In re Sudbury, Inc.
| Decision Date | 11 May 1993 |
| Docket Number | Bankruptcy No. 92-10148. |
| Parties | In re SUDBURY, INC., Debtor. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Northern District of Ohio |
G. Christopher Meyer, Ralph Brubaker, Squire, Sanders & Dempsey, Cleveland, OH, for debtor.
Jeffrey M. Sherman, Lawrence D. Mungin, Katten Muchin Zavis & Dombross, Washington, DC, for Nat. Union Fire Ins. Co. of Pittsburgh, Pa.
Forrest A. Norman, Gary L. Nicholson, Gallagher, Sharp, Fulton & Norman, Cleveland, OH, for Continental Ins. Co.
Jeffrey S. Gray, Ulmer & Berne, Cleveland, OH, for Unsecured Creditors' Committee.
On July 2, 1992, Sudbury, Inc., the Debtor in this chapter 11 case, filed a motion requesting a declaration that its insurance policies ("Policy" or "Policies") issued by National Union Fire Insurance Company of Pittsburgh, Pa. and The Continental Insurance Company ("Insurer(s)") and the related retrospective premium agreements ("Premium Agreement(s)") are not executory contracts under section 365 of the Bankruptcy Code or, in the alternative, permitting the Debtor to reject the Premium Agreements. In subsequent pleadings the Insurers urged that the Policies and Premium Agreements are executory contracts under section 365 and that their retrospective premium claims, totaling several million dollars, are entitled to administrative expense priority rather than the status of general unsecured claims.
The Court confirmed the Debtor's plan of reorganization by order entered August 18, 1992. On the same day the Court also entered an agreed order among the Debtor and the Insurers providing that despite confirmation of its plan the Debtor could reject the Policies and Premium Agreements if they were determined to be executory contracts under section 365. The parties have extensively briefed their positions. On March 5, 1993, the parties filed stipulations of fact for the Court's use in ruling on the Debtor's motion ("Stipulations").
This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (B). This memorandum sets forth the Court's findings of fact and conclusions of law pursuant to rule 7052 of the Federal Rules of Bankruptcy Procedure.
The parties have stipulated that the Policies provide occurrence-based coverage; that is, the Insurers adjust, administer and pay claims arising from occurrences that took place during the policy period. Each of the Policies expired or was terminated prior to the filing of this case. Therefore, each policy period covers only prepetition occurrences. Except for two automobile liability Policies issued by Continental, the other Policies are standard retrospective premium policies; that is, the premium owing the Insurer is adjusted annually based upon claims experience. For each policy year during which the Policies were in effect, the Debtor executed concurrently with the issuance of the Policy a Premium Agreement providing for payment of annual retrospective premiums. Under a standard retrospective premium insurance policy, an initial premium, called a deposit premium, is estimated and paid. After expiration of the policy period, an audit adjustment is made. Thereafter, annual retrospective premium adjustments are calculated based upon actual claims experience for the policy period. In addition, there is a maximum premium cap; the insured is not obliged to pay premiums to the insurer after the cap is reached. Under Debtor's National Union retrospective premium Policies retrospective premiums are still outstanding. Under Debtor's Continental retrospective premium Policies audit adjustments and retrospective premiums are outstanding.
Continental's two automobile liability Policies are fixed premium insurance policies under which the Debtor maintained responsibility for payment of specified per occurrence and aggregate deductible amounts. The Debtor has deposited funds with Continental and procured a letter of credit for the benefit of Continental to assure payment of these deductibles under these Policies.
All of the Policies have clauses ("Bankruptcy Clauses") which provide that the Debtor's insolvency or bankruptcy will not relieve the Insurer of its obligations under the Policy. Both Insurers' workers compensation Policies contain identical Bankruptcy Clauses: "Your default or the bankruptcy or insolvency of you or your estate will not relieve us of our duties under this insurance policy after an injury occurs." The National Union general liability Bankruptcy Clause provides: "Bankruptcy or insolvency of the insured or the insured's estate shall not relieve the company of any of its obligations hereunder." The National Union and Continental automobile Policies contain substantially identical Bankruptcy Clauses.
