HDR Architecture, P.C. v. Maguire Group Holdings, Inc et al
Filing
43
OPINION AND ORDER REVERSING AND REMANDING CASE TO BANKRUPTCY COURT. Closing Case. Signed by Judge Beth Bloom on 12/24/2014. (dgj) NOTICE: If there are sealed documents in this case, they may be unsealed after 1 year or as directed by Court Order, unless they have been designated to be permanently sealed. See Local Rule 5.4 and Administrative Order 2014-69.
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
CASE NO. 14-CIV-21851-BLOOM
HDR ARCHITECTURE, P.C.,
Appellant,
v.
MAGUIRE GROUP HOLDINGS, et al. and
CHARTIS SPECIALTY INSURANCE
COMPANY, LEXINGTON INSURANCE
COMPANY AND CERTAIN OTHER
AFFILIATES OF CHARTIS INC.,
Appellees.
______________________________________/
In re:
Bankr. Case No. 11-39347-BKC-RAM
(Jointly Administered)
MAGUIRE GROUP HOLDINGS, INC., et al.,
Debtors.
______________________________________/
OPINION AND ORDER
THIS CAUSE is before the Court upon the appeal by HDR Architecture, P.C. (“HDR”
or “Appellant”). Appellant seeks review of a final order issued by the United States Bankruptcy
Court for the Southern District of Florida (the “Bankruptcy Court”) dated April 1, 2014,
denying Appellant’s motion to reopen the underlying chapter 11 cases and to modify the
discharge injunction. Bankr. ECF No. [846]; In re Maguire Grp. Holdings, Inc., 508 B.R. 504
(Bankr. S.D. Fla. 2014) (the “Ruling”). The Court has considered Appellant’s Initial Brief,
ECF No. [22], Appellee’s Brief of Maguire Group Holdings, et al. (the “Reorganized Debtors”),
ECF No. [28], Appellee’s Brief of Chartis Specialty Insurance Company and related parties
(“Chartis”), ECF No. [27], Appellant’s Reply Brief, ECF No. [33], and the record in this case.
For the reasons that follow, the Ruling is reversed and remanded.
1
I.
BACKGROUND
Pursuant to a prepetition agreement (the “HDR Agreement”) entered into in 1990
between HDR’s predecessor-in-interest and Maguire Group, Inc. (“Maguire”, one of the
Debtors), the parties provided architectural, design and related services at a public works project
located in Niantic, Connecticut (the “York Project”). Maguire served as a sub-consultant to
HDR at the York Project under the HDR Agreement. In the HDR Agreement, Maguire agreed
to indemnify HDR for negligent acts, errors, and omissions attributable to Maguire and to
maintain a professional liability insurance policy to protect HDR from liability arising out of
Maguire’s performance of professional services at the York Project.
In early 2008, the State of Connecticut (the “State”) commenced a prejudgment remedy
(“PJR”) proceeding pursuant to Conn. Gen. State. § 52-278a, naming as defendants HDR,
Maguire, and several other parties. Connecticut procedure allows a party to seek pre-suit
judicial relief, such as an attachment on property, to secure the anticipated judgment. See Conn.
Gen. Stat. § 52-278c. At the time the applicant initiates the PJR proceeding, it submits a
proposed unsigned copy of the suit papers, but the civil action is not yet initiated. Id. It is not
until after the PJR proceeding is completed that the applicant finalizes the suit papers, has them
served, and returns them to court to officially commence the action. Conn. Gen. Stat. § 52278j. The State’s application for a PJR was subsequently granted. The proceedings were
thereafter stayed for several years.
Chartis was Maguire’s insurer under several insurance policies. As a result of the
State’s filing of the PJR proceeding in 2008, Maguire placed Chartis on notice of a potential
claim against its then current professional liability policy (the “Chartis Policy”). The Chartis
Policy is a “claims-made” architects and engineers professional liability and contractors
2
pollution liability policy which contains no retroactive date limitation and was in effect from
January 1, 2008 to January 1, 2009. The liability limits under the Chartis Policy are $3 million
for each claim and $3 million in the aggregate.
On October 24, 2011, the Debtors filed for protection under chapter 11 of title 11 of the
United States Code (the “Bankruptcy Code”). On April 12, 2012, the Debtors filed their Third
Amended Plan of Reorganization under chapter 11 of the Bankruptcy Code, Bankr. ECF No.
[300] (the “Plan”). The confirmation hearing on the Plan, as later amended, was held on July
11, 2012 (the “Confirmation Hearing”). At the conclusion of the hearing, the Bankruptcy Court
ruled that the Plan would be confirmed, and on July 25, 2012, the Bankruptcy Court entered its
order confirming the Plan, Bankr. ECF No. [701] (the “Confirmation Order”).
The
Confirmation Order and the Plan provide for the discharge of all prepetition claims against the
Debtors and a broad injunction in favor of the reorganized Debtors. On August 28, 2012, the
Debtors filed a notice indicating that the effective date of the Plan had occurred one day earlier.
On May 1, 2013, the Debtors filed their Amended Final Report and Motion for Entry of Final
Decree, Bankr. ECF No. [786], wherein they certified that the cases had been fully
administered, described the Debtors actual payment and preparations for payment at the
distribution rates provided in the Plan for all general unsecured claims, and represented that
“[a]ll administrative claims and expenses have been paid in full, or appropriate arrangements
have been made for the full payment thereof.” On May 6, 2013, the Bankruptcy Court entered
the Final Decree and ordered the closing of the Debtors’ chapter 11 cases. Bankr. ECF No.
[788], [789].
The Final Decree provided that “all future payments under the plan of
reorganization shall be disbursed in accordance with the plan.”
According to the Bankruptcy Court, two key settlements paved the way for plan
3
confirmation. The Debtors negotiated a full and final settlement of their liability arising from or
related to the York Project (and certain other projects on which the Debtors worked in
Connecticut).
Bankr. ECF No. [638] (the “Connecticut Settlement”).
