Summary
In Burr Wolff, a creditor, Marlin Leasing Corp., sought relief from the stay and a declaration that proceeds from an insurance policy owned by the debtor, Burr Wolff, LP, were property of the bankruptcy estate.
Summary of this case from Schmidt v. Villarreal (In re OGA Charters, LLC)Opinion
BANKRUPTCY NO. 06-37073-H3, CIVIL ACTION NO. H-07-1497.
October 10, 2007
MEMORANDUM OPINION AND ORDER
Appellant Marlin Leasing Corp. appeals the March 28, 2007, order of the bankruptcy court denying Marlin's Motion for Relief From Automatic Stay and declaring that the proceeds of an insurance policy issued to Burr Wolff by HCC Specialty Insurance Company were property of the bankruptcy estate under 11 U.S.C. § 541(a)(1), (6). The court will vacate the bankruptcy court's order because the status of the liability insurance proceeds is not a ripe issue.
Marlin Leasing Corp.'s Record on Appeal [hereinafter "MROA"], Docket Entry No. 8, Document 10.
I. Factual and Procedural Background
Before becoming insolvent, the debtor, Burr Wolff, LP ("Burr Wolff"), contracted with other companies to perform professional services related to the payment of property taxes. Burr Wolff entered into contracts with many clients including appellant, Marlin Leasing Corp. ("Marlin").
Brief of Appellant, Marlin Leasing Corp., Docket Entry No. 6, p. 1.
Id.
In connection with its business, Burr Wolff purchased an Errors and Omissions liability insurance policy ("E O policy") from HCC Specialty Insurance Company ("HCC"). Under the E O policy HCC agreed to pay claims "on behalf of" Burr Wolff that HCC incurred while performing its professional services. The policy provided up to $5,000,000 in coverage for any amounts that Burr Wolff became "legally obligated to pay" and that exceeded the policy's $100,000 deductible. HCC's obligation to pay claims made against the policy was contingent upon the claim being reduced to "a monetary judgment, award or settlement" against Burr Wolff.
Id. at 2; Brief of Appellee Joseph M. Hill, Trustee, Docket Entry No. 10, p. 3.
MROA, Docket Entry No. 8, Document 7, p. 73.
Id. at 52, 56, 73.
Id. at 74.
At the end of 2005 Burr Wolff failed to pay its clients' taxes as it had agreed. Burr Wolff estimated that this failure rendered it contractually liable for over $6,000,000 at that time. Consequently, Burr Wolff filed a claim with HCC on the E O policy in February of 2006 to cover the potential claims of its clients. HCC denied Burr Wolff's claim and refused to pay any proceeds under the E O policy because HCC contended that Burr Wolff's claim against potential losses was excluded from coverage. On October 25, 2006, Burr Wolff filed an action in state court against HCC for a declaratory judgment to determine coverage under the E O policy and for actual damages.
Brief of Appellee Joseph M. Hill, Trustee, Docket Entry No. 10, pp. 2, 4-5.
See Petitioner's Original Petition in MROA, Docket Entry No. 8, Document 6, pp. 45-46, which restates HCC's three reasons for denying coverage.
Id.
On December 11, 2006, Burr Wolff filed a petition under Chapter 7 of the Bankruptcy Code. Subsequently, on February 15, 2007, Marlin filed a proof of claim against Burr Wolff's estate in the amount of $402,069.
Brief of Appellant, Marlin Leasing Corp., Docket Entry No. 6, p. 5; Brief of Appellee Joseph M. Hill, Trustee, Docket Entry No. 10, p. 5.
Brief of Appellant, Marlin Leasing Corp., Docket Entry No. 6, p. 5; Brief of Appellee Joseph M. Hill, Trustee, Docket Entry No. 10, p. 5.
With Burr Wolff's declaratory judgment action still pending in state court, Marlin filed a Motion for Relief from Automatic Stay and Brief in Support contending that the proceeds of Burr Wolff's E O policy were not property of the estate. The bankruptcy court denied Marlin's motion and held that the E O policy proceeds were property of the estate. Marlin timely filed this appeal.
