In re Monarch Capital Corp., Civ. A. No. 94-40010-FHF
| Decision Date | 05 October 1994 |
| Docket Number | 94-40011-FHF.,Civ. A. No. 94-40010-FHF |
| Citation | 173 BR 31 |
| Parties | In re MONARCH CAPITAL CORPORATION, Debtor. MONARCH LIFE INSURANCE COMPANY, Springfield Life Insurance Company, Incorporated, First Variable Life Insurance Company, and David V. Whitt, Appellants, v. ROPES & GRAY, Appellee. In re MONARCH CAPITAL CORPORATION, Debtor. MONARCH LIFE INSURANCE COMPANY, Springfield Life Insurance Company, Incorporated, First Variable Life Insurance Company, and David V. Whitt, Appellants/Cross-Appellees, v. ROPES & GRAY, Appellee/Cross-Appellant. |
| Court | U.S. District Court — District of Massachusetts |
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Charles K. Bergin, Jr., Frederica Hummel McCarthy, Robinson, Donovan, Madden & Barry, Springfield, MA, Bruce E. Baty, Christopher D. Schneider, Morrison & Hecker, Kansas City, MO, for Monarch Capital Corp., Springfield Life Ins. Co., Inc., Monarch Life Ins. Co., First Variable Life Ins. Co., and David V. Whitt.
The parties to this imbroglio, Monarch Life Insurance Company ("MLIC"), Springfield Life Insurance Company, Incorporated ("SLIC"), First Variable Life Insurance Company ("FVL"), and David Whitt are appellants (hereinafter, collectively, "appellants"), and Ropes & Gray ("R & G") is the appellee in Civil Action No. 94-40010-FHF. MLIC, SLIC, FVL and David Whitt are also appellants/cross-appellees, and R & G is the appellee/cross-appellant in Civil Action No. 94-40011-FHF. The two cases, Civil Action No. 94-40010-FHF and 94-40011-FHF, have been consolidated in this action.
Prior to reorganization in bankruptcy, Monarch Capital Corporation ("MCC") was the holding company of MLIC and MLIC's subsidiaries, SLIC and FVL. Brief of Appellants Monarch Life Insurance Company, Springfield Life Insurance Company, Incorporated, First Variable Life Insurance Company, and David V. Whitt Appealing the Bankruptcy Court's Orders of December 16, 1993 ("Appellants' 94-40010 Brief") at 3. On May 30, 1991, the Massachusetts Commissioner of Insurance ("the Commissioner"), as temporary receiver for MLIC, filed an involuntary petition in bankruptcy against MLIC's parent, MCC, in the United States Bankruptcy Court for the District of Massachusetts. Id. The law firm of R & G represented MCC in the bankruptcy proceedings. In re Monarch Capital Corporation, No. 91-41379-JFQ, slip op. at 4 (Bankr.D.Mass. October 15, 1993) ("Contempt Order"). At one time R & G also represented MLIC, although the representation ceased prior to the bankruptcy proceedings. See Reply Brief of Appellants Monarch Life Insurance Company, Springfield Life Insurance Company, Incorporated, First Variable Life Insurance Company, and David V. Whitt Appealing The Bankruptcy Court's Order of October 15, 1993 ("Appellants' 94-40011 Reply Brief") at 22. On June 25, 1992, the Bankruptcy Court confirmed MCC's Second Amended Plan of Reorganization ("the Plan"), effectively concluding the bankruptcy proceedings. Id.
The Plan embodied the terms of an extensive settlement agreement entered into among MCC's lenders (the "235 Banks"), the trustee of MCC's estate (the "Trustee"), and the Commissioner, as temporary receiver of MLIC. Id. at 2. The Plan resolved, amongst other things, the claim of MLIC against MCC totaling $280 million. Id. In consideration of MLIC waiving this claim, the Trustee released all of the estate's claims against MLIC. Id. Consistent with the Plan, the Order confirming the Plan contained an injunction (the "Injunction") prohibiting the commencement or prosecution of certain actions or proceedings. Id. at 3.
On May 6, 1993, appellants brought suit against R & G and Ernst & Young for $750 million in the Superior Court of Hampden County, Massachusetts (the "state court action"). Brief of Appellants Monarch Life Insurance Company, Springfield Life Insurance Company, Incorporated, First Variable Life Insurance Company, and David V. Whitt Appealing the Bankruptcy Court's Order of October 15, 1993 ("Appellants' 94-40011 Brief") at 4; see also Contempt Order at 4. Appellants allege that R & G cooperated in various transactions whereby MLIC financed the real estate investments of MCC in violation of certain insurance laws. Contempt Order at 4. Specifically, the complaint in the state court action alleges that a Short Term Investment Pool ("STIP") was designed so that MCC could obtain unsecured loans from MLIC in an effort to keep the former's real estate dealings afloat. Id. The existence and nature of these loans, the complaint goes on, were hidden from insurance regulators. Id.
