Opinion
Civil Action No: 00-3409, 00-3409, Bankruptcy Case No. 00-10992, Adversary Proceeding No. 00-1051 Section: "R" (5)
May 18, 2001
ORDER AND REASONS
Before the Court is an appeal from a judgment of the United States Bankruptcy Court, Eastern District of Louisiana, in In re Babcock Wilcox Company, dismissing an adversary complaint and denying an injunction. Debtor, Babcock Wilcox Company, and Intervenor, Atlantic Richfield Company, both filed briefs in support of this appeal. For the reasons stated below, the Court affirms the Bankruptcy Court.
I. BACKGROUND
Appellants challenge the bankruptcy court's dismissal of debtor's adversary complaint that sought a declaratory judgment staying a class action against Atlantic Richfield Company (ARCO), the debtor's codefendant in an action pending in the Western District of Pennsylvania ("the Hall action"). In addition, debtor and ARCO appeal the bankruptcy court's denial of a motion seeking to enjoin the class action against ARCO.
The Hall action arises from the plaintiffs' alleged exposure to nuclear waste from two nuclear fuel processing facilities. Nuclear Materials and Equipment Corporation ("Old NUMEC) established the two nuclear fuel processing facilities. In 1967, ARCO acquired NUMEC's assets and liabilities and formed the subsidiary NUMEC II to operate the facilities. In 1971, ARCO sold the stock of NUMEC to the debtor. As part of the stock sale, ARCO assumed NUMEC II's liabilities and debts and agreed to indemnify debtor for liabilities arising from NUMEC II's operation of the facilities prior to the sale. In 1974, debtor merged NUMEC into itself.
On June 6, 1994, the Hall plaintiffs filed a complaint against debtor, BW Nuclear Environmental Services, Inc., and ARCO alleging liability under the United States Atomic Energy Act, 42 U.S.C. § 2011, et seq., the Price Anderson Act, 42 U.S.C. § 2210, as well as under state law. They asserted claims for bodily injury and property damage caused by their exposure to radiation and toxic pollutants from the two NUMEC nuclear fuel processing plants in western Pennsylvania. Currently, the amended complaint identifies 336 plaintiffs. The district court for the Western District of Pennsylvania presided over a jury trial of eight plaintiffs' claims that resulted in a verdict for each plaintiff against the debtor and ARCO. On June 29, 2000, the district court ordered a new trial based on an evidentiary issue.
On February 22, 2000, BW filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court in the Eastern District of Louisiana. On March 14, 2000, the Hall plaintiffs moved to sever the debtor from the proceedings in the Western District of Pennsylvania so that they could proceed against ARCO. ARCO and debtor opposed the motion.
On April 5, 2000, debtor filed an adversary proceeding against the Hall plaintiffs in the bankruptcy court. The complaint sought a declaration from the bankruptcy court that the prosecution of the Hall action against ARCO during the pendency of the bankruptcy proceedings violates the stay imposed by 11 U.S.C. § 362 (a). The complaint also requested that the bankruptcy court issue a preliminary and permanent injunction under §§ 362(a) and 105 of the Bankruptcy Code prohibiting the further prosecution of the Hall action against ARCO while the bankruptcy proceedings are ongoing.
ARCO filed a motion to intervene in the adversary proceeding and the bankruptcy court granted the motion. The Hall plaintiffs then filed a motion to dismiss the adversary complaint. The bankruptcy court held oral argument on the motion to dismiss and on debtor's request for a preliminary injunction. At the conclusion of the hearing, the bankruptcy court denied debtor's request for an injunction, finding that debtor had failed to prove the requisites for injunctive relief. The court also granted the Hall plaintiffs' motion to dismiss the adversary proceeding, thereby denying debtor's request for a declaratory judgment that § 362(a) automatically stayed the Hall action against ARCO. In response to the bankruptcy court's ruling, debtor and ARCO filed this appeal.
In the meantime, the Pennsylvania court granted the motion to sever the trial against ARCO. In its ruling, the Court noted that the Third Circuit Court of Appeals had previously found that the debtor's automatic stay did not implicate an interlocutory appeal by ARCO and that ARCO had taken the position in the Third Circuit that debtor's bankruptcy stay did not apply to prevent ARCO from prosecuting its appeal. ( See Pls.' Mem. Supp. Mot. to Supplement the Record, Hall et al. v. BW, et al., Civ. A. No. 94-951 at 2 (W.D. Pa. March 27, 2001)).
