Community Memorial Hospital
Filing
19
OPINION AND ORDER overruling 11 Objections, adopting 18 Report and Recommendation and remanding case to the Bankruptcy Court for further proceedings.Signed by District Judge Mark A. Goldsmith. (DPer)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
IN RE COMMUNITY MEMORIAL
HOSPITAL,
Bankruptcy Case No. 12-20666
Adv. Proc. No. 14-2082
Debtor,
HON. DANIEL S. OPPERMAN
CMH LIQUIDATING TRUST,
Plaintiff,
Case No. 16-cv-14434
v.
HON. MARK A. GOLDSMITH
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURG, PA,
Defendant.
___________________________________/
OPINION & ORDER
(1) OVERRULING DEFENDANT NATIONAL UNION’S OBJECTIONS TO THE
BANKRUPTCY COURT’S SECOND REPORT & RECOMMENDATION (Dkt. 11); (2)
ADOPTING THE BANKRUPTCY COURT’S SECOND REPORT &
RECOMMENDATION (Dkt. 18); AND (3) REMANDING THE CASE TO THE
BANKRUPTCY COURT FOR FURTHER PROCEEDINGS
This matter is before the Court on the second Report & Recommendation (“R&R”) of the
Bankruptcy Court (Dkt. 18), which recommends finding that the insurance policy at issue is an
executory contract as to which the Bankruptcy Code’s prohibition against ipso facto provisions
applies. Defendant National Union Fire Insurance Company of Pittsburgh, PA (“National Union”)
filed objections to the R&R (Dkt. 11), to which Plaintiff CMH Liquidating Trust (the “Trust”)
filed a response (Dkt. 12).1 Because oral argument will not aid the decisional process, the
1
This response offered an argument that the Bankruptcy Court’s opinion should be upheld on
grounds not urged to that court, i.e. certain public policy arguments. Because the Court is adopting
1
objections to the R&R will be decided based on the parties’ briefing. See E.D. Mich. LR 7.1(f)(2);
Fed. R. Civ. P. 78(b). For the reasons set forth below, the objections are overruled, and the R&R
is adopted.
I. BACKGROUND
Community Memorial Hospital (“CMH”) filed for bankruptcy on March 1, 2012. At the
time, it had a directors and officers liability insurance policy (“D&O Policy”) from National
Union, which ran from March 11, 2011 to March 11, 2012. See 2011-2012 Policy, Ex. A to Def.
Obj. (Dkt. 11-2). After filing its petition, CMH renewed its D&O Policy, which ran from March
11, 2012 to March 11, 2013. See 2012-2013 Policy, Ex. I to Def. Obj. (Dkt. 11-10). The renewed
policy was identical to the one that ran for the prior twelve-month period. CMH began to wind
down operations on April 4, 2012. Following the wind-down decision, CMH requested that
National Union add an endorsement to the renewed policy – known as tail or run-off coverage –
to provide coverage for any claims made during the three-year period following April 4, 2012.
See Run Off Policy Endorsement, Ex. N to Def. Obj. (Dkt. 11-15). National Union complied with
that request and issued the tail coverage endorsement effective April 4, 2012. Id. The Trust, to
which CMH’s rights had been assigned, subsequently filed suit against former directors and
officers of CMH in February 2014, asserting claims for breach of fiduciary duty and negligence.
See Underlying Compl., Ex. O to Def. Obj. (Dkt. 11-16).
The D&O Policy provided three types of coverage: (i) Type A coverage indemnified
directors and officers for liability, provided they were not indemnified by CMH; (ii) Type B
coverage indemnified CMH to the extent that it was duty-bound to reimburse or indemnify the
the Bankruptcy Court’s recommendation based on the arguments raised before that court, the
alternate public policy grounds will not be considered.
2
directors and officers; and (iii) Type C coverage protected CMH in the event that it was sued
directly for the wrongful acts of its directors and officers. Id.