MROA, Docket Entry No. 8, Document 5.
Id., Document 9, p. 141 and Document 10.
On appeal, Marlin challenges both the bankruptcy court's determination that the proceeds of the E O policy are property of Burr Wolff's bankruptcy estate and the bankruptcy court's denial of Marlin's motion for relief from stay based on that determination.
Brief of Appellant, Marlin Leasing Corp., Docket Entry No. 6, p. xii.
II. Standard of Review
When a district court reviews a bankruptcy court's decision, it applies the same standards of review applied by federal courts of appeals. Webb v. Reserve Life Ins. Co. (In re Webb), 954 F.2d 1102, 1103-04 (5th Cir. 1992). Accordingly, this court reviews the bankruptcy court's conclusions of law de novo. See Osborne v. Homeside Lending, Inc. (In re Osborne), 379 F.3d 277, 282 (5th Cir. 2004). The bankruptcy court's denial of Marlin's motion for relief of stay is reviewed for an abuse of discretion. Bonneville Power Admin. v. Mirant Corp. (In re Mirant Corp.), 440 F.3d 238, 245 (5th Cir. 2006). Ripeness is a "question of law that implicates this court's subject matter jurisdiction, which [is] review[ed] de novo," and may be raised sua sponte. Urban Developers LLC v. City of Jackson, Miss., 468 F.3d 281, 292 (5th Cir. 2006) (citations omitted).III. Analysis
Under 11 U.S.C. § 362(a), the filing of a bankruptcy petition automatically stays any effort by a creditor to collect from "the debtor or against property of the estate[.]" The automatic stay may be lifted for "cause" upon a party's motion. 11 U.S.C. § 362(d). Because the Bankruptcy Code does not define "cause" "reviewing courts must determine whether cause exist[s] on a case-by-case basis." Reitnauer v. Texas Exotic Feline Found. (In re Reitnauer), 152 F.3d 341, 343 n. 4 (5th Cir. 1998) (citations omitted). Marlin argues that the bankruptcy court had cause to grant Marlin's motion for relief from stay because the property Marlin sought to collect against (the proceeds of the E O policy) was not property of the bankruptcy estate. Marlin argues that the bankruptcy court erred both when it concluded the E O policy proceeds were property of the estate and when it denied Marlin's motion for relief from the stay based on that conclusion.A. Whether the E O Proceeds are Property of the Estate is Not Ripe for Determination.
Section 541(a) of the Bankruptcy Code defines "property of the estate" as "all legal or equitable interests of the debtor in property as of the commencement of the case." Houston v. Edgeworth (In re Edgeworth), 993 F.2d 51, 55 (5th Cir. 1993) (citing 11 U.S.C. § 541(a)). This definition "is intended to be broadly construed[.]" Id. (citation omitted). Accordingly, nearly all courts construe "property of the estate" broadly enough to include liability insurance policies. Homsy v. Floyd (In re Vitek), 51 F.3d 530, 533 n. 8 (5th Cir. 1995). However, the Fifth Circuit distinguishes "titular ownership of a policy from total ownership of the proceeds of that policy[.]" In re Vitek, 51 F.3d at 533 (emphasis in the original). Thus, although a liability insurance policy may be property of the estate, theproceeds of that policy are not property of the estate "when the debtor has no legally cognizable claim to the insurance proceeds[.]" In re Edgeworth, 993 F.2d at 56; accord Baker Hughes Oilfield Operations, Inc. v. Official Unsecured Creditor's Committee (In re Equinox Oil Co., Inc.), 300 F.3d 614, 618 (5th Cir. 2003). A debtor has a cognizable claim to liability insurance proceeds if the debtor has a right to receive and keep the insurance proceeds or if the proceeds fail to fully satisfy all claims. See In re Edgeworth, 993 F.2d at 55-56.
