Walker Cnty. Hosp. Corp. v. Brown (In re Walker Cnty. Hosp. Corp.)

• Docket Number: 19-36300,Adversary 22-3099
• Decision Date: 03 October 2024
• Citation: Walker Cnty. Hosp. Corp. v. Brown (In re Walker Cnty. Hosp. Corp.), 19-36300, Adversary 22-3099 (Bankr. S.D. Tex. Oct 03, 2024)
• Parties: IN RE: WALKER COUNTY HOSPITAL CORPORATION, Debtor. v. SHANNON L. BROWN, Defendant. WALKER COUNTY HOSPITAL CORPORATION, et al., Plaintiffs,
• Court: U.S. Bankruptcy Court — Southern District of Texas

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IN RE: WALKER COUNTY HOSPITAL CORPORATION, Debtor.

WALKER COUNTY HOSPITAL CORPORATION, et al., Plaintiffs, v. SHANNON L. BROWN, Defendant.

No. 19-36300

Adversary No. 22-3099

United States Bankruptcy Court, S.D. Texas, Houston Division

October 3, 2024

CHAPTER 11

MEMORANDUM OPINION

MARVIN ISGUR, UNITED STATES BANKRUPTCY JUDGE

This dispute concerns whether Allied World Specialty Insurance Company breached its contractual obligations to Shannon L Brown, a former CEO of Walker County Hospital Corporation(the "Hospital Corporation"), for refusing to provide Brown insurance coverage under a directors' and officers' liability insurance policy issued in the Hospital Corporation's favor.After the Hospital Corporation's bankruptcy estate sued Brown for alleged unlawful actions he took during his tenure as CEO, Brown brought a cross-claim against Allied World for breach of contract and a declaration that Allied World is required to defend him in this adversary proceeding.Brown moves for judgment on the pleadings, arguing that there is no factual dispute precluding a finding that he is entitled to coverage under the insurance policy.Allied World moves to dismiss arguing that Brown has not stated a plausible allegation that he is entitled to coverage.The gravamen of the dispute is whether Allied World was entitled to deny coverage on the basis of an insured v. insured exclusion in the policy.

Because there is a bankruptcy exception to the insured v. insured policy exclusion, the exclusion itself does not apply to the written demands for compensation sent by the Hospital Corporation's bankruptcy estate and the suit filed after the commencement of the bankruptcy case.Allied World is obligated to provide coverage for the demand letters and this adversary proceeding under its policy.

BACKGROUND

I.Factual Background

The Hospital Corporation operates a non-profit community hospital in Huntsville, Texas.Case No. 19-36300, ECF No. 15at 3.Shannon L. Brown served as the Hospital Corporation's chief executive officer from 2013 to February 28, 2018.ECF No. 1at 3.

A.The Insurance Policy

Allied World issued a Forcefield Healthcare Organizations Management Liability Package insurance policy (the "Policy") to the Hospital Corporation for a policy period from July 1, 2017, through July 1, 2018, and a discovery period from July 1, 2018, through July 1, 2021.ECFNo. 13-2at 2, 125.The Policy contains directors' and officers' liability coverage.The section providing D&O coverage states:

The Insurer shall pay on behalf of any Insured Person the Loss arising from a Claim, first made during the Policy Period (or Discovery Period, if applicable) against such Insured Person for a Wrongful Act, and reported to the Insurer in accordance with Section V. of the General Terms and Conditions, unless the Company is required or permitted to pay such Loss to or on behalf of the Insured Person as indemnification.

ECFNo. 13-2at 60.

The Policy defines a "Claim," in relevant part, as any "written demand for monetary, non-monetary or injunctive relief made against an Insured," and any "judicial, administrative or regulatory proceeding, whether civil or criminal, for monetary, non-monetary or injunctive relief commenced against an Insured, including any appeal therefrom, which is commenced by . . . service of a complaint or similar pleading[.]"ECFNo. 13-2at 63.

A "Insured" is defined under the Policy as "the Company and any Insured Person."ECFNo. 13-2at 67.The Policy defines "Company" as "the Named Insured,""any Subsidiary of the Named Insured," and "the Named Insured or Subsidiary as a debtor, a debtor-in-possession or equivalent status."ECFNo. 13-2at 51.The Hospital Corporation is the Named Insured.ECFNo. 13-2at 2."Insured Person" is defined under the Policy to mean, in relevant part, any "Executive."ECFNo. 13-2at 67."Executive" is defined, in relevant part, as any "past, present or future duly elected or appointed director, officer, trustee, trustee emeritus, governor, management committee member or member of the board of managers of the Company."ECFNo. 13-2at 66.The parties agree that Brown is an Executive and Insured Person under the Policy.The Policy defines a "Wrongful Act" with respect to an Insured Person as "any actual or alleged act, error, omission, neglect, breach of duty, breach of trust, misstatement, or misleading statement by an Insured Person in his or her capacity as such, or any matter claimed against an Insured Person by reason of his or her status as such."ECFNo. 13-2at 70.