The Connecticut
Settlement resolved over $14.4 million in claims asserted by the State against Maguire,
including a claim for not less than $13 million related to the York Project. Under the terms of
the settlement, the State was authorized to deduct up to ten percent of the invoiced amount both
from future invoices submitted by the Debtors and from certain pending invoices, until such
time as $97,889.86 was paid in full. The Connecticut Settlement explicitly provided that it had
“no preclusive effect vis-à-vis third parties . . . [i]n particular, with respect to [York Project
claim], (i) the striking of the claim asserted by [the State] shall have no effect on the claims
regarding the underlying matters against any non-debtor, third-party in any other proceedings
outside of the Debtors’ chapter 11 cases.” On July 17, 2014, the Bankruptcy Court approved
the Connecticut Settlement, Bankr. ECF No. [686] (the “Connecticut Settlement Order”), which
provided, among other things, that the State was precluded from recovering from the Debtors or
reorganized Debtors on any existing claim, specifically including those claims related to the
York Project.
The second key settlement, between the Debtors and Chartis, was reached at the
Confirmation Hearing.
After the Debtors submitted the Connecticut Settlement to the
Bankruptcy Court for approval, Chartis filed an expedited application for payment of an
administrative expense claim, Bankr. ECF No. [678] (the “Chartis Administrative Expense
Motion”), based on Maguire’s self-insured retention obligations to Chartis under various
insurance policies. Chartis asserted that the Debtors had agreed to abide by their obligations
under various policies issued by Chartis because of their ongoing need for insurance coverage
4
during the pendency of their chapter 11 proceedings, and to treat their insurance policies as
executory contracts and assume them under the Plan.
Chartis interpreted the Connecticut
Settlement as permitting the State to pursue its claims against the Debtors as a nominal party in
order to access applicable insurance proceeds. See Bankr. Case. Hr’g Tr. Jul. 11, 2012, Bankr.
Case. ECF No. [702] (“Confirmation Hr’g Tr.”). Chartis anticipated incurring attorney’s fees in
connection with potential claims covered by those policies that would trigger payment by
Maguire of the $250,000 self-insured retention obligation on each of at least four separate
claims. Both the Debtors and the Bankruptcy Court understood the Connecticut Settlement to
preclude the State from asserting and being able to recover on any claims against the Debtors,
or from the Debtors’ insurers in their capacity as insurers of the Debtors on account of the
claims submitted by the State against the Debtors. See Connecticut Settlement Order ¶ 4;
Confirmation Hr’g Tr.
Chartis agreed to compromise its $1,000,000 administrative expense claim in an
agreement that was memorialized and approved by the Bankruptcy Court, Bankr. ECF No.
[692] (the “Chartis Settlement Order”).
Under the Chartis Settlement Order, Chartis was
granted an “administrative expense claim in an amount not to exceed $150,000” for “amounts
that would have been payable by the Debtors, but for the Debtors’ bankruptcy, under the terms
and conditions of any insurance policy issued to the Debtors that was expired as of the Petition
Date (a “Prior Policy”) when such amounts are paid by Chartis.” Chartis Settlement Order ¶ 2.
The Debtors and Chartis agreed that the $150,000 payment need not be paid on the Plan’s
effective date.
Id.
The Reorganized Debtors’ obligation to pay amounts under the
administrative expense claim provision arises only if Chartis incurs obligations attributable to a
Prior Policy. Id. In addition to the $150,000 payment obligation, the Chartis Settlement Order
5
provided for a separate obligation, which permitted Chartis to elect one claim under a Prior
Policy to receive “assumed status” (the “Assumed Claim”). The Reorganized Debtors were
required to comply with all policy obligations implicated by the Assumed Claim as though that
single Prior Policy had been assumed in connection with the Plan – meaning that the
Reorganized Debtors would pay any applicable deductible or applicable self-insured retention
payment obligation with respect to the Assumed Claim in accordance with the terms and
conditions of the single Prior Policy, in an amount not to exceed $250,000. Chartis Settlement
Order ¶ 3. The Debtors reported forty open claims that had a “potential for a claim” under one
of the Prior Policies. Confirmation Hr’g Tr. Based on the information it had at the time of
confirmation, Chartis elected as the Assumed Claim a claim wholly unrelated to the York
Project, the State or HDR. Like the Connecticut Settlement Order, the Chartis Settlement Order
explicitly provided that “[n]othing in this Order shall be deemed to amend, supplement, or
modify the terms of or any rights and obligations under any insurance policy issued to the
Debtors by Chartis, or affect the rights of any non-debtor third-party with respect to any
insurance policy issued to the Debtors by Chartis.”
HDR received timely notice of all relevant pleadings in the Debtors’ chapter 11
proceedings. HDR received copies of the proposed Plan and disclosure statement and was
given notice of the Confirmation Hearing. Counsel for HDR did not appear at the Confirmation
Hearing.
HDR did not object to the Connecticut Settlement Agreement or the Chartis
Settlement Agreement. HDR did not seek relief from the Connecticut Settlement Order or the
Chartis Settlement Order. HDR did not assert indemnification rights against Maguire with
respect to the York Project in a proof of claim, and did not otherwise attempt to assert or
preserve its indemnification rights in the Debtors’ bankruptcy.
6
On February 14, 2013 – after the Debtors’ Plan had been confirmed and became
effective but before their chapter 11 cases were closed – the State of Connecticut commenced
suit against HDR and a number of other defendants to recover damages resulting from alleged
construction and design defects at the York Project (the “Bacon Action”). The State asserted
substantially the same claims in the Bacon Action as it had in the PJR proceeding. Due to the
Connecticut Settlement, the State did not name Maguire as a defendant in the Bacon Action.
The State alleges damages in excess of $18 million.
Ten days after the Debtors cases were closed, HDR moved to reopen them and modify
the plan discharge injunction for the limited purpose of permitting HDR to name Maguire as a
third-party defendant and to bring claims against Maguire in the Bacon Action (the “HDR
Indemnification Claim”).
HDR represented that any damages for which the Reorganized
Debtors might be found liable would be recoverable solely from Chartis under the Chartis
Policy. The Reorganized Debtors acknowledge that the Chartis Policy provides Maguire with
liability coverage for the HDR Indemnification Claim.
