In re CVA General Contractors, Inc.
| Decision Date | 07 June 2001 |
| Docket Number | No. 99-54520-C.,99-54520-C. |
| Citation | 267 BR 773 |
| Parties | In re CVA GENERAL CONTRACTORS, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Western District of Texas |
COPYRIGHT MATERIAL OMITTED
Charles A. Carlson, III, Law Offices of Charles A. Carlson, III, Harlingen, TX, for Terry Burke.
George S. Drugan, III, LeLaurin & Adams, P.C., San Antonio, TX, for CVA General Contractors, Inc.
Richard E. Hettinger, Davidson & Troilo, San Antonio, TX, for Joe Baker.
Sofia A. Ramon, Atlas & Hall LLP, McAllen, TX, Vicki M. Skaggs, McAllen, TX, for Mt. Hawley Insurance Co.
MEMORANDUM ON MOTION FOR AUTHORITY TO USE CORPORATE-DEBTOR'S NAME
Many insurance disputes caught in the sticky web of bankruptcy law, pit the insurer against the insured. This case does not. Instead, the insurer and the insured are allied. Their foe? A third-party defendant, who is being sued by the insurer (in the name of the insured), and who challenges the insured's capacity to sue the third-party defendant or who at the least wants the insurer's own name, Mt. Hawley Insurance Company, to brightly flash before the eyes of jurors hearing the case.
In 1998, Terry Burke filed a personal injury suit against CVA General Contractors, styled Terry Burke v. CVA General Contractors, Inc., Manuel Hinojosa Architects, The City of Port Isabel, and WCS Structural Engineers, in the 197th Judicial District Court of Cameron County, Texas, Cause No. 98-114526-C ("State Court Lawsuit"). The injury giving rise to the State Court Lawsuit occurred on March 13, 1997, when CVA was still insured under a "general liability" insurance policy with Mt. Hawley ("CVA Insurance Policy"). Premiums due for the policy period in question (July 12, 1996 to July 12, 1997) were paid up, so there is no question about coverage as to the injury. Mt. Hawley did not (and does not) contest its obligation to afford coverage to CVA.
In April 1999, Mt. Hawley retained the law firm of Atlas & Hall, L.L.P. ("Atlas & Hall") to defend CVA in the State Court Lawsuit. Atlas & Hall mounted the requisite defense, and in addition, initiated a third-party action on behalf of CVA against Joe Baker d/b/a Coastal Contractors, Inc. ("Third Party Action"), seeking contractual indemnity for any liability that might ultimately be adjudged against CVA in the underlying lawsuit by Burke. This third-party action was initiated pursuant to the terms of the insurance policy, according to which Mt. Hawley is subrogated to any rights of recovery that CVA might have against another who may ultimately be held liable for the injury, as and when Mt. Hawley is called upon to pay the damages ultimately adjudged.
On October 19, 1999, while these suits were still pending, CVA filed for chapter 7 bankruptcy relief, triggering liquidation of all of CVA's assets. Both the State Court Lawsuit and the Third Party Action were abated by the bankruptcy filing, in response to the bankruptcy stay. Burke (the state court plaintiff) then moved for relief from stay to pursue his claim at least to the limits of insurance coverage. On May 8, 2000, an order granting modification of the stay was entered, permitting the relief sought by Burke.
See Abandonment Order. The trustee's motion stated as grounds for abandonment that the estate had only a nominal interest in both the State Court Lawsuit and the Third Party Action. No creditors objected, so the court entered an order granting the trustee's motion ("Abandonment Order").
After the Abandonment Order was entered (on August 22, 2000), Joe Baker (the third-party defendant) filed a motion in state court to "show authority," arguing that Mt. Hawley no longer had authority to proceed against Baker in CVA's name. He alleged two reasons: first, Baker claimed that the rights and obligations of CVA and Mt. Hawley under the CVA Insurance Policy (including the right to subrogation) "ceased to exist" when the chapter 7 trustee failed to "assume" the insurance policy under § 365 of the Bankruptcy Code; second, as an alternative argument, Baker argued that the de facto dissolution of CVA as a result of the chapter 7 bankruptcy filing destroyed Mt. Hawley's legal right to subrogation, effectively denying Mt. Hawley the standing to pursue the third-party action against Baker. In response to Baker's motion, CVA and Mt. Hawley (both represented by Atlas & Hall) filed a motion in this court, seeking to obtain authority to "use corporate debtor's name."
At the conclusion of the hearing on Mt. Hawley's motion, this court ruled from the bench, rejecting Baker's arguments and granting the motion of CVA and Mt. Hawley. The court reserved the right to issue a written opinion on what appears to be an issue of first impression among courts in the Fifth Circuit—whether the subrogation rights of an insurance company pursuant to an insurance contract survive a chapter 7 liquidation of the insured, and if so, in what form.
The overriding issue in this case is whether Mt. Hawley can continue to pursue its third party action against Baker in the name of CVA. The resolution of this issue depends upon whether 11 U.S.C. § 365 applies in this case and whether the alleged de facto dissolution of CVA destroyed Mt. Hawley's right to subrogation. We will consider these two issues in turn.
Section 365(a) of the Bankruptcy Code provides:
Except as provided in sections 756 and 766 of this title and in subsections (b), (c) and (d) of this section, the trustee, subject to the court\'s approval, may assume or reject any executory contract or unexpired lease of the debtor.
11 U.S.C. § 365(a). If a chapter 7 trustee fails to assume or reject an executory contract or unexpired lease within 60 days of the bankruptcy filing, the contract or lease is deemed rejected. See 11 U.S.C. § 365(d)(1). Relying on this provision, Baker argues that CVA's obligations and Mt. Hawley's rights under the policy "ceased to exist" because the chapter 7 trustee failed to assume or reject the CVA Insurance Policy within 60 days of CVA's chapter 7 filing.
Baker's argument is fatally flawed for three reasons: (1) rights and obligations under a contract do not "cease to exist" just because the contract is statutorily rejected under § 365; (2) the insurance contract in this case was not "executory" in nature as of the filing; and (3) the expiration of an insurance policy period does not terminate or forfeit an insured's or insurer's rights and obligations under a policy, if those rights and obligations arose prior to the policy's expiration.
19 F.3d 1077, 1082 (5th Cir.1994) (Jones, J.). The court further noted that, while only the trustee may reject a contract, termination of the contract can only occur at the option of the nondebtor party to that contract. Id. The rule is important because otherwise rejection could result in the de facto avoidance of third-party property interests, such as a bank's security interest in a leasehold, for example. Id. In addition, were rejection to equal termination, then the terms of the agreement itself would no longer serve as a proper measure for damages, a prospect that the Fifth Circuit has already anticipated — and disposed of. Id. The Fifth Circuit wisely held that rejection has an important but appropriately narrow function: it relieves the estate and nondebtor parties from future performance obligations and, by accomplishing a breach, it triggers a dischargeable, unsecured, pre-petition claim against the estate.
Austin Development effectively disposes of Baker's "cease to exist" argument in this case. The rights and obligations of CVA and Mt. Hawley spelled out in their insurance contract did not terminate simply by virtue of the chapter 7 trustee's failing to assume the CVA Insurance Policy.1 Nor has Mt. Hawley sought to terminate the CVA Insurance policy.2 Thus, the rights and obligations of CVA and Mt. Hawley spelled out in the insurance policy have not "ceased to exist." To that extent that talk of rejection of this insurance contract is even applicable (the next section...
To continue reading
Request your trial