In re: DPH Holdings Corp.
OPINION & ORDER: This appeal, arising out of an adversary bankruptcy proceeding, involves the scope of workers compensation coverage purchased from insurance carriers by the underlying debtor. It pits state regulators in Michigan, who argue for broad -ranging coverage, against the carriers, who argue that the coverage they agreed to provide was narrow. Because Michigan law provides that the states workers compensation fund will provide workers compensation to employees when an employer cannot do so, this litigation ultimately affects who is responsible for paying workers compensation benefits to various employees of the debtor, but it does not affect whether some entity has that responsibility. Presently at issue before the Court is a Novem ber 1, 2012, order by the Hon. Robert D. Drain, United States Bankruptcy Judge, granting summary judgment in favor of the insurance carriers, ACE American Insurance Company and Pacific Employers Insurance Company (collectively, ACE) on the coverage i ssue. The regulatorsthe State of Michigan Workers Compensation Insurance Agency (the Agency) and the State of Michigan Funds Administration (the Funds Administration, and collectively with the Agency, the Michigan Defendants) appeal that order. For the reasons stated above, the decision of the bankruptcy court is affirmed. The Clerk of Court is directed to close the case. SO ORDERED. (Signed by Judge Paul A. Engelmayer on 8/1/2013) (rsh)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
In re: DPH HOLDINGS CORP., et al.,
STATE OF MICHIGAN WORKERS’ COMPENSATION :
INSURANCE AGENCY and STATE OF MICHIGAN
ACE AMERICAN INSURANCE COMPANY and
PACIFIC EMPLOYERS INSURANCE COMPANY,
12 Civ. 9292 (PAE)
OPINION & ORDER
PAUL A. ENGELMAYER, District Judge:
This appeal, arising out of an adversary bankruptcy proceeding, involves the scope of
workers’ compensation coverage purchased from insurance carriers by the underlying debtor. It
pits state regulators in Michigan, who argue for broad-ranging coverage, against the carriers,
who argue that the coverage they agreed to provide was narrow. Because Michigan law provides
that the state’s workers’ compensation fund will provide workers compensation to employees
when an employer cannot do so, this litigation ultimately affects who is responsible for paying
workers compensation benefits to various employees of the debtor, but it does not affect whether
some entity has that responsibility.
Presently at issue before the Court is a November 1, 2012, order by the Hon. Robert D.
Drain, United States Bankruptcy Judge, granting summary judgment in favor of the insurance
carriers, ACE American Insurance Company and Pacific Employers Insurance Company
(collectively, “ACE”) on the coverage issue. The regulators—the State of Michigan Workers’
Compensation Insurance Agency (the “Agency”) and the State of Michigan Funds
Administration (the “Funds Administration,” and collectively with the Agency, the “Michigan
Defendants”)—appeal that order. For the reasons that follow, the Bankruptcy Court’s decision is
I. Background 1
Delphi Corporation (or “Delphi”), the debtor in the underlying bankruptcy proceeding,
was headquartered in Troy, Michigan. In 2005, Delphi filed for Chapter 11 bankruptcy. In
October 2009, it was eventually reorganized into DPH Holdings Corp. The dispute here involves
the scope of coverage under workers’ compensation insurance policies that Delphi entered into
A. Michigan’s Workers’ Compensation Laws
Like many states, Michigan requires that employers provide their in-state employees with
workers’ compensation insurance. See Worker’s Disability Compensation Act of 1969
(“WDCA”), Mich. Comp. Laws Ann. §§ 418.101 et seq. Under Michigan law, there are two
methods by which an employer can do so: (1) “[b]y receiving authorization from the director to
be a self-insurer”; or (2) “[b]y insuring against liability with an insurer authorized to transact the
business of worker’s compensation insurance within [Michigan].” Mich. Comp. Laws Ann.
§ 418.611(1). 2 Each method requires approval from the director of the Agency, which is charged
The Court’s account of the underlying facts of this case, which are undisputed unless otherwise
indicated, is drawn from items designated for the record on appeal. See Dkt. 2–3. The Court
cites to them by the docket number used in the underlying bankruptcy adversary proceeding, No.
09-1510 (RDD) (“Bankr. Dkt.”).
An employer may also join with other employers in the same industry to provide for pooled
self-insurance. Mich. Comp. Laws Ann. § 418.611(2).
with administering the WDCA. Id.; id. § 445.2011(II)(O). It is undisputed that an employer
may use one, or more than one, of those methods to provide workers’ compensation insurance.
See Bankr. Op. at 142–43; Transcript of Argument (“Tr.”) at 4–5, 36–37.
Four provisions of Michigan law are necessary background to this controversy. First,
under the WDCA, “[t]he state accident fund and each insurer issuing an insurance policy to
cover any employer not permitted to be a self-insurer under section 611 shall insure, cover, and
protect in the same insurance policy, all the businesses, employees, enterprises, and activities of
the employer.” Mich. Comp. Laws Ann. § 418.621(2).