The Reorganized Debtors objected, arguing that the relief sought by HDR would impair
the Reorganized Debtors’ “fresh start” because the HDR Indemnification Claim would trigger
the $150,000 payment to Chartis under the Chartis Settlement Order. Chartis joined in the
Reorganized Debtors’ objection, arguing that it would be prejudiced if HDR were permitted to
pursue an indemnification claim against Maguire.
In the Ruling, the Bankruptcy Court denied HDR’s motions to reopen the Debtors cases
and to modify the discharge injunction. The Bankruptcy Court determined that “if HDR is
permitted to pursue the HDR Indemnification Claim, the reorganized Debtor will be harmed.”
Ruling at 13; 508 B.R. at 512. It therefore held that HDR’s pursuit of its indemnification claims
7
in the Bacon Action would impair the Debtors’ “fresh start,” violate section 524(a)(2) of the
Bankruptcy Code, and did not fall within the section 524(e) allowance for post-discharge
prosecution of a prepetition action based on third-party indemnification rights. Ruling at 11-14;
508 B.R. at 510-12. The Bankruptcy Court explained that its analysis turned on the nature of
the Debtors’ $150,000 payment obligation under the Chartis Settlement. According to the
Bankruptcy Court, “[a]lthough called an administrative expense claim, the $150,000 obligation
is better described as a contingent obligation of the reorganized Debtors.” Ruling at 6; 508 B.R.
at 508.
[T]he $150,000 administrative expense is not a fixed, non-contingent expense
that the Debtors must pay under the plan. The fact that Chartis and the Debtors
referred to this obligation as an ‘administrative expense’ is a misnomer. Rather,
the obligation to reimburse Chartis is a contingent obligation triggered only if
Chartis incurs expenses in defending any claims under the Prior Policies.
Ruling at 13; 508 B.R. at 512. In addition, the Bankruptcy Court noted that “the Debtor agreed
to the $150,000 potential reimbursement amount without any contemplation that reimbursable
expenses could include the costs of defending any claims relating to the York Project, including
the HDR Indemnification Claim, because the Connecticut Settlement Agreement, together with
the Plan’s discharge injunction, resolved with finality all liability arising out of the alleged
construction and design defects at the York Project, including any potential liability of the
Debtors to HDR.” Id. The Bankruptcy Court also found that HDR’s requested relief would
prejudice Chartis because Chartis entered into the Chartis Settlement and selected the Assumed
Claim “based on its justified belief” that the universe of claims it might have to defend did not
include any claims arising out of the York Project. Ruling at 16; 508 B.R. at 513.
HDR timely appealed the Ruling. The appeal is fully briefed and ripe for adjudication.
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II.
JURISDICTION & STANDARD OF REVIEW
This Court has jurisdiction to hear this appeal of a final order issued by the Bankruptcy
Court pursuant to 28 U.S.C. § 158(a)(1).
A bankruptcy court’s legal conclusions and application of the law to the facts of a given
case are reviewed de novo, and its factual findings for clear error. Carrier Corp. v. Buckley (In
re Globe Mfg. Corp.), 567 F.3d 1291, 1296 (11th Cir. 2009) (reviewing court “review[s] the
bankruptcy court’s factual findings for clear error, and its legal conclusions de novo”); Club
Associates v. Consol. Capital Realty Investors (In re Club Associates), 951 F.2d 1223, 1228
(11th Cir. 1992) (“Factual findings by the bankruptcy court are reviewed under the limited and
deferential clearly erroneous standard.”); Lorenzo v. Wells Fargo Bank (In re Lorenzo), 518
B.R. 92, 94 (S.D. Fla. 2014) (“The district court reviews the factual findings of a bankruptcy
court for clear error, and reviews de novo a bankruptcy court’s conclusions of law of and
application of the law to the particular facts of the case.”); FED. R. BANKR. P. 8013 (“[f]indings
of fact . . . shall not be set aside unless clearly erroneous). “Under de novo review, a Court
independently examines the law and draws its own conclusions after applying the law to the
facts of the case, without regard to decisions made by the Bankruptcy Court.” In re Mut. Ben.
Offshore Fund, Ltd., 508 B.R. 762, 769 (S.D. Fla. 2014) (citing Kaiser Aerospace and Elecs.
Corp. v. Teledyne Indus., Inc. (In re Piper Aircraft Corp.), 244 F.3d 1289, 1295 (11th Cir.
2001)). Reviewing for clear error, “findings of fact are not clearly erroneous unless, in light of
all of the evidence, [the reviewing court is] left with the definite and firm conviction that a
mistake has been made.” Westgate Vacation Villas, Ltd. v. Tabas (Int’l Pharmacy & Discount
II, Inc.), 443 F.3d 767, 770 (11th Cir. 2005).
Additionally, the determination of certain matters committed to the discretion of the
9
bankruptcy court is reviewed for abuse of discretion. See, e.g., Phillips v. Phillips (In re
Phillips), 2013 WL 1899611, at *1 (M.D. Fla. May 7, 2013) (“Where a matter is committed to
the discretion of the bankruptcy court, the district court must affirm unless it finds that the
bankruptcy court abused its discretion.”) (citing Amlong & Amlong, P.A. v. Denny’s, Inc., 500
F.3d 1230, 1238 (11th Cir. 2006)); Charter Crude Oil Co. v. Petroleos Mexicanos (In re
Charter Co.), 125 B.R. 650, 654 (M.D. Fla. 1991) (same, regarding admission of evidence)
(citing Miller v. Universal City Studios, Inc., 650 F.2d 1365, 1374 (5th Cir. 1981)); Quraeshi v.
Dzikowski (In re Quraeshi), 289 B.R. 240, 242 (S.D. Fla. 2002) (same, regarding equitable
determinations) (citing Hatcher v. Miller (In re Red Carpet Corp. of Panama City Beach), 902
F.2d 883, 890 (11th Cir. 1990)).
The Eleventh Circuit has explained that a bankruptcy court’s interpretations of its own
orders are accorded significant deference “unless it clearly abused its discretion.” Finova
Capital Corp. v. Larson Pharm. Inc. (In re Optical Techs., Inc.), 425 F.3d 1294, 1300 (11th Cir.
