Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, In re

• Decision Date: 26 November 1997
• Docket Number: D,No. 1596,1596
• Parties: 38 Collier Bankr.Cas.2d 1851, 31 Bankr.Ct.Dec. 978, Bankr. L. Rep. P 77,560 In re FINLEY, KUMBLE, WAGNER, HEINE, UNDERBERG, MANLEY, MYERSON & CASEY, Debtor. Arthur H. CHRISTY, as Trustee of the Finley Kumble, et al Malpractice Insurance Trust, Plaintiff-Appellant, v. ALEXANDER & ALEXANDER OF NEW YORK INC.; Alexander International Insurance Services, Ltd.; Alexander Howden Insurance Brokers, Ltd., Defendants-Appellees. ocket 96-5125.
• Court: U.S. Court of Appeals — Second Circuit

Page 52

130 F.3d 52

38 Collier Bankr.Cas.2d 1851, 31 Bankr.Ct.Dec. 978,

Bankr. L. Rep. P 77,560

In re FINLEY, KUMBLE, WAGNER, HEINE, UNDERBERG, MANLEY,

MYERSON & CASEY, Debtor.

Arthur H. CHRISTY, as Trustee of the Finley Kumble, et al

Malpractice Insurance Trust, Plaintiff-Appellant, v. ALEXANDER & ALEXANDER OF NEW YORK INC.; Alexander

International Insurance Services, Ltd.; Alexander

Howden Insurance Brokers, Ltd.,

Defendants-Appellees.

No. 1596, Docket 96-5125.

United States Court of Appeals, Second Circuit.

Argued July 14, 1997.

Decided Nov. 26, 1997.

John F. Cambria, New York City (Salvatore A. Santoro, Frank E. Derby, Daniel R. Milstein, Christy & Viener, on the brief), for Plaintiff-Appellant.

Wayne R. Glaubinger, New York City (Lawrence S. Greengrass, Mound, Cotton & Wollan, on the brief), New York City, for Defendants-Appellees.

Before: WINTER, Chief Judge, JACOBS, and LEVAL, Circuit Judges.

JACOBS, Circuit Judge:

The question presented on this appeal is whether an insurance broker, having recommended the purchase of insurance (assumed to have afforded no useful coverage) to a firm that was then insolvent and soon after bankrupt, was an "initial transferee" within the meaning of 11 U.S.C. § 550(a) in respect of Prior to its decision to dissolve in December of 1987, the law firm of Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey ("Finley Kumble") consulted with its insurance broker, Alexander & Alexander of New York, Inc. ("A & A") ¹ to decide what to do about the firm's coverage for professional liability. On A & A's recommendation, Finley Kumble allocated its limited resources to buy a three-year extension of the claims reporting period on its existing primary coverage, which was a $15 million claims-made policy issued by American Home Assurance Co. ("American Home"). This "discovery tail" did not increase the coverage limits.

an allegedly fraudulent transfer under 11 U.S.C. § 548(a)(2) when the broker transferred the premium payment from the policyholder to the insurance company.

In 1988, Finley Kumble's creditors filed an involuntary petition under Chapter 7 of the Bankruptcy Code, a proceeding that the Bankruptcy Court for the Southern District of New York later converted to a proceeding under Chapter 11. The Plan of Reorganization, confirmed in December of 1991 (Abram, B.J.), made provision for payment of legal malpractice claims (i) by creating a Malpractice Insurance Trust to sort out and fund the claims, (ii) by assigning to the Insurance Trust the estate's rights and claims against (inter alia ) Finley Kumble's malpractice insurers and A & A, and (iii) by naming Arthur H. Christy ("Christy") as trustee.

In June of 1990, Christy sued A & A in an adversary proceeding in the Bankruptcy Court, asserting common law claims (malpractice, negligence, breach of contract, and breach of fiduciary duty) as well as a claim to recover from A & A, as an avoidable transfer under 11 U.S.C. § 548(a)(2), the premium that Finley Kumble paid for the discovery tail, on the theory that (i) the premium was paid within one year of the filing, while Finley Kumble was insolvent, (ii) the discovery tail did not afford coverage reasonably commensurate with the $4.375 million premium, and (iii) A & A was the "initial transferee" of the premium within the meaning of 11 U.S.C. § 550(a).

After the Bankruptcy Court transferred that proceeding to the district court (Sprizzo, J.), the parties stipulated to the voluntary dismissal with prejudice of all the common law claims. A & A then moved for summary judgment dismissing the avoidable transfer claim on the grounds that (i) having exercised no dominion over the premium amount, A & A acted as a "mere conduit" of the premium for the discovery tail, and therefore was not an initial transferee under principles articulated in Bonded Financial Servs. v. European Am. Bank, 838 F.2d 890, 893 (7th Cir.1988), and (ii) the discovery tail did in fact represent reasonably equivalent value for the premium paid. The district court found that material issues of fact barred summary judgment on the issue of reasonably equivalent value, but granted summary judgment chiefly on the ground that the Bonded Financial analysis was sound, and that A & A, having exercised no dominion or control, was a mere conduit rather than an initial transferee.