Before this court can reach the merits of this issue, it must be sure "that the claim in question is ripe, even if neither party raised the issue." Urban Developers LLC, 468 F.3d at 292. The ripeness doctrine is rooted in Article III of the Constitution, which limits the jurisdiction of federal courts to actual "cases" and "controversies." United Transp. Union v. Foster, 205 F.3d 851, 857 (5th Cir. 2000) (citing U.S. Const. art. III, § 2). It "prevents federal courts from rendering impermissible advisory opinions and wasting resources through review of potential or abstract disputes." National Advertising Co. v. City of Miami, 402 F.3d 1335, 1339 (11th Cir. 2005). To determine whether an issue is ripe, the court must examine "[1] the fitness of the issues for judicial decision and [2] the hardship to the parties of withholding court consideration." Id. (internal quotations and citations omitted).
1. The Issues are not Fit for Judicial Decision.
Whether the E O policy proceeds are property of the estate is not an issue that is presently fit for review because the facts that underlie that determination are not known. Generally, an issue is not fit for decision "if further factual development is required" or "`if it rests upon contingent future events that may not occur as anticipated, or indeed may not occur at all.'" Monk v. Houston, 340 F.3d 279, 282 n. 2 (5th Cir. 2003) (internal citations omitted). The issue of whether the proceeds of the E O policy are property of the estate is not fit for judicial decision by the bankruptcy court because whether there will even be insurance proceeds for the estate to claim is contingent upon the outcome of litigation pending in state court; and because it is uncertain whether the claims against Burr Wolff's E O policy will exceed the coverage limit.
Before the fate of the E O policy proceeds can be properly decided, it must first be clear that there will be proceeds. In every decision the court has found on this issue the existence of insurance proceeds was either undisputed or apparent. See, e.g.,Baker Hughes Oilfield Operations, Inc. v. Official Unsecured Creditor's Committee (In re Equinox Oil Co., Inc.), 300 F.3d 614, 617 (5th Cir. 2003); In re Vitek, 51 F.3d at 532; In re Edgeworth, 993 F.2d at 54; Louisiana World Exposition, Inc. v. Federal Ins. Co. (In re Louisiana World Exposition, Inc.), 832 F.2d 1391, 1394 (5th Cir. 1987); MacArthur Co. v. Johns-Manville Corp. (In re Johns-Manville Corp.), 837 F.2d 89, 90 (2d Cir. 1988); Tringali v. Hathaway Machinery Co., Inc., 796 F.2d 553 (1st Cir. 1986); see also Landry v. Exxon Pipeline Co., 260 B.R. 769, 784, 785-86 (Bankr. M.D. La. 2001) (noting that the debtor's insurer never denied the debtor coverage but instead "seem[ed] consigned to defend" the debtor); In re Sfuzzi, 191 B.R. 664, 668 (Bankr. N.D. Tex. 1996) (granting insurers permission to disburse liability insurance proceeds to tort claimants).
In this case, however, there are no proceeds. HCC, the insurer, has denied Burr Wolff coverage under the E O policy. Although Burr Wolff has filed an action for declaratory judgment to obtain a defense and coverage, that action is still pending. Thus, whether there will ever be any insurance proceeds is entirely contingent upon the outcome of a separate case in a separate court. Cf. PPG Ind., Inc. v. Hartford Fire Ins. Co., 531 F.2d 58, 62 (2d Cir. 1976) (noting that where an insurer denied its insured coverage, the insurance proceeds did not exist until a judgment was obtained against the insurer).
MROA, Docket Entry No. 8, Document 6, pp. 45-46.
Brief of Appellee Joseph M. Hill, Trustee, Docket Entry No. 10, pp. 4-5.
Brief of Appellant, Marlin Leasing Corp., Docket Entry No. 6, p. 11.
In declaring that the E O policy proceeds were property of the estate, the bankruptcy court necessarily found, or at least assumed, that the E O policy proceeds already existed. This was error because any ruling by the bankruptcy court that the proceeds are property of the estate will be rendered moot if the state court decides against Burr Wolff in its declaratory judgment action. Consequently, the issue of whether the proceeds of the E O policy are property of the estate is unfit for judicial resolution. Cf. Huron County Bd. of Comm'rs v. Saunders, 775 N.E.2d 892, 897-98 (Ohio Ct.App. 2002) (vacating on ripeness grounds a trial court's allocation of motor vehicle liability insurance proceeds because no one had recovered any insurance proceeds at the time of the court's decision).
