Cont'l Cas. Co. v. Chatz, Case Nos. 17-cv-05281-WHO

• Decision Date: 17 September 2018
• Docket Number: 17-cv-06989-WHO,Case Nos. 17-cv-05281-WHO
• Court: U.S. District Court — Northern District of California
• Parties: CONTINENTAL CASUALTY COMPANY, Appellant, v. Barry A. CHATZ, AS TRUSTEE FOR the CFB/WFB LIQUIDATING TRUST, Appellee.

591 B.R. 396

CONTINENTAL CASUALTY COMPANY, Appellant,

v.Barry A. CHATZ, AS TRUSTEE FOR the CFB/WFB LIQUIDATING TRUST, Appellee.

Case Nos. 17-cv-05281-WHO

17-cv-06989-WHO

United States District Court, N.D. California.

Signed September 17, 2018

Laurie J. Hepler, Greines, Martin, Stein & Richland LLP, Suzanne R. Fogarty, Ray L. Wong, Duane Morris LLP, San Francisco, CA, Jeff D. Kahane, Duane Morris LLP, Raymond J. Tittmann, Wargo & French LLP, Los Angeles, CA, Robert Douglas Whitney, Young Moore & Henderson, P.A., Raleigh, NC, for Appellant.

Joseph D. Frank, Neal Gerber & Eisenberg LLP, Chicago, IL, Peter C. Califano, Cooper, White & Cooper LLP, San Francisco, CA, for Appellee.

ORDER ON CONSOLIDATED BANKRUPTCY APPEALS

William H. Orrick, United States District Judge

INTRODUCTION

These consolidated bankruptcy appeals stem from Chapter 11 proceedings in Bankruptcy Court filed by debtors Chicago Fire Brick Co. ("CFB") and Wellsville Fire Brick Co. ("WFB") ("Debtors"), establishing a Liquidating Trust to handle asbestos-related claims and disbursements to claimants from debtors' insurance policies. Appellant Continental Casualty Company ("Continental"), an insurance company that insured debtors, appeals from two decisions from the Bankruptcy Court, the Hon. Roger L. Efremsky presiding. From the underlying bankruptcy matter, Continental appeals Judge Efremsky's decision denying Continental's motion for leave to have an Illinois court decide whether policy coverage existed for the claims the Liquidating Trust asserted against Continental. From the related adversary proceeding ("Adversary Proceeding"), Continental appeals from Judge Efremsky's decision finding Continental liable to the Trust for $3.5 million in claims, as well an award of penalties for Continental's vexatious conduct.

The heart of Continental's consolidated appeal is its argument that Judge Efremsky erred in preventing Continental from presenting its argument on the merits that coverage did not exist over the vast majority of claims the Trustee submitted to it. As explained in detail below, Judge Efremsky appropriately concluded that Continental had the opportunity to make that argument in the Plan's claims process and in the Adversary Proceeding, but its former counsel declined, repeatedly, to do so.

As such, the Bankruptcy Court appropriately determined and I determine separately that, under the doctrines of judicial and equitable estoppel, Continental was bound to the arguments it actually raised on the claims submitted and presented in the Adversary Proceeding. The Bankruptcy Court also appropriately concluded that Continental's attempt to change course and belatedly raise the coverage issue was vexatious and unreasonable.

Because I find that Judge Efremsky's order and judgment based on estoppel and assessing penalties in the Adversary Proceeding were appropriate, I need not separately reach the denial of Continental's motion for leave to file a state court complaint to determine the coverage issue that Continental forfeited in the bankruptcy proceedings.

BACKGROUND

I. THE DEBTORS DECLARE BANKRUPTCY AND THE DEBTORS AND CONTINENTAL AGREE TO A PROCESS FOR SETTLING CLAIMS

The Debtors made and distributed refractory products, some of which contained asbestos. CA-60. Facing numerous personal injury and wrongful death lawsuits, the Debtors filed for Chapter 11 bankruptcy in 2001. Id. The Bankruptcy Court confirmed the Debtors' Joint Chapter 11 Plan on September 7, 2012. CA-660. The Plan established a Liquidating Trust and provided for the appointment of the Trustee to liquidate the Debtors' remaining assets and make distributions on asbestos claims according to the Plan's requirements. CA-33-35; 212-33.

At the time they filed in bankruptcy, the Debtors had approximately $2.5 million in remaining insurance coverage under three Continental policies issued decades earlier. CA-1020; CA-982. After filing, the Debtors negotiated "buyback" settlements with three of their primary insurance carriers; Continental was the only solvent primary insurance carrier that declined to settle. CA-62; 1437.

Prior to the confirmation of the Plan, Continental filed a proof of claim. CA-661. The proof of claim was "contingent and unliquidated" and based on a "potential right of setoff" because "confirmation of the pending plan may leave Continental without the participation of the Debtor's other insurance carriers" and Continental "may be asked to pay some or all of others' share of payments due for defense of claims against the Debtor." CA-661. Through the claim, Continental demanded performance of Debtors' "reciprocal obligations" under applicable insurance policies and, "to the extent such obligations give rise to a ‘Claim’ within the meaning of § 101(5) of the Bankruptcy Code, Continental hereby demands payment on its claim." CA-661.