II. DISCUSSION
A. Jurisdiction
This Court has jurisdiction over this case pursuant to 28 U.S.C. § 158 (a) and Federal Rule of Bankruptcy Procedure 8001. See 28 U.S.C. § 158 (a); FED. R. BANKR. P. 8001.
B. Standard of Review
The standard of review for a bankruptcy appeal by a district court is the same as when a Court of Appeals reviews a district court proceeding. See 28 U.S.C. § 158 (c)(2). Accordingly, the Court reviews the Bankruptcy Court's conclusions of law de novo, findings of fact for clear error, and mixed questions of law and fact de novo. See In re Nat'l Gypsum Co., 208 F.3d 498, 504 (5th Cir. 2000).
The bankruptcy court's ruling regarding the scope of the automatic stay under § 362(a) consisted solely of conclusions of law, which this Court will review de novo. The Court reviews the bankruptcy court's order denying debtor's request for a discretionary injunction under § 105 of the Bankruptcy Code for an abuse of discretion. See In re Cajun Electric Power Coop., Inc., 185 F.3d 446, 452-53 (5th Cir. 1999).
C. Section 362(a)
Debtor and ARCO argue that the bankruptcy court erred in dismissing the adversary complaint which sought a declaratory judgment that § 362(a) automatically stayed the Hall action against ARCO and debtor.
1. Section 362(a)(1)
Section 362(a)(1) provides for an automatic stay of any judicial "proceeding against the debtor." 11 U.S.C. § 362 (a)(1) (emphasis added). Numerous courts have found that actions against solvent codefendants generally are not stayed by an insolvent codefendants's filing of bankruptcy. See In re S.I. Acquisition, Inc., 817 F.2d 1142, 1147 (5th Cir. 1987) ( citing GATX Aircraft Corp. v. M/V COURTNEY LEIGH, 768 F.2d 711, 716 (5th Cir. 1984); Teachers Ins. and Annuity Ass'n of America v. Butler, 803 F.2d 61, 65 (2d Cir. 1986); Fortier v. Dona Anna Plaza Partners, 747 F.2d 1324, 1329-30 (10th Cir. 1984); Williford v. Armstrong World Indus., Inc., 715 F.2d 124, 126-27 (4th Cir. 1983); Lynch v. Johns-Manville Sales Corp., 710 F.2d 1194, 1196-97 (6th Cir. 1983); Austin v. Unarco Indus., Inc., 705 F.2d 1, 4-5 (1st Cir.), cert. denied, 463 U.S. 1247, 104 S.Ct. 34 (1983); Pitts v. Unarco Indus., Inc., 698 F.2d 313, 314 (7th Cir. 1983) (per curiam)
In S.I. Acquisition, the Fifth Circuit recognized that other courts have found that in "very limited situations" a § 362(a)(1) stay may apply to actions against nonbankrupt defendants. See In Re S.I. Acquisition, 817 F.2d at 1147. Those courts found that the automatic stay may protect a codefendant if extension of the stay contributes to the debtor's efforts at rehabilitation or the debtor and the nonbankrupt are closely related. See id. ( citing Teachers Ins, and Annuity Assoc. of America, 803 F.2d at 65; In re Johns Manville Sales Corp., 33 B.R. 254, 263-64 (Bankr. S.D.N.Y. 1983); In re Old Orchard Investment Co., 31 B.R. 599, 603 (Bankr. W.D. Mich. 1983); In re Johns-Manville Sales Corp., 26 B.R. 405, 410 (Bankr. S.D.N.Y. 1983); In re Otero Mills, Inc., 25 B.R. 1018, 1020-21 (Bankr. D. N.M. 1982); and In re Metal Center, 31 B.R. 458, 462 (D. Conn. 1983)). The court further explained that these courts extended the stay to nondefendants under § 362(a)(1) when the debtor and the nonbankrupt party could be considered as one entity or as having unitary interests. See id. at 1148. Notably the Fifth Circuit in S.I. Acquisition did not stay claims against nondebtors under § 362(a)(1), but did so under § 362(a)(3).
