Opinion
Case No. 00-37234-SAF-7, Adversary No. 04-3312.
March 28, 2005
MEMORANDUM OPINION AND ORDER
In this adversary proceeding, M. Diane Koken, Insurance Commissioner of Pennsylvania as Liquidator of Reliance Insurance Company, Amwest Surety Insurance Co., and Swiss Reinsurance America Corp., seek a declaration that funds held by John H. Litzler, the Chapter 7 trustee of the bankruptcy estate of TIC United Corp., in a segregated account, should be turned over to Koken for payment of claimants under Reliance insurance policies issued to TIC. Litzler contends that the funds constitute property of the bankruptcy estate. On January 7, 2005, Litzler filed a motion for summary judgment. Also on January 7, 2005, Koken with Amwest and Swiss Re filed a motion for summary judgment. Both motions are contested. The court held a hearing on the motions on February 7, 2005.
The parties agree that the facts are not in dispute, leaving questions of law to be determined by the court. For that reason, the court does not discuss the summary judgment standards.
Before TIC filed its bankruptcy case, Reliance provided business automobile/truck, commercial, general liability, workers' compensation, and employer's liability insurance coverage to TIC between August 12, 1997, and August 12, 2000. Under the Reliance insurance policies, TIC would pay $1,000,000 per accident deductible or would reimburse Reliance in the event Reliance paid a claim. TIC obtained two irrevocable letters of credit, in the amounts of $1,600,000 and $1,000,000, to secure that deductible/reimbursement obligation. In addition, TIC obtained a bond in the amount of $2,750,000 from Amwest, reinsured or guaranteed by Swiss Re.
On November 7, 2000, TIC filed a petition for relief under Chapter 11 of the Bankruptcy Code. Johnny D. Altman and the Whitaker Family filed claims against TIC and lodged claims under the Reliance policies. By orders entered on August 31, 2001, and September 7, 2001, this court approved settlements of the Altman and Whitaker claims by TIC and Reliance. AmWest and Swiss Re appeared at the hearing to approve the settlements. The Whitaker settlement required that Reliance pay $2,000,000. The Altman settlement required that Reliance pay $1,000,000.
Pursuant to the orders, on October 1, 2001, Reliance drew the full amounts of the letters of credit, depositing $2,600,000 on October 9, 2001, in a Reliance general depository account at Chase Manhattan Bank. Meanwhile, by order entered October 3, 2001, a Pennsylvania court ordered the liquidation of Reliance, appointing Koken as the liquidator.
By order entered August 12, 2002, this court confirmed TIC's third amended plan of reorganization. Koken entered an agreement with TIC to coordinate payment of claims under the Reliance policies and in the bankruptcy case. The plan included that agreement.
The plan classified insurance claims against the Reliance policies as class 4.02. Plan, § 2.6(b). The plan directed Reliance to return to TIC "the collateral represented by the cash proceeds of the Debtor's letter of credit in the approximate amount of $2.6 million . . . which will be placed into a segregated/dedicated fund ("Dedicated Fund") for the benefit of [Reliance policy] claimants. . . . Distribution of the Dedicated Fund will be the sole responsibility of the Debtor, the Reorganized Debtor or the Creditors' Trust as the case may be pursuant to the Plan." Plan, § 2.6(b)(2)(a). In addition, the plan directed Swiss Re to "tender a cash payment of $1.1 million of [the] bond . . in favor of Reliance as obligee to Reliance as payee to be placed into the Dedicated Fund." Plan, § 2.6(b)(2)(b).
The plan provides:
The Dedicated Fund of $3.7 million will discharge the Debtor's, Reliance's and Swiss Reinsurance America Corporation's obligations to Altman and Whitaker, assumed under this Plan provision . . ., completely upon their receiving payment from the Dedicated Fund. Payment to other Claimants against the Debtor from the Dedicated Fund shall discharge their claims as Class 4.02 Claimants under the Plan; if payment as a Class 4.02 Claimant does not fully satisfy the Allowed Claim, further payments to such Claimants under the Plan shall reduce any Claim assertable against Reliance . . . at a ratio of four times each dollar paid to the claimant from the Dedicated Fund. To the extent a claimant is not fully paid, the remainder can be asserted as a claim . . . through the proof of claim process with Reliance.
