Drennen v. Certain Underwriters At Lloyds of London (In re Residential Capital, LLC)

Decision Date21 December 2022
Docket Number12-12020 (MG),Adv. Case 15-01025 (DSJ)
PartiesIn re: RESIDENTIAL CAPITAL, LLC, et al., Debtors. v. CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON, et al., Defendants. ROWENA DRENNEN, FLORA GASKIN, ROGER TURNER, CHRISTIE TURNER, JOHN PICARD AND REBECCA PICARD, individually and as the representatives of the KESSLER SETTLEMENT CLASS, STEVEN AND RUTH MITCHELL, individually and as the representatives of the MITCHELL SETTLEMENT CLASS, and RESCAP LIQUIDATING TRUST, Plaintiffs,
CourtU.S. Bankruptcy Court — Southern District of New York

Chapter 11

PERKINS COIE LLP Counsel for ResCap Liquidating Trust By: Vivek Chopra, Esq. Selena Linde, Esq. ARNOLD & PORTER KAYE SCHOLER LLP Counsel for North American Specialty Insurance Company By: Kent Yalowitz, Esq. Daniel R Bernstein, Esq.

WILEY REIN LLP Counsel for Twin City Fire Insurance Company By: Cara Duffield, Esq.

HINSHAW CULBERTSON LLP Counsel for Certain Underwriters at Lloyd's of London By: J. Gregory Lahr, Esq. Matthew Ferlazzo, Esq. Karen Toto, Esq.

WALTERS RENWICK RICHARDS SKEENS & VAUGHAN, P.C. Counsel for the Kessler Class and the Mitchell Class By: Roy Frederick Walters, Esq. Kip D. Richards, Esq. Karen W. Renwick, Esq. David M. Skeens, Esq.

CAHILL GORDON & REINDELL LLP Counsel for Swiss Re International S.E. By: Thorn Rosenthal, Esq. Taylor Elicegui, Esq.

HANGLEY ARONCHICK SEGAL PUDLIN & SCHILLER Counsel for Steadfast Insurance Company By: Sharon F. McKee, Esq. KAUFMAN DOLOWICH & VOLUCK, LLP Counsel for Continental Casualty Company By: Patrick M. Kennell, Esq.

STEPTOE JOHNSON LLP Counsel for Clarendon National Insurance Company By: Harry Lee, Esq. John O'Connor, Esq.

DECISION RESOLVING CROSS-MOTIONS FOR PARTIAL SUMMARY JUDGMENT

DAVID S. JONES UNITED STATES BANKRUPTCY JUDGE

This memorandum opinion and order (this "Decision") decides eleven separate motions for partial summary judgment filed at the close of discovery in a multi-party dispute between two types of claimants[1]-a liquidating trust that has succeeded to the rights of one of the debtors in a confirmed voluntary Chapter 11 bankruptcy case, and two groups of class-action plaintiffs who hold substantial allowed claims against the estate-as against multiple insurer defendants[2] who, among them, provided up to $400 million of liability insurance to the debtor. The claimants are proceeding under the authority of the confirmed plan and a related settlement, which together entitled the Class Plaintiffs and the Liquidating Trust to pursue coverage claims that the debtor originally had against its insurers. As assignees of the debtor's insurance rights, the Kessler Class and Mitchell Class seek coverage of their respective allowed claims as losses of the debtor under the insurance policies, while the Trust seeks coverage for the debtor's payment of a compensatory damages judgment in the Mitchell Class's underlying suit and related costs and expenses.