The Policy contains a number of exclusions to coverage.ECFNo. 13-2at 71-73.Relevant to the dispute is the following insured v. insured exclusion, and the bankruptcy exception to that exclusion:

This Coverage Section shall not cover any Loss in connection with any Claim:

. . . H. brought by or on behalf of any Insured, provided however, that this Exclusion shall not apply to:

. . .

(6) any Claim brought or maintained by or on behalf of a bankruptcy or insolvency trustee, examiner, receiver or similar official for the Company or any assignee of such trustee, examiner, receiver or similar official[.]

ECFNo. 13-2at 72.

B.The Demand Letters

On November 30, 2020, the Hospital Corporation's bankruptcy estate sent Brown a demand letter for payment of damages, alleging Brown breached his duties while serving as the Hospital Corporation's CEO.ECFNo. 13-3.The Estate alleged that "actions [Brown] took while Chief Executive Officer of [the Hospital Corporation] were breaches of [Brown's] contractual responsibilities to [the Hospital Corporation], as well as breaches of [Brown's] fiduciary and other duties to [the Hospital Corporation]."ECFNo. 13-3at 3.According to the Estate, beginning in March 2016, Brown caused the Hospital Corporation to enter into agreements with lab operators, who would perform lab services and bill them under the Hospital Corporation's provider number, resulting in third-party insurance companies paying the Hospital Corporation for services it did not render.ECFNo. 13-3at 3.The Estate asserted that Brown did not inform nor seek approval from the Hospital Corporation's board for the agreements.ECFNo. 13-3at 3.

After terminating the agreements, the Hospital Corporation allegedly entered into settlement agreements with the private insurance companies at a cost of over $2.5 million.ECFNo. 13-3at 3-4.The Estate demanded Brown pay $3 million to compensate the Estate for the Hospital Corporation's losses to the insurance companies, costs of investigation, and damages caused by Brown's allegedly fraudulent conduct.ECFNo. 13-3at 5.

On March 24, 2021, the Estate sent a second demand letter to Brown.ECFNo. 13-4.The second letter alleges that, in addition to the damages in the Estate's first letter, the Hospital Corporation also suffered losses because multiple insurance companies refused for months to reimburse the Hospital Corporation for lab services until the matter was settled.ECFNo. 13-4at 3.The letter asserts that these circumstances put enormous financial strain on the Hospital Corporation, sparking a liquidity crisis contributing to the Hospital Corporation's bankruptcy filing.ECF No. 13-4 at 3.

Brown tendered the demand letters to Allied World for coverage under the Policy.

C.The Coverage Position Letters

On June 3, 2021, Allied World sent a reservation of rights letter to Brown in response to his tender of the demand letters.ECFNo. 13-5.The letter provided Allied World's preliminary coverage evaluation and advised that Allied World reserved its right to limit or disclaim coverage for the demand letters on various grounds, including the Policy's insured v. insured exclusion. ECFNo. 13-5at 6.The letter also informed Brown that Allied World retained "Thompson Coe" to defend Brown's interests in the dispute, subject to the reservation of rights.ECFNo. 13-5at 8-9.

On November 19, 2021, Allied World sent a letter to Brown advising him that the insured v. insured exclusion bars coverage for the demand letters and that Allied World would be withdrawing from its defense.ECFNo. 13-6at 2-3.

II.Procedural Background

On November 11, 2019, the Hospital Corporation commenced a bankruptcy case by filing a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.Case No. 19-36300, ECF No. 1;11 U.S.C. § 301.

The commencement of the case automatically created a bankruptcy estate.11 U.S.C. § 541(a).The estate is a separate legal entity that includes "all legal or equitable interests of the debtor in property as of the commencement of the case."In re RE Palm Springs II, L.L.C., 106 F.4th 406, 412 n.2(5th Cir.2024)(quoting11 U.S.C. § 541(a)(1));In re Herberman, 122 B.R. 273, 278-79(Bankr.W.D.Tex.1990).

The Hospital Corporation is the debtor-in-possession of the bankruptcy estate pursuant to §§ 1101and1107 of the Bankruptcy Code.

A.The Adversary Proceeding

The Estate (acting through the debtor-in-possession) and the Official Committee of Unsecured Creditors commenced this adversary proceeding on March 25, 2022.ECF No. 1.The joint complaint states four claims for relief.The first claim for relief alleges that Brown breached his duty of obedience to the Hospital Corporation by acting beyond the scope of his authority by effectively selling the Hospital Corporation's provider number to third party laboratory service companies.ECF No. 1at 4-5.The second claim for relief alleges that Brown breached his duty of loyalty to the Hospital Corporation by entering into various lab agreements in order to inflate the Hospital Corporation's financial numbers for Brown's personal benefit.ECF No. 1at 5.The third claim for relief...