Opinion
No. 3:01-CV-1991-P
May 24, 2002
MEMORANDUM OPINION AND ORDER
Now before the Court are the following:
1. Appellant's Brief:, filed October 31, 2001;
2. Brief of Coho Resources, Inc., Appellee, filed November 16, 2001;
3. Bituminous Casualty Company's Appeal Brief, filed November 19, 2001; and
4. Appellant's Reply Brief, filed December 5, 2001.
Appellee Chubb Insurance Co. of Canada did not participate in the proceedings below wherein Chapman requested authority to collect and/or execute on a state court judgment, nor did it participate in this Bankruptcy Appeal.
Appellant seeks reversal of an April 19, 2001 Bankruptcy Court Order denying Appellant's motion for authority to collect and/or execute on a state court judgment, and an August 2, 2001 Order denying Appellant's motion to reconsider. For the reasons set forth below, and after hearing oral argument in this matter on May 15, 2002, the Court AFFIRMS in PART and MODIFIES in PART the opinion of the Bankruptcy Court.
BACKGROUND AND PROCEDURAL HISTORY
In September 1994, V.A. Sauls, Inc. ("Sauls") entered into a contract with Coho Resources, Inc. ("Coho" or "Debtor") to furnish certain repair and service work to several of Coho's well sites located in Jones County, Mississippi. R. at 185-196. Under the terms of the agreement, Sauls promised to defend and indemnify Coho for any claims made against it by Sauls employees. See R. at 417-418 (Demand Letter). Marion C. Chapman ("Chapman" or "Appellant"), an employee of Sauls working at a Coho well, was involved in an accident on August 18, 1995, as a result of which he suffered substantial injuries. R. at 410-411 (Plaintiffs Original Complaint). At the time of the accident, Sauls was insured under a commercial umbrella policy and a general liability policy issued by Bituminous Casualty Company ("Bituminous"). See R. at 179; see also R. 197-315. Coho was also insured under a separate liability policy issued by Chubb Insurance Company of Canada ("Chubb"). See R. at 316-408.
Specifically, the pertinent contract provision provided that:
"CONTRACTOR [Sauls] shall defend, indemnify and hold COMPANY [Coho] harmless and COMPANY [Coho] shall defend, indemnify and hold CONTRACTOR [Sauls] harmless from and against all claims, losses, costs, demands, damages, penalties, liabilities, debts, expenses and cause of action of whatsoever nature or character, including but not limited to, reasonable attorney's fees and other costs and expense, without limit and without regard to the cause or causes thereof, which are related in any way to the subject matter of this Agreement which are asserted by or arise in favor of such party or any of such party's employees, agents or representatives due to personal injury, death or loss or damage of property whether or not cause by sole, joint and/or concurrent negligence of the party seeking indemnity, and/or claim or strict liability and/or any cause whatsoever, whether predating this Agreement or not.
R. at 193-194.
On March 19, 1998, Appellant and his wife, Belinda Chapman, filed an action against Coho and others in the Circuit Court of Jones County, Mississippi, Second Judicial District ("the state court action"). R. at 410-415. Pursuant to their agreement, Coho demanded that Sauls defend, indemnify and hold it harmless from all losses associated with this lawsuit, including its attorneys fees and other expenses. R. at 418. Bituminous thereafter undertook the defense of Coho. See R. at 420, 426-427.
The state court action proceeded to a jury trial on or about May 24, 1999, at the conclusion of which the jury returned a total verdict of $1,653,930.00. R. at 143. Mississippi Circuit Court Judge Billy J. Landrum entered a final judgment in this amount against Coho on June 7, 1999. Id. Thereafter, on June 11, 1999, Coho filed post-trial motions seeking judgment notwithstanding the verdict, a new trial, and a remittitur of the jury award. R. at 144.