Second, the WDCA requires that each worker’s compensation insurance policy contain
the so-called “Michigan Endorsement.” Mich. Comp. Laws Ann. § 418.621(4). This mandatory
language (discussed in detail infra) is deemed to be controlling to the extent it conflicts with the
language of the policy. Id.
Third, to assure that workers are not deprived of coverage, Michigan created the Funds
Administration. It is responsible for providing additional coverage when a self-insured employer
is insolvent. Mich. Comp. Laws Ann. §§ 418.501(1), 418.537.
Fourth, the WDCA requires that employers file a form known as a Form 400 with the
Agency. See Mich. Comp. Laws Ann. § 418.625. This form gives the Agency notice of the
insurance each employer has acquired.
B. Delphi’s Insurance Policies
Delphi is a corporation headquartered in and doing business in Michigan. Since 1999,
Delphi was authorized and approved by the Agency to self-insure. Each year between 2000 and
2008 (except 2002), Delphi purchased two sets of insurance policies from ACE.
The first, the Retention Policies, cover liabilities that exceed Delphi’s self-insured limits.
The retention amount—that is, the amount required to be paid by Delphi before the Retention
Policies kick in—ranges from $2 million (in 2000) to $5 million (in 2008). See Bankr. Dkt. 1635, at 2; 163-18, at 2. The second, the Deductible Policies, are nationwide workers’ compensation
policies, which encompass both Delphi and its subsidiaries. The Deductible Policies are not
merely excess coverage; rather, they provide first-dollar coverage of any benefits due under
applicable workers’ compensation laws. As required by law, the Deductible Policies each
contain the required Michigan Endorsement. (The Retention Policies do not contain the
Michigan Endorsement, and were not required to.)
Also as required by law, ACE filed Form 400s for each year that it ensured Delphi. On
the Form 400s, Delphi Corporation is listed as the insured employer. In addition, the Form 400s
[T]he above referenced employer has been issued a policy of insurance by [ACE].
This policy covers all the liability imposed upon the employer by the provisions
of the Michigan Workers’ Disability Compensation Act for all employees in any
and all of the employer’s businesses.
See, e.g., Bankr. Dkt. 18, at 10 (2004 Form 400). The Form 400s also state “[a] separate form
400 is required for each legal entity insured under a policy.” Id.
C. Adversary Proceeding and the Bankruptcy Court’s Decision
On October 8, 2005, Delphi filed for Chapter 11 protection in bankruptcy court. On
January 6, 2006, the bankruptcy court authorized Delphi to assume the Retention and Deductible
policies and to enter into post-petition policies and agreements. Delphi’s obligations to ACE
under the insurance policies are accorded administrative expense priority. Up until 2008, Delphi
also continued to enter into new policies.
On October 6, 2009, ACE initiated this adversary proceeding. It sought a declaratory
judgment establishing that none of the policies covered Delphi’s Michigan self-insured workers’
compensation liability. In the alternative, ACE asked the bankruptcy court to reform the policies
to conform to the parties’ mutual intent, such that they would not cover employees at Delphi’s
self-insured workplaces in Michigan.
On November 10, 2009, the Michigan Defendants moved to dismiss the adversary
proceeding for lack of subject matter jurisdiction, sovereign immunity, and failure to state a
claim. They also asked that the Bankruptcy Court abstain to allow the Michigan courts and
administrative bodies to resolve the dispute. The Michigan Defendants’ stake in the controversy
is this: With Delphi in bankruptcy, to the extent ACE is not liable for payment of workers’
compensation due to Delphi employees, the Funds Administration may be.
In a bench decision issued on January 12, 2010, the bankruptcy court ruled against the
Michigan Defendants on each of the pre-merits defenses they had interposed. See Bankr. Dkt.
69. It held that (1) it had jurisdiction over the adversary proceeding, (2) the Michigan
Defendants were not entitled to sovereign immunity, and (3) abstention was unwarranted. On an
interlocutory appeal by the Michigan Defendants, all three of these rulings were affirmed. See In
re DPH Holdings Corp., 437 B.R. 88, 93–94 (S.D.N.Y. 2010), aff’d, 448 F. App’x 134 (2d Cir.
2011), cert. denied, 133 S. Ct. 51 (2012).
On August 10, 2012, in response to a separate motion by the Michigan Defendants, the
bankruptcy court later lifted the litigation stay as to a discrete issue relating to the effect of the
Form 400s. The issue raised was whether ACE is liable to cover any workers’ compensation
claims against Delphi “solely because ACE or Pacific filed with the [Agency] any so-called
Form 400 or any amendment thereto that identifies any insurance policy that names Delphi or
any Delphi affiliate.” Bankr. Dkt. 142, at 3. Following that ruling, ACE filed suit in the
Michigan Court of Claims, to resolve that question. See Bankr. Dkt. 146 Ex. 1 (the “Form 400
The issue presently pending in this Court arises out of the parties’ cross-motions for
summary judgment. The Michigan Defendants have conceded that the Retention Policies do not
cover Delphi’s first-dollar workers’ compensation liability (i.e., the amount up to which Delphi
is self-insured under those policies). See Bankr. Dkt. 174 (“Bankr. Op.”), at 140. As a result, the
only disputed issue is whether the Deductible Policies covered (as the Michigan Defendants
assert) all of Delphi’s workers’ compensation liability in Michigan or (as ACE contends) none of
the Michigan liability of Delphi itself, but only discrete subsidiaries identified in those policies.