The D&O Policy included an endorsement – Endorsement 10 – stating that coverage was
subject to a bankruptcy/insolvency/creditors exclusion:
[National Union] shall not be liable to make any payment for Loss in connection
with any Claim made against any Insured:
(1)
alleging, arising out of, based upon, attributable to, or in any way involving,
directly or indirectly:
(i)
any Wrongful Act which is alleged to have led to or caused,
directly or indirectly, wholly or in part, the bankruptcy or insolvency
of the Organization, or to the Organization filing a petition, or a
petition being filed against the Organization, pursuant to the federal
Bankruptcy Code or any similar state law, or the Organization
assigning its assets for the benefits of its creditors; or
(ii)
the Organization having sustained a financial loss due,
directly or indirectly, wholly or in part, to a Wrongful Act of the
Insured(s), but only if such Claim is made after the Organization has
been determined to be insolvent, or has filed a petition for
bankruptcy, or a petition has been filed against it, or the
Organization has assigned its assets for the benefit of its creditors;
or
(2)
brought by or on the behalf of any creditor or debt-holder of the
Organization, or arising out of any liability (whether alleged or actual) to pay or
collect accounts, including but not limited to Claims alleging misrepresentation in
connection with the extension of credit or purchase of a debt instrument, or Claims
alleging any deterioration in the value of the debt as a result of (wholly or in part)
the bankruptcy or insolvency of the Organization.
See id. at 70. The same endorsement was found in the 2012-2013 policy for which tail coverage
was purchased.
It was this endorsement that National Union cited in denying any coverage obligation for
the underlying action against directors and officers, arguing that at least some of the claims were
based on the contention that the directors and officers committed wrongful acts that led CMH to
3
file bankruptcy. In turn, the Trust filed this adversary proceeding, seeking a determination that the
endorsement was not enforceable on the grounds that it was an ipso facto clause – i.e. a provision
in an executory contract that provides for termination or modification based on the filing of a
bankruptcy petition or the financial condition of the debtor. Such clauses are prohibited under the
Bankruptcy Code. See 11 U.S.C. § 365(e)(1).2
In its first R&R (Dkt. 1), the Bankruptcy Court found, among other things, that
Endorsement 10 was not a prohibited ipso facto clause, because the endorsement did not purport
to make the entire policy ineffective as a result of the bankruptcy filing. On appeal, this Court
agreed with CMH’s objection, and held that the ipso facto prohibition may be triggered even if the
challenged prohibition invalidates only part of a contract, and not the entire contract. See 6/6/2017
Op. & Order (Dkt. 9). This Court did not rule on whether Endorsement 10 constituted an
unenforceable ipso facto provision, because there were other issues that would still need to be
decided by the Bankruptcy Court to reach that issue, including whether the insurance policy was
an “executory contract,” as the prohibition on ipso facto clauses only applies to such contracts.
This Court remanded this matter to the Bankruptcy Court for further consideration of all the
parties’ arguments.
2
“Notwithstanding a provision in an executory contract or unexpired lease, or in applicable law,
an executory contract or unexpired lease of the debtor may not be terminated or modified, and any
right or obligation under such contract or lease may not be terminated or modified, at any time
after the commencement of the case solely because of a provision in such contract that is
conditioned on—
(A) the insolvency or financial condition of the debtor at any time before the closing of the
case;
(B) the commencement of a case under this title; or
(C) the appointment of or taking possession by a trustee in a case under this title or a
custodian before such commencement.”
4
On remand, the Bankruptcy Court determined, among other things, that the D&O Policy is
an executory contract to which protection against ipso facto provisions applies. National Union
filed objections to this finding.
II. STANDARD OF REVIEW
In a non-core proceeding, such as the instant matter, a district court reviews de novo those
portions of the bankruptcy court’s proposed findings of fact or conclusions of law to which a party
has timely and specifically objected. 28 U.S.C. § 157(c)(1); Fed. R. Bankr. P. 9033(d); see also
Waldman v. Stone, 698 F.3d 910, 922 (6th Cir. 2012) (explaining that for non-core proceedings,
the bankruptcy court submits proposed findings of fact and conclusions of law, which the district
court reviews de novo under Federal Rule of Bankruptcy Procedure 9033(d) upon the timely filing
of specific objections). A district court “may accept, reject, or modify the proposed findings of
fact or conclusions of law, receive further evidence, or recommit the matter to the bankruptcy
judge with instructions.” Fed. R. Bankr. P. 9033(d).
