In re Fernstrom Storage and Van Co.
| Citation | 100 BR 1017 |
| Decision Date | 08 June 1989 |
| Docket Number | Bankruptcy 80 B 13897 through 80 B 13900. |
| Parties | In re FERNSTROM STORAGE AND VAN COMPANY, an Illinois corporation; Fernstrom Storage and Van Company of Virginia, a Virginia corporation; Fernstrom Storage and Van Company of Minnesota, a Minnesota corporation; and Bradley Moving and Storage Company, a Michigan corporation, Debtors. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
John F. Horvath, Horvath & Wigoda, Steven P. Eisenberg, Chicago, Ill., for debtors.
Robert E. Gilmartin, Nick Papastratakos, Clausen Miller Gorman Caffrey & Witous, Chicago, Ill., for IBM.
The matter before the Court is the Motion for Relief from Stay and/or Adequate Protection ("Motion") of International Business Machines Corporation ("IBM").1 The responsive pleadings to the Motion are: Debtors' Memorandum in Opposition to IBM's Motion, IBM's Reply to Defendants'/Debtors' Response to IBM's Motion, Debtors' Surreply in Opposition to IBM's Motion, IBM's Surreply to Defendants'/Debtors' Surresponse in Opposition to IBM's Motion, IBM's Supplemental Brief Regarding Debtors' Liability Insurance, Debtors' Reply to Plaintiff's Supplemental Brief, and IBM's Reply to Debtors' Response to IBM's Supplemental Brief.
For the reasons set forth below, IBM's motion for relief from the automatic stay is granted.
This dispute concerns the insurance coverage of Fernstrom Storage and Van Company ("Fernstrom") and its subsidiary corporation, Bradley Moving and Storage Company ("Bradley"). Fernstrom and Bradley are both Debtors in this consolidated case under Chapter 11 of the Bankruptcy Code. 11 U.S.C. § 101 et seq. () IBM was scheduled as a major unsecured creditor of the consolidated estate.
The present dispute originated in the June 30, 1979 fire at a warehouse owned and operated by Fernstrom and Bradley at 1495 Axtell Road, Birmingham, Michigan. Certain electronic equipment owned by IBM was in the warehouse at the time and destroyed or damaged by the fire.
IBM presented a written claim for damages from the fire to Fernstrom on March 12, 1980. Fernstrom refused to pay the amount of the claim. At some point in time, not known to this Court, IBM received compensation for its loss from its insurer. Having made this payment to its insured, IBM's insurer maintains that it is subrogated to IBM's fire loss claim against Fernstrom and Bradley.
On October 23, 1980, Fernstrom and Bradley filed petitions for reorganization under Chapter 11. On October 28, 1980, their cases were consolidated, along with the bankruptcy cases of two other corporations affiliated with Fernstrom. (As only Fernstrom and Bradley are parties to this matter, all references to the "Debtors" are to Fernstrom and Bradley only.)
In its bankruptcy petition, each Debtor listed IBM as the largest of its creditors, owed a total of $106,747.46. The Debtors state that this amount does not include IBM's fire loss claim. As indicated by comparison of the Debtors' accounts payable schedules and the list of creditors receiving notice of the bankruptcy, the scheduled indebtedness to IBM is the sum of numerous smaller charges payable to various IBM offices throughout the country.
On January 7, 1981, IBM filed two proofs of claim in this case, relating to charges for IBM equipment purchased or rented by the Debtors. One IBM office also returned a ballot dated December 21, 1981 accepting the Debtors' Amended Plan of Reorganization. No proof of claim was filed by IBM with respect to the fire loss.
The Debtors' Disclosure Statement made no mention of the warehouse fire. Nor was there any special provision in the Debtors' original and amended plans of reorganization for claims from the fire loss.
It is undisputed that IBM engaged in settlement negotiations with Fernstrom and its insurers in the period preceding confirmation of the Debtors' Amended Plan of Reorganization. Two such meetings took place on March 19, 1981 and December 4, 1981. On or about April 27, 1981, one of the Debtors' insurers issued a check payable to IBM for $75,000. Exhibits to the pleadings indicate that the check was intended to be partial payment for the fire loss claim.
No settlement having been reached, IBM filed Case 82 C 4089, a civil action for damages, against the Debtors in the United States District Court for the Northern District of Illinois on June 30, 1982 ("Civil Action"). Both sides are represented by their insurers in the Civil Action.2 Neither party disputes that the Civil Action is essentially an action between their insurers.
The filing of the Civil Action preceded by one day the Bankruptcy Court's July 1, 1982 determination that reorganization was no longer feasible. On August 10, 1982, the Debtors filed a Second Amended Plan of Reorganization, which provided for the orderly liquidation of the Debtors' assets.
In the period of over six years since the filing of the Civil Action, the parties have engaged in substantial discovery and motion practice. The Civil Action reached the point of readiness for trial upon entry of a final pretrial order in November, 1987. That pretrial statement indicates disagreement on numerous questions relating to the Debtors' insurance coverage.
On March 7, 1988 the Debtors moved to dismiss the Civil Action on the basis that continuation of the action violated the automatic stay in the Debtors' bankruptcy case. At that time, counsel for the Debtors explained that it had not brought the motion to dismiss at an earlier time because it assumed the automatic stay had been lifted. Transcript of proceedings before the Honorable William T. Hart, March 7, 1988, at 2-3 (IBM's Reply to Defendants'/Debtors' Response to IBM's Motion, Exhibit A). The Civil Action was dismissed without prejudice, with leave to reinstate the action if the bankruptcy judge modified, amended, or otherwise lifted the automatic stay.
In its Motion, IBM contends that there is cause to modify the automatic stay so as to allow the Civil Action to proceed. IBM's principal argument is that modification of the stay will have no prejudicial effect on the estate. IBM characterizes the Civil Action as a proceeding against the Debtors' insurers, since both IBM's claim and the cost of defending the Civil Action are alleged to be fully covered by the Debtors' insurance. IBM also disclaims any intention to seek recovery of any judgment from assets of the estate. To that end, IBM states that it waives the right to proceed against the Debtors for any deductible amounts under their insurance policies.
IBM contrasts this allegedly minimal effect on the Debtors with the hardship it would incur if the Civil Action cannot be reinstated. According to IBM, it would lose its subrogation rights against the Debtors' insurers. The cost to date of prosecuting the Civil Action would represent an additional loss. Given these factors, as well as the Debtors' apparent acquiescence to six years of litigation and settlement negotiations, IBM argues that it would be inequitable to terminate the Civil Action at this point.
The Debtors, on the other hand, argue that the Court should deny this Motion without engaging in the balancing type of analysis advocated by IBM. The Debtors base this argument on two instances of alleged disregard of bankruptcy procedure by IBM.
First, the Debtors argue that the Civil Action cannot proceed due to IBM's failure to file a proof of claim with respect to the fire loss. Under the Debtors' analysis, reinstatement of the Civil Action would allow IBM to circumvent the requirement that an unsecured creditor file a proof of claim in a bankruptcy case. The Debtors would also equate modification of the stay with an untimely amendment of IBM's earlier proofs of claim regarding the equipment sold or rented to the Debtors. Such an amendment would in effect add a new claim to IBM's earlier claim. The Debtors cite case law to the effect that this type of amendment after the claims bar date is impermissible. In re Middle Plantation of Williamsburg, Inc., 48 B.R. 789, 797 (E.D. Va.1985).
Second, the Debtors note that the Civil Action was filed after the commencement of this bankruptcy case. The Debtors cite cases to the effect that actions brought in violation of the automatic stay are without legal effect. E.g., In re Advent Corp., 24 B.R. 612, 614 (1st Cir.B.A.P.1982); Young v. Critton (In re Young), 14 B.R. 809, 811 (Bankr.N.D.Ill.1981); B-U Acquisition Group, Inc. v. Utica Mutual Insurance Co. (In re Baldwin-United Corp.), 52 B.R. 541, 548 (Bankr.S.D.Ohio 1985). Although the Debtors ask that the Court disregard the Civil Action as a nullity, they have not sought a finding of contempt or damages under § 362(h) for willful violation of the automatic stay.
The logical implication of the Debtors' analysis is that a creditor may reach the proceeds of a debtor's insurance policies only by filing a proof of claim in the debtor's bankruptcy case. In response to IBM's contention that it seeks no recovery from the Debtors or the estate, the Debtors cite a line of cases, described below, which finds that the proceeds of a debtor's insurance policies are property of the bankruptcy estate (the "Manville-Robins line of cases"). Under these cases an attempt to reach the insurance proceeds other than through the bankruptcy claims process is subject to the automatic stay.
This Court disagrees with the Debtors' analysis for two reasons. First, there is a substantial line of authority to the effect that a timely proof of claim is not an essential prerequisite to an action against a debtor's insurer. Second, the rationale of the Manville-Robins line of cases is inapplicable in this case. This opinion commences with a discussion of these two conclusions.
Having determined that...
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