Larson v. OneBeacon Insurance Company

Filing 117

ORDER GRANTING 98 Defendant's Renewed Motion for Summary Judgment by Chief Judge Marcia S. Krieger on 3/31/15.(pglov)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Chief Judge Marcia S. Krieger
Civil Action No. 12-cv-03150-MSK-KLM
DOUGLAS LARSON, in his capacity as Bankruptcy Trustee for the Estate of Cynthia
Coreyn Tester-Lamar,
Plaintiff,
v.
ONE BEACON INSURANCE COMPANY,
Defendant.
OPINION AND ORDER GRANTING
DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
THIS MATTER comes before the Court on the Defendant One Beacon Insurance
Company’s Renewed Motion for Summary Judgment (#98), the Plaintiff Douglas Larson’s
Response (#104), and the Defendant’s Reply (#107). The parties had an opportunity to present
oral argument on the matter at a hearing on March 30, 2015.
I. Material Facts
The underlying facts of this case are complex, although mostly undisputed. As relevant
here, Ms. Tester-Lamar was an attorney who was insured against malpractice liability under a
policy issued by the Defendant, One Beacon Insurance Company. The policy limit was $1
million.
In 2010, former clients of Ms. Tester-Lamar brought a malpractice action against her and
her law firm. One Beacon defended Ms. Tester-Lamar in the malpractice action. Although there
was some evidence suggesting that the clients’ damages could exceed $4 million, Ms. TesterLamar adamantly disputed that she had any liability to her former clients. On two occasions, the

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clients offered to settle their claims for the coverage limit of the One Beacon policy. On neither
occasion did One Beacon timely respond to the settlement offer, and as a consequence, the offer
expired.
On March 1, 2012, while the malpractice litigation was still ongoing, Ms. Tester-Lamar
filed for bankruptcy under Chapter 7. Douglas Larson (Trustee) was appointed as the Trustee in
Ms. Tester-Lamar’s bankruptcy case.
In June 2012, the Trustee entered into a settlement agreement in the malpractice action.
The agreement provided that the Trustee would (1) confess judgment in favor of the former
clients in the amount of $4.5 million, and (2) pursue a bad faith claim against One Beacon due to
its failure to settle. In exchange, the former clients agree to waive their claims against Ms.
Tester-Lamar’s law firm and to fund the Trustee’s lawsuit against One Beacon. The Bankruptcy
Court approved the agreement, and in October 2012, judgment was entered against Ms. TesterLamar in the amount of $4.5 million. The Trustee then brought this action against One Beacon,
asserting authority under 11 U.S.C. § 541 and § 323 to liquidate property of the bankruptcy
estate.
In this action, the Trustee initially asserted three claims under Colorado law: (1) breach
of the insurance contract; (2) bad faith breach of the insurance contract; and (3) violation of
C.R.S. § 10-3-1115 by unreasonably delaying or denying payment of a claim for benefits owed
to Ms. Tester-Lamar. The breach of contract claim has been dismissed, due to the Trustee’s
failure to specify what provision of the contract was breached.1 This leaves the remaining two
claims. One Beacon moves for summary judgment on the claim on the bad faith breach of
insurance contract.

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See Docket #73.
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II. Standard of Review
Rule 56 of the Federal Rules of Civil Procedure facilitates the entry of a judgment only if
no trial is necessary. See White v. York Intern. Corp., 45 F.3d 357, 360 (10th Cir. 1995).
Summary adjudication is authorized when there is no genuine dispute as to any material fact and
a party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). Substantive law governs
what facts are material and what issues must be determined. It also specifies the elements that
must be proved for a given claim or defense, sets the standard of proof and identifies the party
with the burden of proof. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986);
Kaiser-Francis Oil Co. v. Producer’s Gas Co., 870 F.2d 563, 565 (10th Cir. 1989). A factual
dispute is “genuine” and summary judgment is precluded if the evidence presented in support of
and opposition to the motion is so contradictory that, if presented at trial, a judgment could enter
for either party. See Anderson, 477 U.S. at 248. When considering a summary judgment
motion, a court views all evidence in the light most favorable to the non-moving party, thereby
favoring the right to a trial. See Garrett v. Hewlett Packard Co., 305 F.3d 1210, 1213 (10th Cir.
2002).
III. Analysis
One Beacon argues that it is entitled to judgment in its favor on the bad faith claim
because the Trustee cannot make a prima facie showing of each elements of the claim. The
Court agrees that the Trustee cannot prevail — but not because there is a deficiency of proof
with regard to the elements of his claim. Rather, the Court finds that, first, no bad faith claim
against One Beacon accrued prior to Ms. Tester-Lamar’s bankruptcy filing, and second, as a

