Opinion
Civil Action No: 01-2751, Bankruptcy Case No. 00-10992, Adversary Proceeding No. 00-1188 Section: "R"
June 14, 2002
ORDER AND REASONS
Before the Court is an appeal from a judgment of the United States Bankruptcy Court, Eastern District of Louisiana, in In re The Babcock Wilcox Company, dismissing an interpleader complaint of American Nuclear Insurers and Mutual Atomic Energy Liability Underwriters (collectively "ANI"). Appellee Atlantic Richfield Company ("ARCO"), in addition to filing a brief in opposition to the appeal, filed a motion to dismiss the appeal for lack of standing. The Court will consider ARCO's motion to dismiss and its opposition brief as a consolidated opposition to the appeal. The debtor, The Babcock Wilcox Company, filed a motion in opposition to this appeal. For the reasons stated below, the Court affirms the bankruptcy court.
I. Background
BW and ARCO are co-insureds under nuclear energy liability policies that cover nuclear energy hazards at two nuclear fuel processing facilities in western Pennsylvania. Nuclear Materials and Equipment Corporation ("Old NUMEC) established the two nuclear fuel processing facilities. In 1967, ARCO acquired NUMEC's assets and liabilities and formed the subsidiary NUMEC II to operate the facilities. In 1971, ARCO sold the stock of NUMEC to the debtor. As part of the stock sale, ARCO assumed NUMEC II's liabilities and debts and agreed to indemnify debtor for liabilities arising from NUMEC II's operation of the facilities before the sale. In 1974, debtor merged NUMEC into itself.
ANI issued four insurance policies to the owner and operator of the facilities in 1958, 1960, and 1975. The policies have been in effect continuously since they were issued. They have been endorsed as necessary to change the name insured when the licensee of the facilities changed. The debtor is currently the named insured under the policies.
ARCO is an insured under the policies by virtue of the "omnibus insured" provision. That provision defines an "insured" as the named insured and "any other person or organization with respect to his legal responsibility for damages because of bodily injury or property damages caused by the nuclear energy hazard." Rec. Doc. 37, Ex. A, Nuclear Energy Liability Policy. The policies require ANI to pay damages for bodily injury or property damage resulting from nuclear hazards and to defend suits for damages. The policies provide that ANI is obliged to
[pay] all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage caused by the nuclear energy hazard, and [ANI] shall defend any suit against the insured alleging such bodily injury or property damage and seeking damages which are payable under the terms of this policy. . . . Rec. Doc. 37, Ex. A.
On February 22, 2000, BW filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court in the Eastern District of Louisiana. At that time, BW and ARCO were codefendants in a public liability action in federal court in Pennsylvania ("the Hall action"). The Hall action arose from the plaintiffs' alleged exposure to nuclear waste at the two processing facilities. ANI provided a joint defense for BW and ARCO. Under the policy, defense costs reduce the policy limits:
Each payment made by [ANI] in discharge of its obligations under this policy or for expenses incurred in connection with such obligations shall reduce by the amount of such payment the limit of [ANI's] liability under this policy.
If during the policy period or subsequent thereto, the total of such payments made by [ANI] shall exhaust the limit of [ANI's] liability under this policy, all liability and obligations of [ANI] under this policy shall thereupon terminate and shall be conclusively presumed to have been discharged. This policy, if not theretofore canceled, shall thereupon automatically terminate. Id. at Conditions ¶ 3.
Eight Hall "test plaintiffs" tried their claims in 1998, and the jury returned verdicts in favor of all eight plaintiffs. The court vacated the verdicts and ordered new trials.
When BW filed for Chapter 11 relief, the Hall action was stayed under the automatic stay provision of the Bankruptcy Code. In order to proceed against ARCO, the Hall plaintiffs obtained an order severing BW from the action. In response, BW filed an adversary proceeding in the bankruptcy court against the Hall plaintiffs to obtain a stay and an injunction barring the Hall plaintiffs from pursuing their claims against ARCO. On May 18, 2001, this Court affirmed the bankruptcy court's dismissal of the adversary proceeding.
