Benchnotes

Benchnotes

By Aaron M. Kaufman, Bradley D. Pack and Christina Sanfelippo1

Insurance Policy Buybacks and Settlements Approved in Rockville Centre Diocese Case

In mass tort cases like many of the diocese sexual abuse bankruptcies, insurance can present a valuable source of recovery for victims — indeed, sometimes the only real source of recovery — but coverage disputes can often delay or derail those recoveries for years. In In re Roman Catholic Diocese of Rockville Centre,2 the debtor had insurance coverage from many different groups of insurers, spanning decades.

From its inception until 1976, the debtor obtained coverage from insurance companies whose successors were now undergoing liquidation proceedings in New York. Between 1976-86, the debtor obtained coverage from a syndicate of insurers under the so-called “London policies,” which included Interstate, Evanston and Lexington. Since 1986, the debtor had been obtaining coverage from a wholly owned insurance company called Ecclesia Assurance Co.

Coverage under several of the debtor’s policies was in dispute, particularly during the years covered by the London policies. Several insurers commenced declaratory judgment actions to limit their exposure and determine that certain claims were barred. The debtor engaged in mediation with several of these insurers, and the parties reached agreements to buy back the policies under several agreements to be approved through a bankruptcy sale and settlement motion. Under the proposed sale and settlement, certain “settling insurers” would buy back policies in exchange for a combined total of approximately $88.5 million. To maximize the sale proceeds, the debtor sought “channeling injunctions” (channeling victims’ claims to the liquidating trust) and “gatekeeper injunctions.” The debtor filed a motion to approve the sale and settlement.

The U.S. Trustee objected on a number of grounds, but primarily based on the contention that the settlement was a sub rosa plan. To be clear, the debtor was not seeking approval of the plan through the sale and settlement motion. The plan was on its own confirmation trajectory.

However, the sales and settlements were conditioned on the plan eventually being confirmed and becoming effective. The sales and settlements with the settling insurers comprised $88.5 million of the total $320 million proposed to be funded into the liquidating trust under the plan.

The U.S. Trustee argued, among other things, that the motion sought to do through a sale what the U.S. Supreme Court held in Purdue could not be done through a plan (i.e., release third-party insurers from potential liability to third-party victims without their consent). The U.S. Trustee also argued that the sale and settlement should not be done outside of a plan, and the channeling and gatekeeping injunctions should not be entered outside of an adversary proceeding.

Hon. Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York rejected the U.S. Trustee’s sub rosa argument, noting that none of the factors were present to declare the settlement a sub rosa plan.3 Key to Chief Judge Glenn’s rejection of this argument was that the $85.5 million purchase price comprised only about 25 percent of the total $320 million to be funded through the proposed plan. Nothing in the settlement dictated creditor treatment or voting. Moreover, the settlement did not dictate plan treatment; it was merely conditioned on plan confirmation, which itself required affirmative creditor votes in favor of the plan.

Finally, no one was being asked to waive claims against the debtor. Thus, the court rejected the U.S. Trustee’s argument that the settlement was somehow a sub rosa plan. While the court did not directly address the U.S. Trustee’s nonconsensual third-party release arguments, it was implied that such issues were to be taken up at confirmation, not through the settlement.

Having addressed and rejected the sub rosa argument, the court’s approval of the sale and settlement was straightforward, applying business-judgment standards to the sale and the Iridium factors to the settlement.4 The sale of policies was an exercise of sound business judgment, resulting in substantial cash to pay creditors, and any parties objecting to “free and clear” relief were the subject of bona fide disputes that could be satisfied with money judgments. The court was satisfied that the debtor sufficiently amended the settlement and sale order to ensure that only estate property was being sold and settled. The court also found that the settling insurers were good-faith purchasers within the meaning of § 363(m).

Moreover, the settlement factors favored approval. The settlement fairly balanced the coverage litigation’s possibility of success with the future benefits attained through settlement. In addition, the court found that the settlement resolved complex and protracted coverage disputes. Perhaps most critically, the settlement was overwhelmingly supported by creditors, including the official committee and its constituents. Finally, the court found that the settlement was the product of extensive arms’-length negotiations, and that the parties were all represented by competent professionals.

