Hawxhurst v. Pettibone Corp.

• Decision Date: 14 November 1994
• Docket Number: No. 94-1508,94-1508
• Parties: , 26 Bankr.Ct.Dec. 339, Bankr. L. Rep. P 76,204 Robert HAWXHURST, Plaintiff-Appellee, v. PETTIBONE CORPORATION, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 175

40 F.3d 175

63 USLW 2321, 26 Bankr.Ct.Dec. 339, Bankr.

L. Rep. P 76,204

Robert HAWXHURST, Plaintiff-Appellee, v. PETTIBONE CORPORATION, et al., Defendants-Appellants.

No. 94-1508.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 19, 1994.

Decided Nov. 14, 1994.

Richard L. Hirsh, Oak Brook, IL (argued), for appellee.

Robert D. Kolar (argued), Thomas M. Sheehan, Kolar & Associates, Chicago, IL, for appellants.

Before BAUER and MANION, Circuit Judges, and GRANT, District Judge. ^*

BAUER, Circuit Judge.

In this appeal, Pettibone Corporation challenges a decision of the bankruptcy court which modified the statutory post-confirmation injunction imposed pursuant to 11 U.S.C. Sec. 524 to permit Robert Hawxhurst to proceed nominally in litigation against Pettibone in order to recover from its insurers. The district court affirmed the decision of the bankruptcy court, and we affirm.

I.

On October 28, 1983, Hawxhurst, a former employee of TWA Airlines, filed a personal injury suit against Pettibone and other defendants in New York state court under a theory of product liability. The complaint alleged that Hawxhurst was injured on January 6, 1982, when a baggage tractor manufactured by Pettibone overturned upon him. Hawxhurst was represented by attorney Charles Barnett in the state court proceedings.

Pettibone filed a petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Sec. 101 et seq., in the Northern District of Illinois on January 31, 1986. This petition automatically stayed Hawxhurst's personal injury action against Pettibone under 11 U.S.C. Sec. 362. Barnett was notified of Pettibone's petition and the automatic stay in a letter from Pettibone's attorney in the Hawxhurst litigation. Barnett was also twice served by mail with official notice of the bar date for filing proofs of claim in the bankruptcy court against Pettibone's estate, which was October 31, 1986. Although Hawxhurst was required to file a timely proof of claim under Bankruptcy Rule 3003(c)(2) because he was not a scheduled creditor, Hawxhurst failed to file a proof of claim by the October 31, 1986, deadline.

Pettibone's Official Unsecured Creditors' Committee subsequently filed a motion in the bankruptcy court to disallow all personal injury claims for which no proof of claim had been filed. Notice of the motion was sent to all affected parties or their counsel, including Barnett on behalf of Hawxhurst. Neither Barnett nor Hawxhurst filed an objection to the motion or appeared in the bankruptcy court at a hearing concerning the motion. The bankruptcy court granted the Committee's motion on March 11, 1988, and entered an order disallowing the claims of Hawxhurst and forty-six other personal injury claimants listed in the order. Hawxhurst did not appeal. Pettibone's Chapter 11 reorganization plan was confirmed by the bankruptcy court on December 9, 1988. The discharge of Pettibone's debts under Chapter 11 operated as an injunction against the commencement or continuation of any action to collect a discharged debt. See 11 U.S.C. Sec. 524.

Pettibone held several insurance policies for product liability claims prior to the filing of its bankruptcy petition. Northumberland General Insurance Company ("Northumberland") provided a layer of coverage above Pettibone's deductible, or self-insured retention ("SIR"), with respect to Hawxhurst's claim. Northumberland was also obliged to defend Pettibone in personal injury litigation. American Centennial Insurance Company ("American") provided an additional $5 million in coverage beyond the Northumberland coverage with respect to Hawxhurst's claim. Northumberland became insolvent in July, 1985, and Pettibone's excess insurers, including American, refused to defend Pettibone in its personal injury litigation.

Pettibone's reorganization plan included a series of "step-up agreements" with the excess insurers, under which the insurers agreed to defend Pettibone and pay the personal injury claims up to their policy limits after Pettibone had fully met its SIR. Under the plan, personal injury claimants are divided into groups by policy year, share pro rata the burden of Pettibone's SIR, and hold unsecured claims against the estate for their shares of the SIR. The claimants recover pro rata the aggregate of personal injury claims exceeding the relevant SIR from the proceeds of available excess insurance coverage up to the policy limits. Litigation defense costs are credited against the policy coverage.

On December 3, 1992, almost four years after the confirmation of Pettibone's plan, Hawxhurst filed a motion in the bankruptcy court seeking leave to file a late proof of claim and to modify the post-confirmation injunction imposed pursuant to 11 U.S.C. Sec. 524. Hawxhurst also moved for reconsideration of the bankruptcy court's order of March 11, 1988, which disallowed his personal injury claim, and sought to modify the bankruptcy court's order confirming Pettibone's plan. Through these motions, Hawxhurst sought to recover against Pettibone as a "class four creditor," or to the same extent as the other personal injury claimants who filed timely proofs of claim.