2005). Similarly, every appellate court to have considered the issue has held that a bankruptcy
court’s decision whether to reopen a case pursuant to 11 U.S.C. § 350(b) is reviewed on an
abuse of discretion standard. See Clark v. Strand (In re Clark), 556 F. App’x 656, 657 (9th Cir.
2014) (“[W]e review the bankruptcy court’s denial of a motion to reopen a bankruptcy case for
abuse of discretion.”); Redmond v. Fifth Third Bank, 624 F.3d 793, 798 (7th Cir. 2010) (“[T]he
denial of a motion to reopen a closed bankruptcy case is reviewed for abuse of discretion.”); In
re Double J Operating Co., Inc., 37 F. App’x 91 (5th Cir. 2002) (“[T]he decision to reopen a
bankruptcy case is committed to the sound discretion of the bankruptcy judge and will not be
overturned absent abuse of discretion.”) (citing Faden v. Ins. Co. of N. Am. (In re Faden), 96
F.3d 792, 796 (5th Cir. 1996)); Patriot Portfolio, LLC v. Weinstein (In re Weinstein), 164 F.3d
10
677, 686 (1st Cir. 1999) (“We review the bankruptcy court’s discretionary decision to reopen
the case and reconsider its prior decision for an abuse of discretion.”); Donaldson v. Bernstein,
104 F.3d 547, 551 (3d Cir. 1997) (“We review a bankruptcy court’s decision whether to reopen
a case pursuant to 11 U.S.C. § 350(b) on an abuse of discretion standard.”); see also Katz v. I.A.
Alliance Corp. (In re I. Appel Corp.), 300 B.R. 564, 567 (S.D.N.Y. 2003) (A bankruptcy court’s
decision whether to reopen debtor’s case is committed to the sound discretion of the bankruptcy
court.”).
“A bankruptcy court abuses its discretion when its ruling is founded on an error of law
or on misapplication of the law to the facts.” Park Nat. Bank v. Univ. Ctr. Hotel, Inc., 2007 WL
604936, at *1 (N.D. Fla. Feb. 22, 2007). See also Amlong & Amlong, 500 F.3d at 1238 (“A
decision that is contrary to the law plainly is an abuse of discretion.”); Klay v. United
Healthgroup, Inc., 376 F.3d 1092, 1096 (11th Cir. 2004) (explaining that “applying the law in
an unreasonable or incorrect manner” constitutes an abuse of discretion); West v. Smith (In re
Cecil), 2012 WL 3231321, at *2 (M.D. Fla. Aug. 3, 2012) (“A court abuses its discretion when
its ruling is founded on an error of law or a misapplication of law to the facts. In its application,
the abuse of discretion standard is nearly indistinguishable from the clearly erroneous
standard.”).
III.
DISCUSSION
Despite the several issues stated by the parties on appeal, resolution of this matter turns
on whether the Bankruptcy Court correctly determined that allowing Appellant to reopen the
Debtors’ chapter 11 cases and modify the discharge injunction would impair the Reorganized
Debtors’ “fresh start” in violation of 11 U.S.C. § 524 and the prerogatives of the Bankruptcy
11
Code. Appellant seeks ultimately to pursue indemnification claims against the Debtors 1 solely
for purposes of seeking available insurance proceeds from Chartis. The Bankruptcy Court
concluded that, based on the specific facts here, doing so would inevitably result in economic
loss to the Debtors and, therefore, Appellant’s post-discharge prosecution of its prepetition
rights would result in a violation of the section 524(a) injunction. While the Ruling required the
Bankruptcy Court to interpret its own orders and exercise its discretion whether to reopen the
Debtors’ chapter 11 cases, that underlying legal determination – which this Court reviews de
novo – is dispositive. Because the Bankruptcy Court’s application of the law was in error, the
Court reverses the Ruling and remands for consideration of Appellant’s motions to reopen the
chapter 11 cases and modify the discharge injunction in accordance with this opinion and order.
A.
The Section 524(e) Exception to the Discharge Injunction
The Bankruptcy Code’s goal of securing a debtor’s “fresh start” is embedded in section
524(a) of the Bankruptcy Code, which establishes a permanent injunction against any attempt to
collect a debt from a reorganized debtor that was discharged under the terms of the debtor’s
confirmed chapter 11 plan of reorganization. Section 524(a) provides that a discharge obtained
in a chapter 11 case “operates as an injunction against the commencement or continuation of an
action, the employment of process, or an act, to collect, recover or offset any such debt as a
personal liability of the debtor, whether or not discharge of such debt is waived.” 11 U.S.C.
§ 524(a)(2).
As the Eleventh Circuit has explained, “[a] bankruptcy discharge and the
concomitant injunction against subsequent actions [provided by section 524(a)] are designed to
give the debtor a financial ‘fresh start.’” Owaski v. Jet Fla. Sys., Inc. (In re Jet Fla. Sys., Inc.),
883 F.2d 970, 972 (11th Cir. 1989); see also Walker v. Wilde (In re Walker), 927 F.2d 1138,
1
While the Debtors chapter 11 cases were jointly administered, Appellant seeks to prosecute its thirdparty claims specifically against Maguire.
12
1142 (10th Cir. 1991) (“The intent of this post-discharge injunction is to protect debtors . . . in
their financial ‘fresh start’ following discharge.”).
Subsection (e) of section 524 makes clear, however, that the discharge in no way affects
the liability of any other entity, or the property of any other entity, for the discharged debt. See
11 U.S.C. § 524(e). 2 Courts recognize that section 524(e) “permits a creditor to bring or
continue an action directly against the debtor for the purpose of establishing the debtor’s
liability when . . . establishment of that liability is a prerequisite to recovery from another
entity.” In re Walker, 927 F.2d at 1142. Thus, pursuant to section 524(e), a creditor may seek
to establish a debtor’s nominal liability in order to collect on an insurance policy maintained by
the debtor. See Houston v. Edgeworth (In re Edgeworth), 993 F.2d 51, 54-55 (5th Cir. 1993);
Green v. Welsh, 956 F.2d 30, 33-34 (2d Cir. 1992). That is, the debtor’s discharge does not
affect the liability of the debtor’s insurer for damages caused by the debtor and that the creditor
may seek to recover solely from the insurer.
