In re Sntl Corp.
| Decision Date | 19 December 2007 |
| Docket Number | Bankruptcy No. SV 00-14101-GM.,Bankruptcy No. SV 00-14099-GM.,Bankruptcy No. SV 00-14102-GM.,Bankruptcy No. SV 02-14239-GM.,Bankruptcy No. SV 02-14236-GM.,Bankruptcy No. SV 00-14100-GM.,BAP No. CC-06-1350-MoDK |
| Parties | In re SNTL CORP.; SN Insurance Services, Inc.; SNTL Holdings Corp.; SN Insurance Administrators, Inc.; Infonet Management Systems, Inc.; Pacific Insurance Brokerage, Inc., Debtors. Centre Insurance Company, Appellant, v. SNTL Corp.; SN Insurance Services, Inc.; SNTL Holdings Corp.; SN Insurance Administrators, Inc.; Infonet Management Systems, Inc.; Pacific Insurance Brokerage, Inc., Appellees. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Peter J. Gurfein, Esq., Akin, Gump, Strauss, Hauer & Feld, Los Angeles, Ca, Philip A. O'Connell, Jr., Esq., Sonnenschein, Nath & Rosenthal, LLP, San Francisco, CA, for Appellant.
Jeremy V. Richards, Esq., Pachulski, Stang & Ziehl, Young, Jones, Weintraub, LLP, Los Angeles, CA, for Appellees.
Before: MONTALI, DUNN and KLEIN, Bankruptcy Judges.
In this complicated and high-stakes case, we apply, a somewhat obscure doctrine that involves the intersection of insolvency law principles and guaranty law, illustrating the temporal nature of a release of a guarantor when a voidable preference is recovered from the obligee. We also will be one of the first courts to address a question left unanswered by the Supreme Court earlier this year: May an unsecured creditor include `attorneys' fees incurred postpetition but arising from a prepetition contract as part of its unsecured claim?
Here a creditor contended that the debtor's previously released liability as a guarantor of an affiliate's obligation was revived when the creditor compromised a preference action against it. The bankruptcy court disagreed and entered summary judgment disallowing the creditor's multimillion dollar claim and denying the creditor's request for postpetition attorneys' fees and costs. The creditor appeals, and we REVERSE and REMAND.
On April 26, 2000 (the "petition date"), SNTL Corporation (formerly known as Superior, National Insurance Group)1 and its non-insurer affiliates SN Insurance Services, Inc., SNTL Holdings Corporation (formerly known as Business Insurance Group, Inc.), and SN Insurance Administrators, Inc. (collectively, "Debtors") each filed chapter 11 petitions2 for relief.
Pursuant to a confirmed joint plan of reorganization ("Plan"), an SNTL Litigation Trust ("Trust") was formed and an SNTL Litigation Trustee ("Trustee") was appointed. The Trustee was authorized to prosecute certain claims, rights and causes of actions and to oversee and initiate actions pertaining to the allowance and payment of claims, including objections to proofs of claims.
Appellant Centre Insurance Company ("Centre") filed a proof of claim in November 2000 asserting a claim in excess of $294,488,911 (including approximately $3 million in, attorneys' fees lout not including contingent and unliquidated amounts) and an amended proof of claim in March 2005 in the amount of $232,748,280.40. The Trustee filed an objection, to Centre's claim arguing, inter alias that Centre had released claims against SNIG prepetition, that the released claims could not be revived by postpetition events and that Centre, as an unsecured creditor, could not include in its claim attorneys' fees incurred postpetition.
The relationship of the parties, and the nature of the transactions summarized below, are complex and perhaps unique to the insurance and reinsurance industry. Reduced to their central elements, however, they can be summarized as follows: Debtor SNIG guaranteed the performance of its affiliates' obligations to Centre. Following default on these obligations, the parties reached an agreement whereby the affiliates paid Centre $163.4 million to satisfy an obligation, of $180 million and Centre simultaneously released the guarantor (SNIG). Thereafter, in settlement of a preference action brought by the liquidator of the affiliate insurance companies, Centre returned a portion of the $163.4 million payment. Centre now seeks to recover the returned amount ($110 million) from the guarantor SNIG; Trustee asserts that SNIG's released liability cannot be revived.
