Opinion
Case No. 02 C 5170, Case No. 02 C 5242
March 12, 2003
ORDER
Chapter 11 debtors ABC-NACO, Inc. and certain of its affiliates (the "Debtors") appealed the bankruptcy court's orders of June 25, 2002 and July 2, 2002 modifying the automatic stay in In re ABC-NACO, Inc., et al., No. 01 B 36484. The order of June 25th allows Terry Dean Eastman, who has a personal injury claim against the Debtors, to proceed with the settlement of his claim with one of the Debtors' liability insurers, Gerling America Insurance Company ("Gerling"). Similarly, the order of July 2nd permits Burlington Northern Santa Fe Railway ("BNSF") to file a complaint against the Debtors for a property damage claim, provided that any recovery is paid by the Debtor's liability insurers rather than the Debtors. The Debtors appeal both orders on the grounds that the bankruptcy court (1) erroneously concluded that proceeds from the Debtor's liability insurance policies are not property of the Debtors' estates, and (2) abused its discretion by modifying the automatic stay in favor of Eastman and BNSF. As explained below, the court affirms both of the challenged orders.
Given the court's ruling, it need not (and does not) address BNSF's argument that the appeal should be dismissed on the grounds that it would inequitable to undo the bankruptcy court's order after BNSF relied on the order and commenced its litigation in state court.
The Debtors' first argument is misplaced. The bankruptcy court did not decide one way or the other whether the proceeds of the Debtors' liability insurance policies constitute property of the Debtors' estates. In the one-page order of June 25th, the bankruptcy court stated its conclusion that allowing Eastman to settle with Gerling would not affect the property of the Debtor's estate, and that the bankruptcy estate therefore would not be harmed by the settlement. In the one-page order of July 2nd, the court gave BNSF the right to sue the Debtors, provided that any recovery would be paid by the Debtors' insurers rather than the Debtors. Those statements, as explained further below, are not tantamount to a conclusion that the proceeds of liability insurance policies are not property of the bankruptcy estate. Indeed, the transcript of the proceedings shows that in reaching its decision, the bankruptcy court was able to assume, without deciding, that the proceeds of the insurance policy were property of the estate. (Tr. 6/25/02 Proceedings Before Hon. E.R. Wedoff at 3, App. to Brief of Appellant, Ex. 7 (hereinafter "Tr. 6/25/02 Proceedings").)
Thus, the only real question on this appeal is whether the bankruptcy court abused its discretion when it decided to modify the automatic stay for BNSF and Eastman. See In re Boomgarden, 780 F.2d 657, 660 (7th Cir. 1985) (bankruptcy court's decision to lift automatic stay subject to review for abuse of discretion). The answer to that question is no. In fact, the bankruptcy court reached the only just result.
The bankruptcy court's decision relied its..determination that the proceeds of liability insurance policies, even if property of the estate, "can only be used to pay the claimants. whose claims are covered by the insurance." (Tr. 06/25/02 Proceedings at 3.) In other words, the estate would not be free to use insurance proceedaunencumbered assets. ( Id. at 4.) The Debtors disagree. They argue that the proceeds of the liability insurance policies should be available for equal distribution among all of their creditors, claiming that allowing BNSF or Eastman to recover from the Debtors' insureds amounts to giving them a priority over the other creditors. This argument lacks merit. An insured in bankruptcy has no greater right to the proceeds of liability insurance policies than it did before filing for bankruptcy protection. Annette W. Jarvis Kenneth L. Cannon II, Liability Insurance Settlements in Mass. Tort Bankruptcy Cases, 41 F. 13. News J. 199 at 3 (1994). Although the Debtors are the insureds under the liability insurance policies, they are entitled neither to retain the proceeds nor to distribute them to anyone but covered claimants. Liability insurance, also known as third party insurance, does not compensate the insured for its own loss but rather "protects the insured against damages which he may be liable to pay other persons by virtue of his own actions." 1 R. Long, The Law of Liability Insurance § 101 [1] (2003)." The insured is required, therefore, to see to it that the proceeds are used to pay holders of successful, covered claims." Jarvis Cannon, supra, at 3.