In its answer to the complaint, R & G maintains that a wholly-owned subsidiary such as MLIC exists solely for the benefit of its parent, MCC in this case. Id. R & G also states that it first learned of the nature and extent of the loans two years after the STIP began, when its balance was at its peak of $217 million. Id. at 4-5. At that time, R & G asserts that it instructed MCC not to draw further funds from MLIC. Id. at 5.
More importantly for the purposes of this appeal, on the same day it filed its answer in the state court action, R & G filed a motion for contempt in the Bankruptcy Court, claiming that the state court action violated the terms of the Injunction. Appellants' 94-40010 Brief at 4. On October 15, 1993, the Bankruptcy Court issued a Contempt Order as a result of the filing of the complaint in the state court action. The Contempt Order also barred the state court action pursuant to res judicata principles. Finally, the Contempt Order declined to impose sanctions, as R & G had requested.
Appellants stayed the state court action, and pursuant to Federal Rules of Bankruptcy Procedure 9020 and 9033, filed objections to the Bankruptcy Court's Contempt Order. Appellants' 94-40010 Brief at 4. Since they were uncertain of the proper procedure for seeking review of a bankruptcy court's contempt order, appellants also filed a notice of appeal pursuant to Federal Rule of Bankruptcy Procedure 8001. Id. R & G cross-appealed, asserting that the Bankruptcy Court erred in denying sanctions in the Contempt Order. Brief of Appellee/Cross-Appellant Ropes & Gray ("R & G's 94-40011 Brief") at 1-2. R & G also moved to dismiss appellants' objections, arguing that the proper procedure for review of a contempt order is through an appeal. Brief of Appellee Ropes & Gray ("R & G's 94-40010 Brief") at 3. Finally, appellants filed a motion to dismiss R & G's cross-appeal, stating that the proper procedure for seeking review of the Contempt Order is through objections pursuant to Rules 9020 and 9033. Appellants' 94-40010 Brief at 4-5.
On December 16, 1993, the Bankruptcy Court granted R & G's motion to dismiss appellants' objections, denied appellants' motion to dismiss R & G's cross-appeal, and denied appellants' motion to file a reply memorandum in support of their objections. In re Monarch Capital Corporation, No. 91-41379-JFQ, slip op. at 1 (Bankr.D.Mass. December 16, 1993) ("Order of December 16, 1993"). Thus, the Bankruptcy Court agreed with R & G that the proper procedure for review of a contempt order is through an appeal under Rule 8001, not through objections under Rules 9020 and 9033.
Appellants appeal the Contempt Order as well as the Order of December 16, 1993. R & G cross-appeals on the Contempt Order. In sum, the broad issues before the Court are first, what is the proper procedure for review of the Bankruptcy Court's Contempt Order; second, if review of the Contempt Order is for this Court, did the Bankruptcy Court have the power to issue the Contempt Order; third, if the Bankruptcy Court had the power to issue the Contempt Order, was the Contempt Order proper. In determining whether the Contempt Order was proper, the Court must ask whether the Injunction that gave rise to the Contempt Order was proper and whether the Injunction applied to the state court action. In their briefs, the parties raise additional sub-issues. The Court will consider these sub-issues as they arise out of the three broader issues.
(Civil Action No. 94-40010-FHF)
The Court first addresses the procedure for review of the Bankruptcy Court's Contempt Order. In addressing the procedure for review, the Court must consider 28 U.S.C. § 157 ("section 157"). Section 157 allows the district court to refer cases to the bankruptcy court, and the latter may then enter final judgments and orders if the matter is a core proceeding. See 28 U.S.C. §§ 157(a)-(b)(1). In such a case, the proper procedure for review is through an appeal to the district court, where the general standard of review applies. See 28 U.S.C. §§ 158(a), (c). That is, findings of fact shall not be set aside unless clearly erroneous and applications of law are reviewed de novo. See Casco Northern Bank v. DN Assocs. (In re DN Assocs.), 3 F.3d 512, 515 (1st Cir. 1993).
If the matter is a non-core proceeding, the bankruptcy judge may hear the matter if it is otherwise related to a title 11 case. See 28 U.S.C. § 157(c)(1). In non-core proceedings, the bankruptcy judge's findings are not final judgments and orders, but rather are proposed findings of fact and conclusions of law that are submitted to the district court for entry of a final order or judgment. Id. In considering the proposed findings of fact and conclusions of law, the district court conducts a de novo review of any timely objected-to...
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