Opinion
CASE NO. 3:98cv1534 (RNC)
November 6, 1998.
RECONMENDED RULING ON MOTION TO INTERVENE
Pending before the court is a Motion to Intervene as Plaintiff (doc #5) filed by a committee of products liability claimants appointed by the United States bankruptcy trustee. The committee seeks permission to intervene in this case pursuant to Fed.R.Civ.P. 24 and Bankruptcy Rule 7024. For the reasons discussed below, the motion should be denied.
FACTUAL AND PROCEDURAL HISTORY
On or about May 22, 1996, the plaintiff Infiltrator, Inc. obtained a commercial general liability policy and an umbrella policy from the defendants Travelers Indemnity Company and Travelers Indemnity Company of Illinois. One year later, the policies were renewed and coverage was extended until May 22, 1998. This adversary proceeding arises out of a dispute regarding coverage under those policies.
During 1996 and 1997, the plaintiff designed, manufactured, and installed approximately 150 storm water management systems known as "Maximizer" chambers. Beginning in November of 1996, the defendants began receiving claims associated with the failure of the Maximizer chambers, and to date, more than thirty claims have been filed. Although the defendants have assumed the defense of those claims, they have reserved the right to deny coverage.
On February 2, 1998, the plaintiff filed for bankruptcy under Chapter 11 of the Bankruptcy Code, ostensibly due to the defendants' failure to extend coverage on the product liability claims. The plaintiff maintains that it would be rendered insolvent if forced to pay all of the existing product liability claims in full. Pursuant to § 1107(a) and § 1108 of the Bankruptcy Code, the plaintiff continues to operate its business and manage its property as a debtor-in-possession.
On March 16, 1998, the plaintiff brought this adversary proceeding against the defendants seeking a declaration of coverage, damages, and other relief. The defendants filed an Answer and a Motion for Withdrawal of Reference from Bankruptcy Court. The Motion for Withdrawal of Reference was granted by Order dated July 30, 1998.
On June 26, 1998, the United States bankruptcy trustee appointed the products liability claimants' committee to represent the interests of products liability claimants. By motion filed on August 7, 1998, the committee seeks to intervene in this adversary proceeding.
DISCUSSION
Though not argued in its Motion to Intervene or supporting memorandum of law, the committee maintained at oral argument that § 1109(b) of the Bankruptcy Code provides the committee with an absolute right to intervene in this adversary proceeding. In response, the plaintiff argues that § 1109(b) does not grant the committee an absolute right to intervene, asserting instead that Fed.R.Civ.P. 24(a)(2) sets forth the appropriate standard for intervention as of right. Upon review of the case law, it is clear that the parties' conflicting positions reflect the split of authority between the Third and Fifth Circuit Court of Appeals with regard to the applicability of § 1109(b) to adversary proceedings.
Compare Phar-Mor, Inc. v. Coopers Lybrand, 22 F.3d 1228 (3d Cir. 1994) with Fuel Oil Supply and Terminaling v. Gulf Oil Corp., 762 F.2d 1283 (5th Cir. 1985).
Section 1109(b) of the Bankruptcy Code provides that
"[a] party in interest, including the debtor, the trustee, a creditors' committee, an equity security holders' committee, a creditor, and equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter."
As stated in In re Megan-Racine Associates, Inc., 176 B.R. 687, 692 (Bankr. N.D.N.Y. 1994),
The disagreement between the Circuits results from varying interpretations of the word "case." The Third Circuit adopts a broad interpretation of the word "case" which includes adversary proceedings. Marin Motor Oil, supra, 689 F.2d at 450, 451; see also In re Parrot Packing Co., 42 B.R. 323 (N.D.Ind. 1983); In re Overmyer, 30 B.R. 123 (Bankr.S.D.N.Y. 1983); In re D.H. Overmyer Telecasting Co., 18 B.R. 107 (Bankr.N.D.Ohio 1982). In contrast, the Fifth Circuit interprets "case" narrowly and draws a distinction between "case" and "adversary proceeding." Fuel Oil, supra, 762 F.2d at 1286, 1287; see also In re Thompson, 965 F.2d 1136, 1140 (1st Cir. 1992); In re Bumpers Sales, Inc., 907 F.2d 1430, 1433-34 (4th Cir. 1990); In re George Rodman, Inc., 33 B.R. 348 (Bankr.W.D.Okla. 1983).
Although the Second Circuit has yet to address the issue of the proper scope of § 1109(b), district and bankruptcy courts within the circuit have followed the Fifth Circuit's reasoning inFuel Oil, supra, concluding that a creditor does not have an absolute right to intervene in adversary proceedings. See In re Megan-Racine Associates, Inc., supra.; In re 995 Fifth Ave. Associates, L.P., 157 B.R. 942 (S.D.N.Y. 1993) (declining to follow In re Neuman, 124 B.R. 155 (S.D.N.Y. 1991)); In re St. Theresa Properties, Inc., 152 B.R. 852 (Bankr.S.D.N.Y. 1993); andIn re The Barrick Group, Inc., 98 B.R. 133 (D.Conn. 1989).