The Debtors argue to the contrary, relying on In re Rowland, 140 B.R. 206 (Bankr. S.D. Ohio 1992). But Rowland is inapposite: it involved a home owners' fire insurance policy, not a liability insurance policy. There, the contractor who repaired fire damage to the insureds/debtors' home sought relief from the automatic stay in order to recover the insurance proceeds the debtors' received for the fire damage to their home. Id. at 207. The court found no basis to impose a constructive trust on those insurance proceeds, leaving the contractor in line with all the other creditors. Rowland does nothing to help the Debtors, however, because the purpose of a home owners' fire insurance policy is to. compensate the insured for their own losses, as opposed to a liability insurance policy which is designed to protect third parties from losses caused by the insured. Rowland therefore does. not alter the fact that the proceeds ofliability insurance policies "can only be used to pay the claimants . . . whose claims are covered by the insurance." (Tr. 06/25/02 Proceedings at 3.)
Nor is the Debtors' reliance on bankruptcy cases involving mass tort liability persuasive. See, e.g., Forty-Eight Insulations, Inc. v. Lipke (In re Forty-Eight Insulations, Inc.), 54 B.R. 905 (Bankr. N.D. Ill. 1985); In re Johns-Manville Corp., 26 B.R. 420 (Bankr. S.D.N.Y. 1983), It is true that in bankruptcy cases resulting from the debtor's mass tort liability, such as asbestos and other product liability cases, courts typically do not lift the automatic stay to allow claimants to recover from the debtors' insurer. That result makes sense in mass tort liability cases because there are many claimants vying for limited insurance proceeds. The "limits of at least some policies are likely to be exceeded, and there is a strong bankruptcy policy in favor of equitable distribution to claimants, or at least in favor of a waiting period in which it can be determined whether there will be sufficient insurance coverage to satisfy all claims." Janis Cannon, supra, at 3. However, "[i]f there is no threat to exhaustion of the policy limits," as the bankruptcy court reasoned, "then there is no particular reason for the automatic stay to remain in effect." (Tr. 6/25/02 Proceedings at 4.); see Int'l Bus. Machs. v. Fernstrom Storage Van Co. ("In re Fernstrom Storage Van Co), 938 F.2d 731, 736 (7th Cir. 1991); In re Forty-Eight, 54 B.R. at 908-09.
Here, the bankruptcy court agreed to modify the automatic stay only after determining that no threat of exhausting the liability insurance policy currently exists. (Tr. 6/25/02 Proceedings at 5-6, 12.) And the bankruptcy court expressly informed the parties that if a concern were to arise that the policy limits might be exhausted before all successful, covered claimants received relief the Debtors could request an injunction to restrain payment of any insurance proceeds. (Tr. 6/25/02 Proceedings at 6, 12.) Furthermore, the bankruptcy court's conclusion, stated in the June 25th order, that "[t]he bankruptcy estate will in no way be harmed" was correct. In re Fernstrom, 938 F.2d at 736 (7th Cir. 1991) ("debtors-defendants suffer little prejudice when they are sued by plaintiffs who seek nothing more than declarations of liability that can serve as a predicate for recovery against insurers . . ."); In re Forty-Eight, 54 B.R. at 908-09 (recognizing that allowing personal injury claimants to proceed where no threat of exhausting policy limits exists "would not prejudice or diminish the debtor's estate"). Modification of the automatic stay maximized the possibility of recovery not only for BNSF and Eastman, but also for other creditors: any claims paid by the liability insurers will reduce the claims against the Debtors, leaving more money available to satisfy the creditors whose claims are not covered by liability insurance. Jarvis Cannon, supra, at 2.
Accordingly, the court affirms the bankruptcy court's orders of June 25, 2002 and July 2, 2002 modifying the automatic stay.