The Eleventh Circuit addressed this issue directly in In re Jet Fla. Sys., Inc., 883 F.2d
970 (11th Cir. 1989).
There, the Eleventh Circuit permitted a plaintiff to pursue a post-
discharge defamation suit against the reorganized debtor in order to seek access to potential
insurance proceeds. The court held that, because the protections of section 524(a) exist only for
the debtor, when “[t]he Debtor and his property are not subject to any risk and maintenance of
the suit does not frustrate the policy of the Bankruptcy Code in giving the Debtor a fresh start in
his economic life,” the discharge injunction is not implicated. Id. at 974. It explained:
[T]he provisions of 524(a) apply only with respect to the personal liability of the
debtor. When it is necessary to commence or continue a suit against a debtor in
order, for example, to establish liability of another, perhaps a surety, such suit
2
That subsection provides: “Except as provided in subsection (a)(3) of this section, discharge of a debt of
the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.” 11
U.S.C. § 524(e).
13
would not be barred. Section 524(e) was intended for the benefit of the debtor
but was not meant to affect the liability of third parties or to prevent establishing
such liability through whatever means required. Certainly, the obligation of an
insurer can be viewed as such a secondary liability under the provisions of
section 524(e).
Id. at 973 (citations omitted).
Numerous courts have agreed that a tort claimant who seeks to proceed against a
discharged debtor only for the purpose of recovering against an insurer does not impair a
debtor’s fresh start or violate the discharge injunction. See, e.g., Hawxhurst v. Pettibone Corp.,
40 F.3d 175, 181 (7th Cir. 1994) (permitting modification of discharge injunction to pursue suit
to recover insurance proceeds, explaining that a “nominal suit, if successful, will not create a
personal liability of the debtor and therefore will neither deplete the debtor’s assets or otherwise
interfere with the administration of the bankruptcy proceeding, nor hinder the debtor’s fresh
start at the close of the proceeding”); First Fid. Bank v. McAteer, 985 F.2d 114, 118 (3d Cir.
1993) (“[T]he protection from liability afforded the debtor under the Code does not affect the
liability of the debtor’ s insurers. Courts, relying on 11 U.S.C. § 524(e), have allowed claimants
to proceed with tort claims against the debtor for the purpose of collecting from the debtor's
liability insurer. Thus, the creditor remains free to collect the full amount of the original
obligation from any non-debtor party such as a guarantor or insurer.”); Green v. Welsh, 956
F.2d 30, 33 (2d Cir. 1992) (“Numerous courts, confronted with a tort claimant who seeks to
proceed against a discharged debtor only for the purpose of recovering against an insurer, have
relied on §§ 524(a) and 524(e) and the fresh start policy in concluding that the discharge
injunction does not bar such a suit.”); In re Fine Air Servs. Corp., 2005 WL 3190398, at *4
(Bankr. S.D. Fla. May 17, 2005) (“11 U.S.C. § 524(e) . . . was specifically enacted to allow
creditors to recover the debt of the debtor ‘from any third party’ such as the debtor’s insurer”).
The linchpin in this analysis is whether the post-discharge action interferes with the
14
debtor’s fresh start. The Bankruptcy Court held that “any economic loss incurred by a debtor
due to the post-discharge prosecution of a prepetition action would result in a violation of the
section 524(a) injunction.” Ruling at 12; 508 B.R. at 511. Several courts support that position.
See, e.g., Deippo v. Kmart Corp., 335 B.R. 290, 298 (S.D.N.Y. 2005) (“[T]he plaintiff can
maintain the action against the debtor only if the debtor bears none of the expense of the
defense.”); Bank of India v. Trendi Sportswear, Inc., 2002 WL 84631, at *5 (S.D.N.Y. Jan. 18,
2002) (citation omitted) (mentioning that “all of the cases that allow claims to continue against
a bankrupt defendant” require that the “debtor bears none of the expense of the defense”);
Greiner v. Columbia Gas Transmission Corp. (In re Columbia Gas Transmission Corp.), 219
B.R. 716, 721 (S.D.W. Va. 1998) (denying relief from discharge injunction where debtor was
“responsible for costs of defending the lawsuit”); Perez v. Cumberland Farms, Inc., 213 B.R.
622, 624 (D. Mass. 1997) (“Any economic loss to the Debtor would . . . result in the violation of
the statutory injunction of 11 U.S.C. § 524(a).”). Other courts have taken a less rigid view of
what undermines a debtor’s fresh start, recognizing that “ancillary consequences” to the
reorganized debtor of a creditor’s pursuit of a post-discharge indemnity claim will not bar
modification of the discharge injunction. See, e.g., In re Loewen Grp. Inc., 2004 WL 1853137,
at *26 (E.D. Pa. Aug. 18, 2004); Stoneking v. Histead (In re Stoneking), 222 B.R. 650, 656
(Bankr. M.D. Fla. 1998); Granger v. Harris (In re Harris), 85 B.R. 858, 860 (Bankr. D. Colo.
1988).
B.
Ramifications of the Chartis Claim For the Debtors’ “Fresh Start”
The Bankruptcy Court grounded its Ruling on the nature of the Debtor’s $150,000
obligation to Chartis under the Chartis Settlement which would be triggered by Appellant’s
pursuit of the HDR Indemnification Claim in the Bacon Action, as well as the ramifications of
15
the Connecticut Settlement for the HDR Indemnification Claim. The Bankruptcy Court erred
both in construing the Connecticut Settlement Order and Chartis’ claim, and – more importantly
– in identifying the implications of Chartis’ claim for the Debtors’ “fresh start.”
1.
Third-Party Rights Under the Connecticut Settlement Order
The Bankruptcy Court held that “the Connecticut Settlement Agreement, together with
the Plan’s discharge injunction, resolved with finality all liability arising out of the alleged
construction and design defects at the York Project, including any potential liability of the
Debtors to HDR” (emphasis added).
To the extent the Bankruptcy Court interpreted the
Connecticut Settlement Order to compromise HDR’s rights under the HDR Agreement or to bar
HDR from accessing proceeds of the Chartis Policy, that interpretation is belied by the Order
itself and is contrary to established law.
