American States Ins. Co. v. Symes of Silverdale, Inc.

• Decision Date: 06 November 2003
• Docket Number: No. 72817-8.,72817-8.
• Citation: 150 Wash.2d 462,78 P.3d 1266
• Parties: AMERICAN STATES INSURANCE COMPANY, Respondent, v. SYMES OF SILVERDALE, INC. dba Symes Cigar Bar; Evergreen Restaurant Development, Inc., dba Symes Family Restaurant; of Port Orchard, Inc.; McKenzies of Puyallup Inc.; Thomas R. Lepre aka Lennie Lepre, Defendants, Kathryn Ellis (in the capacity as Bankruptcy Trustee), Petitioner.
• Court: Washington Supreme Court

78 P.3d 1266

150 Wash.2d 462

AMERICAN STATES INSURANCE COMPANY, Respondent, v. SYMES OF SILVERDALE, INC. dba Symes Cigar Bar; Evergreen Restaurant Development, Inc., dba Symes Family Restaurant; of Port Orchard, Inc.; McKenzies of Puyallup Inc.; Thomas R. Lepre aka Lennie Lepre, Defendants, Kathryn Ellis (in the capacity as Bankruptcy Trustee), Petitioner.

No. 72817-8.

Supreme Court of Washington, En Banc.

Argued May 22, 2003.

Decided November 6, 2003.

Kennard Goodman, Seattle, for petitioner.

Clarke Bovingdon Cole Mills & Lether, Thomas Lether, Scott Collins, Seattle, for respondent.

Summit Law Group, Thomas James, Seattle, Wiley Rein & Fielding, Laura Foggan, Washington, DC, amicus curiae on behalf of Complex Ins. Claims Litigation.

Bryan Harnetiaux, Debra Stephens, Spokane, for amicus curiae on behalf of Wash. State Trial Lawyers Assoc.

SANDERS, J.

Petitioner Kathryn A. Ellis is bankruptcy trustee for debtor restaurant Symes of Silverdale, Inc. (Symes) whose president allegedly set fire to the premises. Trustee Ellis asks this court to reverse a Court of Appeals decision holding: (1) the exclusion of property insurance coverage for dishonest or criminal acts by the policyholder may be maintained against the policyholder's bankruptcy trustee's seeking benefits from insurer for arson loss and (2) a bankruptcy trustee's claim of bad faith against its insurer for denial of coverage must be dismissed on summary judgment if the insurer had at least one reasonable ground for its action. This is the companion case to Smith v. Safeco Insurance Co., No. 732990, 150 Wash.2d 478, 78 P.3d 1274, 2003 WL 22508858 (Wash. Nov. 6, 2003). Both cases require the court to decide whether the insurer's burden of proof on the summary judgment standard introduced by Ellwein v. Hartford Accident & Indemnity Co., 142 Wash.2d 766, 15 P.3d 640 (2001) is appropriate or applicable. We conclude it is not and reverse and remand to the trial court for proceedings consistent with this opinion.

FACTS

Symes, a family restaurant and sports bar located in Silverdale, Washington, obtained an insurance policy from American States Insurance Company effective March 10, 1997. A month later Symes filed a chapter 11 bankruptcy petition for reorganization. The following spring Symes renewed its insurance contract with American States Insurance effective until March 10, 1999 and increased the limits of its liability. On June 3, 1998, a fire severely damaged Symes. The Bureau of Alcohol, Tobacco and Firearms determined the fire was caused by arson and found no signs of forced entry. The following day with knowledge of the fire, the bankruptcy court granted a creditor's motion to convert the matter from a chapter 11 reorganization to a chapter 7 liquidation. Symes's president, Thomas R. Lepre, filed a claim on behalf of Symes for losses with American States. On June 9, 1998, the bankruptcy court appointed Ellis as Symes's trustee in bankruptcy. As trustee for the bankruptcy estate, Ellis took responsibility for the insurance claim with American States. The insurance policy proceeds are Symes's only significant asset.

To determine coverage under the policy American States conducted an independent investigation. In March 1999 American States denied the trustee's claim citing fraudulent proof of loss, failure to cooperate and its conclusion the fire was intentionally set by or at the behest of Symes. American States filed a declaratory judgment action to establish it properly denied the claim, where it alleged Symes's president, Thomas R. Lepre, set fire to the restaurant. The trustee responded with breach of contract, Consumer Protection Act (chapter 19.86 RCW), and insurance bad faith counterclaims against American States.

Both parties moved for partial summary judgment. The trustee moved to dismiss American States's claim that it properly denied coverage based on arson, arguing that even if Lepre set the fire, his actions as a debtor-in-possession could not be attributed to the bankruptcy estate because arson is outside the scope of the debtor-in-possession's authority. American States Insurance moved to dismiss the trustee's bad faith claim, arguing that Ellwein, 142 Wash.2d 766, 15 P.3d 640, requires dismissal of insurance bad faith claims if the insurer has at least one reasonable ground for its actions. The trial court denied both motions and the parties appealed.