Meanwhile, on August 23, 1999, Coho filed a Voluntary Petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas. R. at 431-434. Pursuant to section 362 of the Code, a "Suggestion of Bankruptcy" was filed in the state court proceedings on September 29, 1999. R. at 502-503. On September 30, 1999, Chapman's counsel wrote to Coho's counsel acknowledging receipt of the Suggestion of Bankruptcy and asking whether Coho would sign an agreed order lifting the automatic stay in order to proceed with the State Court litigation. R. at 448. Additionally, Chapman was later sent a copy of the Notice of Commencement of Coho's bankruptcy case on December 10, 1999, notifying Appellant of the proof of claim deadline. R. at 181. However, Chapman did not file a proof of claim with the bankruptcy court on or before the deadline of December 27, 1999. Id.
On October 5, 1999, Judge Landrum issued an Opinion and Order finding that the jury's verdict in the state court action was excessive and ordered that it be remitted to $853,930.00 as against Coho. R. at 145-146. The order also denied Coho's post-trial motions and directed that Chapman file an acceptance of the remittitur within ten (10) days or a new trial would be granted. R. at 146. Chapman accepted the remitted judgment on October 14, 1999. R. at 452-453. Coho then filed its Notice of Appeal as to Judge Landrum's orders to the Supreme Court of Mississippi on November 2, 1999, without posting a supersedeas bond. R. at 454.
Meanwhile, on November 18, 1999, Chapman commenced separate actions against Bituminous and Chubb by filing Suggestions for Writs of Garnishment with the Circuit Court of Jones County, Mississippi, Second Judicial District. R. at 181. The state court issued separate writs directed to Bituminous and Chubb in the amount of $853,930.00, based upon the remitted judgment which Chapman was granted against Coho on October 5, 1999. R. at 181-182. Bituminous and Chubb subsequently removed both garnishment actions to the United States Court for the Southern District of Mississippi, Hattiesburg Division. Id.
On March 20, 2000, the United States Bankruptcy Court entered its Findings of Fact, Conclusions of Law, and Order Confirming the Debtor's (Coho's) First Amended and Restated Chapter 11 Plan of Reorganization. R. at 506-531. Subsequently, on December 7, 2000, United States District Judge Charles W. Pickering, Sr., following a hearing held in his court on November 20, 2000, directed Chapman to petition the bankruptcy court for permission to lift its stay, or amend its order, to authorize Chapman to collect on the judgment entered against Coho in the underlying state court action and/or for any other appropriate relief, but only to the extent of insurance proceeds available. R. at 147-148. On December 12, 2000, Chapman filed his Motion for Authority to Collect and/or Execute on a State Court Judgment with the bankruptcy court. R. at 135-142. Chapman specifically limited his request "to the extent that insurance proceeds are available to Coho to satisfy the subject debt/judgment and from any other entity responsible for the subject debt/judgment." R. at 141.
In an order dated April 19, 2001, Bankruptcy Judge Harold C. Abramson denied Chapman's motion, finding that the remitted judgment entered in the state court action was in violation of the automatic stay, and as such was either void under Mississippi law or voidable under federal law. R. at 583. Ultimately the bankruptcy court concluded that Chapman had no remedy since either (1) the judgment was void and Chapman needed to go forward to reduce the claim to a valid judgment against Coho, which he could not do because he did not file a claim in the bankruptcy case and his debt and his remedy had been discharged, or (2) if the judgment was voidable, Chapman failed to file a claim in the Chapter 11 bankruptcy case, and therefore he had no entitlement to go forward as a claimant against Coho. R. at 583-584.
Chapman filed a Motion for Rehearing/Reconsideration on April 30, 2001, arguing that the order remitting the original judgment and denying Coho's post trial motions was not entered in violation of the automatic stay, and therefore was not void under Mississippi law. R. at 587. In the alternative, Chapman argued that, if the order granting remittitur was entered in violation of the automatic stay, either: (1) Coho, Bituminous and Chubb waived their right to challenge the subject order based on the principles of res judicata, or (2) the original judgment became a final judgment because Coho waived its post trial motions. Id. The Bankruptcy Court, however, denied the Motion to Reconsider on August 2, 2001, finding no manifest error of law or mistake of fact in its previous order as Chapman had simply re-argued his position from the earlier motion. R. at 008-009. Chapman timely filed a Notice of a Appeal to this Court on August 8, 2001. R. at 625-626.
