UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
HNRC DISSOLUTION CO. CASE NO. 02-14261
Several creditors of the former Debtors (collectively “the Movants”) have petitioned the court for relief that will enable them to proceed with state court cases in which they seek insurance proceeds in actions for personal injury or wrongful death. They have filed the following pleadings seeking stay relief or injunctive relief:
1. Motion to Modify the § 362 Stay, filed by Barbara Boner (“Boner” and “Boner Motion”);
2. Motion to Lift Stay and for Leave to Proceed to the Extent of Insurance Proceeds, filed by Brent Dotson (“Dotson” and “Dotson Motion” );
3. Motion for Relief from the Automatic Stay and for Leave to Proceed to the Extent of Insurance Proceeds Under 11 U.S.C. § 362, filed by Gary and Debra Groves (“the Groveses” and “Groves Motion”);
4. Motion to Modify Automatic Stay, filed by Lawrence Edmonds Jr. (“Edmonds” and “Edmonds Motion”);
5. Motions for Relief from Plan Injunction to Permit Continuation of State Court Litigation Up to the Limits of Applicable Insurance Coverage, filed by Brenda Pack (“Pack” and “Pack Motion”), Chauncy Adams Jr. and others (“the Adams movants” and “Adams Motion”), and Randy Nichols (“Nichols” and “Nichols Motion”).
The court heard these motions (collectively “the Motions”) and the responses to them filed by Lexington Coal Company, LLC (“LCC”) and the Liquidating Trustee on June 21, 2005 (the Nichols Motion) and July 15, 2005 (all other Motions), and took them under consideration for decision.
1. The Motions
All the Motions seek relief from one or more of the former Debtors. Boner seeks relief to allow her to proceed with a lawsuit in a pending West Virginia state court case involving a wrongful death claim in regard to her husband. One of the defendants in that suit, Cannelton, Inc., carried liability insurance that would cover the fatal injuries suffered by her husband. Boner further states that she will not pursue damages against Cannelton, Inc. in excess of its insurance coverage.
Dotson seeks to proceed with an action in Pike Circuit Court against Sunny Ridge Mining Company, Inc. and Sunny Ridge Enterprises, Inc., “to the extent of available insurance coverage.” He states that he is willing to waive any claim he has or might have against LCC, the bankruptcy estate and the Liquidating Trust. The Groveses are parties to a civil action in the Circuit Court of Kanawha County, West Virginia against Evergreen Mining Company, et al. They state that they seek relief from the stay to “pursue their claims against the Debtors for the purpose of collecting the available insurance funds if liability is found.”
Edmonds seeks relief from the stay for the purpose of allowing him to proceed against ECC Dissolution Company (f/k/a Eden Coal Company, f/k/a Bowie Resources Limited) “to the full extent of any liability insurance coverage available to compensate him for damages arising out of an injury” which occurred in August 2003 in one of the former Debtor’s in Delta County, Colorado. Edmonds states that he will only seek to recover from the Debtor’s liability insurance policies, or from employees or agents of the Debtor, and will take no action to recover against other assets of the Debtor’s estate other than through the reorganization process and pursuant to the claims procedure established by the court.
Pack, Nichols, and the Adams movants seek relief from the Plan Injunction to permit continuation of their respective state court actions in Mingo County, West Virginia against Mountaineer Coal Development Company. Pack commenced her litigation for wrongful death, personal injury and related injuries regarding the injury and death of her husband, Nichols for personal injuries allegedly caused by the Debtor, and the Adams movants for nuisance and related tort injuries. Pack, Nichols, and the Adams movants all state that they do not seek to prosecute their state court actions in order to collect a judgment from any of the Debtors or their respective estates.
2. LCC’s Response
LCC filed an Omnibus Objection to certain of the motions for stay relief set out above, and then filed a Supplement to its Omnibus Objection, Objection to Motion for Relief from Plan Injunction and Objection to Motion to Modify Automatic Stay by Lawrence Edmonds, Jr. (“the Supplement”). The Supplement concedes that the automatic stay is no longer in effect, citing Plans § 11.4 and Bankruptcy Code section 362(c)(2). LCC further filed an Objection to Motion for Relief from Plan Injunction to Permit Continuation of State Court Litigation Up to the Limits of Applicable Insurance Coverage Filed by Brenda Pack and the same Objection in regard to the Adams movants. LCC appears to treat all the Motions before the court as motions for relief from the Plan Injunction.
LCC contends that granting relief from the Plan Injunction would negate its benefits for the Debtors’ estates and the creditors, and that it would “amount to an end-run around the claims resolution procedures established in these cases.” LCC also contends that the Plan Injunction prohibits the commencement or continuation “. . . . in any manner any action or other proceeding of any kind . . . . against the Debtors . . . .” Plans at § 11.3. LCC also cites language from Article 7 of the Plans: “On the effective date, all pre-petition lawsuits, litigation, administrative actions or other proceedings, judicial or administrative, against any of the Debtors, shall be dismissed as to the Debtors. Such dismissal shall be with prejudice to the assertion of a Claim against any of the Debtors other than by the timely filing of a proof of Claim.” Sale Plan at § 7.7; Liquidating Plan at § 7.8. That section of Article 7 further provides that “[c]onfirmation of this Plan and entry of the Confirmation Order shall have no effect on any insurance coverages of the Debtors with respect to any Claim.”
LCC characterizes the attempts of the Movants to obtain relief as attempts to modify the Plans solely for their own benefit, based on its contention that the Plan provisions it cites prohibit the Movants from proceeding with their state court actions. LCC argues that Bankruptcy Code section 1127(b) only allows post-confirmation plan modification prior to “substantial consummation” of the plan, and since the Plans herein are substantially consummated, the Movants cannot meet the section 1127(b) standard for plan modification.
