflagging obligation to exercise the jurisdiction given to it, I
decline to abstain in the exercise of discretion. For the reasons already discussed, the coverage
issue raised in the 3420 Action could have a dispositive effect on the scope of the debtor’s
discharge. Hence, it will affect the administration of this estate and the debtor’s future. And
although the coverage issue is controlled by state law, the issue is not a difficult one and
coincides with the issue of dischargeability under federal bankruptcy law. The issue in the 3420
Action is directly related to Margulies’ bankruptcy case, and because of this interrelatedness,
there is no feasible way to sever the coverage claim from the dischargeability claim to allow the
state court to determine the former without also determining the latter.
I do not view Hough’s adversary complaint as an attempt to forum shop. He commenced
the 3420 Action against USAA prior to the bankruptcy after he had obtained the Judgment.
Margulies was not a party to the 3420 Action and there is no reason why he should be. Once
bankruptcy ensued, Hough commenced this adversary proceeding because it was the only way to
join all of the required parties in a single lawsuit involving two disputes that raised the same
legal and factual issues.
Finally, the denial of the abstention motion does not place an undue burden on the
Court’s docket.
I recognize that several of the factors weigh in favor of abstention. The 3420 Action has
been pending for several years, involves a non-core, third party dispute to which the debtor is not
a party (although Hough stands in Margulies’ shoes), and the Court’s jurisdiction is solely based
on 28 U.S.C. § 1334. Finally, USAA has demanded a jury trial. This Court cannot conduct a
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 13 of 17

14
jury trial unless all parties expressly consent, 28 U.S.C. § 157(e),11 and USAA’s position implies
that it will not consent. 	However, these considerations do not override the factors that weigh in
favor of exercising jurisdiction over the coverage dispute between Hough and USAA.
Furthermore, the parties can solve the jury trial issue by asking the District Court to withdraw the
reference and try the coverage dispute and dischargeability action in one trial. Alternatively, this
Court can try the dischargeability action with all parties present, and the resolution of the
dischargeability action may dispose of any factual issues in the coverage action.
Furthermore, the cases cited by USAA in the Defendant USAA Casualty Insurance
Company’s Motion for Partial Abstention to Stay the Proceeding, dated Feb. 3, 2012 (“Stay
Motion”) (ECF Doc. # 34) are distinguishable. Each involved a situation in which the creditor
brought a pre-petition tort claim against the debtor in state court, the creditor subsequently filed a
dischargeability action in the bankruptcy court based on the same tort, and the bankruptcy court
abstained from deciding the dischargeability matter until the state court first decided the tort
claim. See Wallace v. Guretzky, No. CV-09-0071(SJF), 2009 WL 3171767 (E.D.N.Y. Sept. 29,
2009); Williams v. Horowitz (In re Horowitz), Bankr. No. 8:09-75567-ast, 2010 WL 814103
(Bankr. E.D.N.Y. Mar. 1, 2010); Fowler & Huntting Co. v. Granoff (In re Granoff), 242 B.R.
216 (Bankr. D. Conn. 1999); Barbaro v. Wider (In re Wider), Bankr. No. 09-72993-ast., 2009
WL 4345411 (Bankr. E.D.N.Y. Nov. 30, 2009); Roberts v. Goidel (In re Goidel), 150 B.R. 885
(Bankr. S.D.N.Y. 1993); Blackmer v. Richards (In re Richards), 59 B.R. 541 (Bankr. N.D.N.Y.
11 	Section 157(e) states:
If the right to a jury trial applies in a proceeding that may be heard under this section by a
bankruptcy judge, the bankruptcy judge may conduct the jury trial if specially designated to
exercise such jurisdiction by the district court and with the express consent of all the parties.
The District Court designated the judges of this Court to conduct jury trials by order dated Dec. 7, 1994.
See General Order M-139 (Bankr. S.D.N.Y.).
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 14 of 17