III. ANALYSIS
The parties and the Bankruptcy Court framed the issue as whether the insurance policy at
issue should be deemed an “executory contract” – a term the Bankruptcy Act does not define, but
which courts have. See, e.g., Matter of B. Siegel Co., 51 B.R. 159, 161 (Bankr. E.D. Mich. 1985)
(citing Executory Contracts in Bankruptcy, Part 1, 57 Minn. L. Rev. 439, 460 (1973)) (defining an
executory contract as a contract “under which the obligation of both the bankrupt and the other
party to a contract are so far unperformed that failure of either to complete performance would
constitute a material breach excusing the performance of the other”).
The dispute here, however, is not so much whether obligations remain unperformed. The
central dispute is whether the term “executory contract” should be applied to the particular
5
endorsement under which coverage is sought – without regard to the entirety of the contractual
relationship, both pre-petition and post-petition, which could bear on whether a contracting party
is seeking to terminate or modify a right that has pre-petition roots. Because the Court adopts the
more fulsome approach, it concludes that Endorsement 10 is a prohibited ipso facto clause that
National Union attempted to enforce to limit an executory contract.
National Union’s premise is that the tail coverage is a distinct policy, and as such did not
exist pre-petition. In its view, only obligations grounded in pre-petition contracts are subject to
the ipso facto prohibition; because the tail coverage did not exist pre-petition, it could not possibly
constitute an executory contract against which ipso facto provisions are unenforceable. See Def.
Obj. at 11-12.3 The Trust argues that the proper focus is not when the tail coverage came into
existence, but whether the contractual relationship was continuous and essentially unchanged from
the pre-petition period through the post-petition period, such that the same contractual relationship
and the same contract can and should be deemed to have been extant pre-petition. See Pl. Resp.
at 12 (Dkt. 12) (“[T]he Policy should be treated as continuous over the pre-petition and postpetition periods for purposes of determining whether National Union can enforce the contractual
exclusion of coverage upon CMH filing for bankruptcy.”)
The Bankruptcy Court agreed with the Trust’s argument that “since National Union
attempts to modify the existing contractual rights of a debtor, the ipso facto provisions of the
Bankruptcy Code, especially Section 365, prohibit National Union from doing so.” 2d R&R at 4
(Dkt 18). The Bankruptcy Court concluded that, although “the 2011-2012 D&O Policy is different
3
National Union cites cases holding that an executory contract must be pre-petition, but those
cases involve the issue of a trustee’s rejection or assumption of a contract – not enforcement of an
ipso facto prohibition. See, e.g., In re General Homes Corp., 199 B.R. 148, 149 (S.D. Tex. 1996).
For purposes of this opinion, National Union’s premise in this regard may be assumed to be correct.
6
from the 2012-2013 D&O Policy in regard to time frames, the rights of CMH continued under
both policies.” Id. at 5. The court further concluded that “[u]sing the language of the 2011-2012
D&O Policy, since coverage continued, the parties must have agreed and understood that the D&O
Policy was renewed.” Id.
The Bankruptcy Court rightly focused on whether the policies in effect pre- and postpetition were essentially the same – a perspective adopted in In re Garnas, 38 B.R. 221 (Bankr.
D.N.D. 1984). The issue there was whether an insurer could fail to renew a one-year policy postpetition when the policy had been issued pre-petition. Observing that the policies of this type
would “automatically renew upon expiration of the term,” id. at 222, the court concluded that
“[a]lthough a policy may state a termination date, that date in most circumstances is simply ignored
and the policy continues on and on with the relationship between the insurance company and the
policyholder continuing over the term without any interaction between the two except for payment
of premium.” Id. at 223. Under these circumstances, the court concluded that the policies were
executory contracts that would have been automatically renewed were it not for the filing of a
bankruptcy petition, thereby justifying an injunction to prevent nonrenewal of the policies. Id. at
224.
Here, there is no dispute that the two relevant policies are functionally the same. The
language of the 2011 and 2012 policies are identical, except for the timeframes and the premium
amounts. Notably, each contained Endorsement 10. Thus, the relationship between insured and
insurer remained continuous and essentially unchanged.