All of the Policies contain "notice" and "cooperation" provisions. According to the Stipulations, these provisions ("Cooperation Clauses") must be satisfied or the Insurer may not be obliged to pay an otherwise covered claim. The Cooperation Clauses impose the following obligations on the Debtor: (1) giving the Insurer timely notice of a claim, (2) providing the Insurer with fair, frank and substantially full disclosure of information reasonably demanded by the Insurer to enable it to prepare for or determine whether there is a genuine defense to a claim, (3) cooperating in the defense of a claim by, inter alia, testifying or attending trial, cooperating and responding to discovery and in the investigation, negotiation, settlement and litigation of the claim, (4) obtaining the consent of the Insurer if the Debtor settles with a claimant, and (5) protecting and preserving the Insurer's right of subrogation with respect to a claim.
A number of cases have considered whether a debtor's obligation to pay retrospective premiums coupled with the insurer's obligation to pay claims based on prepetition occurrences constituted an executory contract under section 365 of the Bankruptcy Code. So far as appears from the parties' briefs and the Court's research, the cases have held without exception that a debtor's obligation to pay retrospective premiums did not make an insurance policy executory. Texscan Corp. v. Commercial Union Insurance Cos. (In re Texscan Corp.), 107 B.R. 227 (9th Cir. BAP 1989), aff'd, 976 F.2d 1269 (9th Cir.1992); Firearms Import and Export Corp. v. United Capitol Insurance Co. (In re Firearms Import and Export Corp.), 131 B.R. 1009 (Bankr.S.D.Fla.1991); In re Wisconsin Barge Line, Inc., 76 B.R. 695 (Bankr. E.D.Mo.1987); In re Placid Oil Co., 72 B.R. 135 (Bankr.N.D.Tex.1987). These courts generally invoked the Countryman definition of executory contract in concluding that the policy was not an executory contract under section 365.
Professor Countryman defined an executory contract as "a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other." Vern Countryman, Executory Contracts in Bankruptcy, Part I, 57 Minn. L.Rev. 439, 460 (1973). The Countryman definition has been employed in the Sixth Circuit. See Terrell v. Albaugh (In re Terrell), 892 F.2d 469 (6th Cir.1989); In re Jolly, 574 F.2d 349 (6th Cir.1978), cert. denied, 439 U.S. 929, 99 S.Ct. 316, 58 L.Ed.2d 322 (1978).
The courts that have considered retrospective premiums have generally concluded that insurance policies and related obligations to pay retrospective premiums were not executory contracts under the Countryman definition because the policy period had expired and there was therefore nothing to assume, and/or because the insurer's indemnity obligation was not conditioned upon the debtor's payment of retrospective premiums.
This Court too concludes that the Debtors' retrospective premium obligation does not make the Policies executory contracts which may be assumed or rejected under section 365. Although the Insurers' obligation to pay insured claims that arose during the policy period, and the Debtor's obligation to pay retroactive premiums, are both executory, under the ordinary meaning of that term, since neither has been performed, this does not constitute them an executory contract under the Countryman definition. That definition requires not only executory obligations but obligations whose nonperformance would excuse performance by the other party.
The obvious purpose of the Bankruptcy Clauses was to make clear that the Debtor's failure to pay retrospective premiums because of the Debtor's bankruptcy or insolvency would not excuse the insurer's payment of claims arising out of occurrences during the policy period. See Texscan, supra. The Insurers appear to acknowledge this disconnect. They do not argue that their obligations to provide insurance coverage can be avoided by the Debtor's failure to pay the retrospective premiums.
Section 365 is designed to give the trustee the option of assuming contracts where performance by a third party will benefit the estate or to forego the third party's performance where the benefit to the estate will be less than the cost. If the contract is assumed, the third party must perform and the debtor must render at full value the debtor's bargained for performance on which the third party's performance was conditioned. If the contract is rejected, the third party is not obligated to perform but has only a prepetition claim for its damages.
In this case, however, the Insurers agreed in the Bankruptcy Clauses that their obligations to pay covered claims were not conditioned upon the Debtor's full...
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