Trenwick Am. Reinsurance Corp. v. Swasey (In re Swasey)

• Decision Date: 14 February 2013
• Docket Number: Bankruptcy No. 11–20627–JNF.,Adversary No. 12–1040.
• Citation: 488 B.R. 22
• Parties: In re Malcolm C. SWASEY, Debtor. Trenwick America Reinsurance Corporation and Unum Life Insurance Company of America, Plaintiff v. Malcolm C. Swasey, Defendant.
• Court: U.S. Bankruptcy Court — District of Massachusetts

488 B.R. 22

In re Malcolm C. SWASEY, Debtor.Trenwick America Reinsurance Corporation and Unum Life Insurance Company of America, Plaintiff

v.Malcolm C. Swasey, Defendant.

Bankruptcy No. 11–20627–JNF.

Adversary No. 12–1040.

United States Bankruptcy Court, D. Massachusetts.

Feb. 14, 2013.

Michael Cahalane, Cetrulo & Capone LLP, Boston, MA, for Plaintiffs.

Ira H. Grolman, Donahue Grolman & Earle, Boston, MA, for Defendant.

MEMORANDUM

JOAN N. FEENEY, Bankruptcy Judge.

I. INTRODUCTION

The matter before the Court is the Motion for Summary Judgment filed by the Plaintiffs, Trenwick America Reinsurance Corporation and Unum Life Insurance Company of America (the “Plaintiffs”), with respect to the Plaintiffs' Complaint to Determine Debt Nondischargeable pursuant to 11 U.S.C. § 523(a)(6). Malcolm C. Swasey (“Swasey” or the “Debtor”) filed an Opposition to the Motion. The Court heard the Motion on December 20, 2012 and took the matter under advisement.

The Plaintiffs filed a Memorandum in Support of their Motion for Summary Judgment together with a Statement of Material Facts and exhibits, including 1) a published decision issued by the United States District Court for the District of Massachusetts, see Trenwick America Reinsurance Corp. v. IRC, Inc., 764 F.Supp.2d 274 (D.Mass.2011); 2) a Judgment entered by the District Court on May 23, 2011; 3) an Amended Judgment entered by the District Court on July 1, 2011; and 4) portions of the transcript of a deposition of the Debtor conducted on July 27, 2012.

The Debtor submitted a Memorandum in support of his Opposition, as well as a Statement of Material Facts, portions of transcripts of depositions of Tracie Pancak conducted on March 9, 2009 and August 2, 2012, portions of transcripts of depositions of the Debtor conducted on September 17, 2008, January 13, 2009, January 14, 2009, and July 27, 2012, as well as several other exhibits.

The issue presented is whether the Plaintiffs are entitled to summary judgment because the Debtor is collaterally estopped from contesting his liability under § 523(a)(6) based upon the findings of fact and rulings of law set forth in the District Court's decision.

II. BACKGROUND

The Debtor filed a voluntary Chapter 7 petition on November 11, 2011. On Schedule F–Creditors Holding Unsecured Nonpriority Claims he listed only “Trenwick America Reinsurance” and “Unum Life Insurance,” each holding a claim in the sum of $12,842,772.42. On Schedules I and J–Current Income and Expenditures of Individual Debtor(s), he disclosed that he was retired and had no monthly income and that his monthly expenses totaled $17,923.00. In his Statement of Financial Affairs, he disclosed the following businesses in which he held interests: NESIC Holdings, Inc., IRC–OHU Management Company, Inc., IRC, Inc., and Sam Pooh LLC.

On February 10, 2012, the Plaintiffs timely filed an adversary proceeding against the Debtor seeking a declaration that the judgment entered by the United States District Court for the District of Massachusetts was nondischargeable pursuant to 11 U.S.C. § 523(a)(6). Specifically, they alleged:

The District Court determined that Swasey, individually and through the two codefendants that he controlled, disavowed a reinsurance contract in bad faith, raised sham defenses, gave false and misleading testimony, and engaged in other outrageous pre- and post-litigation misconduct in a deliberate effort to frustrate Plaintiffs' contractual rights.

Plaintiffs' Complaint at ¶ 3. The Plaintiffs added:

The Court awarded Plaintiffs compensatory damages in the amount of $4,182,055.32, which amount was doubled in accordance with Chapter 93A, prejudgment interest of $1,643,033.15, and attorneys' fees and expenses of $2,661,013.83. As of November 11, 2011, the date of the filing of Swasey's Chapter 7 petition (the “Petition Date”), the sum of $11,476,251.93 remained due and owing, inclusive of post-judgment interest.

Id. at ¶ 4.

III. THE DISTRICT COURT DECISION

On February 16, 2011, the United States District Court issued its decision in Trenwick America Reinsurance Corp. v. IRC, Inc., 764 F.Supp.2d 274 (D.Mass.2011). The Plaintiffs commenced their law suit on November 16, 2007, after making demand on the Debtor and the other defendants in the district court action on November 5, 2007.

