Monarch Life Ins. Co. v. Ropes & Gray
| Decision Date | 05 April 1995 |
| Docket Number | 94-2200,Nos. 94-2173,s. 94-2173 |
| Citation | 65 F.3d 973 |
| Parties | 34 Collier Bankr.Cas.2d 313, 27 Bankr.Ct.Dec. 1039, Bankr. L. Rep. P 76,634 MONARCH LIFE INSURANCE COMPANY, et al., Appellants, v. ROPES & GRAY, Appellee. MONARCH LIFE INSURANCE COMPANY, et al., Appellees, v. ROPES & GRAY, Appellant. . Heard |
| Court | U.S. Court of Appeals — First Circuit |
Bruce E. Baty, with whom Christopher D. Schneider, Morrison & Hecker, Kansas City, MO, Charles K. Bergin, Jr. and Robinson, Donovan, Madden & Barry, P.C., Springfield, MA, were on brief, for Monarch Life Insurance Company.
John K. Villa, with whom Nicole K. Seligman, Philip J. Deutch, Williams & Connolly, Washington, DC, Charles S. Cohen and Egan, Flanagan and Cohen, P.C., Springfield, MA, were on brief, for Ropes & Gray.
Before TORRUELLA, Chief Judge, and CYR and STAHL, Circuit Judges.
Following an unsuccessful intermediate appeal to the district court, Monarch Life Insurance Co. ("Monarch Life") continues to press its challenge to a bankruptcy court order enjoining its prosecution of a legal malpractice action in Massachusetts Superior Court against its former counsel, the law firm of Ropes & Gray. The bankruptcy court determined that the Monarch Life action violated a permanent injunction incorporated in the confirmed reorganization plan of its parent corporation, Monarch Capital Corporation ("Monarch Capital"). We now affirm the district court on the ground that Monarch Life is collaterally estopped from asserting a state court challenge to the bankruptcy court's jurisdiction to enter the permanent injunction incorporated in the confirmed reorganization plan.
Monarch Capital, incorporated as a holding company in 1968, marketed life and disability insurance through Monarch Life, its wholly-owned Massachusetts subsidiary, 1 and developed real estate through another group of subsidiaries ("real estate subsidiaries"). Ropes & Gray provided simultaneous legal representation to Monarch Capital and its subsidiaries, including Monarch Life. In 1985, Monarch Capital established a Short-Term Investment Pool ("STIP"), a common bank account into which Monarch Capital's subsidiaries agreed to make daily deposits of their excess cash balances. The STIP agreement authorized Monarch Capital to borrow needed funds from the STIP at an interest rate more favorable than the market rate, and permitted the subsidiaries to recoup their STIP deposits on demand.
Beginning in 1987, Monarch Capital's real estate subsidiaries began experiencing serious cash flow problems due to an abrupt economy-wide decline in real estate values. In order to prop up its failing real estate subsidiaries, Monarch Capital began to borrow heavily from the STIP deposits contributed by Monarch Life. By 1990, Monarch Life's outstanding STIP "advances" to Monarch Capital approximated $175 million. When Monarch Life learned the extent of Monarch Capital's borrowings, it unilaterally cancelled its participation in the STIP. Shortly thereafter, Monarch Life discharged Ropes & Gray as its counsel. During that same year, Monarch Capital borrowed an additional $235 million from a group of financial institutions (hereinafter: "the 235 Banks"), pledging its capital stock in Monarch Life as collateral for the loan.
In May 1991, the Massachusetts Insurance Commissioner placed Monarch Life in receivership. The receiver in turn filed an involuntary chapter 11 petition against Monarch Capital. After seven months of negotiation, the principal creditors of Monarch Capital--the 235 Banks and Monarch Life--proposed a plan of reorganization ("Plan"), which purported to settle or release a tangle of "complex" claims and cross-claims held by and against Monarch Capital, its subsidiaries, and other creditors. In re Monarch Capital Corp., No. 91-41379-JFQ, slip op. at 9 (Bankr.D.Mass. June 25, 1992). 2 These included Monarch Life's claim that Monarch Capital, acting in concert with the 235 Banks, had used the STIP to deplete Monarch Life's coffers, thereby placing Monarch Life in violation of state insurance regulations. 3 In consideration of their mutual agreement to The injunction ultimately included in the order confirming the Plan provides as follows:
release claims and to make financial contributions to fund the Plan, the Plan proponents insisted on the inclusion of a permanent injunction to protect them from future lawsuits arising from or related to claims settled under the Plan.
