Schmidt v. Villarreal (In re Oga Charters, LLC)

Decision Date24 July 2017
Docket NumberCASE NO: 16-70297,ADVERSARY NO. 16-7016
PartiesIN RE: OGA CHARTERS, LLC Debtor MICHAEL B SCHMIDT, TRUSTEE Plaintiffs v. MARTA VILLARREAL, et al Defendants
CourtU.S. Bankruptcy Court — Southern District of Texas

CHAPTER 7

MEMORANDUM OPINION IN SUPPORT OF CERTIFICATION OF A DIRECT APPEAL TO THE FIFTH CIRCUIT COURT OF APPEALS

Pending before the Court is a single matter, self-styled as "Motion for Certification for Direct Appeal to the Fifth Circuit Court of Appeals (Unopposed)," that was filed by the "Settled Claimants"1 on July 6, 2017. ECF No. 111 (the "Motion"). The Motion seeks certification of Settling Creditors' appeal direct to the Fifth Circuit Court of Appeals under 28 U.S.C. § 158(d). See generally id. Settling Creditors also filed their Notice of Appeal on July 6, 2017. ECF No. 110. Likewise, Beatrice Garcia ("Garcia") filed her Notice of Appeal on July 7, 2017 and a notice incorporating the Motion by reference. ECF Nos. 115-116. On July 19, 2017, Michael B. Schmidt, Plaintiff and chapter 7 trustee, and Petitioning Creditors,2 filed their Joint Notice of Cross Appeal. ECF No. 142 (the "Cross Appeal").3

Statutory and Rule Authority

This certification is made pursuant to 28 U.S.C. § 158(d)(2). It is governed by Fed. R. Bankr. P. 8006.

Factual Background

A bus owned by OGA Charters, LLC ("OGA") was involved in an accident on a route to the Kickapoo Lucky Eagle Casino near Laredo, Texas and resulted in the death of nine passengers and the injury of approximately forty others giving rise to personal-injury, survival, and wrongful-death claims. See generally ECF No. 78 at 10. OGA owns an insurance policy through New York Marine and General Insurance Company that provides, among other coverages, $5,000,000 in liability coverage. ECF Nos. 76, 77.

On July 8, 2016, Petitioning Creditors filed an involuntary bankruptcy against OGA. Bankr.4 ECF No. 1. OGA consented to an entry of the order for relief on August 18, 2016, which was entered by this Court on August 22, 2016. Bankr. ECF Nos. 52, 55.

Separately, Petitioning Creditors filed an adversary proceeding, the instant case, seeking to enjoin the use of the insurance policy proceeds and to have them declared an asset of OGA's bankruptcy estate. See generally ECF Nos. 1, 3.

Section 541 of Title 11 of the United States Code5 enumerates which assets owned by a debtor at the time of filing bankruptcy are includable or excludable from the bankruptcy estate. The issue of whether proceeds from a debtor-owned insurance policy are property of a bankruptcy estate is entirely dependent, factually, on the type of coverage provided by the policy and who may benefit from the policy. See generally In re Babcock & Wilcox Co., 69 F. App'x 659 (5th Cir. 2003); In re Equinox Oil Co., 300 F.3d 614 (5th Cir. 2002); In re Vitek, Inc., 51 F.3d 530 (5th Cir. 1995); In re Edgeworth, 993 F.2d 51 (5th Cir. 1993); In re Louisiana World Exposition, Inc., 832 F.2d 1391 (5th Cir. 1987).

The instant appeal arises out of this Court's Memorandum Opinion and Order determining the proceeds of OGA's insurance policy should be declared property of the bankruptcy estate. ECF Nos. 106-107, 110, 115.

The Question Itself

"Are proceeds of a debtor-owned liability insurance policy property of the debtor's bankruptcy estate when: (1) the policy covers the debtor's liability to third parties; (2) the debtor cannot make a legally cognizable claim against the policy; and (3) the claims by third partiesexceed the coverage limits of the policy." C.f. ECF No. 111 at 6, ¶ 21 ("The critical issue in this case that must be decided is whether the proceeds of a liability insurance policy are property of the estate (the "Legal Issue").").

The Relief Sought

Settling Creditors seek a declaration that proceeds of a debtor-owned liability insurance policy that covers the debtor's liability to third parties and is subject to claims in excess of its coverage limits are not property of the debtor's bankruptcy estate. Id. at 6-7 (discussing resolution by the Fifth Circuit and reversal of this Court's Order).

Procedural Background

Under Rule 8006, a party may request certification of their appeal direct to the court of appeals that the bankruptcy court may grant so long as the movant meets three qualifications: (1) the certification has been filed; (2) a timely appeal has been taken under Rule 8003 or 8004; and (3) the notice of appeal has become effective under Rule 8002. Fed. R. Bankr. P. 8006(a)(1)-(3). For the first requirement, the bankruptcy court may simply look to the docket to determine whether a certification has been timely filed by the movant within 30 days of the notice of appeal becoming effective. Fed. R. Bankr. P. 8006(b). Rules 8003 and 8004 both require that the notice of appeal be filed within the time prescribed by Rule 8002, which is 14 days. Compare Fed. R. Bankr. P. 8003(a)(1) and Fed. R. Bankr. P. 8004(a)(1) with Fed. R. Bankr. P. 8002(a)(1). Rule 8003 governs appeals as of right under § 158(a)(1), (2) while Rule 8004 applies to appeals by leave pursuant to § 158(a)(3). Finally, a notice of appeal is typically effective under Rule 8002 when it is filed with the bankruptcy court. Fed. R. Bankr. P. 8002 advisory committee's note to 2014 amendment.