Settlement agreements compromising claims in bankruptcy, including where approved
by a bankruptcy court, are treated as contracts in accordance with normal contract-interpretation
principles. See, e.g., In re W.B. Care Ctr., LLC, 419 B.R. 62, 65 (Bankr. S.D. Fla. 2009)
(bankruptcy court orders approving claim settlement agreements are treated as contracts); In re
May, 2006 WL 5940803, at *3 (Bankr. N.D. Ga. Sept. 29, 2006) (“judgment entered pursuant to
a settlement agreement is treated as having both contract and judgment characteristics”);
Berardinelli v. Gen. Am. Life Ins. Co. (In re Gen. Am. Life Ins. Co. Sales Practices Litig.), 357
F.3d 800, 804 (8th Cir. 2004) (“Once approved, a settlement agreement is interpreted as a
contract.”) (citation omitted); Yassian v. Goodrich (In re Rodeo Canon Dev. Corp.), 2010 WL
6259764, at *9 (9th Cir. B.A.P. Oct. 28, 2010) (“Generally speaking, we interpret a settlement
agreement approved by court order like we would interpret any other contract.”); Am.
LaFrance, LLC v. RT Jedburg Commerce Park, LLC (In re Am. LaFrance, LLC), 461 B.R. 267,
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271-72 (Bankr. D. Del. 2011) (orders approving claim settlement are treated as contracts);
Enter. Energy Corp. v. United States (In re Columbia Gas Sys., Inc.); 146 B.R. 106, 113 (D.
Del. 1992) (holding that it is appropriate to treat a judicially-approved settlement agreement like
a contract in the bankruptcy context) (citations omitted).
“It is axiomatic that a contract cannot bind a nonparty.”
R/V Beacon, LLC v.
Underwater Archeology & Exploration Corp., 2014 WL 4930645, at *3 (S.D. Fla. Oct. 1, 2014)
(citing Whetstone Candy Co. v. Kraft Foods, Inc., 351 F.3d 1067, 1073 (11th Cir. 2003)
(“Generally, a contract does not bind one who is not a party to the contract, or who has not in
some manner agreed to accept its terms.”); E.E.O.C. v. Waffle House, Inc., 534 U.S. 279, 294
(2002) (“It goes without saying that a contract cannot bind a nonparty.”); Norfolk S. Ry. Co. v.
Groves, 586 F.3d 1273, 1281-82 (11th Cir. 2009) (“Furthermore, it is a tenet of contract law
that a third-party cannot be bound by a contract to which it was not a party.” (citation
omitted))).
The Connecticut Settlement explicitly provided that it had “no preclusive effect vis-à-vis
third parties . . . [i]n particular, with respect to [York Project claim], (i) the striking of the claim
asserted by [the State] shall have no effect on the claims regarding the underlying matters
against any non-debtor, third-party in any other proceedings outside of the Debtors’ chapter 11
cases.” The Connecticut Settlement Order incorporated and explicitly restated those limitations.
On its own terms, the Connecticut Settlement Order had no preclusive effect on the State’s
ability to sue HDR with respect to the York Project, as it has in the Bacon Action, or on HDR’s
indemnification rights against Maguire under the HDR Agreement.
The Connecticut Settlement Order – a bankruptcy court order approving the Debtors’
settlement with the State – could not have compromised HDR’s indemnification rights even had
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it purported to do so.
HDR was not a party to the Connecticut Settlement Agreement.
Admittedly, HDR did not object to the Connecticut Settlement Order or the Confirmation
Order. Nor did it participate in the Confirmation Hearing. It had no reason and was not
required to. The Connecticut Settlement did not seek to restrict HDR’s indemnification rights.
Nor could it have. It sought only to settle the State’s claims against the Debtors and to preclude
the State from asserting and being able to recover on any claims against the Debtors, or from
the Debtors insurers in their capacity as insurers of the Debtors on account of the claims
submitted by the State against the Debtors. See Connecticut Settlement Order ¶ 4 (“[The State]
also shall not, and agrees that it will not, reassert the [State’s c]laims against the Debtors, the
reorganized debtors or their respective estates, or the insurers of the Debtors, solely in their
capacity as insurers of the Debtors with respect to the [State’s c]laims, in any other proceeding
in any forum.”). In as much as the Ruling interpreted the Connecticut Settlement Order to bind
and restrict HDR, it was clearly erroneous.
This accords with the undisputed law in this Circuit that a creditor is not required to
actively participate in a bankruptcy proceeding in order to seek relief from the plan discharge
injunction so as to pursue insurance proceeds. See Jet Florida, 883 F.2d at 974 (holding that
section 524(a) did not require a plaintiff to have filed a notice of claim in order to establish
Debtor's liability solely as a prerequisite to recovery from a debtor’s insurer); In re Fine Air
Servs., 2005 WL 3190398 (Bankr. S.D. Fla. 2005) (“[T]he filing or non-filing of a proof of
claim . . . would be completely irrelevant to the issue of whether a creditor may pursue a
debtor’s liability insurer after a discharge order has been entered in the debtor’s bankruptcy case
except to the extent that an ultimate judgment of liability against a debtor’s liability insurer
would have to be reduced to the extent that the creditor received a distribution on its claim in
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the bankruptcy case.”). Forcing a creditor seeking indemnification solely against a debtor’s
insurer to file a proof of claim and appear in the debtor’s bankruptcy or risk losing its
indemnification rights would upend the purpose of section 524(e).
2.
Nature of the Chartis Claim
The Bankruptcy Code defines a “claim” to include contingent obligations of the debtor.
See Perkins v. Haines, 661 F.3d 623, 626-27 (11th Cir. 2011) (“Although antecedent debt is not
defined, the term ‘debt’ is stated to include ‘liability on a claim,’ and ‘claim’ is broadly defined
as the ‘right to payment, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable,
secured, or unsecured.’” (citing 11 U.S.C. §§ 101(5), (12))); Midwest Holding # 7, LLC v.
Anderson (In re Tanner Family, LLC), 556 F.3d 1194, 1196 (11th Cir. 2009) (“[A] debtor incurs
a debt to a creditor when the creditor has a claim against the debtor, even if the claim is
unliquidated, unmatured, unfixed, or contingent.”).