While National Union tries to characterize the tail coverage as a separate policy, it was
nothing more than an endorsement to the 2012 policy. As an appendage to the 2012 policy, it had
pre-petition roots that make it part of an executory contract. In fact, its roots are deep because the
7
2011 contract and the 2012 contract gave the insured the right to purchase tail coverage. See 2d
R&R at 2. Thus, as the Bankruptcy Court observed, the insurance contract extant post-petition
can be viewed either as the renewal of the pre-petition 2011 contract or as tail coverage purchased
under rights guaranteed by the pre-petition 2011 contract. Either way, National Union’s premise
that the contract did not exist as of the bankruptcy filing is without merit.
The cases cited by National Union that purportedly support its position are not persuasive.
In In re New England Marine Services, Inc., 174 B.R. 391 (Bankr. E.D.N.Y. 1994), the debtors
filed for bankruptcy in November 1992, but continued purchasing pollution liability insurance on
an annual basis through the December 1993 - December 1994 policy period. Holding the ipso
facto prohibition inapplicable, the court allowed cancellation of the 1994 post-petition policy,
finding that it was “distinctively different” from the 1990 pre-petition policy. Id. at 397. The
differences included coverage for different vessels, thereby making the 1994 post-petition a new
policy. Id. There are no such “distinctively different” provisions in our case.
Also distinguishable is In re Bolin Oil Co., 51 B.R. 936 (Bankr. N.D. Ohio 1985), in which
the debtor entered into a new policy with a new insurer after the filing of a bankruptcy petition;
clearly there was no continuation of a contractual relationship when the identity of the insurer
changed. Similarly, in In re Bogey’s Barn, Ltd., 47 B.R. 555 (Bankr. S.D. Fla. 1985), there was
no pre-bankruptcy relationship between the parties. Finally, In re Baird, 567 F.3d 1207 (10th Cir.
2009), does not help National Union, as that case involved a medical malpractice insurance policy
whose coverage period had expired two years before the filing of bankruptcy; the question in that
case – whether the trustee could assume the contract – had nothing to do with the issue in our case:
8
whether multiple policy documents evidence a unitary contractual relationship for purposes of
interpreting the ipso facto prohibition of § 365(e).4
As the Bankruptcy Court found, the contractual relationship between insurer and insured
here was continuous and substantially unchanged as between the pre-petition period and the postpetition period. Given that business reality, National Union’s declination of coverage impeded an
executory contract, in violation of the Bankruptcy Code’s prohibition on enforcement of ipso facto
provisions. Accordingly, National Union’s objections are overruled.5
IV. CONCLUSION
For these reasons, National Union’s objections (Dkt. 11) are overruled, and the Court
adopts the Bankruptcy Court’s second R&R (Dkt. 18). Because the second R&R does not contain
a specific recommendation on the pending cross-motions for summary judgment, the case is
remanded to the Bankruptcy Court for further proceedings.
Dated: July 23, 2019
Detroit, Michigan
s/Mark A. Goldsmith
MARK A. GOLDSMITH
United States District Judge
4
National Union also cites to authority holding, under state law, that renewal policies are
considered distinct policies. See, e.g., Farmers Ins. Exch. v. Allstate Ins. Co., 143 F. Supp. 213,
215 (E.D. Mich. 1956) (determining, outside of the bankruptcy context, that there was no meeting
of the minds to renew a policy and thus no contract). Such authorities have limited usefulness in
deciding, in the bankruptcy context, whether the ipso facto rule should be applied to a contractual
relationship that is continuous and unchanging through the pre-petition and post-petition period.
5
National Union also objects to the Bankruptcy Court’s conclusion that the bankruptcy exclusion
was a prohibited ipso facto clause within the meaning of § 541(c)(1) of the Bankruptcy Code. That
section only applies if the policy in question becomes property of the estate. The Bankruptcy
Court did not fully address this argument, see 2d R&R at 6, because it was not necessary to address
it if the exclusion is already prohibited under § 365. This Court will take the same approach.
National Union also raises several objections to what it claims are “misstatements that warrant
correction.” Def. Objs. at 23. These misstatements include non-material statements of fact and
law contained in the Bankruptcy Court’s R&R. None of the supposed misstatements affects the
outcome of the case, and thus need not be addressed.
9
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?