June 23, 2017
Court issues Memorandum Opinion and Order. ECF Nos.
106-107
July 6, 2017
Settling Creditors file a notice of appeal, which is timely
pursuant to Fed. R. Bankr. P. 8002(a)(1). July 6, 2017 is
the "effective" date under Rule 8002(a).
July 6, 2017
Settling Creditors file a request for certification of a
direct appeal, noting that it is unopposed.
July 7, 2017
Garcia files a notice of appeal, which is also timely under
Rule 8002(a)(1), and has an "effective" date of July 7,
2017 per Rule 8002(a).
July 7, 2017
Garcia files a notice that incorporates by reference
Settling Creditor's request for certification of a direct
appeal under Fed. R. Civ. P. 10(c).
July 19, 2017
Plaintiff and Petitioning Creditors file a notice of cross
appeal, which is timely and appropriately filed pursuant
to Fed. R. Bankr. P. 8002(a)(3), 8003(b)(1).

July 24, 2017
This Certification is issued and is timely under Fed. R.
Bankr. P. 8006(b).
August 7, 2017
Last day in which this matter would be "pending" before
this Court under Fed. R. Bankr. P. 8006(e)

Procedurally, the Court finds that the Motion was timely filed by the Settling Creditors, as was Garcia's notice adopting by reference the Motion. Compare ECF Nos. 106-107 with ECF Nos. 110, 111, 115-116. Further, the Court finds that the Cross Appeal was timely filed by Plaintiff and Petitioning Creditors. Compare ECF No. 142 with ECF No. 111 and Fed. R. Bankr. P. 8002(a)(3).

Reasons Why the Direct Appeal Should be Allowed

Section 158(d) provides that an appeal may be certified directly to the court of appeals by the bankruptcy court, inter alia, when the issue on appeal "the judgment, order, or decree involves a question of law as to which there is no controlling decision ... resolution of conflicting decisions ... or an immediate appeal ... may materially advance the progress of the case or proceeding in which the appeal is taken." § 158(d)(2)(i)-(iii). Upon certification of the direct appeal by the bankruptcy court or district court, the appeal must still be authorized by the court of appeals. Id.

Section 158(d)(2)(A)(i) - No Controlling Decision

The Court's Memorandum Opinion discusses the continuum of holdings by the Fifth Circuit in the area of insurance proceeds that provide for a general rule, as announced in Edgeworth, of liability insurance proceeds not being assets of the bankruptcy estate if the debtor cannot make a legally cognizable claim against the proceeds. 993 F.2d at 55-56 & n.20-21. Circuit Judge Edith H. Jones, writing for the court, distinguished whether a secondary impact, such as "the policy limit was insufficient to cover ... claims or competing claims to proceeds," was alleged or if Dr. Edgeworth could assert a legally cognizable claim upon the proceeds. Id. at 55-56 & n.21. Since Edgeworth, the Fifth Circuit has only touched on the issue of exhaustion of policy proceeds tangentially in In re Vitek. 51 F.3d at 530-32. While the facts of Vitek include claim exhaustion, it was not an issue before the Fifth Circuit on appeal. See generally id. at 531-38. It could be concluded that the Vitek court implicitly approved the proceeds of the debtor's insurance policy being diverted to the debtor's bankruptcy estate, vis-à-vis the settlement, subject to an action by the co-insureds against the insurer. Id. at 538.

Moreover, the issue in this case involves competing public policy interests. Namely the equal treatment of creditors in bankruptcy contrasted with Texas' public policy, as announced in Stowers, for efficient and expedient resolution of claims by insurance carriers. G.A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544, 547 (Tex. Comm'n App. 1929).

Thus, the Court finds that the Motion should be certified because there is not a controlling decision by the Fifth Circuit or by the Supreme Court of the United States that specifically addresses the particular set of facts presented by the instant case. Further, the issuepresents a matter of public importance.

Section 158(d)(2)(A)(ii)

For similar reasons as to the prior section, there are not necessarily conflicting decisions by the Fifth Circuit. The decisions do, however, create an appearance of conflict between themselves. Other circuits have decided the matter differently.

Section 158(d)(2)(A)(iii)

The Court's Memorandum Opinion and Order resolved dueling motions for summary judgment between the Settling Creditors, Garcia, Petitioning Creditors, and the Trustee. As such, and for the reasons stated above in regards to § 158(d)(2)(A)(i), an immediate appeal from the Court's Order would materially advance the progress of the instant case as a resolution by the Fifth Circuit would settle the dispute.

Section 158(d)(2)(A)

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