“It is generally agreed that a debt is
contingent if it does not become an obligation until the occurrence of a future event, but is
noncontingent when all of the events giving rise to liability for the debt occurred prior to the
debtor’s filing for bankruptcy.” Mazzeo v. U.S. (In re Mazzeo), 131 F.3d 295, 303 (2d Cir.
1997).
Section 503 of the Bankruptcy Code provides for the allowance of administrative
expense claims. “The threshold requirement for an administrative expense is that it be actual
and necessary to the preservation of the estate; the benefit must run to the debtor and be
fundamental to the conduct of its business.” McMillan v. Joseph Decosimo and Co. (In re Das
A. Borden & Co.), 131 F.3d 1459, 1463 (11th Cir. 1997) (quoting Varsity Carpet Servs., Inc. v.
Richardson (In re Colortex Indus., Inc.), 19 F.3d 1371, 1383 (11th Cir. 1994)); see also 11
19
U.S.C. § 503(b). A pre-petition claim – such as a contingent claim for indemnification or
contribution based on a pre-petition obligation – can be elevated and transformed into a postpetition administrative claim, but only where the debtor assumes the pre-petition contract such
that the existence of a post-petition transaction can be seen as benefiting the bankruptcy estate.
See, e.g., In re New Power Co., 313 B.R. 496, 506 (Bankr. N.D. Ga. 2004) (holding that claim
for attorney fees payable under creditor’s pre-petition service agreement that debtor did not
assume did not arise out of post-petition transaction between creditor estate and was not payable
on administrative priority basis as “actual and necessary” cost of preserving estate, even though
fees were incurred post-petition); FIE Corp. v. United Capitol Ins. Co. (In re Firearms Imp. &
Exp. Corp.), 131 B.R. 1009, 1015 (Bankr. S.D. Fla. 1991) (holding that insurer’s claim, based
on debtor’s failure to fund self-insured retention, was not entitled to administrative expense
priority because debtor’s funding obligation arose out of pre-petition contractual relationship
with insurer, and insurer’s post-petition performance of policy obligations despite debtor’s
failure to fund retention could not be deemed a benefit it had bestowed upon bankruptcy estate);
(MBNA America Bank, N.A. v. Trans World Airlines, Inc. (In re Trans World Airlines, Inc.), 275
B.R. 712, 723 (Bankr. D. Del. 2002) (denying administrative expense status to claim where
there was “no post-petition transaction or relationship between [debtor] and [creditor] which
would elevate [creditor’s] claims from mere breaches of a pre-petition contract to breaches of a
post-petition contract entitled to administrative status”); In re Chateaugay Corp., 102 B.R. 335,
352 (Bankr. S.D.N.Y. 1989) (denying administrative expense status to contingent indemnity
loss claims where contingency occurred post-petition, explaining that upon occurrence of the
triggering event “the contingent claim simply becomes a liquidated one; it, however, is not
thereby elevated to the status of a post-petition claim”).
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The Bankruptcy Court held that the Debtors’ $150,000 payment obligation under the
Chartis Settlement was an administrative expense claim in name only. Rather, it explained, the
obligation should be understood as a “contingent obligation of the reorganized Debtors . . .
triggered only if Chartis incurs expenses in defending any claims under the Prior Policies.” The
Bankruptcy Court’s characterization of the claims allowed through the Chartis Settlement Order
appears to be based on a misapplication of the relevant law.
To qualify as an administrative expense, a claim must provide value to the estate
independent of a debtor’s pre-petition obligations. The Chartis Settlement resolved Chartis’
assertion of administrative expense claims arising from its alleged provision of insurance
coverage to the Debtors post-petition based on the understanding that the Debtors had agreed to
treat their insurance policies as executory contracts and assume them under the Plan. That is,
Chartis maintained in its Administrative Expense Motion that the Debtors’ pre-petition
obligations were transformed into post-petition obligations of the estate based on the Debtors’
assumption of their policies and Chartis’ continued provision of coverage post-petition. The
Chartis Settlement Order explicitly stated that “Chartis is granted an Administrative Expense
Claim (as such term is defined in the Plan) in the amount of $150,000.” The $150,000 payment
obligation was accounted for under Article II of the Plan, pertaining to payment of
administrative expense claims.
On its face, the Chartis Settlement provided for an
administrative expense claim for value provided by Chartis to the Debtors under assumed
contracts. Read as written, the Order, consequently, conferred administrative expense status on
Chartis’ claim.
Bankruptcy Courts are afforded significant deference in interpreting their own orders.
But the Bankruptcy Court’s recasting of the Debtor’s $150,000 payment obligation as a pre-
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petition claim appears to flatly contradict the Chartis Settlement Order and the treatment of
Chartis’ claim as an administrative expense under the Plan.
The Bankruptcy Court appears to have relied on a false dichotomy between an
administrative expense claim and a contingent claim. Nothing in the Bankruptcy Code nor
case-law construing it prohibits contingent administrative expense claims. “To the contrary,
whenever an entity provides goods or services to a trustee or debtor-in-possession, it has a
contingent administrative claim.” In re Caldor, Inc.-NY, 240 B.R. 180, 191 (Bankr. S.D.N.Y.
1999); see also In re SunCruz Casinos LLC, 342 B.R. 370, 379 (Bankr. S.D. Fla. 2006) (holding
that creditor was required to have filed administrative expense claim based on debtors’
contingent post-petition obligations). The Debtors’ $150,000 obligation to Chartis may have
been contingent, but it was allowed by the Bankruptcy Court and accounted for under the Plan
as an administrative expense.
3.
The Chartis Claim Cannot Impair the Debtors’ “Fresh Start”
Regardless of whether Chartis’ $150,000 claim is understood as a contingent
administrative expense claim or a contingent pre-petition claim, payment on that claim by the
Reorganized Debtors cannot implicate their “fresh start.” As a result, Appellant’s assertion of
the HDR Indemnification Claim against Maguire does not violate the Debtors’ discharge
injunction, but rather, falls squarely within the permissive space of section 524(e).