DISCUSSION I. Standard of Review
This Court reviews a bankruptcy court's findings of fact under the clearly erroneous standard and decides issues of law de novo. Matter of Christopher, 28 F.3d 512, 514 (5th Cir. 1994). A finding of fact is clearly erroneous when, although there is enough evidence to support it, the reviewing court is left with a firm and definite conviction that a mistake has been committed. Id. While conducting this review, this Court is particularly mindful of the opportunity for the bankruptcy judge to determine the credibility of the witnesses, whenever applicable. Matter of Young, 995 F.2d 547, 548 (5th Cir. 1993).
II. Bankruptcy Discharge
Confirmation of a Chapter 11 plan of reorganization "discharges the debtor from any debt that arose before the date of such confirmation. . . ." 11 U.S.C. § 1141 (d)(1)(A) (2001). Confirmation of a plan further results in all property of the estate being vested in the debtor and in the property being free and clear of all claims and interests of creditors. 11 U.S.C. § 1141 (b), (c) (2001). In this case, the United States Bankruptcy Court for the Northern District of Texas entered its Findings of Fact, Conclusions of Law, and Order Confirming the Debtor's (Coho's) First Amended and Restated Chapter 11 Plan of Reorganization on March 20, 2000. R. at 506-531. Chapman concedes that because he did not file a proof of claim, he is not entitled to any recovery against Coho under the plan. However, Chapman states he is not seeking the judgment from Coho personally but only from its insurers Bituminous and Chubb. Appellant's Br. at 10.
Generally, discharge in a bankruptcy case protects a debtor by:
"(1) void[ing] any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with response to any debt discharged under section . . . 1141 . . . whether or not discharge of such debt is waived; and
(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor . . .11 U.S.C. § 524 (a) (2001). Nevertheless, the Fifth Circuit Court of Appeals, adopting the view of several sister circuits, has found that "a discharge in bankruptcy does not extinguish the debt itself, but merely releases the debtor from personal liability for the debt." See Houston v. Edgeworth (Matter of Edgeworth), 993 F.2d 51, 53 (5th Cir. 1993); see also 11 U.S.C. § 524 (e) (2001) ("discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt"). As such, a majority of courts have held that the scope of a section 524(a) injunction does not affect the liability of liability insurers and does not prevent establishing their liability by proceeding against a discharged debtor. See Matter of Edgeworth, 993 F.2d at 54; see also Matter of Fernstorm Storage and Van Co., 938 F.2d 731, 733-34 (7th Cir. 1991) (concluding that the failure to file a proof of claim does not preclude an action against the debtor to establish liability that will be satisfied by a third party, namely insurers); Green v. Welsh, 956 F.2d 30, 35 (2nd Cir. 1992) (holding that § 524 permits a plaintiff to proceed against a discharged debtor solely to recover from the debtor's insurer).
In this case, the state court action proceeded to trial and the jury returned a verdict of $1,653,930.00 against Coho prior to its filing for Chapter 11 protection on August 23, 1999. R. at 431-434. Judge Landrum thereafter entered a final judgment against Coho in this amount on June 7, 1999. R. at 143. The Court agrees with Coho that, since Chapman did not file a proof of claim in the bankruptcy proceeding, it may not now proceed against it to recover any outstanding debt. However, the bankruptcy court committed error here when it held that Appellant had no recourse because of his failure to file a proof of claim. As the Fifth Circuit has found, "where no question has been raised about the sufficiency of the liability insurance coverage, a plaintiffs failure to file in the bankruptcy proceeding should not impair the right to file suit against another party who may be liable on the debt." Matter of Edgeworth, 993 F.3d 55 (citations omitted).
The Court agrees with the bankruptcy court that the post-petition actions taken by the state court and the parties were in violation of the automatic stay. Chapman argues that since he is only seeking recovery from Coho's insurers, the post-petition actions were not in violation of the automatic stay. However, in October 1999 it was not clear that Chapman was seeking recovery solely from the Debtor's insurers. Chapman was proceeding directly against Coho in the state court lawsuit and had not given any indication that he was limiting his recovery to the extent of the insurance available. Hence, the Court finds that the state court order and final judgment of October 5, 1999 were issued in violation of the automatic stay. Chapman's subsequent filing of an acceptance of the remitted judgment, Coho's filing of a notice of appeal, and Chapman's filing of the garnishment suit naming Coho as a defendant were also made in violation of this stay.
