UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
ASHLAND DIVISION
IN RE:
HNRC DISSOLUTION CO. CASE
NO. 02-14261
DEBTOR
MEMORANDUM OPINION
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.
4. Discussion
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.
Copies to:
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.