In re West Electronics, Inc., Bankruptcy No. 86-07871
| Decision Date | 12 June 1991 |
| Docket Number | Adv. No. 89-0965.,Bankruptcy No. 86-07871 |
| Citation | 128 BR 905 |
| Parties | In re WEST ELECTRONICS, INC. WEST ELECTRONICS, INC., Plaintiff, v. NATIONAL UNION FIRE INSURANCE CO., Defendant. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
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Mesirov, Gelman, Jaffe, Cramer & Jamieson, Robert H. Malis, Robert B. Bodzin, Philadelphia, Pa., for plaintiff and debtor West Electronics, Inc.
White & Williams, Christopher P. Leise, Michael O. Kassak, Westmont, N.J., for defendant Nat. Union Fire Ins. Co.
Presently before the court are the cross-motions of plaintiff, West Electronics, Inc. ("West"), the debtor herein, and defendant, National Union Fire Insurance Co., Inc. ("National Union"), for summary judgment as to liability under a policy of insurance previously determined by this court to be in force and effect at the time of the loss. For the reasons set forth below in the opinion of the court, summary judgment as to liability will be granted in favor of West.
The instant cross-motions for summary judgment are before this court as Phase II of a trifurcated adversary proceeding in which West seeks recovery for an alleged loss under a policy of insurance issued by National Union. During Phase I, this court conducted a trial on the issue of the effectiveness of National Union's purported cancellation of the subject policy. That trial began on January 17, 1990. At the conclusion of Phase I, this court issued an opinion directing a verdict in favor of West holding that the insurance policy was in effect at the time of the loss.
During Phase II, the instant matter, this court will consider the issue of the liability of the parties. Finally, in Phase III, the issue of damages will be determined.
Since 1972, West had been manufacturing electronic components for use by the military. As the business relationship between West and the government progressed, however, certain problems developed which prompted a government investigation into West's manufacturing procedures. West claims that the investigation severely restricted its cash flow and precipitated its failure to complete certain government contracts which it had been awarded in the early to mid 1980's by the Navy and the Air Force.
West's financial difficulties culminated in September of 1986 when the Internal Revenue Service ("IRS" or "the Service") put the debtor on notice of certain tax obligations and the existence of a government tax lien on the debtor's property. In early December of 1986, the Defense Contractors Management Service Area ("DCMSA") accelerated its investigation of West and instructed the Defense Contracting Auditing Agency ("DCAA") to audit progress payments made to West. At the same time, many of West's government contracts were terminated for failure to meet delivery and for allegedly deficient manufacture and quality of materials.
Also in December of that year, the IRS began its own investigation of the debtor. Because West failed to make progress in reducing tax delinquencies and because of mounting tax accruals, the IRS began to contemplate a seizure action. Agent Darrell Carp was in charge of the IRS investigation. In early to mid December, he concluded that exigent circumstances existed for a seizure of West's property. On December 17, 1986, the IRS informed West that it had received instructions to seize West's assets. The next day IRS agents appeared, presented West with a tax lien and levied on the property located at the plant and on the building itself.
On December 19, because he believed DCMSA to be the rightful owner of much of West's property, Agent Carp permitted agents from DCMSA to enter the plant and seize part of West's inventory and work in progress.1 Also on that date, at 4:11 pm, West filed a petition under Chapter 11 of the Bankruptcy Code. Concurrently, the debtor moved for a turnover of the assets seized. On December 24, this court ordered the turnover of all assets seized by the IRS, and much of the material seized by the DCMSA. On December 30 the DCMSA returned the material in a severely damaged state. Those damages gave rise to the within claim.
Subsequent to the loss, West filed a claim with National Union for coverage under its "all-risk" policy, number 706-6864, which had been issued by National Union on October 15, 1986. National Union denied coverage on the grounds that the policy specifically excluded it under the circumstances.2
As a threshold matter this court must establish its jurisdiction. In a companion opinion issued this day, the court has determined that it has jurisdiction over the instant cross-motions pursuant to 28 U.S.C. § 1334(a) and (b). The court has further concluded that the instant matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (E).3
This is a motion for summary judgment and is therefore governed by Bankruptcy Rule 7056 which incorporates Fed.R.Civ.P. 56. Rule 56(c) provides that:
the judgment sought 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 the moving party is entitled to judgment as a matter of law.