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consequence, neither Ms. Tester-Lamar’s bankruptcy estate nor the Trustee as its representative
have any claim to pursue in this action.
A. Bankruptcy Principles
Because the Plaintiff in this action is a Chapter 7 Bankruptcy Trustee, the Court begins
with consideration of several fundamental principles of federal bankruptcy law. First, a Chapter
7 Trustee is the agent of the bankruptcy estate, and therefore has the duty to “collect and reduce
to money the property of the estate . . . .” 11 U.S.C. § 323(a) and § 704(a)(1). In this capacity, a
Trustee has authority to pursue claims and causes of action that are property of the bankruptcy
estate. 11 U.S.C.§323(b).
Second, the bankruptcy estate is comprised of “all legal or equitable interests of the
debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1) (emphasis
added). The phrase “as of the commencement of the case” places both temporal and qualitative
limits on the reach of the bankruptcy estate. In a temporal sense, “as of the commencement of
the case” sets a clear-cut date for presumptive determination of whether specific property
belongs to an estate.2 For example, if a debtor had a legal claim or cause of action that had
accrued prior to the bankruptcy filing, such claim would become property of the bankruptcy
estate and the Trustee could pursue it. See Sender v. Simon, 84 F.3d 1299, 1305 (10th Cir.
1996). In a qualitative sense, “as of the commencement of the case” limits the property of the
estate to the precise interests and rights that the debtor had on the petition date. See In re
Hedged-Investments Associates, Inc., 84 F.3d 1281, 1285 (10th Cir. 1996). So, for example, if a
claim or cause of action has not accrued prior to the bankruptcy filing, there is nothing for the

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Section 541(a)(3)-(7) identify certain types of property that become part of the estate postpetition, but none of these provisions are applicable here.
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Trustee to pursue. See Witko v. Menotte (In re Witko), 374 F. 3d 1040, 1042 (11th Cir. 2004),
cited with approval in Cook v. Baca, 512 Fed.Appx. 810, 820 (10th Cir. 2013).
Finally, the nature and scope of the debtor’s interests or rights at the time of the filing of
the bankruptcy case is determined by state law. See Butner v. United States, 440 U.S. 48, 55
(1979); Parks v. FIA Card Servs., N.A., 550 F3d 1251 (10th Cir. 2008). In this case, Colorado
law applies.
B. Colorado Law
Colorado recognizes bad faith tort liability with regard to an insurance contract in two
contexts — first-party and third-party. First-party claims arise when an insurance company
delays or refused to make payments “owed directly to its insured under life, health disability,
property fire or auto insurance” policy. Goodson v. Am. Standard Ins., Co., 89 P3d 409, 414
(Colo. 2004). Third-party bad faith claims, like the one asserted here, arise when an insurance
company acts unreasonably in investigating, defending, or settling a claim brought by a third
person against the insured under a liability policy. Id. With regard to third-party bad faith
claims, it is actually the insured rather than the third party that holds the claim because the
insurer’s duty of good faith and fair dealing extends only to the insured. A third party can pursue
the claim against the insurer, if the insured assigns his or her claim to the third-party. Nunn v.
Mid-Centruy Ins.Co., 244 P.3d 116, 119 (Colo. 2010).
Like other torts recognized by Colorado law, a bad faith claim accrues when the insured
knew (or should have known) that the insurance company acted unreasonably and the insured
suffers an injury. C.R.S. §13-80-108(1). In the third-party context, this means two events must
occur: first, the insurer must act unreasonably in handling a claim against its insured, and second,
the insured must suffer an exposure to excess liability. Colorado law provides that in the context

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of an unreasonable failure to settle, the injury to the insured cannot be “known” pursuant to § 1380-108(1) until a final judgment as to the insured’s liability. See Torrez v. State Farm Mutual
Automobile Ins. Co., 705 F.2d 1192, 1202 (10th Cir 1982); Vanderloop v. Progessive Casualty
Insurance Co. 769 F. Supp. 1172, 1175 (1991); cf. Brodeur v. American Home Assurance
Company, 169 P.3d 139 (Colo. 2007).
C. Application of Bankruptcy Principles and Colorado Law
The bad faith claim asserted in this case is a third-party claim. The Trustee contends that
One Beacon unreasonably failed to settle the malpractice action against Ms. Tester-Lamar and,
as a consequence, Ms. Tester-Lamar was injured when a $4.5 million judgment was entered
against her. The Trustee pursues the claim as property of Ms. Tester-Lamar’s bankruptcy estate.
Unfortunately for Ms. Tester-Lamar’s creditors, however, the claim is not property of the estate
because it had not accrued as of the time of the bankruptcy filing.
For such claim to be property of the estate, it had to have accrued as of the bankruptcy
petition date — March 1, 2012. Under Colorado law, accrual required both that One Beacon
unreasonably failed to settle the malpractice action against Ms. Tester-Lamar, and that Ms.
Tester-Lamar was injured as a result.
On March 1, 2012, the malpractice action against Ms. Tester-Lamar was ongoing. She
was represented by One Beacon, which had failed to respond to offers to settle at policy limits.
Viewing the evidence in the light most favorably to the Trustee, which the Court must do in
considering a motion for summary judgment, a reasonable jury could find that One Beacon acted
unreasonably in failing to settle the malpractice action. Thus, the first requirement for accrual of
the bad faith claim occurred before the bankruptcy petition was filed.