In addition to the discharge provided by Section 1141 of the Bankruptcy Code and to supplement the discharge provisions of Article VI.A of the Plan, this Order constitutes an injunction against all persons (other than the FDIC as Receiver) from taking any of the following actions (other than an action brought to enforce any right or obligation under the Plan or the Settlement Agreement):
a. commencement or continuation of any action or proceeding arising from or related to a claim against [Monarch Capital] against or affecting or [sic] any property of [Monarch Capital], or any direct or indirect transferee of any property of, or direct or indirect successor in interest to, any of the foregoing ...; and
b. commencement or continuation of any action or proceeding arising from or related to a claim against the Debtor of this Chapter 11 case, the [Monarch Life] Receivership or the operations of the Debtor against or affecting any of New Holding Co., New Realty Co., [Monarch Life], the Agent, the 235 Banks, the Trustee, the Creditors' Committee (in such capacity), the [Monarch Life] Receiver and their respective officers, directors, employees, attorneys, agents, successors and assigns other than a claim to enforce obligations under the Plan or the Settlement Agreement.... 4
Id. at 19-20 (emphasis added).
After a hearing, at which the parties discussed whether, and to what extent, Bankruptcy Code Sec. 105(a) 5 empowers a bankruptcy court to afford permanent injunctive relief which effectively grants a "discharge" to parties other than the chapter 11 debtor, the bankruptcy court confirmed the Plan, including the proposed injunction. See id. at 23-27; see also infra Appendix at pp. 984-85 (). The bankruptcy court found that absent prompt confirmation of a chapter 11 plan, Monarch Life likely would be forced into liquidation. In re Monarch Capital Corp., No. 91-41379-JFQ, slip op. at 18. Monarch Life's receiver elected not to appeal the confirmation order.
Monarch Life soon discovered documentary evidence allegedly establishing that Ropes & Gray simultaneously represented both Monarch Capital and Monarch Life in circumstances which suggested an inherent conflict of interest. In May 1993, Monarch Life brought suit in Massachusetts Superior Court, seeking compensatory damages for Ropes & Gray's alleged participation in Monarch Capital's private strategy to use Monarch Life's STIP contributions to prop up Monarch Capital's moribund real estate investments. Monarch Life alleged, inter alia, that Monarch Capital and Ropes & Gray, in reports to Massachusetts insurance regulators, deliberately concealed the nature and understated the amount of the STIP "advances" to Monarch Capital, thereby exposing Monarch Life and its directors to civil liability for Monarch Life's violation of Massachusetts insurance laws which require that insurance companies keep on hand minimum "admitted assets" to cover extant policies. Monarch Life further alleged that Ropes & Gray had deliberately concealed from Monarch Life the ongoing use of the STIP by Monarch Capital to finance its long-term real estate ventures, as well as the fact that Monarch Capital had no realistic prospect of ever repaying its STIP "advances" had Monarch Life made demand. 6
Ropes & Gray filed a motion for civil contempt against Monarch Life in the bankruptcy court, claiming that its state court action violated the injunctive provision in the confirmed Monarch Capital chapter 11 plan. Following a hearing on the contempt motion, the bankruptcy court determined that (1) the Monarch Life action was barred by the broad terms of both subparagraphs (a) and (b) of the injunction included in the Plan, see supra p. 976; and (2) the doctrine of res judicata precluded Monarch Life from attacking the bankruptcy court's "jurisdiction" to enter the broad-based injunction. Ropes & Gray v. Monarch Life Ins. Co. (In re Monarch Capital Corp.), No. 91-41379-JFQ, at 6-7 (Bankr.D.Mass. Oct. 15, 1993). The bankruptcy court held Monarch Life in civil contempt but refused to impose sanctions because the terms of the injunctive provision in the confirmed Plan were not "sufficiently specific and definite" to permit a finding that the violation had been deliberate or undertaken in bad faith. Id. at 7. On intermediate appeal, the district court affirmed the bankruptcy court decision. Monarch Life Ins. Co. (In re Monarch Capital Corp.) v. Ropes & Gray, 173 B.R. 31 (D.Mass.1994). 7
Monarch Life contends, as a matter of law, that the permanent injunctive provision included in the confirmed Plan cannot extinguish actions against third parties such as Ropes & Gray, since bankruptcy courts have no "jurisdiction " or power to "discharge" (1) debts other than those of the chapter 11 debtor, see Brief for Appellants at 12-16 ; ), or (2) debts of any nondebtor such as Ropes & Gray which concededly made no financial contribution to the Plan, see id. at 16-20 (citing In re Heron, Burchette, Ruckert & Rothwell, 148 B.R. 660 665, 687 (Bankr.D.D.C.1992)).
Ropes & Gray counters that Monarch Life is barred,...
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