In July 1999, BW instituted a coverage action against ANI, to which ARCO is also a party, in state court in Pennsylvania. The Pennsylvania court defined the coverage trigger under the policies and ruled that ANI must provide separate counsel to represent BW and ARCO, respectively, in the Hall action. ANI filed an interlocutory appeal of these rulings.
ANI then filed this interpleader complaint and a contemporaneous motion for a preliminary injunction in bankruptcy court. ANI sought to prevent the filing of any claims against it for recovery under the policies pending BW's reorganization and a decision in the state court regarding the coverage issues. ANI argued that if it is to fund ARCO's defense from the limits of the policies it will violate 11 U.S.C. § 362(a)(3), the automatic stay provision of the Bankruptcy Code. Both ARCO and BW opposed the injunction. ARCO moved to dismiss the interpleader complaint based on this Court's earlier ruling that the insurance policies were not assets of the debtor's estate. ARCO also alleged that the complaint should be dismissed because it is not a proper interpleader and because the interpleader is untimely. Alternatively, ARCO asked the bankruptcy court to abstain from ruling on the case because it involved issues being litigated in state court. The bankruptcy court ruled that it lacked subject matter jurisdiction over ANI's interpleader complaint and dismissed the proceedings. ANI appeals the bankruptcy court's ruling.
II. Discussion
A. Jurisdiction
This Court has jurisdiction over this case pursuant to 28 U.S.C. § 158(a) and Federal Rule of Bankruptcy Procedure 8001. See 28 U.S.C. § 158(a); FED. R. BANKR. P. 8001.
B. Standard of Review
The standard of review for a bankruptcy appeal by a district court is the same as when a Court of Appeals reviews a district court proceeding. See 28 U.S.C. § 158(c)(2). Accordingly, the Court reviews the bankruptcy court's conclusions of law de novo, findings of fact for clear error, and mixed questions of law and fact de novo. See In re Nat'l Gypsum Co., 4 208 F.3d 498, 504 (5th Cir. 2000)
C. Standing to Appeal
ARCO contends that ANI lacks standing to appeal the bankruptcy court's order. Standing to appeal an order of the bankruptcy court is governed by the "person aggrieved" test. See Rohm Hass Texas, Inc. v. Ortiz Bros. Insulation, Inc., 32 F.3d 205, 208 n. 18 (5th Cir. 1994). "To have standing to appeal, a party must show that it was "directly and adversely affected pecuniarily by' the order, or that the order diminished its property, increased its burdens or impaired its rights." Cajun Electric Power Cooperative, Inc. v. Central Louisiana Electric Co., Inc, 69 F.3d 746, 749 (5th Cir.), withdrawn in part, 74 F.3d 599 (5th Cir. 1996) (quoting In re El San Juan Hotel, 809 F.2d 151, 154 (1st Cir. 1987)).
The First Circuit explained that the rule of appellate standing protects bankruptcy proceedings from the unreasonable delay that results from protracted litigation that does not serve the interests of the bankrupt's estate or its creditors. See In re El San Juan Hotel, 809 F.2d at 154. The appellate standing rule developed in response to the nature of the bankruptcy proceeding which involves numerous parties who are directly and indirectly affected by every order and ruling of the bankruptcy court. Id. (citing In re Follier, 707 F.42d 441, 443 (9th Cir. 1983)); see also Kane V. Johns-Manville Corp., 843 F.2d 636, 643 (2d Cir. 1988) ("Bankruptcy proceedings regularly involve numerous parties, each of whom might find it personally expedient to assert the rights of another party even though that party is present in the proceedings and is capable of representing himself."); Travelers Ins. Co. v. H.K. Porter Co., Inc., 45 F.3d 737, 741 (3d Cir. 1995) (same). For example, the rule prevents "hopelessly insolvent" debtors from appealing orders affecting the size of the estate even though such an order would not diminish the debtor's property, increase his burdens, or negatively affect his rights. See In re El San Juan Hotel, 809 F.2d at 154-55 (citing cases).