The Plaintiffs brought their action against Swasey, as well as companies that he created and controlled, namely IRC, Inc. (“IRC, Inc.”) and IRC Re, Limited (“IRC Re”), “for fraud and breach of contract in connection with a managed workers' compensation insurance and employers['] liability insurance program known as Compcare 2000.” Id. at 280. According to the District Court, the dispute centered on the Plaintiffs' claim that IRC Re and Swasey breached a reinsurance contract under which IRC Re was to provide retrocessional coverage for the Compcare 2000 program.¹ In 1996, the Debtor changed the direct insurer for the Compcare 2000 program such that Trenwick America Reinsurance Corp. was to provide reinsurance and retroceded 19% of the risk to IRC Re, a contract which was the subject of Plaintiffs' lawsuit. Id. at 281.

The District Court observed that, because IRC Re allegedly owed the Plaintiffs sums in excess of $4 million and IRC Re did not have the assets to cover the claimed losses, the Plaintiffs sought to pierce the corporate veil and recover those damages against IRC, Inc. and Swasey. In addition, the Plaintiffs sought damages and attorneys' fees under Mass. Gen. Laws ch. 93A against all the defendants, including Swasey, for “fraud, negligent misrepresentation, as well as for disavowing the contract in bad faith and engaging in a ‘moving target’ strategy of constantly shifting positions throughout this litigation.” Id.

In addition to considering a number of outstanding motions, in particular Plaintiffs' motion in limine to identify adverse inferences to which the Plaintiffs maintained they were entitled pursuant to a March 19, 2009 Sanctions Order,² the District Court described procedural issues and defenses, “raised by the defendants at the last minute, ostensibly to keep this Court from addressing the merits of the plaintiffs['] claim.” Id. at 282. It observed:

First, the defendants claimed for the first time at trial that Trenwick and UNUM were not proper parties. Rather, SARF [Special Accident Reinsurance Facility] ³ was the proper party and since one of the SARF members was a Massachusetts corporation, there was no diversity. As I describe below, that claim was waived by the defendants because it was not raised in a timely fashion.Second, the defendants [claimed] that any contract between the parties required they arbitrate their claims. This claim was also waived because of timeliness.

Id. at 282.

In summary, the District Court found the following:

I find that a contract did exist between IRC Re and the plaintiffs, and that the contract provided that 19% of the plaintiffs' risk was retroceded to IRC Re. I make this finding notwithstanding the statute of frauds, based on the extensive record before me. I further find that IRC Re cannot escape liability here by raising the defenses that Reliance raised against the initial parties, because the “follow the fortunes” or the “follow the settlements” doctrine applies to the case at bar. This doctrine does not allow a reinsurer to raise defenses that the reinsured has already decided to waive in good faith.

I decline to pierce the corporate veil with respect to the defendants' breach of contract claim against IRC Re; none of the factors for piercing are met in the case at bar.

And because I have found that a contract exists as between IRC Re and the defendants, a contract that has been breached, I do not have to address the other claims against IRC Inc. and Swasey that are predicated upon the failure to execute a written contract.

Nevertheless, neither Swasey nor IRC Inc. escape liability here. All of the defendants violated Chapter 93A in myriad ways. Swasey's conduct and that of the companies he created, controlled and administered, pre-, post- and during litigation was simply outrageous, turning what should have been a routine claim against a reinsurer into a tortuous marathon.

Id. at 282 (emphasis supplied).

The District Court determined that Swasey disavowed a contract and did so in bad faith. Id. at 286. The court found that evidence of the existence of a contract was “overwhelming” and that it shared the anger and frustration of a witness who was “indignant that Swasey and/or IRC Re had the audacity to claim that IRC Re did not take on risk in the program.” Id. at 287. In addition, the District Court found the Debtor's testimony to be “wholly incredible,” “internally contradictory and obviously false.” Id. at 290. Indeed, the court found that “on more than one occasion at trial, Swasey admitted that he had given misleading or incorrect testimony during his deposition on key issues.” Id. (emphasis in original). The court found that Swasey lied on a number of occasions and that his contentions as to the contract were “ludicrous.” Id. at 292.

In considering the defendants' claim that the Plaintiffs lacked standing to maintain their contract claims against the defendants because any alleged contract would have been between IRC Re and SARF, a claim the District Court determined the defendants had waived, the court stated:

I find that raising an objection to Trenwick and UNUM as the proper plaintiffs in this suit three years into the proceedings and on the eve of trial constitutes undue delay on defendants' part. They have waived their right to object. (Indeed, this tactic is another version of raising the “no written contract” claim at the eleventh hour to avoid repayment of an acknowledged debt. It is a delaying tactic, putting off the day of reckoning.)

Id. at 294 (emphasis supplied).

With respect to the Plaintiffs' claims for fraud and negligent misrepresentation, the District Court set forth the elements of proof...