On appeal, Christy argues, inter alia, that (i) the Bonded Financial test should not be adopted in this Circuit for determining initial transferee status; (ii) even if we adopt that test, summary judgment is defeated by material issues of fact as to whether A & A, as an active participant in the design and execution of Finley Kumble's insurance program, can properly be deemed a mere conduit; and (iii) the discovery tail did not represent "reasonably equivalent value" for the premium paid. Because we agree with the district court that A & A was not an "initial transferee," we affirm the judgment.

BACKGROUND

Finley Kumble authorized A & A to serve as Finley Kumble's broker of record for the 1987-88 policy year on July 1, 1987. A & A proceeded in the summer and fall of 1987 to design and place Finley Kumble's 1987-88 policy year program for coverage effective as of July 14, 1987.

For a premium of $3.5 million, A & A purchased single-year primary professional liability coverage from American Home, which had been Finley Kumble's primary insurer on that risk since at least 1982. American Home's policy furnished coverage on a claims-made basis; that is, it covered claims first made against Finley Kumble and reported to the insurer during the policy period. The policy limits were $15 million, and the policy specified a $1 million per claim deductible and a $4 million aggregate self-insured retention.

A & A also procured four excess layers of professional liability coverage from a number of insurers, totaling $76,875,000 above the primary coverage, deductible and retention. A & A inadvertently left Finley Kumble with an uninsured $1,375,000 gap at the third excess layer.

At the time of issue, the American Home primary policy provided that upon cancellation, non-renewal, or termination, Finley Kumble was entitled to purchase for an additional premium an optional extended reporting period--the discovery tail--subject to the original $15 million limit. In November 1987, A & A advised Finley Kumble of certain retroactive endorsements, including Endorsement 3 (the "New York Amendatory Endorsement") which changed the policy terms by providing that the purchase of the discovery tail would both extend the reporting period and add another $15 million to the aggregate limit. ²

Christy charges that A & A cannot be viewed as a "mere" conduit because it is culpable in the following ways: (i) A & A fell several hundred thousand dollars short of its initial undertaking to arrange $100 million in coverage for the 1987-88 policy year; (ii) A & A arranged some of the excess coverage from London insurers that were then insolvent or otherwise financially impaired, and that ultimately failed to pay on Finley Kumble claims; (iii) A & A took inadequate measures to afford notice of claims to certain excess insurers that required direct and prompt notice of every claim regardless of whether the ad damnum appeared to implicate their coverage layers; and (iv) A & A advised Finley Kumble to purchase the discovery tail, the terms of which afforded no appreciable incremental coverage, in exchange for the $4.375 million premium. The fourth ground requires elaboration.

Near the end of 1987, a number of Finley Kumble partners adopted a "Plan of Termination," to take effect on January 4, 1988, that contemplated (inter alia ) that the partnership would end its law practice, but would continue to maintain professional liability insurance even beyond the expiration of its existing coverage. American Home offered A & A two coverage options: (A) a buy-back of the $4 million self-insured retention effective on December 31, 1987, subject to the $1 million deductible, or (B) purchase of a discovery tail that would make available the "unimpaired portion of the existing [$15 million] limit" for either one or three years. American Home pointed out that the second option would be "more restrictive than that which is granted" by the New York Amendatory Endorsement.

A & A explained American Home's proposed options to Finley Kumble in a letter and accompanying materials that memorialized Finley Kumble's representation to A & A that at that time Finley Kumble knew of no losses that would penetrate its aggregate $5 million self-insured retention. A & A's letter then added that the absence of such losses, "coupled with the fact that the other options were unaffordable," led A & A to request a quote for a discovery tail without the feature that would reinstate the limits. A & A negotiated the premium for a three-year extended reporting period down from $5.250 million to $4.375 million, and Finley Kumble instructed A & A to purchase a three-year discovery tail on Finley Kumble's behalf. The tail provided a three-year extended reporting period (from January 1, 1988 through January 1, 1991), but afforded no additional indemnity dollars beyond the original $15 million limit. According to the Finley Kumble partner who interfaced with A & A, Finley Kumble decided to extend the reporting period without increasing the limit Relying on the tail, Finley Kumble canceled the primary and excess coverage in respect of claims made after January 1, 1988, and paid for the tail with $1.375 million in available cash and the return premiums from the cancellation of the other coverages. The flow of funds was accomplished in the following manner:

for the simple reason that Finley Kumble "didn't have the money."

* On January 1, 1988, American Home internally applied the return premium due Finley Kumble for cancellation of the policy--$1.673 million--directly to the tail premium.

* On January 8, ...