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However, the second requirement for accrual of the bad faith claim, injury to Ms. TesterLamar, was not satisfied before the petition date. Under Colorado law, for there to have been an
injury to Ms. Tester-Lamar, there must have been a final judgment determining that she was
liable to her former clients in an amount in excess of the policy coverage ($1 million). No such
judgment was entered before March 1, 2012. As a consequence, no bad faith claim had accrued
prior to the bankruptcy filing, became property of the bankruptcy estate, or can be pursued by the
Trustee in this action.3
The Trustee apparently did not recognize the two conditions necessary for a bad faith
claim to accrue. He mistakenly assumed that Ms. Tester-Lamar had a claim that became
property of the bankruptcy estate, and based on that assumption, negotiated a settlement that
resulted in the October 2012 judgment against Ms. Tester-Lamar in amount of $4.5 million. He
contends that this fixes Ms. Tester-Lamar’s loss at $3.5 million because if One Beacon had acted
reasonably the malpractice claims would have been settled at the $1 million policy limits.
Actually, the stipulated judgment has no legal effect on the determination of property of
the estate. Apart from the fact that the judgment was entered post-petition, the Trustee had no
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At oral argument, the Trustee suggested that an equitable doctrine recognized in the Tenth
Circuit would allow property that Ms. Tester-Lamar acquired after her bankruptcy filing to be
treated as property of the estate. The “sufficiently rooted in the prepetition past” doctrine is
derived from Segal v. Rochelle, 382 U.S. 375 (1966), a decision that predated the current
Bankruptcy Code. Whether the doctrine remains good law in light of the statutory provisions of
11 U.S.C. § 541 has not been squarely addressed in the Tenth Circuit, and indeed, the Circuit
court has applied it in limited circumstances. In Parks v. Dittmar (In re Dittmar), 618 F.3d 1199
(10th Cir. 2010), the court held that a debtor’s stock appreciation rights were property under
Kansas law where a debtor had a contingent interest in property prior to the bankruptcy filing
that matured after the filing. In Cook v. Baca, 512 Fed.Appx. 810 (10th Cir. 2013), the court
confirmed that the “sufficiently rooted” doctrine applies in such cases where the debtor obtains a
contingent interest in property prior to the bankruptcy filing, and where the interest only matures
after filing. The Court finds that the situation here is distinguishable from cases where the
“sufficiently rooted” doctrine has been applied. The injury element of a bad faith claim cannot
fairly be regarded as a “contingency.” Rather, it is a necessary element of the claim that must be
proven. Thus, Ms. Tester-Lamar did not, and could not, have any legal interest in the claim until
an injury occurred.
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authority to act on behalf of Ms. Tester-Lamar. He participated in the malpractice action only as
the representative of the bankruptcy estate. Indeed, the judgment and underlying settlement in
the malpractice action expressly identify the Trustee in his capacity of representative of the
bankruptcy estate. In such capacity, the Trustee had no authority to act for Ms. Tester-Lamar in
determining her liability to her clients or to fix her loss — he could only act for the estate.4
Ultimately, the stipulated judgment has no effect on Ms. Tester-Lamar, who discharged her prepetition debt to her former clients through the bankruptcy. As to the estate, the consequence of
the stipulated judgment, at most, acts to allow and quantify the former clients’ claim. See 11
U.S.C. § 502.
D. Remaining Claim
The only claim remaining in this case is one for violation of C.R.S. § 10-3-1115 for
unreasonably delaying or denying payment of a claim for benefits owed to Ms. Tester-Lamar.
The Court notes, however, that the analysis above would apply equally to a claim under C.R.S. §
10-3-1115 with regard to the Trustee’s standing to assert the claim. This will constitute notice
pursuant to Fed. R. Civ. P. 56(f) that the Court will consider entry of summary judgment on this
claim because the Trustee has no viable claim.

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The Trustee may have believed that in settlement of the malpractice action, the estate was
acquiring the third-party bad faith claim from Ms. Tester-Lamar’s former clients. However, no
assignment is reflected in the Settlement Agreement, in the Order of the Bankruptcy Court
approving it, or in the arguments presented to this Court. Indeed, the agreement by the former
clients to fund the Trustee’s bad faith litigation suggests the contrary.
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IV. Conclusion
For the forgoing reasons, the Defendant’s Renewed Motion for Summary Judgment is
GRANTED. The Plaintiff’s claim for bad faith breach of insurance contract is dismissed. The
only claim remaining is for violation of C.R.S. § 10-3-1115. It shall also be dismissed unless the
parties make a sufficient showing that the Trustee/bankruptcy estate has a viable claim within 14
days of the date of this order.
Dated this 31st day of March, 2015.
BY THE COURT:

Marcia S. Krieger
Chief United States District Judge

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