Sexton v. Executive Risk, et al.

2007 DNH 116

• Court: District Court, D. New Hampshire
• Decided: September 24, 2007
• Docket: 07-CV-013-SM
• Status: Published

Opinion

Sexton v. Executive Risk, et a l . 07-CV-013-SM 09/24/07 UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

Kevin Sexton and Marcella Darling, Plaintiffs

v. Civil No. 0 7-cv-13-SM Opinion No. 2007 DNH 116 Executive Risk Indemnity, Inc. and Landmark American Insurance Company, Defendants

O R D E R

This declaratory judgment action, brought under state law

and originally filed in the New Hampshire Superior Court, was

removed to this court based on diversity jurisdiction. Among

other things, plaintiffs seek a declaration of coverage under

directors'’ and officers'’ liability policies issued by the

defendant insurers to Felt Manufacturing Company, Inc. ("EMC"),

formerly known as Foss Manufacturing Company, Inc. The

plaintiffs now move this court to refer the matter to the United

States Bankruptcy Court for the District of New Hampshire.

EMC is involved in a Chapter 11 proceeding in the bankruptcy

court. In re Felt Manufacturing Company, I nc.. No. 05-13724-JMD

(Bankr. D.N.H.). In connection with that proceeding, E M C '’s

unsecured creditors brought an adversary proceeding against these

plaintiffs (as officers and directors of EMC), seeking to recover money damages for various alleged torts. See Official Committee

of Unsecured Creditors v. Stephen Foss, et a l ., No. 06-11711-JMD

(Bankr. D.N.H.). Those claims implicate insurance coverage under

defendants' policies, which apparently provide coverage for any

assessed liability, up to policy limits, but less costs of

providing a defense to the insureds.

The defendant insurers have provided representation for the

plaintiffs in the adversary proceeding, but subject to a

reservation of rights. The insurers acknowledge that their

ability to fund the costs of that defense is restricted by an

order of the bankruptcy court lifting the automatic stay

provisions of the Bankruptcy Code to the extent of permitting

aggregate disbursements of up to $300,000 for defense costs - a

limit that has already been reached. In granting only limited

relief from the automatic stay, the bankruptcy court was, no

doubt, concerned that unreasonable or unnecessary defense

expenditures would deplete insurance proceeds that otherwise

would be available for distribution to the estate for the benefit

of creditors, should the named insureds be found liable in the

adversary proceeding. But, when he partially lifted the stay,

the bankruptcy judge expressly authorized the insureds to file a

subsequent motion seeking additional relief from the stay, as

necessary to adequately fund their defense. See Order dated

2 October 19, 2006, Case No. 05-13 72 4-JMD. Importantly, however,

nothing in the declaratory judgment suit record suggests that,

prior to filing this declaratory judgment action, plaintiffs

sought relief from the automatic stay provisions.

Discussion

Essentially, the plaintiffs base their motion for referral

to the bankruptcy court on a claim that their suit for

declaratory judgment falls comfortably within that court's

"relatedness" jurisdiction. See 28 U.S.C. § 1334(b). See also

Local Rule 77.4 (referring all cases and proceedings in

bankruptcy to the bankruptcy court). Generally speaking, a

matter is "related" to a bankruptcy case if the outcome of the

proceeding could alter the debtor's rights, liabilities, options,

or freedom of action, or if it might have an impact upon the

handling and administration of the estate. See In re Boston

Regional Med. C t r . , 410 F.3d 100, 105 (1st Cir. 2005).

Defendant insurers contest "relatedness" here, arguing that

this insurance coverage action does not implicate any rights held

by the EMC estate, and will not have any direct effect upon the

bankruptcy estate. Of course, to the extent available policy

proceeds are diminished due to unnecessary defense expenditures.

3 the estate will likely be affected (assuming officer or director

liability and the absence of other sources of payment).

The parties raise and debate interesting issues in their

memoranda regarding the character of directors' and officers'

liability policy proceeds as assets of a bankruptcy estate, and

the subtleties of "relatedness" bankruptcy jurisdiction over

coverage disputes under such policies. In this particular case,

however, the motion to refer can, and should, be resolved on more

straightforward grounds.

The first question that ought to be addressed is whether

parties wishing to access proceeds of the D&O policies for

defense costs must first seek relief from the automatic stay

provisions of the Bankruptcy Code. I believe that they must.

S e e , e . g . . In re Cvbermedica, I nc.. 280 B.R. 12, 17-18 (Bankr. D.

Mass. 2002). See generally 11 U.S.C. § 362(a)(3). More to the

point. Judge Deasy, in E M C 's Chapter 11 proceeding, thought so as

well, as illustrated by his order granting limited relief from

the automatic stay to permit the insureds to obtain proceeds

necessary to pursue a defense, but only up to the $300,000 fixed

l i m i t .1

1 Interestingly, plaintiffs seek a number of forms of relief in their declaratory judgment suit, including a

4 And, perhaps of even more significance, in his order

authorizing a modification to the Second Amended Plan in E M C s

Chapter 11 proceeding. Judge Deasy expressly provided that:

Notwithstanding anything to the contrary in the Plan or the Confirmation Order shall (1) affect or impair in any way the rights of the defendants named in the Committee Adversary Proceeding as parties to the Committee Adversary Proceeding or (2) affect or impair in any wav the rights and remedies of the parties to the Committee Adversary Proceedings with respect to the Insurance policies and their p r o c e e d s .17 The Bankruptcy Court shall retain jurisdiction to determine the interests of the Liquidating Debtor and the Insureds (as defined in the Insurance Policies) under the Insurance P o l i c i e s .

- Insurance Policies are defined in the Plan as "the directors and officers liability policy issued by Executive Risk Indemnity, Inc. ("ERII") in the amount of $5,000,000, and (ii) an "Excess Directors and Officers Liability Policy" issued by Resurgens Specialty Underwriting, Inc. ("Resurgens") in the amount of $5,000,000."

Order dated May 16, 2007, Case No. 05-13724-JMD (Deasy, B.J.)

(emphasis s u p p l i e d ) .

On its face, the plaintiffs'’ declaratory judgment action was

probably filed in derogation of the limited relief from the

automatic stay provisions previously granted by Judge Deasy, and

declaration that the insurers' duties under the policies include a duty to "seek relief from the automatic stay" to free up money necessary to support the insureds' defense in the adversary pr o c e e d i n g .

5 in any event, in contravention of the bankruptcy court's express

retention of jurisdiction to determine the interests of the

insureds under the very policies at issue in this declaratory

judgment suit. At least in the first instance, then, the

bankruptcy court is entitled to determine its own jurisdiction

over this matter and, if appropriate, determine the interests of

the insureds in the directors and officers liability policies.

Conclusion

Plaintiffs' motion to refer this matter to the United States

Bankruptcy Court (document no. 12) is granted. This matter is

referred to the bankruptcy court for appropriate action as it

plainly comes within the express retention of jurisdiction

provisions of the Third Amended Plan.

Defendant Landmark American Insurance Company's motion to

dismiss (document no. 26) and defendant Executive Risk Indemnity,

Inc.'s motion for joinder of necessary parties (document no. 45)

are denied, without prejudice to refiling, if appropriate, after

the bankruptcy court has determined its own jurisdiction over

this matter.

6 SO ORDERED.

McAuliffe hief Judge

September 24, 2007

cc: Edmond J. Ford, Esq. Karyn P. Forbes, Esq. Doreen F. Connor, Esq. Janet R. McFadden, Esq. John Chesney, Esq. James C. Wheat, Esq. Wayne E. Borgeest, Esq. Robert A. Benjamin, Esq.