ARCO argues that the Hall plaintiffs' claims against it are derivative of the claims against BW and therefore ARCO and BW share interests and an identity for the purposes of an automatic stay. (See ARCO's Brief at 15-17.) ARCO relies on cases in which courts have enjoined actions under § 362(a)(1) against officers, directors, and affiliates of the debtor. See e.g., In re Int'l Heritage, Inc., 239 B.R. 306 (E.D.N.C. 1999); In re North Star Contracting Group, 125 B.R. 368 (S.D.N.Y. 1991); In re Lomas, 117 B.R. 64 (S.D.N.Y. 1990). The bankruptcy court held that ARCO fits into none of these categories, and it is an unrelated third-party. (See Oct. 6, 2000 Tr. at 29.) The bankruptcy court's finding in this regard is correct.
ARCO further argues that the stay can also apply to entities not affiliated with the debtor, citing A.H. Robins Co. v. Piccinin, 788 F.2d 994 (4th Cir. 1986), and In re Family Health Servs., Inc., 105 B.R. 937 (C.D. Cal. 1989) (staying actions against nondebtor members of debtor HMO because actions would trigger indemnity claims against debtor; debtor was "real party defendant"). However, ARCO's position vis á vis the debtor is quite different from the parties who received the benefit of the automatic stay in the cases cited by ARCO. A.H. Robins, for example, involved debtor's directors and/or officers who had unconditional rights to be indemnified by the debtor, so that a judgment against them would in effect be a judgment against the debtor. See A.H. Robins, 788 F.2d at 1008 (finding that a judgment against indemnitees will frustrate debtor's reorganization effort). Here, BW has no unconditional obligation to indemnify ARCO; rather, ARCO is obligated to indemnify BW for the debts and liabilities ARCO assumed under the NUMEC stock sale. Although ARCO claims that it has a potential indemnity claim against BW, this purported claim does not rest on any contract or absolute right to indemnity if ARCO is held liable to the Hall plaintiffs. Rather, ARCO asserts the circular logic that since plaintiffs have sued ARCO under ARCO's agreement to indemnify BW, if it is held liable to plaintiffs under that theory, BW must indemnify ARCO because ARCO's liability is derivative of BW's. This indemnity theory overlooks that ARCO agreed to indemnify BW in the first place. In any event, this theory does not posit an unconditional right to indemnification. The bankruptcy court correctly held that § 362(a)(1) does not mandate a stay of the claims against ARCO.
2. Section 362(a)(3)
ARCO and BW also argue that § 362(a)(3) mandates a stay in this matter. Section 362(a)(3) provides that the filing of a petition for bankruptcy "operates as a[n] [automatic stay] applicable to all entities, of . . . any act to obtain possession of property of the estate or of property from the estate." 11 U.S.C. § 362 (a)(3). Thus, § 362(a)(3) implements a stay of actions against debtors and third parties who seek to obtain or exercise control over the property of the debtor. Appellants argue that the Hall action involves control over BW's property because they claim that BW's insurance policies and the Hall plaintiffs' alter ego claims are property of the estate.
a. Insurance
Appellants argue that § 362(a)(3) mandates a stay of this action because certain insurance policies are property of the estate and the Hall action against ARCO allegedly affects these policies. Although the Hall plaintiffs have sued ARCO, they have not sued the insurers and are not seeking to recover from them. Rather, appellants claim that both ARCO and BW have asserted rights to the same insurance policies. BW is the named insured under these policies. BW claims that the insurance carriers view ARCO as also meeting the definition of an "insured" under the policy terms. (See Debtor's Compl. for Declaratory and Injunctive Relief at ¶ 49.) The insurance carriers have enlisted a single law firm to provide a joint defense of BW and ARCO in the Hall litigation. (See Debtor's Mem. Opp. Mot. to Dismiss Ex. 1 at ¶ 43.) Debtor argues that these policies are property of its estate and that allowing the Hall litigation to proceed against ARCO in the debtor's absence amounts to an effort to obtain or exercise control of this property. The debtor therefore claims that § 362(a)(3) requires the bankruptcy court to stay the Hall litigation.