The burden of proof is on the movant to show that there is no genuine issue of fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). Furthermore, the court is constrained to view the evidence in the light most favorable to the party opposing the motion for summary judgment. Goodman v. Mead Johnson & Co., 534 F.2d 566, 573 (3d Cir.1976).
National Union has asserted three specific grounds upon which the coverage sought by West should be excluded. National Union first asserts that West had no insurable interest in the goods which it alleges to have been damaged. Next, it asserts that the policy's governmental acts exclusion operates to exclude coverage under the circumstances of this case. Finally, National Union argues that the damage was caused by West's own criminal acts and that the loss was not fortuitous. This court will consider National Union's defenses to coverage sequentially.
The parties, as well as this court, recognize that in order to sustain recovery under a policy of insurance, an insured must have an insurable interest in the subject property at the time of the loss. The courts of New Jersey have also acknowledged this axiomatic principle of insurance law. P.R. DeBellis Enterprises, Inc. v. Lumberman's Mut. Casualty Co., 77 N.J. 428, 390 A.2d 1171 (1978); Miller v. New Jersey Ins. Underwriting Ass'n, 82 N.J. 594, 414 A.2d 1322 (1980).
National Union contends that West did not have an insurable interest in the property and bases that assertion upon an allegation that West did not own the subject property at the time of the loss. National Union argues that because the government had made progress payments in excess of the amount which West has claimed as a loss, the government had title to the subject property at the time of the loss.4 National Union additionally argues that all of the contracts between the parties had been terminated for default, and that West consequently had no further expectation of benefiting under its contracts with the government.
National Union relies upon two cases to support its position. In the first, In re Double H Prods. Corp., 462 F.2d 52 (3d Cir.1972), the Third Circuit concluded that partial payments made on a government contract would, in most circumstances, transfer title in the subject property to the government, at least to the extent of those payments. Id. at 55. The Double H court went on to state that the government's title would even be good as against creditors of a bankrupt government contractor. Id. In a thorough analysis of Congressional intent underlying the practice of making progress payments to defense contractors, the Seventh Circuit agreed that upon termination of a contract, title to goods did pass to the government in proportion to the amount of progress payments which had been made. In re American Pouch Foods, Inc., 769 F.2d 1190, 1195 (7th Cir.1985), cert. denied, 475 U.S. 1082, 106 S.Ct. 1459, 89 L.Ed.2d 716 (1986).
National Union's theory, however, misinterprets the meaning of the term "insurable interest" as expressed in the cases construing the term under the laws of this state. Counsel has failed to recognize that even if West lacked legal title to the property, it may retain an insurable interest. An insurable interest has been determined to exist where:
the insured derives pecuniary benefit or advantage by the preservation or continued existence of the property or will sustain pecuniary loss from its destruction. Liability to loss from damage to the property will be sufficient . . . and a right of property is not an essential ingredient.
4 J. Appleman, Insurance Law and Practice, § 2123, p. 35-37 (1969) (emphasis added). In Miller, supra., the New Jersey Supreme Court considered the effect of an ownership interest in determining whether plaintiffs, in a consolidated appeal, had an insurable interest in real estate. Both plaintiffs were delinquent in payment of real property taxes and, as a result, the city of Newark had foreclosed on their properties. The properties sustained fire damage after the statutory redemption period on the foreclosure judgments had run. The insurer refused payment on the grounds that the plaintiffs did not have an insurable interest at the time of the loss since they did not have title to the real property.
In concluding that the plaintiffs did have an insurable interest, the court held that the plaintiffs' failure to have title did not preclude a finding that they did have insurable interests. Miller 82 N.J. at 599, 414 A.2d 1322. Justice Pollack reasoned that "an insured retains...
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