Nonetheless, the Court further finds that Coho's argument that it filed its notice of appeal only to protect itself also applies to Chapman's filing of an acceptance of the remitted judgment. Clearly, Judge Landrum's order specifically directed Chapman to file an acceptance of the remitted judgment within ten (10) days or a new trial would be granted. Coho bears as much responsibility for the activity after the state court order of October 5, 1999 by its failure to seek protection from the bankruptcy court from any post-petition activity. Also, because the state court's order of October 5, 1999 was issued close in time to the filing of the Suggestion of Bankruptcy, it is possible that the state trial judge was not actually aware of the bankruptcy proceedings involving Coho. In any event, Coho made no effort to seek relief from the state trial court on the basis of its bankruptcy filing. Ultimately, the Court finds that Chapman's post-petition actions are not a bar to proceeding with the state court lawsuit or the garnishment suit. Therefore, the focus is then on whether Chapman can proceed against Coho nominally in order to recover from third party insurers. See Pettibone Corp. v Hawxhurst, 163 B.R. 989, 995 (N.D. Ill. 1994), aff'd Hawxhurst v. Pettibone Corp., 40 F.3d 175 (7th Cir. 1994).
In order to determine whether an insurer may be liable one must determine the type of policy at issue. If the policy is one for liability, the insurer becomes liable when liability attaches to the insured. Fenimore v. White (In Re White), 148 B.R. 330, 332 (W.D. Okla. 1992) (citing 6B Appleman, Insurance Law and Practice § 4261 (1981)). If the policy is one for indemnity, the insurer becomes liable only after the insured has paid on the judgment. Id. Although both policies at issue in this case are for general liability, Bituminous is correct in noting that it is Sauls', and not Coho's general liability insurer. As such, the only way it could be liable for the payment of the outstanding judgment related to the state court action is through its insurance coverage of Sauls, who agreed to indemnify Coho.
Under Mississippi law, a valid claim for indemnity does not exist until such time as the legal liability of the indemnity has been established. See Hopton Bldg. Maintenance, Inc. v. United Parcel Service, Inc., 559 So.2d 1012, 1013-14 (Miss. 1990). In other words, in order to recover under an indemnity agreement, the indemnity must prove that it was legally liable to the third party, and was compelled to make payment to the third party in order to satisfy its legal obligations. See Keys v. Rehabilitation Centers, Inc., 574 So.2d 579, 584 (Miss. 1990).
In Greiner v. Columbia Gas Transmission Corp. (In Re Columbia Gas Transmission), 219 B.R. 716 (S.D.W.V. 1998), the plaintiff Cathy Greiner alleged she was injured by defendant Columbia Gas Transmission Corporation's negligently maintained gas well road which she encountered while driving on the adjacent Route 57 as runoff water caused ice to form. In Re Columbia Gas Transmission, 219 B.R. at 717. After a Delaware bankruptcy court entered a Chapter 11 Confirmation Order, Greiner commenced her tort action in West Virginia. Id. at 718. The court eventually denied the creditor's right to sue the discharged debtor because (1) no primary insurer, only an excess insurer was available; (2) excess insurer liability was not triggered under the policy until debtor was "legally obligated to pay" a sum; and (3) because creditor's claim was discharged in bankruptcy, the debtor could never be "legally obligated to pay" on the discharged debt. Id. at 720. Similarly here, since Coho's debt has been discharged by the bankruptcy reorganization, any potential liability of Sauls or Bituminous has also been extinguished. The effect of discharge is essentially that Coho could never be obligated to pay Chapman on the state court judgment, and hence Bituminous or Sauls will never have to satisfy their indemnification obligations in this case. As such, the Court shall proceed to determine the potential liability, if any, of Coho's general liability insurer: Chubb.
