A voluntary chapter 11 case dealing with mass torts is neither a “suit” nor a “claim” against the debtor, and insurers are therefore not obligated to pay the debtor’s bankruptcy costs as part of the duty to defend, according to Chief Bankruptcy Judge Robyn L. Moberly of Indianapolis.
In her January 19 opinion, Judge Moberly said that she did “not reach the issue of whether an Insurer would have a contractual obligation to defend contested matters in a bankruptcy context where the debtor was actively denying liability and putting forth a defense to each survivor.” Judge Moberly’s opinion was a recommendation that the district court deny the debtor’s motion for summary judgment.
Beset with claims of sexual abuse, USA Gymnastics filed a chapter 11 petition. Before bankruptcy, the insurers had been covering defense costs in sexual abuse suits under a reservation of rights. Since filing, the debtor has spent most of its time dealing with insurance coverage issues. So far, Judge Moberly said, the debtor has not objected to any claims by those alleging sexual abuse.
The debtor filed an adversary proceeding against its insurers alleging that their duty to defend included covering the costs of bankruptcy. After discovery, the debtor filed a motion for summary judgment.
Judge Moberly said that outcome turned on the interpretation of the policies under Indiana law. The insurers’ obligations are purely contractual, she said, leaving courts no room to devise common law about the duty to defend.
Generally speaking, the general liability policies obligated the insurers to defend any “suit” against the insured alleging damages for “bodily injury.”
The sexual abuse lawsuits represented claims under the policies, “but is the chapter 11 bankruptcy itself a ‘claim’ or a ‘suit’ under the policies?,” Judge Moberly asked.
Focusing on the debtor’s bankruptcy, Judge Moberly described how the plan gives an option for sexual abuse claimants to settle or litigate, with recovery coming from a trust. The plan, she said, “does not evaluate nor classify the value of survivor’s claims by the usual defensive criteria.” She found nothing in the plan indicating “that the bankruptcy case would be used to adjudicate the claims . . . or reduce [the debtor’s] liability.”
For bankruptcy costs to represent defense costs that the insurers must cover, Judge Moberly said that bankruptcy must be “a civil proceeding in which damages for bodily injury are alleged.” To the contrary, the bankruptcy “is a procedural vehicle by which [the debtor] can gather, maximize and then divvy up insurance proceeds in resolution of sexual abuse lawsuits,” she said. “This object is far different than the duty to defend objective of minimizing an insured’s liability.”
In sum, the “bankruptcy is neither in form nor substance a ‘suit’ against [the debtor] that is ‘seeking [covered] damages” and thus “is not a ‘suit’” that the insurers are obligated to pay “as part of their duty to defend.” Furthermore, the bankruptcy filed by the debtor “is not a claim for a ‘wrongful act” that is defined in the policies as a “wrongful act” committed by the insured.
In some other mass tort bankruptcies, Judge Moberly acknowledged that insurers had agreed to provide funding. Although an insurer may voluntarily fund a bankruptcy given its “systemic advantages . . . , it is not a reason for this Court to stretch or rewrite the contractual coverage obligation.”
Finding that the bankruptcy was neither a “suit” nor a “claim” triggering the insurer’s duty to defend, Judge Moberly recommended that the district court deny the debtor’s motion for summary judgment.
A voluntary chapter 11 case dealing with mass torts is neither a “suit” nor a “claim” against the debtor, and insurers are therefore not obligated to pay the debtor’s bankruptcy costs as part of the duty to defend, according to Chief Bankruptcy Judge Robyn L. Moberly of Indianapolis.
In her January 19 opinion, Judge Moberly said that she did “not reach the issue of whether an Insurer would have a contractual obligation to defend contested matters in a bankruptcy context where the debtor was actively denying liability and putting forth a defense to each survivor.” Judge Moberly’s opinion was a recommendation that the district court deny the debtor’s motion for summary judgment.
Beset with claims of sexual abuse, USA Gymnastics filed a chapter 11 petition. Before bankruptcy, the insurers had been covering defense costs in sexual abuse suits under a reservation of rights. Since filing, the debtor has spent most of its time dealing with insurance coverage issues. So far, Judge Moberly said, the debtor has not objected to any claims by those alleging sexual abuse.
The debtor filed an adversary proceeding against its insurers alleging that their duty to defend included covering the costs of bankruptcy. After discovery, the debtor filed a motion for summary judgment.
Judge Moberly said that outcome turned on the interpretation of the policies under Indiana law. The insurers’ obligations are purely contractual, she said, leaving courts no room to devise common law about the duty to defend.