Plan, § 2.6(b)(2)(c). If not paid in full from the Dedicated Fund, the Reliance claimants could assert a general unsecured claim against TIC for the balance of the claim. They would receive a proportionate share of distributions under Class 5 of the plan, with a four to one dollar ratio credited against Reliance. Plan, § 2.6(b)(2)(e).
The plan directed the manner and timing of the payments from Reliance to fund the Dedicated Fund. Plan, §§ 2.6(b)(2)(h) and (I).
Pursuant to separate agreements, TIC held $2,000,000 in the Dedicated Fund "in trust" for Whitaker and $1,000,000 "in trust" for Altman. Plan, §§ 2.6(b)(2)(j) and (k).
Following confirmation and pursuant to the plan, Koken wire transferred $2,600,000 from a Reliance general depository account at Mellon Bank to a TIC account at First Union National Bank, Charlotte, North Carolina, for payment to claimants holding insurance claims against Reliance, as defined in the plan. On August 16, 2002, Reliance drew $1,100,000 on the AmWest bond. Reliance received a wire transfer in that amount from Swiss Re, which Koken deposited in a Reliance general depository account at Mellon Bank. On September 10, 2002, Reliance transferred $1,100,000 from a different Mellon Bank account to TIC.
From the Dedicated Fund, TIC paid the Altman and Whitaker claims and three other Reliance claims, for a total distribution of $3,148,750.
The plan never became effective. Litzler v. CitiCapital Commercial Corp. (In re TIC United Corp.), 305 B.R. 270, 272 (Bankr. N.D. Tex. 2003). On March 3, 2003, the court converted the case to a case under Chapter 7 of the Code. From November 7, 2000, until March 3, 2003, TIC was a debtor in possession under and subject to the provisions of the Code. At the time of conversion, the Dedicated Fund held a balance of $551,250. Although the plan did not become effective, once confirmed, the plan's terms are binding. Id., at 274.
In their first amended complaint, Koken, AmWest and Swiss Re request declarations that the proceeds in the Dedicated Fund are not assets of the TIC bankruptcy estate, that the proceeds are assets of the Reliance liquidation estate, that Litzler turn over the proceeds to Koken, and that Litzler not interfere with the Reliance claims process. Alternatively, they seek declarations that the funds "are impressed with the express trust that was created for the benefit of claimants" under the Reliance policies, or that Reliance has a first, perfected valid security interest in the proceeds remaining in the Dedicated Fund. Under either alternative, they seek declarations that Litzler turn over the proceeds to Koken and that Litzler not interfere with the Reliance liquidation estate.
In his summary judgment motion, Litzler asserts that Reliance does not have a perfected security interest in the proceeds remaining in the Dedicated Fund and that the Fund is not a trust. As a result, Litzler maintains that the proceeds became property of the TIC bankruptcy estate available for the general administration of the estate. In their motion, Koken, AmWest, and Swiss Re contend that the Fund is a trust, with the proceeds constituting trust property that must be returned to Reliance. They maintain that the funds had to be transferred to Koken for use in the Reliance liquidation proceeding, even if Reliance claims remain unpaid in the TIC bankruptcy case. While the court will address these contentions, as a result of a final, binding order of this court, the proceeds in the Dedicated Fund must be used to pay Reliance claims filed in the TIC bankruptcy case. To the extent that proceeds remain after the payment of the Reliance claims, the proceeds must be returned to Koken for use in the Reliance liquidation for TIC claims.
Although the plan did not become effective, the Dedicated Fund had been established as mandated by the plan. In that regard, the plan's terms are binding. The court did not make the provision for payments to Reliance claimants from the Dedicated Fund conditioned on the effective date of the plan. To the contrary, the treatment of Reliance claims operated separately from the other provisions of the plan.