More specifically, on December 18, 1998, SNIG sold its affiliate Business Insurance Company ("BICO") to Centre Solutions Holdings (Delaware Limited) ("Centre Solutions"); BICO became known as Centre. On the same day, Centre entered into certain reinsurance agreements (the "LPT and Quota Share Agreements") with insurance companies affiliated with SNIG: California Compensation Insurance Company ("CalComp") and Superior National Insurance Company ("SNIC"). SNIG guaranteed performance of one of these reinsurance agreements known as the "QSR Contract?'
In addition, the parties also entered into fronting (service) agreements known as the Underwriting Management Agreement ("UMA") and the Claims Administration Services Agreement ("CSA"). SNIG also guaranteed performance of these agreements. The UMA, CSA, LPT and Quota Share Agreements are collectively referred to as the "Fronting Agreements."3 The Fronting Agreements provide for the recovery of all reasonable expenses, including attorney's fees, incurred in the enforcement of SNIG's guaranty.
The. Fronting Agreements were breached in late 1999. On December 31, 1999, Centre entered into a Partial Commutation and Settlement Agreement ("PCSA") with CalComp, SNIC and SNIG. The PCSA modified the Fronting Agreements and provided for a partial release of the reinsurance obligations of SNIG, CalComp, SNIC and all of their parents and affiliates () up to $180 million (the "Release").4
In exchange for the Release, SNIG, CalComp and SNIC agreed to meet six conditions, including payment of a $163.4 million Partial Commutation Payment ("Payment") by CalComp and SNIC. Centre received the Payment; no evidence was introduced that any of the six conditions for the Release were unsatisfied. In its opening brief, Centre acknowledges that "the primary obligors and SN Holdings [SNIG] (the guarantor) were released from liability for up to $180 million" in exchange for the Payment. Appellant's Opening Brief at 13. Consequently, the Release in the PCSA became effective prepetition.
Article X of the. PCSA provided that the Release could be revoked by Centre if the PCA or other payments made pursuant to the PCSA were found to be voidable or preferential transfers, stating in pertinent part:
In the event that any court of competent jurisdiction or governmental or regulatory authority asserting jurisdiction over the subject matter hereof or the parties hereto enters a final order, judgment, or other finding (i) the payment of all or any part of the $22,300,000, described above, or (ii) the payment by Reinsurers of all or any part of the [Payment] of $163,400,000, or (iii) any of the consideration described in the Recitals to this Agreement ... constitutes a voidable or preferential transfer, such payment constitutes an improper or disproportionate payment, or the payment is otherwise in violation of law or subject to a claim or [sic] preference, then [Centre] may in its sole discretion, in addition to any other remedy provided by law, equity, statute, or contract: (a) enforce this Agreement according to its express terms and conditions; or (b) declare this Agreement to be null and void in its entirety, and thereupon enforce the terms and conditions of the LPT and Quota Share Agreements as though this Agreement (including without limitation the releases and discharges set forth in Articles III and IV) had not been executed....
In March 2000, the Insurance Commissioner for the State of California (the "Commissioner") placed certain insurance companies affiliated with Debtors into conservation, followed by liquidation. In January 2002 (approximately fourteen months after the petition date), the Commissioner filed a complaint in state court against Centre and others, seeking in part the return of the Payment from Centre as an avoidable preference under state law preference provisions.
Centre subsequently agreed to settle that state court litigation, and on February 17, 2005, the state court entered an order approving a settlement agreement between the Commissioner and Centre () providing that the Commissioner's avoidance action would be dismissed in exchange for Centre's partial return (in the amount of $110 million) of the Payment. Paragraph F of the state court order indicated that the Commissioner sought to recover property transferred by the insurance companies to Centre and that the Commissioner had sought avoidance of such transfers.5
The order also provided that the settlement agreement between the Commissioner and Centre was "fully and finally approved." In turn, the settlement agreement itself provided that "[t]he payments to the Liquidator under section III.C.1 of this Settlement Agreement are payments on account of the claims of the Liquidator arising from payments asserted to be preferential transfers ... and not payments on account of any tort claims." Settlement Agreement and Mutual Release at 15.
In its initial proof of claim filed in November 2000, Centre stated that SNIG's liability as guarantor was for amounts "in excess of $180,000,000" and reserved the right to seek additional amounts if any portion of the Payment was "deemed void or avoidable," specifically mentioning the then-pending avoidance action by the Commissioner. The amended proof of claim does not specifically mention the avoidance action or its effect on the Release, but as will be shown, the battle is all about Centre's contention that the amended claim can include the amount...
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