The time period covered by this dispute is October 2000 through September 2009, the period
covered by the policies. 4
On October 16, 2012, after argument, Judge Drain issued his decision from the bench.
Bankr. Dkt. 174 (“Bankr. Op.”). He held, on the basis of their plain language, that the policies
excluded all Delphi Corporation workplaces in Michigan from their coverage, and covered only
Delphi subsidiaries in Michigan. He further held that the Michigan Endorsement did not conflict
with the coverage provided by the policies.
D. Appellate Procedural History
On December 20, 2012, Michigan appealed. Dkt. 1. On February 15, 2013, Michigan
filed its opening brief. Dkt. 8. On April 15, 2013, ACE filed its brief in opposition. Dkt. 13.
As more fully explained below, see infra note 7, the Michigan Court of Claims recently ruled
on that question, in favor of ACE. See ACE Am. Ins. Co. v. Elsenheimer, No. 12-96-MM, slip
op. at 9–11 (Mich. Ct. Cl. July 8, 2013).
It is undisputed that there was no policy in effect between October 2002 and October 2003.
Bankr. Op. at 140.
That same day, DPH also filed a brief. Dkt. 14. On May 10, 2013, Michigan filed its reply brief.
Dkt. 17. On July 9, 2013, the Court heard argument.
Applicable Legal Standards
A. Summary Judgment
On appeal from a decision on a summary judgment motion, the Court reviews the
bankruptcy court’s core jurisdiction, and the Court “may affirm, modify, or reverse a bankruptcy
judge’s judgment, order, or decree or remand with instructions for further proceedings.” Fed. R.
Bankr. P. 8013. The Court reviews a bankruptcy court’s decision on a summary judgment
motion de novo. See In re Bayou Grp., LLC, 439 B.R. 284, 296 (S.D.N.Y. 2010). In conducting
such a review, the Court “decide[s] the issue[s] as if no decision had previously been rendered.”
H & C Dev. Group, Inc. v. Miner (In re Miner), 229 B.R. 561, 565 (2d Cir. BAP 1999). This
Court will “review only those facts and legal arguments presented to the Bankruptcy Court.” In
re Bayou Grp., 439 B.R. at 296–97 (collecting cases).
The same standards apply to summary judgment motions under Federal Rule of
Bankruptcy Procedure 7056 as to motions under Federal Rule of Civil Procedure 56. To prevail
on a motion for summary judgment, the movant must “show that there is no genuine dispute as
to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(a). The movant bears the burden of demonstrating the absence of a question of material fact.
In making this determination, the Court must view all facts “in the light most favorable” to the
non-moving party. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); see also Holcomb v. Iona
Coll., 521 F.3d 130, 132 (2d Cir. 2008). To survive a summary judgment motion, the opposing
party must establish a genuine issue of fact by “citing to particular parts of materials in the
record.” Fed. R. Civ. P. 56(c)(1); see also Wright v. Goord, 554 F.3d 255, 266 (2d Cir. 2009).
“A party may not rely on mere speculation or conjecture as to the true nature of the facts to
overcome a motion for summary judgment,” because “conclusory allegations or denials cannot
by themselves create a genuine issue of material fact where none would otherwise exist.” Hicks
v. Baines, 593 F.3d 159, 166 (2d Cir. 2010) (citation omitted). Only disputes over “facts that
might affect the outcome of the suit under the governing law” will preclude a grant of summary
judgment. Anderson v. Liberty Lobby Inc., 477 U.S. 242, 248 (1986).
B. Michigan Contract Interpretation
Under Michigan law, “[t]he proper interpretation of a contract is a question of law.”
Certified Restoration Dry Cleaning Network, L.L.C. v. Tenke Corp., 511 F.3d 535, 543 (6th Cir.
2007) (quoting Coates v. Bastian Bros., Inc., 276 Mich. App. 498, 503 (2007)). “Insurance
policies are contracts and, in the absence of an applicable statute, are ‘subject to the same
contract construction principles that apply to any other species of contract.’” Titan Ins. Co. v.
Hyten, 491 Mich. 547, 554 (2012) (quoting Rory v. Cont’l Ins. Co., 473 Mich. 457, 461 (2005)).
“If the language of the contract is unambiguous, we construe and enforce the contract as
written.” Quality Prods. & Concepts Co. v. Nagel Precision, Inc., 469 Mich. 362, 375 (2003)
(citing Farm Bureau Mut. Ins. Co. of Michigan v. Nikkel, 460 Mich. 558, 570 (1999)).
