Lavigne, In re

• Decision Date: 02 June 1997
• Docket Number: D,No. 1141,1141
• Citation: 114 F.3d 379
• Court: U.S. Court of Appeals — Second Circuit
• Parties: 38 Collier Bankr.Cas.2d 67, 30 Bankr.Ct.Dec. 1200 In re Jeffrey E. LAVIGNE, doing business as Laser Medical Associates of NY, Debtor. MEDICAL MALPRACTICE INSURANCE ASSOCIATION, Plaintiff-Appellant, v. Hal M. HIRSCH, as Trustee of the Estate of Jeffrey E. Lavigne, d/b/a Laser Medical Associates of NY, Defendant-Appellee. ocket 96-5104.

Page 379

114 F.3d 379

38 Collier Bankr.Cas.2d 67, 30 Bankr.Ct.Dec. 1200

In re Jeffrey E. LAVIGNE, doing business as Laser Medical

Associates of NY, Debtor.

MEDICAL MALPRACTICE INSURANCE ASSOCIATION, Plaintiff-Appellant, v. Hal M. HIRSCH, as Trustee of the Estate of Jeffrey E.

Lavigne, d/b/a Laser Medical Associates of NY,

Defendant-Appellee.

No. 1141, Docket 96-5104.

United States Court of Appeals, Second Circuit.

Argued Feb. 24, 1997.

Decided June 2, 1997.

Richard J. Cairns, New York City (Larry P. Schiffer, Haroula K. Ballas, Werner & Kennedy, New York City, of counsel), for Appellant.

Hal M. Hirsch, Purchase, NY (David L. Barrack, Scott R. Goldberg, Allen G. Kadish, Gainsburg & Hirsch, Purchase, NY, of counsel), for Appellee.

Before: VAN GRAAFEILAND, MESKILL and KEARSE, Circuit Judges.

MESKILL, Circuit Judge.

Appeal from a final judgment of the United States District Court for the Southern District of New York, Duffy, J., affirming an order of the bankruptcy court. See In re Lavigne, 199 B.R. 88 (S.D.N.Y.1996). The United States Bankruptcy Court for the Southern District of New York, Lifland, C.B.J., held that Medical Malpractice Insurance Association (MMIA) must allow the Chapter 7 Trustee to purchase extended medical malpractice insurance coverage (tail coverage) for the estate of the bankrupt, Jeffrey E. Lavigne. See In re Lavigne, 183 B.R. 65 (Bkrtcy.S.D.N.Y.1995). MMIA brought an adversary proceeding in the United States Bankruptcy Court seeking a declaratory judgment that the option to purchase tail coverage expired both contractually and statutorily before the Chapter 7 Trustee attempted to exercise the option on behalf of the estate. The policy was cancelled by the debtor-in-possession before his bankruptcy case was converted from Chapter 11 to Chapter 7 of the United States Bankruptcy Code (Bankruptcy Code). The Trustee filed a cross-motion seeking to establish his right to purchase the extended coverage under the terms of the policy. In its decision on cross-motions for summary judgment, the United States Bankruptcy Court denied MMIA's motion and granted the Trustee's cross-motion.

The bankruptcy court held that the Chapter 11 debtor-in-possession's cancellation of the policy was use of estate property beyond the ordinary course of business, which required notice and a hearing under 11 U.S.C. § 363(b)(1). In re Lavigne, 183 B.R. at 70-71. Since the debtor-in-possession did not provide notice, the bankruptcy court determined that the cancellation was ineffective and the policy remained in effect when the case was converted from Chapter 11 to Chapter 7. Id. at 71. The bankruptcy court further held that because the Trustee did not assume the policy within sixty days of conversion to Chapter 7, the policy was deemed rejected under 11 U.S.C. § 365(d). Id. at 72-73. The court then held that the deemed rejection cancelled the existing coverage under the policy and triggered the policy's sixty day automatic extended reporting period and option to purchase additional tail coverage. Id. The court concluded that the Trustee had timely exercised the option to purchase the tail coverage. Id. at 73. MMIA was directed to notify the Trustee of the premium amount due for the tail coverage and to accept the Trustee's tender of premium payment. Id.

MMIA filed an appeal of the bankruptcy court's decision in the district court, and the judgment was stayed pending the appeal. The district court affirmed the judgment of the bankruptcy court. In re Lavigne, 199 B.R. 88. MMIA appeals the judgment of the district court, and for the following reasons, we affirm.

BACKGROUND

MMIA, a non-profit, unincorporated underwriting association, was established by the New York Legislature in 1975 to provide Dr. Jeffrey Lavigne, d/b/a Laser Medical Associates of New York, was a proctologist specializing in laser surgery. He had several offices throughout the New York metropolitan area and advertised extensively as "MD-Tusch."

professional liability insurance to all medical practitioners licensed in New York. MMIA was created to cure "the lack of adequate medical malpractice insurance at reasonable rates, and ... to assure the prompt and fair disposition of medical malpractice claims." Bleiler v. Bodnar, 65 N.Y.2d 65, 68, 489 N.Y.S.2d 885, 887, 479 N.E.2d 230, 232 (1985) (internal quotation omitted). MMIA's rates and policy provisions are governed by New York Insurance Law. See N.Y.Ins.Law § 5501, et seq. (McKinney 1985 & Supp.1997).

