Opinion
Case No. 14-58784
03-24-2015
In re: Birmingham Cosmetic Surgery, P.L.L.C., Debtor.
Chapter 11 ORDER DENYING CREDITOR'S MOTION REGARDING MEDICAL MALPRACTICE INSURANCE PROCEEDS AND FOR PARTIAL LIFT OF BANKRUPTCY STAY
I. INTRODUCTION
Katherine Pagan sued Birmingham Cosmetic Surgery, P.L.L.C. and Dr. Rouchdi Rifai ("Debtors") for medical malpractice and obtained a $1.35 million state-court judgment. Debtors requested a stay pending appeal. As the trial court's stay order permitted, Debtors' medical malpractice insurance carrier - The Doctors Company - deposited a copy of its insurance policy; admitted liability; and pledged to pay proceeds of $428,609.82, if Pagan's judgment is affirmed on appeal. Debtors filed bankruptcy petitions, and the appeal was automatically stayed. This Court recently modified the automatic stay to allow Debtors' appeal to continue.
This amount represents the policy limit of $200,000.00 plus pre- and post-judgment interest, and taxable costs assessed by the state court.
Pagan seeks: (1) a determination that the insurance proceeds are not property of the bankruptcy estate; and - upon reaching that conclusion - (2) a partial lift of the automatic stay so the state court can determine if she should receive the proceeds while Debtors' appeal is pending. The Doctors Company objects. Argument was heard on March 16, 2015.
Pagan asks the Court to strike The Doctors Company's response as untimely because it was filed one day late. The Court declines to do so. In reaching its conclusion, the Court considered Pagan's motion, The Doctors Company's response, and Pagan's reply.
The Court finds: (1) The Doctors Company deposited only its insurance policy - a conditional pledge to pay insurance proceeds is not the same as the actual deposit or posting of those proceeds; and (2) the insurance policy is property of the bankruptcy estate. Alternatively, the state court clearly determined that Pagan cannot collect on the insurance policy while Debtors' appeal is pending. Therefore, Pagan's motion is DENIED.
II. BACKGROUND
On May 12, 2014, Pagan received a $1.35 million medical malpractice judgment against Debtors in the Jackson County Circuit Court. Debtors requested a stay of judgment pending appeal. On November 14, 2014, the Circuit Court granted the stay in part. The stay order provides:
IT IS ORDERED that Defendants shall post security in the total amount of $950,000.00 in favor of Plaintiff, as set forth below. Plaintiff may engage in collection efforts if Defendants have not posted total security in the amount of $950,000.00.
IT IS ORDERED that Defendant Birmingham Cosmetic Surgery, PLLC, may use its insurance policy, with proceeds in the amount of $428,609.82,
payable by The Doctors Company, as partial satisfaction of the security ordered by the Court in the amount of $950,000.00. Notwithstanding any other provision herein, execution on the insurance policy is stayed. Defendants shall have the original Recognizance signed by the appropriate representative of The Doctors Company and filed, together with a certified copy of the policy, with the Clerk of this Court. Defendants shall post the balance of the appeal bond, being the amount of $521,390.18, with the Clerk of this Court.(Emphasis added). The Doctors Company executed an affidavit of recognizance and deposited it with the clerk of the court along with a copy of its insurance policy - no insurance proceeds were posted. Debtors did not post the balance of the security ($521,390.18) with the clerk of the court or establish an escrow account. Instead, they filed bankruptcy petitions on December 8, 2014, which prevented Pagan from collecting on the judgment.
IT IS ORDERED that an interest-bearing escrow account shall be established, in which joint escrow agents will be counsel for Plaintiff . . . and counsel for Defendants . . . and that Defendants shall pay $5,000 monthly into the escrow account. Monies may not be withdrawn from that account absent joint consent of each escrow agent and only upon direct order of this Court.
Pagan believes no stay is in effect and disbursement of the $428,609.82 is ripe for determination by the state court, because Debtors did not satisfy all of the conditions required by the stay order. She seeks permission from this Court to return to state court and move to obtain the $428,609.82 in insurance proceeds from The Doctors Company.
Pagan's other argument is that this issue is ripe for determination because Debtors did not request the appeal to continue during the bankruptcy. This argument is moot: Debtors filed - and the Court granted - a motion to lift the automatic stay and allow the appeal to continue.
--------
III. ANALYSIS
A. The Insurance Policy is Property of the Bankruptcy Estate
11 U.S.C. § 541(a)(1) defines property of the estate as "all legal or equitable interests of the debtor in property as of the commencement of the case." Section 541(a)(1)'s definition is "unquestionably broad, and it is well-settled that property of the estate includes every conceivable interest of the debtor held as of the commencement of the bankruptcy case, whether that interest is future, nonpossessory, contingent, speculative [or] derivative." Moyer v. Slotman (In re Slotman), 2013 WL 7823003, at *5 (Bankr. W.D. Mich. Dec. 5, 2013) (internal quotations omitted).