The Court of Appeals affirmed in part and reversed in part, holding "the intentional act exclusion can be maintained against" the trustee for acts committed by the debtor and the insurer is "entitled to summary judgment dismissal of a bad faith claim unless the insured shows there was no reasonable basis for the insurer's actions." Am. States Ins. Co. v. Symes of Silverdale, Inc., 111 Wash.App. 477, 488, 491, 45 P.3d 610 (2002). The trustee petitioned this court for discretionary review, which we granted. 148 Wash.2d 1014, 64 P.3d 649 (2003).

STANDARD OF REVIEW

"The standard of review of an order of summary judgment is de novo, and the appellate court performs the same inquiry as the trial court." Jones v. Allstate Ins. Co., 146 Wash.2d 291, 300, 45 P.3d 1068 (2002).

ANALYSIS

I. The Right of a Bankruptcy Trustee to Recover Insurance Proceeds for Damage to Property Allegedly Caused by Debtor

As an initial matter the parties dispute whether state law or federal bankruptcy law applies. The Court of Appeals held "state law, not bankruptcy law, determines contractual terms between the parties, even if one is in bankruptcy...." 111 Wash.App. at 480, 45 P.3d 610.

"Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding." Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). However, a state has no power to make or enforce any law that conflicts with federal bankruptcy laws. Int'l Shoe Co. v. Pinkus, 278 U.S. 261, 263-64, 49 S.Ct. 108, 73 L.Ed. 318 (1929). State court decisions that define property rights are not binding on federal bankruptcy courts when they are contrary to bankruptcy law. In re Lahman Mfg. Co., 33 B.R. 681, 687 (Bankr.D.S.D.1983). Thus, if there is a conflict between state law and federal law, federal law prevails.

A trustee, as representative of the bankruptcy estate, acquires all the rights of the debtor in an insurance policy issued to the debtor, subject to all defenses and obligations that may have existed at the time the bankruptcy estate was created. In re Feiereisen, 56 B.R. 167, 169 (Bankr.D.Ore.1985). But "the Trustee and the Debtor are neither the same entity nor alter egos of each other." In re Buckeye Countrymark, Inc., 251 B.R. 835, 840 (Bankr.S.D.Ohio 2000). If the debtor has no authority to act on behalf of the bankruptcy estate, a debtor's intentional wrongdoing is not attributable to the trustee. Feiereisen, 56 B.R. at 169-70. Accordingly, a bankruptcy trustee is not barred from recovering under debtor's insurance policy if the debtor's principal intentionally sets fire to the debtor's premises after the debtor filed a chapter 11 petition for bankruptcy. In re J.T.R. Corp., 958 F.2d 602, 605 (4th Cir.1992).¹

The Court of Appeals relied on In re Light, 23 B.R. 482 (Bankr.E.D.Mich.1982) for the proposition that a bankruptcy trustee's interest in a debtor's insurance policy is equal to that of the debtor's. But that case is clearly distinguishable. There the debtor allegedly intentionally set fire to his property and filed a claim against his insurer several months before he was forced into involuntary bankruptcy and before a trustee had been appointed to oversee the estate. Id. at 483. The sole issue before the court was whether the defense of arson asserted by the insurer was also valid against the trustee. Id. The court held because the debtor was barred from recovery at the time the petition was filed, the trustee was likewise barred. Id. at 484.

Here Symes's president allegedly set fire to the restaurant after Symes filed a bankruptcy petition but before a trustee was appointed. This case is on all fours with J.T.R. Corp. where a principal of the debtor restaurant corporation intentionally set fire to the restaurant several months after filing a chapter 11 bankruptcy petition. 958 F.2d at 603. The court appointed a bankruptcy trustee a few days after the fire. Id. The Fourth Circuit held the bankruptcy estate was not barred from recovering under an insurance policy even if the principal would have been barred from recovery under the policy. Id. at 605. It reasoned the arson was not attributable to the estate because the principal had no authority from the estate to destroy the restaurant. Id.

But the Court of Appeals declined to apply J.T.R., reasoning:

A holding consistent with [J.T.R.] could encourage acts of arson and encourage fraud against the insurer. Certainly the unsecured creditors would benefit when the insolvent owner burns his business with the intent to destroy records that would implicate him criminally or just relieve him of a debtor situation by having sufficient insurance to cover all of the debt when the business is destroyed. The unscrupulous debtor would then have fewer persons examining his position criminally if the unsecured creditors were satisfied by insurance payments. (It is likely that secured creditors would have insurance on their security or be provided for as loss payees.) And the insurer would have little incentive to pursue the debtor if it were required to sustain the loss and pursue the insolvent debtor.

111 Wash.App. at 488-89, 45 P.3d 610. Yet state courts have no authority to depart from federal bankruptcy law based on a disagreement as to appropriate public policy. Pinkns, 278 U.S. at 263-64, 49 S.Ct. 108. Moreover, the Court of Appeals public policy argument is...