ARCO contends that ANI is not an aggrieved party because the bankruptcy court's order dismissing ANI's interpleader complaint insulates ANI from liability for violating the Section 362(a)(3) stay if it pays ARCO from the policy proceeds. See Appellant's Original Brief at 19. Although the bankruptcy court's decision benefits ANI to some extent, ARCO ignores the other implications of the bankruptcy court's decision. ANI sought protection from any claims against it for recovery under the policies during the pendency of BW's bankruptcy. See ANI's Cmplt. for Interpleader at p. 7, (iii). When the bankruptcy court denied ANI's requested relief, it prevented ANI from holding on to its money pending BW's bankruptcy. Therefore, the Court finds that the bankruptcy court's decision adversely affected ANI's pecuniary interests and that it has standing to appeal. See Cajun Electric, 69 F.3d at 749.
D. The Policy/Proceeds Thicket
The bankruptcy court dismissed ANI's interpleader complaint because found that it did not have subject matter jurisdiction over the action. The bankruptcy court based its decision on this Court's earlier determination that the proceeds of the policies are not assets of the debtor's estate. See In re Babcock Wilcox, 2001 WL 536305, *5 (E.D. La.) (affirming denial of debtor's motion to stay the Hall litigation against ARCO under Section 362(a)(3)). This Court acknowledges that the Fifth Circuit jurisprudence on the policy/policy proceeds dichotomy is somewhat muddled. Compare, In re Louisiana World Expedition, Inc., 832 F.2d 1391, 1399 (5th Cir. 1987) (holding that proceeds of debtor's liability policy payable to directors and officers not part of debtor's estate) (Chapter 11 proceeding), and In re Edgeworth, 993 F.2d 51, 55 (5th Cir. 1993) (holding that a doctor's liability policy was property of estate but proceeds of that policy were not) (Chapter 7 proceeding), with In re Vitek, Inc., 51 F.3d 530 (5th Cir. 1995) (casting doubt on scope of application of policy/proceeds distinction) (Chapter 7 case). Because there is another clear-cut basis in the record to affirm the decision of the bankruptcy court, this Court declines to reenter into the policy/proceeds thicket. Accordingly, the Court affirms the ruling of the bankruptcy court on the following alternative ground.
E. ANI's Interpleader Action
ARCO argued to the bankruptcy court and to this Court that ANI's interpleader complaint was defective and should be dismissed. Since a reviewing court can affirm a bankruptcy court's decision on grounds that the bankruptcy court did not rely on, the Court finds that ANI's interpleader action is improper and subject to dismissal. See In re Young, 237 F.3d 1168, 1173 (10th Cir. 2001) (affirming decision of bankruptcy appeal panel on alternative grounds for which there is a sufficient record to permit conclusions of law) (citing United States v. Sandoval, 29 F.3d 537, 542 n. 6 (10th Cir. 1994)); In re Best Products Co., Inc., 68 F.3d 26, 30 (2d Cir. 1995) (analogous to general appellate review, court can affirm bankruptcy decision on a ground not relied upon by the bankruptcy court); see also In re Hopkins, 201 B.R. 993, 995 (D. Nev. 1996) (district court may affirm bankruptcy court decision on any basis in the record) (internal citation omitted).
Under Federal Rule of Civil Procedure 22 and its bankruptcy corollary, Bankruptcy Procedure Rule 7022, a plaintiff can join defendants when defendants' claims are such that the plaintiff is or may be exposed to double or multiple liability. FED. R. CIV. P. 22; FED. R. BANKR. P. 7022. Interpleader is a procedural device that enables a stakeholder such as an insurance company to bring together adverse claimants to a single policy in order to have the claimant's rights adjudicated to avoid the establishment of multiple liability when only a single obligation is owing. ANI commenced this interpleader action in the bankruptcy court alleging that it was exposed to competing claims by its insureds, ARCO and BW, for defense costs and indemnity under the policies.