Because Continental had not settled, over an eight month period Continental and the Debtors negotiated a specific process for handling any asbestos claims the Trustee might submit to Continental. CA-35-37. The Debtors incorporated this process into Section 8.3 of the Plan. See Id. Under Section 8.3 of the Plan, the Trustee could submit asbestos claims to Continental, with limits on how many claims could be submitted at once, and Continental had 90 days to accept or reject each claim. CA-35-37. For each claim, the Trustee had to: (1) provide documentation; (2) state the liquidated value; and (3) state "the allocated percentage" of that value that the Trustee contended Continental owed. CA-35.

On this appeal, Continental places much emphasis on the following. First, the Plan "stated no consequence" for failure on the part of Continental or the Trustee to "meet the terms" of Section 8.3. Appellant's Opening Brief (AOB) at 19. Second, the Order confirming the Plan reserved all of Continental's and the Trustee's rights, subject only to Section 8.3:

Notwithstanding anything to the contrary in this Confirmation Order, the Plan, the Trust Distribution Procedures, or any settlement agreement, nothing in this Confirmation Order, the Plan, the Trust Distribution Procedures or any settlement agreement (including any other provision that purports to be preemptory or supervening) shall in any way operate to impair, or have the effect of impairing either (a) an insurer's legal, equitable or contractual rights, if any, in any respect, except to the extent that such insurer's rights are expressly impaired or limited in a settlement agreement to which it is a party, or, in the case of Continental, by section 8.3 of this Plan, or (b) the legal, equitable or contractual rights of the Debtors and/or the Liquidating Trust against the Debtors' insurers, if any, in any respect, except to the extent that such rights are expressly impaired or limited in a settlement agreement to which the Debtors and/or the Liquidating Trust are parties.

CA-271; AOB 19-20. Third, the Plan reserved the parties' rights with regard to "rights and arguments as to jurisdiction and venue." CA-271; 52. Finally, the parties agreed that Illinois law would govern the Plan, unless "a rule of law or procedure is supplied by federal law...." CA-51.

II. THE TRUSTEE SUBMITS CLAIMS TO CONTINENTAL, WHO NEITHER ACCEPTS NOR REJECTS THEM WITHIN THE TIME REQUIRED

In May 2015, the Trustee began submitting claims to Continental. Between May and September 2015, the Trust submitted 249 claims. CA-804-05; 921-44; 946-48; 956-60; 962-69.¹ In each Proposal, the Trustee contended that Continental's allocated percentage was 100% of the liquidated value of each Tendered Claim. Each Proposal also included a cover letter stating that:

[E]ach claim results from repeated exposure to one or more asbestos-containing products for which one of the Debtors has legal responsibility, including exposure during the coverage period of the Continental Policies.

CA-3550-51. Continental informed the Trustee that in its view the Trust's submissions "did not qualify as ‘Proposals’ under § 8.3," because 100% was not a permitted allocation unless the evidence showed that the Claimant was exposed to asbestos exclusively during Continental's policy periods. CA-3551. The Trustee responded that he believed an allocated percentage of 100% for each claim was appropriate under applicable Illinois law. CA-805, 953-54.² In response, Continental disagreed with this reading of the Plan but did not offer an alternative proposed allocation. CA-1505.

The 249 claims tendered by the Trustee between May and September 2015 totaled $3,410,000. CA-807. This amount exceeded the $2,512,444 remaining in coverage under the Debtors' Continental policies. CA-807. By December 31, 2015, Continental's 90 day window to accept or reject each claim had closed. That day, the Trustee initiated an adversary proceeding against Continental before the Bankruptcy Court ("Adversary Proceeding").

III. THE TRUSTEE FILES AN ADVERSARY COMPLAINT AGAINST CONTINENTAL

The Trustee's December 31, 2015 adversary Complaint against Continental sought declaratory relief and asserted breach of contract claims with respect to Continental's obligations under the Plan and policies. CA-409-27. The Complaint, as amended, also sought damages under Section 155 of the Illinois Insurance Code for Continental's "unreasonable delay and vexatious refusal to pay [claims] when due." CA-794-812.

Continental answered and counterclaimed, seeking a declaration that the Trustee had not complied with the "condition precedent" in Section 8.3 because the phrase "allocated percentage" did not permit the Trustee to seek the full liquidated value of any claim from Continental "without allocating a percentage [to the Debtors' other] insurers," and that Continental owed "no recovery to the Trust ... absent an allocated percentage proposed to Continental." CA-984; CA-907-85. Continental also objected to the bankruptcy court entering judgments against Continental on issues where the bankruptcy court lacked "core" jurisdiction. CA-971, 981; see ...