“‘An insurance contract is ambiguous when its provisions are capable of conflicting
interpretations.’” Klapp v. United Ins. Grp. Agency, Inc., 468 Mich. 459, 467 (2003) (quoting
Farm Bureau Mut. Ins., 460 Mich. at 566). Contracts are to be “‘construed so as to give effect to
every word or phrase as far as practicable.’” Id. (quoting Hunter v. Pearl Assurance Co., Ltd.,
292 Mich. 543, 545 (1940)).
“[U]nless a contract provision violates law or one of the traditional defenses to the
enforceability of a contract applies, a court must construe and apply unambiguous contract
provisions as written.” Rory, 473 Mich. at 461. One traditional defense to enforceability is
public policy: “The parties have the right to employ whatever terms they wish, and the courts
will not rewrite them as long as the terms do not conflict with pertinent statutes or public policy.”
State Farm Fire & Cas. Co. v. Liberty Ins. Underwriters, Inc., 398 F. App’x 128, 130 (6th Cir.
2010) (quoting St. Paul Fire & Marine Ins. Co. v. Am. Home Assurance Co. (“St. Paul”), 444
Mich. 560, 564 (1994)).
The Court begins its analysis by looking first to the plain language of the policies. Both
parties contend that the policies are unambiguous.
A. Coverage of the Policies
Delphi and ACE entered into eight Deductible Policies relevant here: in 2000, 2001, and
in each year from 2003 to 2008. Each began October 1, and was in effect until the following
October 1. These policies apply nationwide, not just to Delphi’s Michigan operations. The
policies are virtually identical for the years 2003 through 2008. Accordingly, the Court uses the
Deductible Policy for 2008 as the basis for its analysis, noting those instances in which the 2000
and 2001 policies materially differ from the 2008 iteration. Specifically, the Court relies on an
excerpt from the 2008 policy as representative, see Bankr. Dkt. 163-17 (the “2008 Policy”), on
which the parties relied both in briefing and at argument. See Tr. 6, 37.
The 2008 Deductible Policy is issued to “Delphi Corporation,” which is identified as the
“Named Insured” in Item 1 of the Information Page of the Policy. 2008 Policy at 2. 5 Item 1 also
permits the applicant to expand upon the information supplied in response to Item 1, using
ensuing extension pages. One is “[f]or other named insured”; the other is“[f]or other
Previous iterations of the Deductible Policies had been issued in the name of “Delphi
Automotive Systems Corporation.” See, e.g., Bankr. Dkt. 51-6, at 1.
workplaces.” Both were completed. The “Schedule of Named Insured” extension page lists
Delphi Corporation, and eight additional named insured—all subsidiaries of Delphi. Id. at 7.
The “Schedule of Other Workplaces” extension page lists, by state, workplace locations across
the country for Delphi and the aforementioned subsidiaries. Id. at 9–16. As to Michigan, the list
of workplaces includes 25 Delphi workplaces in Michigan. Id. at 10–12. These subsidiaries and
workplaces thus are encompassed within the Named Insured section in Item 1.
The Deductible Policy also contains a “General Section,” which defines terms within the
contract. Id. at 5. Section B, entitled “Who is Insured,” states: “You are insured if you are an
employer named in item 1 of the information page.” Section E, titled “Locations,” states: “This
policy covers all of your workplaces listed in items 1 or 4 of the Information Page; and it covers
all other workplaces in item 3.A. states [which include Michigan] unless you have other
insurance or are self-insured for such workplaces.” Viewed in isolation, these responses to Item
1 would appear to encompass all of the listed workplaces of the named insureds.
Crucially here, however, the 2008 Deductible Policy contains a “Designated Workplaces
Exclusion Endorsement.” This “Exclusion Endorsement” states: “The policy does not cover
work conducted at or from:” and then lists four insurance policy numbers. Id. at 6, 29. One such
policy, “WCU C42850135,” corresponds to a Retention Policy issued to Delphi Corporation in
October 2008. See Bankr. Dkt. 39-14. The Retention Policy covers excess workers’
compensation liability in the states of Alabama, Indiana, Michigan, and Ohio. Id. at 1. The
Retention Policy states that “acceptance of this policy indicates that you are now and will remain
until the end of the policy period a duly qualified self-insurer.” Id. at 3. The Exclusion
Endorsement is incorporated into the 2008 policy writ large via the modification on the first
page, which provides that “This policy includes these endorsements and schedules,” then directs
the reader to a list of endorsements, which includes the Exclusion Endorsement. See id. at 2;
Bankr. Dkt. 41-23, at 52–53. The policies from 2003 through 2007 contain the same Exclusion
The issue presented, then, is how to reconcile the fact that Item 1 of the Deductible Policy
lists all of Delphi’s Michigan workplaces whereas the Exclusion Endorsement excludes the
workplaces covered by Delphi’s Retention Policy, as to which Delphi is a self-insurer. The
Court concludes that the Exclusion Endorsement controls, because it is more specific. Under
Michigan law, “specific language prevails over general language in a contract.” Nat’l Fire Ins.
Co. v. Roofmaster Const., Inc., No. 04-CV-71142-DT, 2005 WL 1030326, at *6 (E.D. Mich.