Based on these factors and the record presented, the court overruled the U.S. Trustee’s objections, and approved the “free and clear” sale of policies to the settling insurers under §§ 105(a) and 363(b) and (f), and Rule 9019(a) of the Federal Rules of Bankruptcy Procedure.

Miscellaneous

• In re Powell, --- F.4th ----, 2024 WL 4352615 (9th Cir. Oct. 1, 2024) (Ninth Circuit held that court need not definitively determine whether debtor meets eligibility requirements for chapter 13 relief under § 109(e) before allowing debtor to exercise its “absolute right” to dismiss chapter 13 case under § 1307(b); Ninth Circuit explained that debtor’s certification on petition that they meet chapter-specific eligibility requirements presumptively establishes that filing entity “may be a debtor” under designated chapter; § 301(a) neither precludes bankruptcy court from relying on presumption of eligibility established by debtor’s certification, nor does it require that filing party “actually” be a debtor or “bona fide” debtor or that court must verify debtor’s eligibility; rather, § 301(a) simply states that case is commenced by filing of petition; accordingly, debtor that files petition under chapter 13 and certifies that they meet chapter-specific eligibility requirements is presumptively debtor under chapter 13; under Ninth Circuit’s precedent in Nichols v. Marana Stockyard and Livestock Mkt. Inc. (In re Nichols), 10 F.4th 956 (9th Cir. 2021), once chapter 13 case has been commenced under § 301(a), debtor has absolute right to voluntarily dismiss that case under § 1307(b); Ninth Circuit found support for its holding in Bankruptcy Code’s repeated reference to cases as commencing with filing of a petition — not with eligibility determination; for these reasons, bankruptcy court correctly concluded that under § 1307(b), it was required to dismiss debtor’s chapter 13 case without further inquiry);

• FTI GP I LLC on Behalf of Falcata Tech Inv. Fund I LP v. Point Invs. Ltd. (In re Point Invs. Ltd.), 2024 WL 4262832 (D. Del. Sept. 23, 2024) (district court affirmed bankruptcy court’s holding that “home court” rule — judicially created exception to automatic stay that permits filing of adversary proceeding against debtor — does not apply in chapter 15 cases; rationale underlying home court rule is that filing of adversary proceeding against debtor in home bankruptcy court is equivalent to filing of proof of claim in debtor’s bankruptcy case and, therefore, does not violate automatic stay; however, court explained that underlying rationale does not apply in chapter 15 cases because there is no claims-adjudication process for U.S. bankruptcy court to oversee; “home court” of foreign debtor is foreign main proceeding, and automatic stay in chapter 15 case serves to channel claims against debtor to debtor’s foreign main proceeding; therefore, creditor violated automatic stay by initiating adversary proceeding against debtor in chapter 15 case);

• Feldman v. John B. Lynch, Jr. (In re Fitzpatrick Container Co.), --- B.R. ----, 2024 WL 4511806 (Bankr. E.D. Pa. Oct. 16, 2024) (bankruptcy court held that trustee’s fraudulent-transfer claims under § 548 were timely because equitable tolling applied to statute of limitations under § 546; noting that § 546 is not jurisdictional in nature, court explained that equitable tolling may be applied to statute of limitations when trustee can establish diligence in pursuing relevant causes of action and presence of extraordinary circumstances; to avoid incentivizing lack of cooperation with trustee, diligence of trustee must be measured against several competing interests, including limited resources of estate, overall benefit to creditors and ongoing efforts in related proceedings; court rejected defendant’s argument that equitable tolling was inapplicable because obstructions in question were caused by involuntary debtor and its principal and not defendant, explaining that equitable tolling can apply based solely on actions of debtor and its principal because bankruptcy cases present “different slant” on application of equitable tolling, and trustee’s ability to bring avoidance actions in involuntary chapter 7 case is often subject to cooperation of debtor);