"A district court has broad powers in an interpleader action." Rhoades v. Casey, 196 F.3d 592, 600 (5th Cir. 1999). The Fifth Circuit set out a two-step process for analyzing interpleader actions. First, the district court must determine whether the requirements for rule interpleader have been met by determining if there is a single fund at issue and whether there are adverse claims to the fund. Id. (citing Wright, Miller Kane, Federal Practice Procedure: Civil 2d § 1714 (1986)). Second, if the district court determines that the interpleader action has been properly brought, the district court must then make a determination of the respective rights of the claimants. Id.
Here, ANI fails to establish that there is a single fund. Rather, there are four insurance policies covering two nuclear facilities, and the policies provide coverage for different ranges of years with different coverage limits for each range of years. See Wausau Ins. Companies v. Gifford, 954 F.2d 1098, 1101 (5th Cir. 1992) (affirming dismissal of insurance companies' interpleader action because case involved six insurance funds encompassing different periods during a four-year period); Matter of Bohart, 743 F.2d 313, 324 (5th Cir. 1984) ("An interpleader action is designed to protect a stakeholder, as such, from the possibility of multiple claims upon a single fund."); Gaines v. Sunray Oil Co., 539 F.2d 1136, 1141 (8th Cir. 1976) ("Requisite to the maintenance of an interpleader action is that the stakeholder be subject to multiple adverse claims against a single fund or liability."). In the absence of a single fund, ANI cannot maintain this interpleader action.
ANI's interpleader action is also improper because its admitted purpose in this case is not to take advantage of the interpleader device for the purpose for which it is intended, i.e., to adjudicate the competing rights of its insureds under the policies. At oral argument in the bankruptcy court, ANI's counsel stated that its client was not asking for a determination of the adverse rights of the insureds under the policies. Rather, it was asking the court only to stay all claims against the proceeds of the policies pending a determination regarding coverage in the Pennsylvania state court litigation. ANI's counsel stated "I'm not asking the Court to make coverage decisions. I'm asking this Court to maintain the status quo, so that Debtor's estate is not diminished, pending the decision in the coverage opinion in Pennsylvania." Appellant's Rec. Doc. 50 at 20. ANI confirmed its stance in its reply brief in this matter. See Appellant's Reply Brief at 12 ("ANI does not seek to have this Court determine the rights of BW or ARCO to coverage under the [policies].").
Further, if in fact ANI were seeking to bring ARCO and BW in under an interpleader action as defendants to adjudicate their competing claims under the policies, it would have sought a stay of the ongoing coverage action. ANI has not sought any such relief. Rather, it has sought to use the interpleader device to prevent ARCO from benefitting from insurance proceeds and to prevent any party from making claims against it pending the outcome of BW's bankruptcy proceeding. This Court has already affirmed the bankruptcy court's refusal to stay the Hall action against ARCO. See In re Babcock Wilcox, 2001 WL 536305 at *3-7. Essentially, ANI is attempting to end-run this Court's ruling by using the interpleader device. ANI's interpleader complaint must therefore be dismissed.
If ANI had asked the Court to adjudicate the conflicting claims of its insureds, the Court would agree with ARCO that this action would be properly subject to permissive abstention in favor of the Pennsylvania proceeding. See 11 U.S.C. § 1334(c)(1); see also In re Wood, 825 F.2d 90, 93 (5th Cir. 1987); In re Engra, Inc., 86 B.R. 890, 895 (S.D. Tex. 1988).
III. Conclusion
For the foregoing reasons, the Court affirms the bankruptcy court's dismissal of the adversary proceeding.