Liability insurance policies are included in section 541(a)(1)'s definition of bankruptcy estate property, Homsy v. Floyd (In re Vitek, Inc.), 51 F.3d 530, 533 (5th Cir. 1995), but insurance proceeds are not property of the bankruptcy estate. Houston v. Edgeworth (In re Edgeworth), 993 F.2d 51, 55-56 (5th Cir. 1993). "Insurance policies are property of the estate because, regardless of who the insured is, the debtor retains certain contract rights under the policy itself." Id. at 55. Conversely, the debtor does not have any legally cognizable claim to the insurance proceeds - they are only payable to individuals harmed by the debtor under the terms of the insurance contract. Id. at 56.
The Doctors Company argued at the hearing that because it filed its insurance policy - not insurance proceeds - with the clerk of the court, the $428,609.82 symbolically represented by the policy is property of the bankruptcy estate. The Court agrees: the insurance policy was deposited; the insurance proceeds were conditionally pledged - not deposited.
It appears that the state court relied on Mich. Comp. Laws § 500.3036 when it issued the stay order. Section 500.3036 provides that when an appellant has insurance through a carrier authorized to do business in Michigan, to stay execution pending appeal, the court may require the insurance carrier to: (1) execute a written recognizance for the payment; (2) deposit a copy of the insurance policy with the court; (3) admit liability under the policy; and - of particular import here - (4) agree to pay proceeds up to the policy amount on any judgment against its insured that is affirmed on appeal. If these conditions are satisfied, no appeal bond is required. McMillan v. Detroit Auto Inter Ins. Exch., 96 Mich. App. 75, 76 (1980) ("A statutory exception to the bond requirement is provided in M.C.L. § 500.3036, which permits an appellant to file an insurance policy if the liability is one that is insured against. Defendant insurer in the present case utilized this provision and filed two insurance policies in lieu of bond.") (Emphasis added).
Debtors executed an affidavit of recognizance on December 4, 2014 that states:
The Doctors Company, an insurance carrier authorized to do business in Michigan, posts its insurance policy number 10002124 (the "Policy") . . . in lieu of an appeal bond on behalf of Defendants Rouchdi M. Rifai, M.D. and Birmingham Cosmetic Surgery, PLLC[.]
The Doctors Company admits its liability under the Policy . . . and agrees to pay the May 12, 2014 Judgment, entered against Defendants Rouchdi M. Rifai, MD and Birmingham Cosmetic Surgery, PLLC, if and to the extent it is affirmed by the appellate courts, but not to exceed the amount of its liability under the Policy, which amount is limited to Two Hundred Thousand and No One-Hundredths ($200,000.00) Dollars, plus statutory pre-judgment and post-judgment interest on that amount, plus taxable costs
assessed by the court (including case evaluation sanctions), plus costs which may be awarded on appeal against Defendants and in favor of Plaintiff.(Emphasis added). A copy of the insurance policy was attached to the affidavit of recognizance and deposited with the clerk of the court. But no insurance proceeds are committed or available unless and until the judgment against Debtors is affirmed on appeal. Cf. Stevenson v. PHI Air Medical, LLC (In re Justin), 2014 WL 3373863, at *3 (Bankr. E.D. Mich. July 9, 2014) (holding a pre-bankruptcy absolute assignment of the right to insurance proceeds creates a constructive trust; the proceeds are not part of the estate).
The Doctors Company satisfied the statutory provisions of section 500.3036, and deposited the insurance policy - not insurance proceeds - with the clerk of the court. Because the policy is property of the bankruptcy estate, Pagan's motion must be denied.
B. Pagan's Request to Lift the Automatic Stay is Premature
Even if the $428,609.82 in insurance proceeds were unconditionally deposited - and therefore property of the bankruptcy estate - Pagan's request to lift the automatic stay is nevertheless premature.
11 U.S.C. § 362(d)(1) allows the Court to lift the automatic stay "for cause." The Bankruptcy Code does not define "cause." Instead, courts must determine whether relief is appropriate on a case by case basis. Chrysler LLC v. Plastech Engineered Products, Inc. (In re Plastech Engineered Products, Inc.), 382 B.R. 90, 106 (Bankr. E.D. Mich. 2008) (citing Laguna Assoc. Ltd. P'ship v. Aetna Cas. & Sur. Co. (In re Laguna Assoc. Ltd. P'ship), 30 F.3d 734, 737 (6th Cir. 1994)).
The Stay Order states "[n]otwithstanding any other provision herein, execution on the insurance policy is stayed." The fact that Debtors did not satisfy all of the conditions of the Stay Order is of no moment: the state court has ruled that Pagan may not collect on the insurance policy pending appeal. As such, lifting the automatic stay before a final determination of Debtors' appeal would serve no purpose and is premature.
IV. CONCLUSION
The Court finds: (1) The Doctors Company deposited only its insurance policy - a conditional pledge to pay insurance proceeds is not the same as the actual deposit or posting of those proceeds; and (2) the insurance policy is property of the bankruptcy estate. Alternatively, the state court clearly determined that Pagan cannot collect the insurance proceeds while Debtors' appeal is pending. Therefore, Pagan's motion is DENIED.
IT IS ORDERED. Signed on March 24 , 2015
/s/ Mark A. Randon
Mark A. Randon
United States Bankruptcy Judge