• In re Jackson, 663 B.R. 738 (B.A.P. 8th Cir. 2024) (dismissing as constitutionally moot debtor’s appeal from bankruptcy court’s order annulling and retroactively vacating automatic stay to give effect to U.S.’s post-petition eviction of debtor from four properties that he owned and seizure of personal property left at eviction sites, where debtor failed to obtain stay of order and properties were sold at auction during pendency of appeal; because properties had been sold to bona fide purchaser, “there is no effective relief that may be accorded Jackson regarding his requests for return of his property”; because order annulling automatic stay was moot, debtor’s appeal of order denying contempt sanctions was also moot, as “[t]here can be no basis for contempt based on a violation of the stay once the stay is annulled”);

• In re Bohman, 2024 WL 4564547 (Bankr. D. Utah 2024) (retired anesthesiologist was not “engaged in commercial or business activities” at time he filed individual chapter 11 petition, and thus was ineligible to file under subchapter V; debtor’s only source of income in two years prior to bankruptcy filing was from Social Security; volunteer work that debtor performed for family ranch was not commercial or business activity because work did not involve purchase or sale of commodities and was not means of livelihood or employment for gain; while debtor owned interest in defunct mining business, there was no credible evidence that debtor intended to recommence business operations as of petition date, and debtor’s tangential involvement in business’s appeal from adverse judgment was not significant enough to prove that debtor was engaged in commercial or business activities as of petition date);

• In re Celsius Network LLC, 2024 WL 4564200 (Bankr. S.D.N.Y. Oct. 24, 2024) (court would authorize service of process on defendants in fraudulent-transfer avoidance lawsuits “by airdropping a nonfungible token ... to their cryptocurrency wallet addresses,” where plaintiff was unable to locate or identify defendants; service in this manner was reasonably calculated to apprise defendants of pendency of action because “each wallet is a pseudonymous identifier of a single wallet-holder, and only that individual who owns a private key to a given wallet can access the wallet,” and it was unlikely that wallets had changed hands after alleged fraudulent transfers of cryptocurrency into wallets);

• In re Freeman, 2024 WL 4546980 (Bankr. N.D. Miss. Oct. 22, 2024) (chapter 7 trustee’s motion for summary judgment on adversary complaint to compel debtor’s nonfiling estranged spouse to turn over home in which she was living so that home could be sold and proceeds distributed to creditors would be granted in part and denied in part; trustee proved that home was estate property because it was acquired by debtor and spouse while they were married and was therefore community property under California law, and included in bankruptcy estate pursuant to 11 U.S.C. § 541(a)(2); court had already denied debtor’s claim of homestead exemption in home, and nondebtor spouse had no right to claim exemption in home on her own behalf; however, issue of fact existed as to whether home was “of inconsequential value or benefit to the estate”; although home had more than $373,000 in nonexempt equity, there were only three claims filed against estate, and two of them appeared to be sole and separate debt of debtor rather than community claims, such that they could not be satisfied out of community property pursuant to 11 U.S.C. § 726(c); record was not sufficiently developed to determine whether third claim of $7,140.38 was fully or partially enforceable against community property, and court had to weigh amount of claims that could actually be paid out of proceeds from sale of home against administrative and other costs of sale to determine whether home was of inconsequential value or benefit); and

• In re Fawcett, 2024 WL 4553195 (Bankr. E.D. Mo. Oct. 22, 2024) (state of Missouri, which brought claim on behalf of class of consumers, was entitled to judgment against chapter 7 debtor who owned and controlled construction company that took down payments from customers without intent or ability to complete construction work; in addition to establishing right to judgment under state consumer fraud statute, state proved that claim satisfied elements of nondischargeability under 11 U.S.C. § 523(a)(2)(A) for false pretenses, false representations or actual fraud; debtor, by himself and acting through construction company’s sales representative, told customers that company would complete their construction projects; despite debtor’s testimony that he believed that company would finish work, evidence showed that debtor knew or should have known that representations were false given company’s insolvency and undercapitalization and debtor’s control over company’s financial accounts and records; debtor intended to deceive customers into paying substantial down payments without intention that company would complete work, and customers justifiably relied to their detriment on debtor’s misrepresentations; penalties and fine to which state was entitled under consumer fraud statute were nondischargable under 11 U.S.C. § 523(a)(7)).

Aaron Kaufman is a partner with Gray Reed in Dallas. Bradley Pack is a shareholder with Engelman Berger, PC in Phoenix. Christina Sanfelippo is an associate with Cozen O’Connor in Chicago.