Second, even if there were no dispute about whether there was coverage under the E O policy, the bankruptcy court still could not properly decide that the proceeds were property of the estate because it is not clear whether Burr Wolff has a cognizable interest in the E O proceeds under In re Edgeworth. As theEdgeworth court observed, the proceeds of a liability insurance policy may be property of the estate if the claims against the policy exceed the policy's limit. 993 F.2d at 56 n. 21. In several cases whether claims against a liability insurance policy exhausted the policy's proceeds proved dispositive of the status of liability insurance proceeds as property of the estate. See, e.g., In re Edgeworth, 993 F.2d at 955-56; Tringali, 796 F.2d at 560-61; In re Sfuzzi, 191 B.R. at 668. However, in these cases the facts surrounding the amount of the claims against the liability insurance policy were sufficiently clear to render the case fit for resolution.
For instance, in Tringali, it was clear that a tort plaintiff's claims against the debtor's liability insurance policy would exceed the policy's coverage limit because the tort plaintiff had already obtained a judgment against the debtor that exceeded the limit. 796 F.2d at 556. Thus, the court concluded the proceeds were property of the estate. Id. at 560. In In re Sfuzzi the court was able to conclude that liability insurance proceeds were not property of the estate because the debtor settled the claims against it within the policy's limits. 191 B.R. at 668. Even without a judgment or settlement agreement, it may become clear that a liability insurance policy will not fully satisfy all claims when the number of claims against the policy makes it obvious that coverage will be insufficient. See, e.g., A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 996 (4th Cir. 1986) (debtor was subject to 5,000 products liability lawsuits).
At the time of the bankruptcy court's order, however, whether the claims of Burr Wolff's former clients will exceed the E O policy's limit was not known. None of Burr Wolff's former clients had obtained a judgment against Burr Wolff. There were no settlement agreements between Burr Wolff and its former clients. All that was known was that Burr Wolff estimated its own liability as exceeding $6,000,000. But whether that number will translate into an excess of $5,000,000 in claims covered under the E O policy (assuming there is coverage) is entirely speculative at this point. Some of Burr Wolff's former clients may not file claims, which could reduce the total amount of claims against the policy below the limit. Moreover, Burr Wolff's former clients could later agree to settle all of their claims against Burr Wolff within the policy's limits. Given the uncertainty surrounding the extent of the claims against Burr Wolff's E O policy and the existence of coverage under the policy, whether the E O proceeds are property of the estate is an issue that was not fit for judicial decision at the time of the bankruptcy court's order.
Brief of Appellee Joseph M. Hill, Trustee, Docket Entry No. 10, p. 2.
2. Hardship to the Parties
While the lack of fitness of the issues in this case is alone a sufficient basis for the court's conclusion that the issue whether the policy proceeds are property of the estate is not ripe, see United Trasp. Union, 205 F.3d 857-58, the court also concludes that any hardship imposed by its conclusion that the issue is not ripe would be slight. The automatic stay provided by § 362 remains in place and "will adequately protect the interests of all parties involved" by preventing Burr Wolff's former clients from "suing or recovering from the debtor's insurer." In re Edgeworth, 993 F.2d at 56 n. 21. Consequently, neither the Trustee nor Marlin will be exposed to hardship. Moreover, once the issue ripens into an actual case or controversy, Marlin will be free to request from the bankruptcy court whatever relief the facts and the law allow. Cf. In re Sfuzzi, 191 B.R. at 665, 668.
B. Marlin's Motion for Relief of Stay
Marlin limited its appeal of the bankruptcy court's denial of its motion to the argument that the proceeds were not property of the estate. Because the court has concluded that the issue of whether the E O policy proceeds are property of the estate is not ripe, the court has necessarily rejected Marlin's argument that the policy proceeds are not property of the estate.
IV. Conclusions and Order
For the reasons explained above, the court concludes that the bankruptcy court erred when it concluded that the proceeds of the E O policy were property of the estate because that issue was not ripe. Accordingly, the March 28, 2007, order of the bankruptcy court is VACATED.