LCC also argues that the Movants’ requests for relief circumvent the claims resolution procedures established in the Plans. It points out that the claims resolution framework included deadlines for creditors of the Debtors’ estates to file proofs of claim, and contends that the Movants had an obligation to timely file a proof of claim to preserve their right to pursue their claims against the Debtors. According to LCC, only Boner has filed claims in this proceeding, but contends that even her claims should not be liquidated in the context of the bankruptcy, and not in state court.
Finally, LCC argues that the Movants have no claim against an insurance company, but only a claim against a Debtor that might have entitlement to insurance coverage. LCC acknowledges that the court could allow the requested relief and let the insurance carrier raise this point as a defense, but that the Debtors’ creditors would be affected by such action as one of the Debtors’ insurance carriers has filed a $44 million administrative expense claim that might be based on costs incurred to defend such claims.
3. The Liquidating Trustee’s response
The Liquidating Trustee filed an Omnibus Objection to Motions for Relief from Stay in regard to the Boner, Dotson, and Groves motions. He states at Paragraph 9 therein that “to the extent that the Plaintiffs are seeking relief from the automatic stay solely to pursue claims against an insurance policy, if any applies, and are waiving all claims against the Debtors’ estates, then the Liquidating Trustee has no objection to relief from the automatic stay.” The Liquidating Trustee is apparently only concerned with the possibility that the Movants might seek to assert unsecured claims against the Debtors’ estates arising out of their respective state court actions. The Movants have all stated that they seek only to proceed against available insurance funds and not against any of the Debtors’ estates, and such action is not at issue here.
LCC bases its objections to the Motions on the language of the Plan Injunction which prohibits “commencing or continuing in any manner any action or other proceeding of any kind . . . . against the Debtors . . . .” Plans at § 11.3. LCC contends that this language prohibits the Movants from going forward with their state court actions. The Movants all contend, however, that they do not seek to recover from any of the Debtors, but only from any available insurance funds. As pointed out in memoranda attached to the Pack and Adams Motions, the applicable Debtor or Debtors are merely nominal parties in the state court actions for the purpose of establishing liability to permit payment up to the limits of applicable insurance. As stated by the court in Doughty v. Holt (In re Doughty), 195 B.R. 1 (Bankr. D. Me. 1996), “[A]fter discharge and upon expiration of the automatic stay, actions aimed at collecting such an obligation from a debtor’s liability insurer are permissible, even when they involve the debtor as a nominal defendant.” Id. at 4.
LCC’s arguments concerning the Movants’ failure to file claims are addressed in In re Coho Resources, Inc., 345 F.3d 338 (5th Cir. 2003), in which the court considered a creditor’s request for relief to recover from the debtor’s liability insurer for personal injuries suffered while working on the debtor’s property. The insurer asserted that the creditor was barred from proceeding against the debtor’s insurers because he had failed to file a claim in the debtor’s Chapter 11 case. The court stated:
We and other courts have squarely rejected [the insurer’s] argument; it is entirely without merit. 11 U.S.C. § 524(a) operates as an injunction against actions against a debtor subsequent to the discharge of a debt. The bankruptcy discharge and § 524 injunction serve to give the debtor a financial fresh start. As a general rule, a creditor must file a proof of claim during the bankruptcy proceedings to preserve its claim against the debtor. If a creditor fails to file such notice, the § 524 injunction will act to shield the debtor from the creditor.
The discharge and injunction, however, are expressly designed to protect only the debtor, and do not affect the liability of any other entity for the debt. Accordingly, courts are in near unanimous agreement that § 524(e) permits a creditor to bring, and proceed in, an action nominally directed against a discharged debtor for the sole purpose of proving liability on its part as a prerequisite to recovering from its insurer. . . .
In short, even though [the creditor’s] failure to file a proof of claim in [the debtor’s] bankruptcy proceedings is a bar to continued prosecution of his claims against [the debtor], it does not affect his claims against non-debtors, such as general liability insurers. The fresh-start policy is not intended to provide a method by which an insurer can escape its obligations based simply on the financial misfortunes of the insured.
Id. at 342-43 (internal quotations and citations omitted).
While the matter before the court involves an injunction written into the confirmed Chapter 11 Plans and not the section 524 injunction, the reasoning set out above is applicable here. The Plan Injunction is intended to protect the Debtors from attempts of all kinds to proceed against any and all of them; it is not intended to and does not protect third parties such as liability insurers. LCC argues that allowing the Movants to proceed with their state court actions will disrupt the claims resolution procedure established in the Plans and impermissibly modify the Plans. Its major concern, however, appears to be the effect of recovery by the Movants on the Debtors’ liability insurers, especially one with a very large administrative expense claim pending in this case.
Further, while the Plan Injunction contains no provision akin to section 524(e) which provides in pertinent part that “ . . . . discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of another entity for, such debt[,]” the Plans do provide that “[c]onfirmation of this Plan and entry of the Confirmation Order shall have no effect on any insurance coverages of the Debtors with respect to any Claim.” Sale Plan at § 7.7; Liquidating Plan at § 7.8. It is clear that both the language of the Plan provisions and the case law support the position of the Movants. The court will therefore by separate order sustain the Motions and overrule LCC’s objections. As set out above, the Liquidating Trustee’s objection is effectively moot.
Dennis M. Ostrowski, Esq.
Laura Day DelCotto, Esq.
Rhonda Jennings Blackburn, Esq.
Ellen Arvin Kennedy, Esq.
John T. Hamilton, Esq.
Spencer D. Elliott, Esq.
Andrew D. Stosberg, Esq.
Geoffrey S. Goodman, Esq.