I. Lavigne's Purchase and Cancellation of the Policy

In April 1992, Lavigne obtained a one-year claims-made professional liability insurance policy from MMIA. The policy, which became effective on April 1, 1992, covered liability for malpractice claims arising on or after the effective date, as long as the claims were first asserted during the policy period or during any extended reporting period. ¹ See N.Y.Comp.Codes R. & Regs. tit. 11 § 73.1(a) (1993) (NYCRR) (defining claims-made policy).

The policy provided for an automatic sixty day tail coverage period upon termination of the policy and a concurrent sixty day option to purchase additional tail coverage. Tail coverage is insurance coverage that becomes effective upon the cancellation or termination of a policy. The coverage applies to all claims that arise during the primary policy period but are not asserted until after the stated policy period expires. Claims made during the tail period are considered to have been made during the primary policy term. See id. § 73.1(d). Under New York law, MMIA is required to provide both automatic tail coverage for sixty days and the option to purchase additional tail coverage upon the termination of a policy. Id. §§ 73.3, 73.5.

On October 8, 1992, Lavigne filed a voluntary petition for protection under Chapter 11 of the Bankruptcy Code. Lavigne continued to practice medicine and to manage his affairs as a debtor-in-possession. In this capacity, Lavigne renewed his policy with MMIA for a one year period beginning April 1, 1993. However, in a letter to MMIA dated September 24, 1993, Lavigne cancelled the policy and requested information regarding tail coverage. During this time, Lavigne's personal and professional lives were in turmoil. His medical license was subject to revocation hearings and he faced over seventy medical malpractice claims. Several days before cancelling the policy, Lavigne decided to close his last remaining office. Also, following a criminal investigation, he pleaded guilty to a criminal information for tax evasion.

Two days after cancelling the insurance policy, Lavigne attempted suicide. He was hospitalized, put on suicide watch and eventually transferred to a rehabilitative facility in New Hampshire, where he remained until the end of November 1993. During the period of Lavigne's incapacity, his attorney took over operation and control of his business affairs. Without leave of court, the attorney collected accounts receivable, placed them in a non-segregated general account and at his discretion paid certain claims. When these activities were discovered, the bankruptcy court reprimanded the attorney and ordered him to provide an accounting.

In response to the insurance cancellation letter, MMIA sent a letter to Lavigne stating that the cancellation was effective as of September 28, 1993 and that the option to purchase tail coverage would expire sixty days from termination (November 28, 1993). The stated option period expired while Lavigne was institutionalized and his attorney never purchased the tail coverage.

II. Conversion of the Bankruptcy Case to Chapter 7

On January 27, 1994, Lavigne's case was converted from Chapter 11 to Chapter 7 and When the Trustee discovered the existence of the policy, he wrote a letter to MMIA dated May 3, 1994 seeking to purchase tail coverage. The Trustee claimed that Lavigne's cancellation of the policy without court approval was invalid and that the policy remained in effect until it terminated on April 1, 1994 by its own terms. Thus, according to the Trustee, the option to purchase tail coverage did not expire until May 31, 1994. The parties entered into a Standstill and Tolling Agreement on May 27, 1994 to allow the parties to assess whether any claims would be made against Lavigne subsequent to the alleged cancellation date of September 28, 1993. At least four malpractice claims were asserted after that date. On September 29, 1994, MMIA terminated the agreement and advised the Trustee that it would not grant the request to purchase the coverage. According to MMIA, Lavigne's cancellation was valid and therefore the option had already expired, or alternatively, the option was not available because the policy had been rejected by the Trustee.

Hal M. Hirsch was appointed Trustee. According to the Trustee, the circumstances of Lavigne's incapacitation and the conduct of Lavigne's attorney, coupled with their failure to inform the Trustee of the existence of the policy, made it impossible immediately to obtain a clear picture of the estate's affairs. The Trustee claims that based on the above, he was unaware of the MMIA policy and unable to assume it or seek to extend the time to do so.

III. Procedural History

Pursuant to Bankruptcy Rule 7001, MMIA brought an adversary proceeding seeking a declaratory judgment that its obligation to extend the option to purchase tail coverage had expired. Both parties filed motions for summary judgment, agreeing that there were no material issues of fact and the dispute could be decided as a matter of law.

MMIA argued that under section 363(c)(1) of the Bankruptcy Code, Lavigne properly cancelled the policy effective September 28, 1993, and therefore, the option to purchase tail coverage and the time to make valid claims expired on November 27, 1993. In the alternative, MMIA argued that when the case was converted from Chapter 11 to Chapter 7, the Trustee had sixty days either to accept or reject the...