Congress was aware of the distinction between proceedings and cases. Fuel Oil, supra, 762 F.2d at 1286 (citing provisions that distinguish between "cases" and "proceedings" such as jurisdiction, 28 U.S.C. § 1471 (a) and (b); abstention, 28 U.S.C. § 1471 (d) and 11 U.S.C. § 305; venue, 28 U.S.C. § 1472 and 1473; and jury trials, 28 U.S.C. § 1480 (a)). The Fifth Circuit also directs our attention to the language of advisory committee note to Fed.R.Bankr.P. 7024 which states, "Intervention in a case under the Code is governed by Rule 2018 and intervention in an adversary proceeding is governed by this rule." Id. In addition, the advisory committee notes to Fed.R.Bankr.P. 2018 state that the rule "implements §§ 1109 and 1164 of the Code . . . [and] does not apply in adversary proceedings. For intervention in adversary proceedings see Rule 7024." 995 Fifth Ave., supra, 157 B.R. at 948 n. 8. These judicial and legislative signposts demonstrate that Congress drew a distinction between bankruptcy cases and adversary proceedings. Fifth Ave., supra, 157 B.R. at 948, 949.In re Megan-Racine Associates, Inc., 176 B.R. at 692 (footnote omitted).
Persuaded by the court's analysis in Fuel Oil, supra, this court also believes that Congress intended there to be a distinction between "case" and "adversary proceeding" for purposes of construing the Bankruptcy Code. Accordingly, the court concludes that § 1109(b) does not provide "a party in interest", such as the Products Liability Claimants Committee in this case, with an absolute right to intervene in adversary proceedings; instead, it must be determined on a case-by-case basis whether such a party may intervene based upon the standards set forth in Fed.R.Civ.P. 24(a)(2) or 24(b).
See also, In the Matter of Richman, 104 F.3d 654 (4th Cir. 1997) (following the analysis set forth in Fuel Oil Supply and Terminaling, supra.)
This more restrictive approach to intervention enables the bankruptcy court "to control the proceeding by restricting intervention to those persons whose interests in the outcome of the proceeding are not adequately represented by existing parties." Fuel Oil Supple and Terminaling, 762 F.2d at 1287. Such an approach is "necessary as a means to protect the bankruptcy court from being overwhelmed by a flood of "automatic parties."Id.
To intervene as of right pursuant to Fed.R.Civ.P. 24(a) (2), the committee must establish (1) that it has filed its motion to intervene in a timely fashion; (2) that it has an interest in the adversary proceeding; (3) that disposition of the adversary proceeding may impede or impair its ability to protect that interest; and (4) that its interest is not adequately represented by the existing parties to the suit. Restor-A-Dental Laboratories. Inc. v. Certified Alloy Products. Inc., 725 F.2d 871, 874 (2d Cir. 1984)
First, it is uncontested that the motion to intervene has been timely filed.
With regard to the second and third requirements, the committee argues that it has a direct and immediate interest in the adversary proceeding because the outcome could be deteriorative of the plaintiff/debtor's ability to fund a plan of reorganization and pay existing claims. The plaintiff and defendants respond that the Committee's interest is neither direct nor immediate, but instead is purely contingent upon the ability of the individual products liability claimants to recover against the plaintiff in separate suits.
This court agrees with the parties. Any interest that the committee has in maximizing the plaintiff/debtor's estate is not direct and substantial enough to satisfy the second and third requirements for intervention as of right. The Second Circuit has stated that in order to have a "significantly protectable" interest which may warrant intervention, the interest "must be direct, as opposed to remote or contingent." Restor-A-Dental Laboratories, Inc., 725 F.2d at 874. In addition, courts generally have held that the interest of a tort claimant is not sufficient to warrant that claimant's intervention as of right in an action to determine coverage available to an alleged tortfeasor. See Redland Ins. Co. v. Chillingsworth Venture, Ltd., 171 F.R.D. 206 (N.D. Ohio 1997); Independent Petrochemical Corp. v. Aetna Cas. Surety Co., 105 F.R.D. 106 (D.D.C. 1985), aff'd, 784 F.2d 1131 (D.C. Cir. 1986); Liberty Mut. Inc. Co. v. Pacific Idem. Co., 76 F.R.D. 656 (W.D.Pa. 1977).