Apr. 28, 2005) (collecting cases). In effect, here, although Delphi’s operations broadly would
have been covered by the general terms of Delphi’s nationally applicable 2008 policy with ACE
had there been no ensuing exclusion, the specific and express exclusion of Delphi’s self-insured
Michigan operations, being specific, carries the day. Significantly, the alternative construction
would render the Exclusion Endorsement meaningless, in contravention of basic principles of
contract construction. See Klapp, 468 Mich. at 467 (“[C]ontracts must be ‘construed so as to
give effect to every word or phrase as far as practicable.’” (quoting Hunter, 292 Mich. at 545)).
Accordingly, the Court holds, the plain language of the 2003 through 2008 Deductible Policies
expressly excludes workers’ compensation liability for the operations covered by the Retention
Also highly probative as to this point, the Deductible Policies for all years each contain
separate sections specific to each covered state. See, e.g., Bankr. Dkt. 1-6, at 90 (2001
Deductible Policy); Id. 41-13, at 114 (2005 Deductible Policy). Each state-specific section
includes an extension of the Information Page listing “Classifications.” These “Classifications”
relate back to Item 4 of the Information Page, which provides: “The premium for this policy will
be determined by our Manual of Rules, Classifications, Rates and Rating Plans.” Notably, each
state-specific section lists the insured employers that are covered within that state. For example,
in 2005 in Arkansas, only Delphi Corp. was insured. See Bankr. Dkt. 41-13, at 54. In contrast,
that same year in California, Delphi Corp. was insured, as were subsidiaries Delphi Diesel and
PHI (Packard Hughes Interconnect). Id. at 60–61. As to Michigan, the Michigan extension page
for 2000 through 2008 (excluding 2002, when there was no policy at all) does not list Delphi as
an insured. Instead, these policies list only Delphi’s subsidiaries Delphi Diesel, ASEC, and
Mechatronics. Id. at 114–15 (2005 policy); see also 2008 Policy at 22. Indeed, none of the
Michigan Information Extension Pages in any year include Delphi Corporation on their lists of
“Classifications,” although extension pages for many other states do.
As to the 2000 and 2001 Deductible Policies, the analysis is slightly different, but the
bottom line is the same. There is no Designated Workplaces Exclusion Endorsement for those
years. However, Section 3.A of the Information Page for those policies states that “Part One of
the policy applies to the Workers’ Compensation Law of the states listed,” and then refers to the
“information page attached.” Many state information pages follow, including one for Michigan.
See Bankr. Dkt. 41-2, at 95–96; id. 41-6, at 90–91. The state information page for Michigan
expressly limits coverage to Delphi’s designated subsidiaries. On this basis, the Court concludes
that only the named Delphi subsidiaries in Michigan, and not all Delphi Corporation workplaces
in Michigan, were covered.
In sum: The Court concludes, on the basis of the plain language of the Deductible
Policies covering 2000 through 2008 (save 2002), that they do not extend workers compensation
insurance to employees of Delphi Corporation in Michigan. Instead, they extend such coverage
in Michigan only to the subsidiaries listed in the state-specific information pages that form part
of each year’s Deductible Policy. This conclusion is bolstered in the policies for 2003 through
2008, which expressly exclude any coverage of Delphi’s self-insured workplaces in Michigan.
That was the shared intention of the parties, Delphi and ACE, who entered into these policies. 6
B. The Michigan Endorsement
Determination of the subjective intent of the parties, as revealed in the plain language of
the Deductible Policies, does not, however, end the inquiry. Having found that the Deductible
Policies’ text supports ACE’s claim that these policies do not cover all Michigan workplaces but
only designated subsidiaries, the Court now turns to the question of whether that reading of the
policies conflicts with the Michigan Endorsement, and thus must be overridden.
As noted, the Michigan Endorsement is required by statute. It is identical in all the
Deductible Policies relevant here; it appears as a separate page within each policy. See, e.g.,
2008 Policy at 24; Bankr. Dkt. 41-13, at 117 (the “Mich. Endorsement”). In relevant part, the
[t]hat this insurance contract or policy shall for all purposes be held and deemed
to cover all the businesses the said employer is engaged in at the time of the
issuance of this contract or policy and all other businesses, if any, the employer
may engage in during the life thereof, and all employees the employer may
employ in any of his businesses during the period covered by this policy.
Although it is not necessary to its decision, the Court notes that extrinsic evidence of the intent
of the negotiating parties firmly supports this conclusion: These parties (ACE and Delphi) have
both offered unrefuted evidence that they did not intend the Deductible Policies to cover
Delphi’s self-insured locations in Michigan. As an indicator of the parties’ intent, ACE also
persuasively explains that the economics of the policies—i.e., the amount paid in premiums for
the coverage—is consistent with furnishing workers compensation coverage for a limited
number of subsidiaries in Michigan, but not for also covering Delphi’s self-insured locations.
ACE Br. 10–13, 38–39. Consistent with this, DPH has submitted a brief on this appeal
concurring with ACE’s position as to what the parties’ intent was at the time they entered into
the policy. Dkt. 14.