The fact that an allowed claim is contingent does not mean that, once the triggering
contingency occurs, the required payment impairs the reorganized debtor’s fresh start. Quite
the opposite. It means that treatment of the claim was contemplated by the confirmed plan of
reorganization, and that distribution on that allowed claim pursuant to the terms of the plan
cannot, by definition, disturb the debtor’s fresh start. Here, Chartis’ claims (the $150,000
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contingent obligation and the up-to-$250,000 Assumed Claim) were allowed by the Bankruptcy
Court. The fact that the Debtors were not made to remit $150,000 to Chartis along with
disbursement on all other administrative expense claims (i.e., on the Plan’s effective date) only
demonstrates that Chartis’ claim was contingent, and that the triggering event had not yet
occurred.
The Bankruptcy Court explained that “the Debtor agreed to the $150,000 potential
reimbursement amount without any contemplation that reimbursable expenses could include the
costs of defending any claims relating to the York Project, including the HDR Indemnification
Claim.” That may be. But all it means is that the Debtors failed to foresee that the triggering
contingency would arise. Not that the current turn of events could not have been predicted.
After all, for all the Debtors (and the Bankruptcy Court) stress that HDR knew about the PJR
proceeding, the Debtors’ bankruptcy, and the possibility that they would need to dip into the
Chartis Policy proceeds under the HDR Agreement, the Debtors knew about the State’s claim
against non-debtors like HDR and Maguire’s obligation to indemnify HDR under the HDR
Agreement.
In fact, non-party rights were expressly carved out of both the Connecticut
Settlement and the Chartis Settlement. In any event, people are often wrong about future
developments. But the inability to foreshadow does not foreclose the claim. The Debtors may
have settled with Chartis never imagining that the State would revive its claims against HDR,
and HDR would invoke its indemnification rights under the HDR Agreement. They may well
have attempted to strike a different bargain with Chartis had they so imagined. Hindsight is
twenty-twenty. But they did, in fact, settle for a $150,000 obligation. The Bankruptcy Court
approved that settlement, allowed that claim, and confirmed the Plan. Payment of the $150,000
claim amount cannot impair the Debtors’ fresh start.
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The only other possible interpretation of the Ruling is that the Bankruptcy Court, in
effect, valued Chartis’ contingent claim at zero. The Chartis Settlement Order provided for a
$150,000 obligation for “amounts that would have been payable by the Debtors, but for the
Debtors’ bankruptcy, under the terms and conditions of any insurance policy issued to the
Debtors that was expired as of the Petition Date (a “Prior Policy”) when such amounts are paid
by Chartis.” It also excepted that claim from satisfaction on the Plan’s effective date under
Article II of the Plan. In the Ruling, the Bankruptcy Court determined that, at the time it
approved the settlement, neither the Debtors nor Chartis expected Chartis to ever pay out on a
Prior Policy or for the Debtors to incur the $150,000 obligation. That may amount to a
valuation by the Bankruptcy Court of Chartis’ $150,000 claim at zero. But if that is how the
Bankruptcy Court interpreted the Chartis Settlement and Confirmation Orders, HDR can
certainly pursue the HDR Indemnification Claim without disturbing the Debtors’ fresh start.
Either way – reviewing the Bankruptcy Court’s analysis and application of section 524
of the Bankruptcy Code de novo – the Bankruptcy Court erred in determining that, by triggering
the Debtors’ $150,000 obligation to Chartis, the HDR Indemnification Claim would impair the
Debtors’ fresh start. Because payment of an allowed claim cannot impair a debtor’s fresh start,
Appellant’s pursuit of the HDR Indemnification Claim does not violate the discharge
injunction. Pursuant to section 524(e), Appellant may seek to establish Maguire’s nominal
liability in the Bacon Action in order to collect on the Chartis Policy.
C.
Prejudice to Chartis
Because this matter is remanded to the Bankruptcy Court for consideration of
Appellant’s motions to reopen and modify consistent with this opinion and order, the Court
need not determine whether the Bankruptcy Court was correct in entertaining Chartis’
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arguments on HDR’s motions and considering prejudice to Chartis in issuing the Ruling. But
the Court notes the following: The Bankruptcy Court explained that:
Allowing the HDR Indemnification Claim to proceed would materially change
the risk and benefit analysis that was the foundation of the Chartis Settlement
Agreement . . . Chartis would be bound by an agreement it negotiated with the
Debtors in reliance on the fact that all liability in connection with the alleged
construction and design defects at the York Project, including the nominal
liability of Maguire, had been extinguished . . . [and] is too late for Chartis to
elect to treat the HDR Indemnification Claim as the “assumed” claim under the
terms of the Chartis Settlement Order.
Ruling at 16; 508 B.R. at 513-14. In fairness to Chartis, it does appear to have anticipated the
possibility that the State would sue one of the other PJR proceeding defendants – i.e., HDR –
who would then attempt to gain access to the Chartis Policy proceeds. See Confirmation Hr’g
Tr. at 11-17. But in compromising its administrative expense claims and selecting the “assumed
claim,” it read too broadly the language and capabilities of the Connecticut Settlement Order
with regard to HDR’s indemnification rights. Chartis may be able to argue, in the Bacon
Action, that the State has already released or waived the claims it now asserts against HDR, at
least with respect to Chartis. Id. But that issue is not before this Court.
IV.
CONCLUSION
The Bankruptcy Court’s determination that Appellant’s pursuit of the HDR
Indemnification Claim in the Bacon Action against Maguire as a nominal defendant only and
solely in order to gain access to proceeds of the Chartis Policy impaired the Debtors’ fresh start
and violated the discharge injunction was in error. That decision is, therefore, REVERSED.
This cause is REMANDED to the Bankruptcy Court for consideration of Appellant’s motions
to reopen the Debtors’ chapter 11 cases and to modify the discharge injunction consistent with
this decision.
The Clerk is directed to TRANSMIT notice of this Order to the Bankruptcy Court in
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accordance with all relevant rules and procedures, and is further directed to CLOSE this case.
DONE AND ORDERED in Fort Lauderdale, Florida this 24th day of December, 2014.
_________________________________
BETH BLOOM
UNITED STATES DISTRICT JUDGE
Copies to:
Counsel of Record
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