Even if the committee had been able to demonstrate a "significantly protectable" interest in the adversary proceeding, the committee has not convinced this court that its interest is inadequately represented by existing parties. "'Whether or not representation of an intervenor's interest by existing parties is to be considered inadequate hinges upon whether there has been a showing of (1) collusion; (2) adversity of interest; (3) possible nonfeasance; or (4) incompetence.'" Brooks v. Sussex County State Bank, 167 F.R.D. 347, 351-52 (N.D.N.Y. 1996) (citing British Airways Bd. v. Port Auth. of N.Y. and N.J., 71 F.R.D. 583, 585 (S.D.N.Y. 1976)
In this case, the committee argues that the plaintiff's interests are adverse to its own because the plaintiff has duties to many and various constituents of the bankruptcy proceeding other than the products liability claimants. The committee also argues that the plaintiff's own self-interest in getting a Chapter 11 plan confirmed and achieving a successful reorganization might affect its pursuit of the greatest possible return for the products liability claims. In response, the plaintiff maintains that the committee and the plaintiff do share the common interest of maximizing insurance coverage for the underlying claims. Citing Kheel v. American Steamship Owners Mut. Protection and Indem. Assoc., 45 F.R.D. 281, 284 (S.D.N.Y. 1968), the plaintiff argues that "the mere existence of some differences between the interests of the movants and the [plaintiff] is insufficient to warrant granting of intervention" or a finding of inadequate representation.
Although the committee speculates that the plaintiff will not prosecute its action diligently or uphold its fiduciary duty to maximize its estate for the benefit of its creditors, there is nothing in the record to support such a conclusion. Instead, the evidence indicates that the plaintiff has both the ability and the intent to ardently pursue this action in order to protect the interests of its creditors. By way of affidavit, a Certified Public Accountant and Chief Financial Officer for the plaintiff stated that due to its ongoing operations, the company has the financial resources necessary to fund this action. In addition, the officer stated that the plaintiff has retained special counsel with significant experience in coverage litigation for the very purpose of vigorously seeking the greatest possible recovery for the products liability claims.
The court notes that the committee's interest in this adversary proceeding is also safeguarded by inherent protections contained in the Bankruptcy Code, such as a creditor's right to notice of any proposed settlement of a lawsuit involving the bankrupt estate. Bankr. Rule 2002(a), 11 U.S.C.
Creditors are thereby afforded the opportunity to review the compromise and settlement and to object to it if it does not adequately protect their interests. A broad but not absolute right of intervention in adversary proceedings based on Rule 24 does not preclude creditors from appearing in bankruptcy adversary proceedings to monitor the progress of the bankruptcy case and make known to the bankruptcy court their views, positions and interests as to the compromise or settlement of an adversary proceeding entered into by the debtor. Moreover, in deciding whether to approve a compromise or settlement of an adversary proceeding, a bankruptcy court is compelled to keep in mind the best interests of both the estate and the creditors.In re 995 Fifth Ave. Associates. L.P., 157 B.R. at 950. (Citations omitted)
Finally, the Court finds that the committee has not established an entitlement to permissive intervention pursuant to Fed.R.Civ.P. 24(b). Fed.R.Civ.P. 24(b)(2) provides, in pertinent part, that:
Upon timely application anyone may be permitted to intervene in an action when an applicant's claim or defense and the main action have a question of law or fact in common. . . . In exercising its discretion the court shall consider whether the intervention will unduly delay or prejudice the adjudication of the rights of the original parties.
Although the committee asserts that it shares a "concern" with the plaintiff as to the defendant's contractual obligation to provide coverage for the products liability claimants, the committee has not identified any common questions of law or fact which exist between its products liability claims and this adversary proceeding. See Liberty Mut. Ins. Co. v. Pacific Indem. Co., 76 F.R.D. 656, 660 (W.D.Pa. 1977) ( "[A] motion for permissive intervention under Rule 24(b) must have grounds in claims for relief which share questions of fact or law in common with the main action, and not in the coincidence of financial interests."). As such, the first requirement for permissive intervention has not been satisfied.
Furthermore, even if the plaintiff had been able to identify common questions of law or fact, granting the committee permissive intervention would unnecessarily complicate and delay this coverage action. As stated in Crosby Steam Gage and Valve Co. v. Manning, Maxwell Moore, Inc., 51 F. Supp. 972, 973 (D.Mass. 1943), "[a]dditional parties always take additional time. Even if they have no witnesses of their own, they are the source of additional questions, objections, briefs, arguments, motions and the like
CONCLUSION
For all of the foregoing reasons, the committee of products liability claimant's Motion to Intervene as Plaintiff (doc. #5) should be DENIED. However, consistent with their representations at oral argument, the parties shall provide the committee with copies of all pleadings and briefs filed in this adversary proceeding.
Any party may seek the district court's review of this recommendation. See 28 U.S.C. § 636 (b) (written objections to proposed findings and recommendations must be filed within ten days after service of same); Fed.R.Civ.P. 6(a), 6(e) 72; Rule 2 of the Local Rules for United States Magistrate Judges, United States District Court for the District of Connecticut;Thomas v. Arn, 474 U.S. 140, 155 (1985); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir. 1992) (failure to file timely objections to Magistrate Judge's recommended ruling waives further review of the ruling).
SO ORDERED this 5th day of November, 1998, at New Haven, Connecticut.