Mich. Endorsement § 5(e). The Michigan Endorsement further provides “[t]hat all the
provisions of this contract, if any, which are not in harmony with this paragraph are to be
construed as modified hereby, and all conditions and limitations in the policy, if any, conflicting
herewith are hereby made null and void.” Id. § 5(h).
It is undisputed that this endorsement modifies insurance coverage such that it covers all
employees and business of the “insured employer.” Id. §§ 2, 5. The issue before the Court is
what entity is the “insured employer” for the purposes of the Michigan Endorsement. The
Michigan Defendants note that at the top of the page of the Endorsement, “Delphi Corporation”
is listed (consistent with Item 1 of the overall Deductible Policy) as the “Named Insured.” The
Michigan Defendants further note that, in the course of defining terms, the Endorsement recites
that “You are the ‘insured employer.’” Id. § 2. The Michigan Defendants argue that “you”
naturally refers to the named insured listed both at the top of the Endorsement and in Item 1 of
the Information Page. Thus, they argue, Delphi, as the “Named Insured,” should be construed to
be the “insured employer” referred to throughout the Endorsement.
The Court is unpersuaded. As ACE fairly notes, nowhere in the Endorsement (or the rest
of the policy, for that matter) is Delphi referred to as the “insured employer.” And the term
“insured employer” is not tantamount to “named insured.” Instead, because “insured employer”
is not a defined term within the Michigan Endorsement or, indeed, the rest of the policy, it is
appropriate to review the totality of the Deductible Policy to derive the name of the insured
employer. And, for the reasons reviewed above, the balance of the policy makes clear that
although Delphi Corporation is the parent company in whose name the nationwide policy was
issued, within Michigan, the Deductible Policy applies only to discrete subsidiaries of Delphi,
and not to the parent company itself, which is not insured under the policy. For purposes of
discerning who the “insured employer” is, it is they, not the parent company, who are the insured
Also significant as to this issue, the Endorsement provides that “[t]his endorsement
applies only to the insurance provided by the policy because Michigan is shown in item 3.A. of
the Information Page.” (emphasis added). Judge Drain reasoned below that “that language
means that it applies literally only to the insurance provided by the policy, the word ‘only’
modifying the first noun after it, which is ‘insurance provided by the policy.’” Bankr. Op. at
150. This Court joins in that analysis. Put another way, the scope of the Endorsement is limited
to the coverage actually provided by the policy. This clause effectively directs the reader to refer
back to the whole of the policy to determine who is covered as the “insured employer,” and here,
the employer consists of discrete subsidiaries, not the excluded parent company.
Finally, to read the Michigan Endorsement to cover as the “insured employer” only the
entity listed as the named insured (i.e., Delphi Corp.) on the overall policy would lead to absurd
results. And under Michigan law, “contracts must be construed consistent with common sense
and in a manner that avoids absurd results.” Kellogg Co. v. Sabhlok, 471 F.3d 629, 636 (6th Cir.
2006) (citing Parrish v. Paul Revere Life Ins. Co., 103 Mich. App. 95, 97 (1981)). Specifically,
reading the Endorsement to apply to Delphi on account of its having been listed as the “named
insured” would not only contravene the clear intent of the parties—it would exclude from the
policies the Delphi subsidiaries who are, in fact, quite clearly insured under the policies.
For these reasons, the Court holds that the policy provides workers’ compensation
insurance coverage only to those employers named on the Michigan classification page, i.e.,
those subsidiaries of Delphi which are covered by ACE for workers’ compensation liability in
Michigan. Accordingly, only these employers (e.g., in 2005, Delphi Diesel, ASEC, and
Mechatronics; in 2008, just Delphi Diesel) are “insured employers” for the purposes of the
Michigan Endorsement. Pursuant to the Michigan Endorsement, all employees and businesses of
these named subsidiaries are required to be covered by the policy; however, that obligation does
not extend to the employees and businesses of their parent company, Delphi.
C. Michigan Public Policy
In a related argument, the Michigan Defendants appear to claim that the Deductible
Policies, if construed to cover only discrete subsidiaries of Delphi, violate Michigan workers’
compensation laws. Specifically, the Michigan Defendants rely on a provision in the WDCA
The state accident fund and each insurer issuing an insurance policy to cover any
employer not permitted to be a self-insurer under section 611 shall insure, cover,
and protect in the same insurance policy, all the businesses, employees,
enterprises, and activities of the employer.
Mich. Comp. Laws Ann. § 418.621(2). On its face, this provision clearly provides that workers
compensation coverage of an employer must extend to all of its businesses, and thus prevents an
insurer from cherrypicking for coverage only particular workplaces or employees within an
employer. However, the Michigan Defendants appear to extract from it a broader rule, that an
insurer cannot provide coverage only to certainly subsidiaries of a parent; rather, if one in-state
subsidiariary of a parent is covered, so must all. On this premise, the Michigan Defendants
further argue, the contrary intent of the parties must be disregarded, because Michigan law “bars
any evidence of intent or mistake, and requires the policy to be enforced as written.” Appellant
Br. 32 (citing New Amsterdam Cas. Co. v. Moss, 312 Mich. 459 (1945)); see also New
Amsterdam Cas. Co., 312 Mich. at 472.