As a court-approved contract, the court must accord the plain meaning to the unambiguous provision of the plan concerning class 4.02. A confirmed plan is a contract, binding on the parties. 11 U.S.C. § 1141; Matter of Texas General Petroleum Corp., 52 F.3d 1330, 1335-1336 (5th Cir. 1995). Contract rules of construction apply to the plan. Under general rules of contract construction, the parties' intent is determined from the four corners of the contract. In re Independent American Real Estate, Inc., 146 B.R. 546 (Bankr. N.D. Tex. 1992). The plan is not ambiguous. The ordinary meaning of its language must therefore govern. Reliance and Swiss Re had been mandated to transfer $3,600,000 to TIC for the Dedicated Fund prior to the effective date of the plan. Reliance and Swiss Re complied with that mandate. TIC had been mandated to establish with that $3,600,000 a segregated/dedicated fund for the benefit of the Reliance claimants. TIC complied with that mandate. Consequently, the Dedicated Fund had been established pursuant to the plan prior to the effective date set for the other plan provisions.
In addition, the plan contemplated that the Dedicated Fund could be administered by the debtor, TIC, as contrasted with a Reorganized Debtor or a Creditors' Trust. Plan, § 2.6(b)(2)(a) ("Distribution of the Dedicated Fund will be the sole responsibility of the Debtor, the Reorganized Debtor or the Creditors' Trust as the case may be pursuant to the Plan"). As the plan did not otherwise become effective, there was no Reorganized Debtor or Creditors' Trust. TIC remained the debtor. The plan directed that the debtor distribute the proceeds of the Dedicated Fund. TIC did so. With the conversion to Chapter 7, Litzler, as the trustee, assumed the debtor's obligations under the Dedicated Fund.
Furthermore, to assure that Reliance claimants received their distribution, § 2.6(b) addressed payment of the Whitaker and Altman court-approved settled claims, irrespective of the other plan provisions. The plan accomplished that goal by establishing trusts for the Whitaker and Altman claims. TIC fulfilled the trust obligations to Whitaker and Altman, thereby extinguishing the trust subsets of the Dedicated Fund.
This case must be contrasted with the CitiCapital case cited above. In this case, the plan, as confirmed by order of this court, compelled the acts to establish and implement the Dedicated Fund, irrespective of the effective date of the plan. In CitiCapital, the effective date not having occurred, the court had to consider the actions of the parties, with TIC restricted by the Code's provisions for a debtor in possession. The parties did not act in compliance with either the plan or the Code in CitiCapital, whereas the parties have acted in compliance with the plan and the Code in this case.
The Dedicated Fund must be used by Litzler to pay Reliance claims. When Litzler pays Reliance claims, Koken must apply the four-fold credit against any corresponding TIC claims lodged in the Reliance liquidation. Litzler reports that there may indeed be outstanding Reliance claims in the TIC bankruptcy case that would be subject to the Dedicated Fund. The court does not understand Koken to contest that proposition. Indeed, the court has received a letter from a claimant asserting a right to a distribution from the Dedicated Fund. Although outside the record of this adversary proceeding, Koken, by responding letter, acknowledged that the claim might exist.
The Dedicated Fund must be used for its "dedicated" purpose. The Dedicated Fund must be used to pay Reliance claims in the TIC bankruptcy case. Litzler, as successor to TIC, must perform the obligation imposed on the debtor by the provisions for the Dedicated Fund. Should any amount remaining in the Dedicated Fund not be needed to pay those claims, those proceeds must be returned to Koken for use in the Reliance liquidation for TIC claims and any related claims as provided by Pennsylvania law.
This application of the Dedicated Fund provisions of the plan does not conflict with the McCarran-Ferguson Act. Koken, the Insurance Commissioner of Pennsylvania, agreed to the terms of the Dedicated Fund.
The provisions of the court-ordered confirmed plan establishing the Dedicated Fund are therefore binding on the parties. Koken has not filed a motion for relief from the bankruptcy court nor filed an appeal of the order confirming the plan. See Celotex Corp. V. Edwards, 514 U.S. 300, 313 (1995).
Even though the application of the contractually-binding provisions of the Dedicated Fund resolves the dispute, for purposes of completeness, the court addresses the other issues raised by the parties in their respective summary judgment motions.