15
1986). Here, the debtor is not a party to the 3420 Action, and the underlying tort issue has been
resolved by the Judgment.
The refusal to abstain also disposes of USAA’s motion to stay this adversary proceeding
pending the disposition of the 3420 Action. USAA was concerned, in part, that the Appellate
Division might reverse the May 2011 Order and conclude that USAA was collaterally estopped
from litigating whether Margulies acted intentionally, raising the chance that it could prevail in
the adversary proceeding but lose in the 3420 Action. (Stay Motion at ¶ 3.) The Appellate
Division unanimously affirmed the May 2011 Order, rendering this argument moot. However,
USAA also contends that it should not have to defend the same action brought by Hough in two
different courts, and faces the possibility of inconsistent and adverse results because the
standards for “willful and malicious” injuries and “intentional” injuries may differ. (Id. at ¶ 2.)
USAA’s concern about fighting the same battle in a two front war is a reasonable one.
Hough cannot prosecute the same dispute in two different courts, particularly since inconsistent
determinations of the same issue are always possible. I have interpreted the initiation of Hough’s
adversary proceeding as his determination to prosecute the coverage issue here rather than in
state court. Accordingly, while the Court will deny the stay for the same principal reason that it
refused to abstain in the exercise of discretion—a state court ruling on the coverage issue could
collaterally estop Margulies (and Hough) in the dischargeability suit—USAA may renew its stay
motion if Hough does not take steps to discontinue the 3420 Action without prejudice, or
succeed in placing it on the state court’s suspense calendar, or its equivalent.
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 15 of 17

16
C. 	Failure to State a Claim
The final prong of USAA’s original motion challenged the legal sufficiency of Hough’s
claim and requested a more definite statement. USAA objects to alternative claims for
inconsistent relief stated in a single count and contends that Hough failed to state a claim against
USAA because the Adversary Complaint did not mention § 3420 of the New York Insurance
Law and the ad damnum clause contains contradictory statements relating to the relief sought
against USAA.
Rule 8(d)(2) of the Federal Rules of Civil Procedure provides:
A party may set out 2 or more statements of a claim or defense alternatively or
hypothetically, either in a single count or defense or in separate ones. If a party
makes alternative statements, the pleading is sufficient if any one of them is
sufficient.
The Adversary Complaint alleges that Margulies struck Hough with his vehicle causing him
serious injury, Hough sued Margulies, USAA failed to defend that suit, Hough recovered the
Judgment, more than thirty days passed, and under New York Insurance Law § 3420, USAA is
liable to Hough up to the limits of the Policies. Thus, Hough specifically invoked Insurance Law
§ 3420 as the basis of USAA’s liability. Furthermore, USAA has argued that Hough has asserted
the same claims against it in the 3420 Action and this adversary proceeding. Accordingly, the
Adversary Complaint states a claim for relief against USAA, and under Rule 8(d)(2), the single
claim for relief is legally sufficient.
In addition, although paragraph 38 and one portion of the ad damnum clause demand a
judgment against USAA in the amount of the Judgment, paragraph 28 acknowledges that under
New York Insurance Law § 3420 the amount of any recovery is subject to the limitations in the
Policies. Moreover, paragraph 39 alleges that Hough has been damaged in the amount of the
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 16 of 17

17
Judgment up to the limits in the Policies. The Court must construe pleadings so as to do justice,
FED. R. CIV. P. 8(e), and I construe Hough’s alternative claim against USAA—as USAA does—
to recover the Judgment up to the limits of the Policies based upon the unintentional injuries
caused by Margulies when he struck Hough with his vehicle. Accordingly, the Adversary
Complaint states a claim for relief against USAA.
The parties are directed to settle an order consistent with this decision.
Dated: New York, New York
August 13, 2012
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
10-04050-smb Doc 52 Filed 08/13/12 Entered 08/13/12 10:46:38 Main Document
Pg 17 of 17