This argument can be quickly put to one side. Section 418.621(2) does not, by its terms,
impose a rule that all subsidiaries within a corporate family must be insured under a workers’
compensation policy together if any one of them is insured. Instead, its all-or-none directive is
fixed at the level of the employer. ACE’s construction of the Deductible Policies (adopted by
the bankruptcy court below) is consistent with that. It recognizes each covered Delphi subsidiary
as an employer and extends coverage throughout each covered subsidiary. There is no basis on
the record to treat instead the parent company, Delphi, as the “employer” of the employees of its
subsidiaries. The Michigan Defendants have not cited legal authority under which all entities
within a corporate umbrella must be covered by a workers’ compensation policy if any of them
are covered. There is, thus, no conflict between the Deductible Policies and Michigan state law,
so as to require the Court to override the intent of the negotiating parties reflected in the text of
the Deductible Policies. And “courts will not rewrite [the terms of a contract] as long as the
terms do not conflict with pertinent statutes or public policy.” St. Paul, 444 Mich. at 514.
D. Sovereign Immunity
Michigan separately argues that the bankruptcy court’s decision should be reversed
because it impermissibly infringed on the State of Michigan’s sovereign immunity. The
Michigan Defendants raised a similar argument earlier in this litigation. The Second Circuit
rejected it, holding that Michigan’s sovereign immunity had not been infringed by the institution
of this adversary proceeding:
The scope of the States’ waiver of sovereign immunity includes proceedings
implicating the bankruptcy court’s traditional in rem authority—“a narrow
jurisdiction that does not implicate state sovereignty to nearly the same degree as
other kinds of jurisdiction,”—as well as “proceedings necessary to effectuate the
in rem jurisdiction of bankruptcy courts.” Since the adversary proceeding here is
an in rem proceeding (or, at least, is otherwise necessary to effectuate the in rem
jurisdiction of the Bankruptcy Court), it does not offend the Michigan
Defendants’ sovereign immunity.
In re DPH, 448 F. App’x at 137 (quoting Cent. Va. Comm. Coll. v. Katz, 546 U.S. 356, 378
Seeking to avoid this holding, the Michigan Defendants argue that even if the adversary
proceeding itself does not violate Michigan’s sovereign immunity, the effect of the bankruptcy
court’s decision in ACE’s favor does. They argue that “the effect of the decision [is] to compel
the state to act by reading insurance policies,” Mich. Br. 36, because under the decision the state
could not rely on the designation on a Form 400 of who the named insured was. In this vein, the
Michigan Defendants note that the bankruptcy judge, during the argument preceding his decision
from the bench, explained that the state, to discern who the insured employer was, should “read
the Policy.” Bankr. Op. at 130. In fact, the Michigan Defendants argue, Michigan law requires
employers to file only the Form 400 with the Agency, and for the state to learn the identity of the
covered corporate subsidiaries, it will now need to read the underlying policies.
As an initial matter, the Court notes that the Michigan Defendants’ argument that the
designation of a “named insured” on a Form 400 is determinative of workers’ compensation
liability is not before this Court. That question is pending before the Michigan state courts in
the parallel proceeding, where to date it has been resolved in the insurers’ favor. 7 This lawsuit
solely concerns the Deductible Policies, and whether they—as a result of their text, the Michigan
Endorsement, or application of state law—provide broadly for coverage of all employees of the
Delphi parent company, not merely designated subsidiaries.
As to the issue of sovereign immunity, the fact that this adversary proceeding is within
the bankruptcy court’s in rem jurisdiction does not resolve that issue. See Tenn. Student
Assistance Corp. v. Hood, 541 U.S. 440, 450 (2004) (“Nor do we hold that every exercise of a
bankruptcy court’s in rem jurisdiction will not offend the sovereignty of the State.”). However,
See supra note 3. The Michigan Court of Claims held that the filing of a Form 400 under Mich.
Comp. Laws Ann. § 428.625 does not itself create a “statutory contract” requiring the insurer to
provide coverage beyond that provided in the underlying policy. ACE Am. Ins., No. 12-96-MM,
slip op. at 9–11.
the Second Circuit has squarely held, as noted above, that the interpretation of the policies
presented here does not infringe on Michigan’s sovereign immunity, because this proceeding is
necessary to effectuate the bankruptcy court’s in rem jurisdiction. In the event that the Michigan
courts ultimately resolve the Form 400 litigation in Michigan’s favor, in effect so as to hold that
the designation of Delphi as the “named insurer” on a Form 400 filed with the state gives rise to
workers’ compensation liability on Delphi’s part, that decision would then supply a different
basis other than the one here for imposing such liability on the insurers. It would appear to
render academic the decision here as to who is covered in fact by the Deductible Policies.