Koken, AmWest and Swiss Re contend that the Dedicated Fund is an express trust. Litzler responds that the Dedicated Fund does not constitute a trust under Texas law. To establish an express trust under Texas law, an express devise of property to another as trustee for named beneficiaries is required. Tex. Prop. Code Ann. § 111.003. An express trust arises by an expressed agreement or by the direct and positive acts of the parties in writing.Jameson v. Bain, 693 S.W.2d 676, 680 (Tex.App.-San Antonio 1985, no writ); Cullum v. Texas Commerce Bank Dallas, Nat. Ass'n, 1992 WL 297338, at 5 (Tex.App.-Dallas, 1992). One of the basic formalities required to create an express trust is the stated intention of the settlor. Tex. Prop. Code Ann. § 112.002;City of Wichita Falls v. Kemp Public Library Bd. of Trustees, 593 S.W.2d 834, 836 (Tex.Civ.App.-Fort Worth 1980, writ ref'd n.r.e.). In order to show an express trust certain terms must be reasonably certain: (1) identification of the property covered by the trust, (2) the beneficiaries or persons in whose behalf the trust is created, and (3) the manner in which the trust is to be performed by the trustee. City of Wichita Falls, 593 S.W.2d at 836. If any of these required trust elements are vague, general or equivocal, the trust will fail for want of certainty.Cullum, 1992 WL 297338 at 5.
The provisions of § 2.6 (b)(2)(a) do not state that the Dedicated Fund constitutes a trust. The plan provides that Reliance's collateral will be used as the assets for the Dedicated Fund, with those proceeds segregated by the debtor for the specified dedicated purpose. While that identifies property, it does so in the context of a secured creditor-debtor relationship. The Dedicated Fund is to administered by the debtor or the Reorganized Debtor or by a Creditors' Trust, depending on the circumstances. The plan does not impose the duties of a trustee on the administrator of the fund. The plan does not make the administrator of the fund a trustee. The plan does not contain any provision regarding the management of the fund itself by a trustee. Customarily, in this district, the creation of a trust by a plan would require the submission of the trust agreement at confirmation for approval by the court. There is no evidence of a trust agreement. By contrast, the plan expressly establishes trusts, as a subset of the Dedicated Fund, for the Whitaker and Altman claims. Plan, §§ 2.6(b)(2)(j) and (k). The specific creation of trusts by §§ 2.6(b)(2)(j) and (k) compared to the language of § 2.6(b) for a segregated/dedicated fund indicates that the plan did not make the Dedicated Fund a trust.See Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 15-18 (1979); Dvorken Family Ltd. Partnership v. Martin Marietta Materials, Inc., No. SA-03-CA-0031 FB, 2004 WL 377537, at 7 (W.D. Tex. Jan. 6, 2004). The court concludes that the plan did not establish the Dedicated Fund as a trust under Texas law.
The court has also considered whether the summary judgment record supports the application of the Texas constructive trust doctrine. For a constructive trust, TIC must have obtained the funds from Reliance through actual fraud, TIC would be unjustly enriched by keeping the funds, and Reliance can trace the property acquired by TIC to an identifiable res. Haber Oil Co. v. Swinehart (In re Haber Oil Co.), 12 F.3d 426, 437 (5th Cir. 1994) (applying Texas law); Monnig's Dept. Stores, Inc. v. Azad Oriental Rugs, Inc., (In re Monnig's Dept. Stores, Inc.), 929 F.2d 197, 201 (5th Cir. 1991) (applying Texas law).
TIC did not acquire the assets in the Dedicated Fund by fraud. Litzler cannot be unjustly enriched by keeping the funds, because Litzler can only use the funds to pay Reliance claims in the TIC bankruptcy case and not for the general administration of the TIC case. Koken can trace the funds from one of several Reliance accounts to the Dedicated Fund. Since only one of the three elements for a constructive trust have been established, the court does not impose or empress a constructive trust on the Dedicated Fund.
Koken argues that the court should apply the principals underlying the common law doctrine of cy pres. Litzler argues that the doctrine does not apply. Koken replies that Litzler takes her argument too literally. Koken does not assert that the doctrine applies, rather she asserts that its teaching is instructive for the court's decision. The court has concluded that the Dedicated Fund must be used by Litzler to pay Reliance claims with any remaining funds to be returned to Koken to pay TIC claims filed in the Reliance liquidation as provided under Pennsylvania law.
