There is no “cause” for modifying the automatic stay when the creditor’s objective is to undo the consequences of disastrous litigation strategy, according to the Eleventh Circuit.
The November 16 decision by Circuit Judge Kevin C. Newsom is a cautionary tale for lawyers representing insurance companies, for whom the opinion is “must reading.”
Judge Newsom described the underlying facts as “truly horrific.” A woman attempted to commit suicide and murder her two children by drugging them, putting herself and them in the car and turning on the engine while the car was in the garage.
One child died, but the woman and one child survived.
The father, the injured child, and the estate of the deceased child sued the mother in state court for wrongful death and personal injury. The mother was incarcerated for murder, but the insurance company undertook the proffered defense.
The plaintiffs made a settlement offer that the insurance company advised the woman to reject. The offer would have absolved the woman of further liability.
After rejecting the offer, the insurance company obtained a ruling from the state court that the policy did not cover the incident and there was no duty to defend. The insurance company then withdrew from the wrongful death suit.
Still incarcerated, the woman was unrepresented. The plaintiffs obtained a default judgment, and a jury fixed the damages at $500 million.
The plaintiffs filed an involuntary chapter 7 petition against the woman, and a trustee was appointed.
You know what happened next: The chapter 7 trustee filed suit against the insurance company in state court, claiming that rejection of the settlement offer was bad faith.
Evidently recognizing there was a problem, the insurance company filed a motion in bankruptcy court seeking modification of the automatic stay to allow intervention in the wrongful death suit. If the stay were modified and intervention allowed, the insurance company hoped to vacate the $500 million default judgment. Vacating the judgment would make the bad faith suit disappear.
The bankruptcy court refused to modify the stay, and the district court affirmed. So did Circuit Judge Newsom.
The insurance company argued that stay modification was not required because the insurer wanted to vacate the judgment and thereby benefit the estate.
To intervene in state court, Judge Newsom determined that stay modification was indeed required, given the “plain language” of Section 362(a). “It doesn’t matter,” he said, whether the creditor seeks “to raid the estate or protect it.” The stay applied because the suit was an “action . . . against the debtor.”
Next, the insurer contended that refusal to allow intervention would be a denial of due process, based on the notion that the insurance company would have no forum in which to attack the default judgment.
Of significance for insurance lawyers, Judge Newsom identified several occasions when the insurer could have attacked the default judgment. Because due process only requires an opportunity to be heard, he found no due process violation.
Finally, the insurer argued that the bankruptcy court had incorrectly given it the burden of showing cause to lift the stay.
Judge Newsom agreed that the bankruptcy court erred, because Section 362(g)(2) places the burden on the trustee to prove everything except the debtor’s equity in the property. Nonetheless, the error was harmless, he said, because “the trustee demonstrated that there was no cause to lift the stay.”
The Eleventh Circuit looks to the “totality of the circumstances” in finding cause. The bankruptcy court “weighed the benefits and burdens of lifting the stay,” Judge Newsom said.
The insurance company had decided, “for its own reasons,” to withdraw from the wrongful death suit and now wants “a second bite at the apple,” Judge Newsom said.
“The [bankruptcy] court further concluded that allowing that second bite would unduly increase the bankruptcy trustee’s administrative expenses,” Judge Newsom said.
Judge Newsom found no reversible error because there was “no grave injustice” to the insurance company.
There is no “cause” for modifying the automatic stay when the creditor’s objective is to undo the consequences of disastrous litigation strategy, according to the Eleventh Circuit.
The November 16 decision by Circuit Judge Kevin C. Newsom is a cautionary tale for lawyers representing insurance companies, for whom the opinion is “must reading.”
Judge Newsom described the underlying facts as “truly horrific.” A woman attempted to commit suicide and murder her two children by drugging them, putting herself and them in the car and turning on the engine while the car was in the garage.
One child died, but the woman and one child survived.
The father, the injured child, and the estate of the deceased child sued the mother in state court for wrongful death and personal injury. The mother was incarcerated for murder, but the insurance company undertook the proffered defense.
The plaintiffs made a settlement offer that the insurance company advised the woman to reject. The offer would have absolved the woman of further liability.