However, at this point, with no such ruling in favor of the Michigan Defendants on the Form 400
issue having been made by the Michigan courts, there is no basis to find infringement on
sovereign immunity by the Court’s construction of the Deductible Policies here.
Finally, the Michigan Defendants argue that the bankruptcy court erred by not abstaining.
They ask the Court to vacate the judgment and abstain from resolving ACE’s claims. They urge
this result based on both permissive abstention and Burford abstention.
1. Permissive Abstention
Under 28 U.S.C. § 1334(c)(i), a court may abstain from hearing a particular bankruptcy
proceeding “in the interest of comity with State courts or respect for State law.” The Michigan
Defendants argue that because this adversary proceeding turns on a question of state law—
“contract interpretation within the overlap of the Michigan statutory workers’ compensation
scheme”—the bankruptcy court should have abstained. See Mich. Br. 38.
ACE responds that this argument was waived, because the Michigan courts did not raise
it before the bankruptcy court. That argument is not without force. But even if that were not the
case, the Court would not vacate the judgment on that ground, because the Court does not find
that the bankruptcy court abused its discretion in declining to abstain. See In re Joint E. & S.
Dist. Asbestos Litig., 78 F.3d 764, 775 (2d Cir. 1996) (standard of review of decision by lower
court not to abstain is abuse of discretion). “Courts must be ‘sparing’ in their exercise of
permissive abstention.” CCM Pathfinder Pompano Bay, LLC v. Compass Fin. Partners LLC,
396 B.R. 602, 607 (S.D.N.Y. 2008) (quoting Winstar Holdings, LLC v. Blackstone Grp. L.P.,
No. 07 Civ. 4634 (GEL), 2007 WL 4323003, *5 (S.D.N.Y. Dec. 10, 2007)). They “may abstain
only for a few extraordinary and narrow exceptions.” In re WorldCom, Inc. Sec. Litig., 293 B.R.
at 332 (citation omitted).
Abstention is appropriate primarily where there are novel state-law claims that “involve
arcane or idiosyncratic provisions of state law that would warrant abstention based on comity
concerns.” Kirschner v. Bennett, No. 07 Civ. 8165 (GEL), 2008 WL 1990669 (S.D.N.Y. May 6,
2008) (citation omitted). That standard, however, is not met here. Interpreting the Deductible
Policies presents an unremarkable question of contract interpretation, albeit in a case involving
dense contract documents, as illustrated by the preceding discussion. These questions do not,
however, turn on “arcane or idiosyncratic provisions of state law.” To be sure, there may or may
not be novel or arcane questions of state law presented by the issue of the impact of Form 400
on the insurers’ legal obligations, but those questions are not pending before this Court.
Accordingly, abstention is not appropriate, and the bankruptcy court did not abuse its discretion
in declining to abstain.
2. Burford Abstention
Abstention under Burford v. Sun Oil Co. is appropriate where intervention of the lower
federal courts is likely to result in “[c]onflicts in the interpretation of state law, dangerous to the
success of state policies.” 319 U.S. 315, 334 (1943). More specifically,
a federal court sitting in equity must decline to interfere with the proceedings or
orders of state administrative agencies: (1) when there are difficult questions of
state law bearing on policy problems of substantial public import whose
importance transcends the result in the case then at bar; or (2) where the exercise
of federal review of the question in a case and in similar cases would be
disruptive of state efforts to establish a coherent policy with respect to a matter of
substantial public concern.
Liberty Mut. Ins. Co. v. Hurlbut, 585 F.3d 639, 649–50 (2d Cir. 2009) (quoting New Orleans
Pub. Serv., Inc. v. Council of New Orleans, 491 U.S. 350, 361 (1989)).
Burford abstention is not appropriate here. This case does not intrude on state regulatory
or policy preserves. By all accounts, the Deductible Policies being interpreted are unique to the
parties here, and the critical issues turn on construction of ACE Policy documents. The Court’s
construction of those materials ought have little effect outside this proceeding. The only issue
likely to implicate state policies is the issue of whether an insurer is bound by the identification
of its client on a Form 400. But that dispute, again, is not before this Court.
The Michigan Defendants further contend that the WDCA requires that “all questions
arising under this act . . . be determined by the bureau or a worker’s compensation magistrate, as
applicable,” Mich. Comp. Laws Ann. § 418.841(1), and therefore that the Court should abstain
so as to allow the specialized forum in Michigan to resolve this dispute. But the Court is not
interpreting the language of the Michigan Endorsement or of the WDCA. Rather, the Court’s
task here has principally been to determine, based on the language of the Deductible Policies
themselves, what entity is the “insured employer,” and then to confirm that Michigan state law
does not override that contractual understanding, which it does not. The interpretation of the
policies freely entered into by Delphi and ACE is unlikely to affect state interests or have ripple
effects beyond this litigation. Accordingly, abstention is not warranted.
For the reasons stated above, the decision of the bankruptcy court is affirmed. The Clerk
of Court is directed to close the case.
United States District Judge
Dated: August 1,2013
New York, New York
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