The bankruptcy court denied Hawxhurst's motions to file a late proof of claim and to reconsider its March 11, 1988, order. 156 B.R. 220, 227-31 (N.D.Ill.1993). The bankruptcy court, however, granted Hawxhurst's motion to modify the post-confirmation injunction to permit Hawxhurst to proceed nominally against Pettibone in order to collect insurance proceeds notwithstanding Hawxhurst's inability to file a late proof of claim. Id. at 231-35. The bankruptcy court imposed the following limitations on Hawxhurst's right of recovery: (1) Hawxhurst could recover against Pettibone's insurers only pursuant to the confirmed plan and subject to the payment conditions and procedures imposed on timely claimants; (2) Hawxhurst could recover no more than if he had timely filed an allowed claim; (3) Hawxhurst could not recover against Pettibone's non-insurance assets and could not recover as a class four creditor; and (4) Hawxhurst could only recover insurance proceeds available after timely claimants were paid the maximum their claims were entitled to recover. Id. at 232-34. Pettibone appealed the bankruptcy court's modification of the post-confirmation injunction, and the district court affirmed. 163 B.R. 989, 999 (N.D.Ill.1994).

II.

We review the conclusions of law of the bankruptcy court and the district court de novo. In re Chappell, 984 F.2d 775, 779 (7th Cir.1993). The bankruptcy court's factual findings are reviewed for clear error. Id. Pettibone raises several challenges to the bankruptcy court's modification of the post-confirmation injunction, which we will address in turn.

A.

Pettibone first contends that the bankruptcy court had no subject matter jurisdiction to modify the post-confirmation injunction. Subject matter jurisdiction cannot be waived and may be challenged by a party or raised sua sponte by the court at any point in the proceedings. Jackson v. Consolidated Rail Corp., 717 F.2d 1045, 1055 (7th Cir.1983), cert. denied, 465 U.S. 1007, 104 S.Ct. 1000, 79 L.Ed.2d 233 (1984).

Pettibone challenges the subject matter jurisdiction of the bankruptcy court on the ground that Hawxhurst's motion for reconsideration of its March 11, 1988, order was untimely. Federal Rule of Civil Procedure 60 governs motions for reconsideration of an order disallowing a claim against the debtor's estate. Fed.R.Bankr.P. 9024. Rule 60(b) required that Hawxhurst's motion be brought within one year of the date of the order. Pettibone argues that once the bankruptcy court determined that Hawxhurst's motion for reconsideration was untimely, 156 B.R. at 230-31, it had no jurisdiction to modify the discharge injunction.

Pettibone's argument is premised upon an assumption that a claimant must be a participant in the bankruptcy proceeding in order to obtain a declaration of liability against the debtor outside of bankruptcy. This assumption is unwarranted under In re Fernstrom Storage and Van Co., 938 F.2d 731 (7th Cir.1991), and its progeny. In Fernstrom, 938 F.2d at 733, 737, we affirmed an order of the bankruptcy court modifying the automatic stay imposed pursuant to 11 U.S.C. Sec. 362 to permit a claimant, who had failed to file a proof of claim in the bankruptcy court, to continue a civil suit seeking a declaration of liability against a debtor who had filed a petition for relief under Chapter 11. We subsequently relied on Fernstrom to affirm a bankruptcy court's modification of a discharge injunction imposed pursuant to 11 U.S.C. Sec. 524 to permit a claimant to seek a declaration of liability against a debtor. In re Shondel, 950 F.2d 1301, 1306-09 (7th Cir.1991); accord In re Hendrix, 986 F.2d 195, 197-200 (7th Cir.1993). The bankruptcy court retained jurisdiction to modify the discharge injunction under Hendrix, 986 F.2d at 197-98, and Shondel, 950 F.2d at 1308-09. ¹

Pettibone also contends that the bankruptcy court was divested of subject matter jurisdiction to modify the discharge injunction when it entered the order disallowing Hawxhurst's claim on March 11, 1988. Pettibone, citing Bursch v. Beardsley & Piper, 971 F.2d 108, 114 (8th Cir.1992), asserts that, unlike the discharged claims in Fernstrom, Shondel, and Hendrix, Hawxhurst's disallowed claim was never recognized in the bankruptcy proceeding and, consequently, its insurers cannot be derivatively liable for the claim because Pettibone was never principally liable for it. See Bursch, 971 F.2d at 114. We reject this challenge to the bankruptcy court's jurisdiction because it reflects a fundamental misunderstanding of the bankruptcy court's order.

Pettibone is correct that a disallowed claim may not share in the distribution of the debtor's assets in bankruptcy. See 3 Collier on Bankruptcy p 502.02 at 502-18 (15th ed. 1994). The bankruptcy court's order is consistent with ...