III. Effect of Automatic Stay and Permanent Injunction
The filing of a petition in bankruptcy gives rise to an automatic stay pursuant to Section 362, "which generally prevents third parties from taking action that could affect the property of the bankruptcy estate." In re Jason Pharmaceuticals, Inc., 224 B.R. 315, 321 (D. Md. 1998) (citing United States v. Carolina Parachute Corp., 907 F.2d 1469, 1471 (4th Cir. 1990)). Confirmation of a plan of reorganization, in conjunction with discharging pre-confirmation indebtedness of the debtor, replaces the automatic stay with a permanent injunction under Section 524(a), which prohibits any attempt to hold the debtor liable on discharged debt. Id. However, just as the discharge is personal to the debtor, so too is the permanent injunction resulting therefrom. As such, the permanent injunction extends only to efforts seeking post-confirmation recovery of discharged indebtedness from the debtor, and specifically excludes from its operation efforts to recover from other entities which might be liable for the discharged debt, such as direct liability insurers. See Id. at 322; see also Edgeworth, 993 F.2d at 53.
Ultimately, the granting of relief from the automatic stay is left to the discretion of the bankruptcy court and is decided on a case by case basis. In re Fowler, 259 B.R. 856, 858 (Bankr. E.D. Tex. 2001). However, based on the record before it and the arguments made by the parties' counsel at the hearing conducted on May 15, 2002, the Court finds that remand to the Bankruptcy Court is not necessary. As the parties have acknowledged, the automatic stay in place under 11 U.S.C. § 362 (a) following Coho's commencement of bankruptcy proceedings was replaced with a permanent injunction under 11 U.S.C. § 524 (a)(2) following the Bankruptcy Court's Confirmation Order on March 20, 2000. The record evidence is also clear that Chapman does not seek any recovery from the discharged debtor, but rather seeks recovery limited to the insurance proceeds of Coho's policies underwritten by either Chubb or Bituminous. Appellant's Br. Reply at 1. Numerous courts, confronted with a claimant who seeks to proceed against a discharged debtor only for the purpose of recovering against an insurer, and relying on §§ 524(a) and 524(e), have concluded that the discharge injunction does not bar such a suit. See Matter of Edgeworth, 993 F.2d at 53-54 ("[t]he foundation of this reading of § 524(a)(2) is that it makes no sense to allow an insurer to escape coverage for injuries caused by its insured merely because the insured received a bankruptcy discharge"); see also Green, 956 F.2d at 32-33; In re Jet Florida Systems, Inc., 883 F.2d 970, 976 (11th Cir. 1989). Moreover, those courts which have agreed that an action against a debtor may proceed for insurance recovery in spite of the discharge and concomitant injunction, have permitted such actions to go forward either by explicitly modifying the injunction or by simply issuing an order allowing the suit. See Matter of Shondel, 950 F.2d at 1307.
Section 362(d) states that:
"On request of a party in interest and after notice and a hearing, the shall grant relief from the stay provided [in this] section, such as by terminating, annulling, modifying, or conditioning such stay
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest. . . ."
See 11 U.S.C. § 362 (d) (2001).
As there is no indication in the record that the enforcement of any judgment, once validated, would prejudice the interests of the Debtor or cause any interference with the bankruptcy case here, the Court shall allow Chapman to go forward with its enforcement of the State Court action against the general liability insurer for the Debtor.
As the Court has already noted, Judge Landrum's Opinion and Order remitting the jury's award was issued post Coho's bankruptcy petition, and therefore was issued in violation of the automatic stay. See infra. Under Mississippi law, "the general rule is that any action taken in violation of [a] bankruptcy stay . . . is void." Overbey v. Murray, 569 So.2d 303, 306 (Miss. 1990). However, under the law of the Fifth Circuit, it is well settled that "actions taken in violation of the automatic stay are not void, but rather they are merely voidable, because the bankruptcy court has power to annul the automatic stay pursuant to Section 3 62(d)." Jones v. Garcia, 63 F.3d 411 (5th Cir. 1995). The Court does not reach this issue, but rather will leave it up to the Mississippi courts to determine which judgment will be enforced.