The motions addressed by this Decision seek rulings related to (i) whether the losses resulting from the claims of the Mitchell Class and the Kessler Class are covered under the terms of the insurance policies' provisions defining the scope of their coverage; (ii) if so, whether those insurance claims are barred by the policies' "Exclusion 38," which (as detailed and stated more precisely below) excludes from the policies' coverage certain claims arising from services rendered by insured people or entities that are not a "Professional Liability Assured"[3] as that term is defined in the policies; (iii) whether at least portions of the insurance claims at issue are excluded from the policies' coverage and/or precluded as a matter of law because they arise from awards of punitive damages and/or statutory penalties; (iv) whether claims against the Excess Insurers (those responsible for all but the first $50 million of coverage) are barred by so-called "exhaustion" provisions in the Excess Insurers' policies, which, roughly speaking, state that the Excess Insurers' obligations do not arise until the primary layer of insurance is paid in full or the Primary Underwriters are held liable to pay in full; (v) whether claims based on a variety of specific types of asserted consequential damages are recoverable; (vi) whether certain claims or causes of action are time-barred; (vii) whether the Insurers are entitled to challenge the reasonableness of the allowed claim amount giving rise to the Kessler Class's claims notwithstanding this Court's previous approval of the settlement, in the course of which this Court explicitly determined under the standards applicable to review of class action settlements and Bankruptcy Rule 9019 motions, among other things, that the settlement was fair and reasonable; (viii) even if the Insurers are not precluded from contending that their coverage obligations are not triggered because the settlement for which insurance payment was sought was unreasonable, whether the Court should determine that the Class Plaintiffs are entitled to summary judgment on the ground that no reasonable juror could conclude that the settlement was unreasonable; and (ix) whether the full allowed-claim amount of $300 million of the Kessler Class action claimants constitutes an insured loss, or whether the amount of that loss is limited to the actual cash payment obligation of the estate, where under the parties' Court-approved settlement and the Plan the Kessler Class received an allowed claim of $300 million that by agreement was to be satisfied solely by a cash distribution from the estate of approximately $27 million, coupled with the right to pursue the Insurers for the debtor's insurance coverage rights up to the full allowed amount of the claim, i.e., $300 million.

Put succinctly here and in greater and more precise detail below, this Decision holds as follows:

1. The Plaintiffs are entitled to summary judgment determining that the claims fall within the scope of the policies' coverage, and the unambiguous language of Exclusion 38, which case law instructs must be construed narrowly against the insurer, does not exclude the claims from coverage. The Court further concludes that the Insurers have waived their entitlement to rely on Exclusion 38 through their sustained invocation of other defenses and exclusions while never raising Exclusion 38. Thus, the Insurers' summary judgment motion on these issues is denied.
2. The Insurers are not entitled to summary judgment on their contention that the Plaintiffs are barred from recovering from the Insurers on the portions of the claims that arise from what the Insurers assert are punitive damages and/or statutory penalties, because the policies specify that their scope of coverage is to be determined applying the most broadly permissive relevant source of state law. Delaware law concededly is among the states whose law applies under that provision, and Delaware law does not bar insurance coverage of punitive damages. The Court does not accept the Insurers' contention that a limited public-policy based aspect of New York's choice of law principles calls for deviating from New York's usual willingness to enforce agreements as to what law applies; among other things, New York lacks a sufficiently strong state interest in the matter for its public-policy choice-of-law override to apply here. Further, claims that were allowed to the Class Plaintiffs based on available compensation-heightening measures such as law authorizing the award of treble damages in some circumstances do not constitute the sort of fines or penalties that the policy excludes.
3. The Excess Insurers' policies' wording varies, but they all unambiguously require that the primary layer of insurance be paid in full or that the Primary Underwriters be held liable to pay in full before the Excess Insurers' obligations to pay are triggered. Accordingly, any claim against the Excess Insurers premised on their failure to make payments prior to such time as the Primary Underwriters either paid in full or were held liable to pay in full fails. Thus, the Excess Insurers' summary judgment motion on that issue is granted.
4. As recognized by this Court's prior order allowing the Plaintiffs to amend their complaint, the amendments do not reflect new claims, but instead reflect new allegations and damages demands pled as part of the breach of contract claims already contained in the prior version of the complaint, which are undisputedly timely. Therefore, none of the Plaintiffs' claims or causes of action are time-barred.
5. The Defendants' various legal arguments against the availability of various types of consequential damages are precluded by the law of the case doctrine because they have already been considered and rejected by this Court, and/or they are otherwise unavailing on the merits. The Plaintiffs have identified evidence demonstrating that the parties reasonably dispute certain material facts, including whether the parties contemplated certain types of consequential damages at the time of contracting, whether the Defendants engaged in bad faith, and whether consequential damages are quantifiable or purely speculative. Therefore, summary judgment on that issue is inappropriate.
6. The Kessler Class's motion for partial summary judgment on the issues of whether the Insurers are barred by reason of waiver and/or are collaterally estopped from challenging the reasonableness of the settlement amount is denied. The Insurers took steps to preserve all defenses to claims at the time the Court approved the claim settlement and confirmed the Plan, including with respect to reasonableness, and the Court's approvals were without prejudice to those Insurer defenses. The mere fact that the then-presiding judge found the settlement to be, among other things, "re
...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT