In re Lavigne, Bankruptcy No. 92 B 45593 (BRL). Adv. No. 94/8905A.

• Decision Date: 14 June 1995
• Docket Number: Bankruptcy No. 92 B 45593 (BRL). Adv. No. 94/8905A.
• Citation: 183 BR 65
• Parties: In re Jeffrey E. LAVIGNE, d/b/a Laser Medical Associates of NY, Debtor. MEDICAL MALPRACTICE INSURANCE ASSOCIATION, Plaintiff, v. Hal M. HIRSCH, as Trustee of the estate of Dr. Jeffrey E. Lavigne, d/b/a Laser Medical Associates of NY, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

183 B.R. 65 (1995)

In re Jeffrey E. LAVIGNE, d/b/a Laser Medical Associates of NY, Debtor MEDICAL MALPRACTICE INSURANCE ASSOCIATION, Plaintiff, v. Hal M. HIRSCH, as Trustee of the estate of Dr. Jeffrey E. Lavigne, d/b/a Laser Medical Associates of NY, Defendant.

Bankruptcy No. 92 B 45593 (BRL). Adv. No. 94/8905A.

United States Bankruptcy Court, S.D. New York.

June 14, 1995.

COPYRIGHT MATERIAL OMITTED

Werner & Kennedy by Richard J. Cairns, New York City, for plaintiff.

Gainsburg & Hirsch by Hal M. Hirsch and David L. Barrack, Purchase, NY, for the Trustee.

DECISION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT RELATING TO ESTATE ACCESS TO MEDICAL MALPRACTICE INSURANCE COVERAGE

BURTON R. LIFLAND, Chief Judge.

Introduction

On cross motions for summary judgment, this court must weigh the competing claims of Medical Malpractice Insurance Association ("MMIA") and Hal M. Hirsch (the "Trustee"), Trustee of the estate of Dr. Jeffrey E. Lavigne ("Lavigne"). MMIA brought this adversary proceeding to prevent the Trustee from obtaining continued medical malpractice insurance coverage for the estate after the debtor-in-possession cancelled an insurance policy and the case was converted from Chapter 11 to Chapter 7. The Trustee, on the other hand, seeks to establish his right to purchase extended insurance coverage under the terms of the insurance policy. Two inquiries are central to this case: (1) whether cancellation of a medical malpractice insurance policy by the Chapter 11 debtor-in-possession was effective; and if not, (2) whether the Trustee retained any rights under the policy once it was deemed rejected.

Factual Background

MMIA is a non-profit, unincorporated joint underwriting association established by the New York Legislature in 1975 to provide professional liability insurance to all physicians and surgeons licensed to practice in New York. MMIA, its rates and policy provisions are governed by New York Insurance Law and the regulations promulgated by the Superintendent of Insurance of the State of New York.

Lavigne, also known as Laser Medical Associates of New York, filed for bankruptcy under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") on October 8, 1992. No creditors' committee was appointed (section 1102) by the United States Trustee to exercise the powers and duties specified in section 1103.

Lavigne performed laser surgery in medical offices located throughout the New York metropolitan area. He advertised extensively as "MD-TUSH".¹ Lavigne was insured by Medical Liability Malpractice Insurance Company (MLM) until April 1992 when MLM cancelled the insurance. Thereafter, Lavigne obtained insurance from MMIA. MMIA issued Lavigne a one-year claims-made professional liability insurance policy (the "Policy") effective April 1, 1992 (the "Retroactive Date"). The Policy covered liability for injury or damage arising out of the rendering of or failure to render professional services that occurred on or after the Retroactive Date, as long as claims were first made during the policy period or any extended reporting period. Upon filing for Chapter 11 relief, Lavigne continued to do business and to manage his affairs as a debtor-in-possession. In this capacity, Lavigne renewed the Policy for a one-year period commencing April 1, 1993. However, by letter to MMIA dated September 24, 1993 (the "Cancellation Date"), Lavigne inexplicably cancelled the Policy. The record in this now converted Chapter 11 case reveals that, on or around the Cancellation Date, disturbing events were taking place. Lavigne was faced with numerous tort claims at the time he filed for bankruptcy. See Trustee's Notice of Motion, Exhibit A — Schedule F at 17-24 (listing 70 unsecured creditors with malpractice claims against Lavigne). Just prior to cancelling the Policy Lavigne decided to close his last remaining medical office in New York. Two days after cancelling the Policy he attempted to commit suicide. Lavigne was hospitalized at St Vincent's Hospital and put on suicide watch. Impaired, he was then transferred to a rehabilitative facility in New Hampshire and remained there through the end of November 1993 at which time he lost his license to practice medicine. During this period of Lavigne's incapacity, his attorney Michael Sucher ("Sucher") single-handedly took over operation and control of Lavigne's business affairs. Without leave of court, Sucher collected accounts receivable and escrowed them in a non-segregated, general account and at his discretion paid certain claims. When these activities came to light the Court directed Sucher to provide an accounting and emphasized that he had crossed several lines of demarcation as to his appropriate role and function. See Transcript of Hearing Dated December 9, 1993 at 12-33.

In response to Lavigne's cancellation letter, MMIA informed him by letter that the cancellation was effective as of September 28, 1993, and that his contractual option to purchase Tail Coverage² would expire sixty days from termination; namely, on November 28, 1993. Lavigne did not purchase Tail Coverage within the prescribed period. The Court notes that Lavigne was incapacitated in the New Hampshire facility on the expiration date of the option.

On January 27, 1994, Lavigne's case was converted to one under Chapter 7 of the Code and Hal M. Hirsch was appointed Trustee of the estate. Because of the peculiar circumstances of the debtor's disability coupled with the unorthodox conduct of the debtor's operations by his attorney, a clear picture of the debtor's affairs was not readily obtainable by the Trustee. Upon being apprised of the facts, the Trustee sought to exercise the option to purchase Tail Coverage. In a letter to MMIA dated May 3, 1994, the Trustee requested MMIA to send all necessary documents to exercise the option. Instead of resolving the option issue, the parties entered into a Standstill and Tolling Agreement concerning the Policy which this court "so Ordered" on May 31, 1994. On September 29, 1994, MMIA terminated the Standstill and Tolling Agreement and advised the Trustee that it could not grant his request to purchase Tail Coverage for the Policy because, in its opinion, the option had already expired or, alternatively, was not available because the Policy had been rejected.

Summary of Parties' Positions

MMIA's motion for summary judgment is based on five claims: (1) Lavigne properly cancelled the Policy, effective September 28, 1993; (2) the option to purchase Tail Coverage expired on November 27, 1993, according to the Policy's terms; (3) the time to make valid claims under the Policy, as extended by the Regulatory Tail Period, expired on November 27, 1993; or, in the alternative, (4) the Trustee's option to assume the Policy and purchase Tail Coverage expired on or before March 27, 1994 (the "Deemed Rejection Date"); and (5) the Trustee cannot seek to enforce the terms of a policy that was rejected.

The Trustee's cross-motion for summary judgment is based on five claims: (1) given his failure to obtain court approval, Lavigne's cancellation of the Policy is deemed null and void; (2) cancellation of the Policy was use of property of the estate outside the ordinary course of Lavigne's business; (3) Lavigne's cancellation of the Policy was an abandonment of property without court authorization and therefore a nullity; (4) because Lavigne's cancellation was unauthorized, the Policy remained in effect upon conversion of the case; and (5) section 365(g) of the Code has no retroactive effect. The parties generally agree that there are no material issues of fact in dispute.

Discussion

Fed.R.Civ.P. 56, applicable to bankruptcy proceedings through Fed.R.Bankr.P. 7056, provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56.

The essential question on a motion for summary judgment is whether there is a genuine dispute about a material fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 246-247, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202 (1986); Orderline Wholesale Dist., Inc. v. Gibbons, Green, van Amerongen, Ltd., 675 F.Supp. 122, 125-26 (S.D.N.Y. 1987). The moving party bears the burden of demonstrating that no genuine issue of material fact exists, while the nonmoving party is entitled to have all ambiguities resolved, and all factual inferences drawn, in his favor. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Binder v. Long Island Lighting Co., 933 F.2d 187, 191 (2d Cir.1991); In re Wingspread Corp., 178 B.R. 938, 941 (Bankr.S.D.N.Y. 1995). In the instant case, the parties agree that this court must resolve one legal issue, namely whether and to what extent medical malpractice insurance coverage extends to the Chapter 7 estate of Lavigne.

As an initial matter the Court must determine whether Lavigne's cancellation of the Policy was effective. Section 1107 of the Code provides a Chapter 11 debtor-in-possession, subject to limitations applicable to a trustee, all the rights, powers, and duties of such trustee, with few exceptions. Lavigne was a debtor-in-possession from the time he filed for bankruptcy on October 8, 1992, until conversion of the case on January 27, 1994. In that capacity, Lavigne was free to conduct his business, subject to, inter alia, limitations such as those imposed on debtors-in-possession by sections 363 and 365 of the Code.

Section 363 of the Bankruptcy Code — Ordinary Course of Business

The Trustee asserts that Lavigne's cancellation of the policy was null and void because, inter alia, it was use of estate property outside the ordinary course of business for which notice, a hearing and court authorization was required pursuant to section 363...