In his summary judgment motion, Litzler contends that Koken does not hold a security interest in the proceeds of the Dedicated Fund. Litzler concedes that the court in the orders approving the Altman and Whitaker settlements recognized that Reliance held a security interest in the letter of credit and in the bond. But Litzler asserts that does not result in the perfection of a security interest. Rather, the court in the settlement orders reserved the determination of the status and priority of Reliance's claim against the bankruptcy estate. Arguing that the perfection of a security interest had thereby been left unresolved, Litzler asserts that under Texas law Koken must control the letter of credit to perfect a security interest. Tex. Bus. Com. Code Ann. §§ 9.312(b)(2), 9.314(a). Litzler further argues that the voluntary transfer of the proceeds of the letters of credit and the bond negates retention of control by Reliance. Without a perfected security interest, Litzler maintains that the funds became property of the bankruptcy estate. 11 U.S.C. § 541(a)(7).
Koken responds that Litzler does not challenge the existence of a security interest in the funds. Rather, Litzler limits his challenge to perfection of the security interest. Since Litzler has not filed an adversary proceeding to avoid the security interest, Koken argues that the court does not need to address the perfection issue. Because of the running of limitations, Litzler may not now file an adversary proceeding to avoid the security interest. 11 U.S.C. § 546(a)(1). Litzler replies that he may raise perfection as an affirmative defense.
Although Litzler focuses on the Altman and Whitaker settlement orders, § 2.6(b)(2)(a) expressly provides that Reliance must deliver the "collateral represented by the cash proceeds of the Debtor's letter of credit" to TIC for the Dedicated Fund. Reliance obtained possession of the cash proceeds from the letters of credit and, following the entry of this court's order, transferred the cash to TIC. The plan, as confirmed by order of this court, thereby recognizes the security interest of Reliance in the proceeds of the letters of credit, which Reliance delivered to TIC as its cash collateral. The plan provided that the cash collateral be held in a segregated account to be used for a dedicated purpose, thereby mirroring a typical adequate protection provision for the use of cash collateral under 11 U.S.C. § 363. Litzler has not brought an avoidance action to challenge the security interest. As mentioned above, the Reliance security interest in the fund constitutes one reason why the plan did not establish the Dedicated Fund as a trust. The Reliance security interest assures that Koken has a means to obtain the unused cash collateral for the payment of TIC claims in the Reliance liquidation process. The plan does not contain a similar recognition of a Reliance security interest in the bond proceeds. Nevertheless, recognizing the Altman and Whitaker settlement orders, the parties present no summary judgment evidence that the remaining funds do not derive from the Reliance collateral.
Based on this analysis, Koken is entitled to a partial summary judgment recognizing a Reliance security interest in the proceeds of the Dedicated Fund, while Litzler is entitled to a partial summary judgment declaring that the Dedicated Fund is not a trust. The proceeds in the Dedicated Fund may only be used for the purposes of the Dedicated Fund.
Order
Based on the foregoing,
IT IS ORDERED that the motion for summary judgment filed by M. Diane Koken, Insurance Commissioner of Pennsylvania, AmWest Surety Insurance Company and Swiss Reinsurance America Corporation is GRANTED IN PART and DENIED IN PART. IT IS FURTHER ORDERED that the motion for summary judgment filed by John H. Litzler, Chapter 7 trustee of the bankruptcy estate of TIC United Corp., is GRANTED IN PART and DENIED IN PART. IT IS FURTHER ORDERED that the court shall enter a final judgment declaring that the remaining funds in the Dedicated Fund must be used to pay claims under the Reliance insurance policies filed in the TIC bankruptcy case. The Dedicated Fund must be administered by Trustee Litzler as successor to TIC, the debtor. To the extent that proceeds remain after the payment of the Reliance claims, the proceeds must be returned to Commissioner Koken for use in the Reliance liquidation for TIC claims pursuant to Pennsylvania law.
Counsel for Koken shall, within ten days of the date of entry of this order, submit a proposed final judgment consistent with this memorandum opinion and order.