"Property of the estate" includes all legal or equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. § 541 (a). Courts construe this definition broadly and generally agree that an insurance policy will be considered property of the estate. See In re Edgeworth, 993 F.2d 51, 55 (5th Cir. 1993). This follows because regardless of who the insured is, the debtor retains certain contract rights under the policy. The debtor's rights against the insurer, whether by contract or otherwise, are property of the estate. See id. The same is not always true with respect to policy proceeds. See id. In Louisiana World Exposition, the Fifth Circuit held that whether insurance proceeds are property of the estate depends on the nature of the insurance policy. See In re Louisiana World Expedition, Inc., 832 F.2d 1391, 1399 (5th Cir. 1987) (proceeds of debtor's liability policy payable to directors and officers not part of debtor's estate). In Edgeworth, the Fifth Circuit explained its reasoning in Louisiana World Exposition:
The overriding question when determining whether insurance proceeds are property of the estate is whether the debtor would have a right to receive and keep those proceeds when the insurer paid on a claim. When a payment by the insurer cannot inure to the debtor's pecuniary benefit, then that payment should neither enhance nor decrease the bankruptcy estate. In other words, when the debtor has no legally cognizable claim to the insurance proceeds, those proceeds are not property of the estate.See Edgeworth, 993 F.2d at 55-56 (emphasis added). The Edgeworth court distinguished casualty, collision, fire, and life insurance policies in which the beneficiary is the debtor from liability policies that are payable to those harmed by the debtor. See id. at 56. In doing so, the court found that a doctor's liability policy was property of the estate but the proceeds of that policy were not. See id.
The policies at issue here are also liability policies. The policies' beneficiaries are those harmed by the insured. The debtor would have no right to keep these proceeds when the insurer pays a claim. Therefore, the proceeds of the policies are not property of the debtor's estate under the Louisiana World Exposition/Edgeworth analysis. These proceeds could not be made available to creditors other than those who are beneficiaries under the policies. Therefore, even if ARCO were a co-insured under the policy, the Hall plaintiffs' recovery of insurance proceeds does not involve obtaining possession of property of the estate or from the estate under § 362(a)(3). Furthermore, there is no allegation that the insurance coverage is inadequate, which would implicate BW's assets. Indeed, BW admits that it did not even allege the inadequacy of the insurance policy in its adversary complaint. (See Oct. 6, 2000 Tr. at 32.) Therefore, in the absence of any allegation that the policy is in fact inadequate, the Court fails to see how the Hall litigation jeopardizes the debtor's property.
The Court recognizes that the policy/proceeds analysis has been questioned by In re Vitek, Inc., 51 F.3d 530 (5th Cir. 1995). The court in Vitek explained, however, that its precedential value for future Chapter 11 cases should be little or none. See id. at 533 n. 3. Therefore, the Court finds that Louisiana World Exposition applies.
Appellants also argue that the plaintiffs' causes of action against ARCO are property of the debtor's estate. They claim that since plaintiffs allege that ARCO was the alter ego of NUMEC, which BW acquired, plaintiffs are in effect claiming that ARCO and BW are alter egos. They further argue that this "alter ego" claim is property of the debtor's estate. While it is true that some cases have recognized that a creditor's claim that a nondebtor is an alter ego of the debtor may be property of the estate, none of these cases remotely resembles this one because all of them involved affiliates of the debtor. See Schimmelpenninck v. Byrne, 183 F.3d 347 (5th Cir. 1999) (finding creditor's alter ego claim against wholly owned subsidiary is "property of the estate," warranting an automatic stay under section 362(a)(3)); In re S.I. Acquisition, 817 F.2d 1142 (5th Cir. 1987) (finding creditor's alter ego claim against parent corporation, sister corporation, and registered agent of debtor is "property of the estate" warranting an automatic stay under section 362(a)(3)); St. Paul Fire and Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989) (finding creditor's alter ego claim against parent corporation of debtor is "property of the estate" warranting an automatic stay under section 362(a)(3)); Steyr-Daimler-Puch of America Corp. v. Pappas, 852 F.2d 132 (4th Cir. 1988) (finding creditor's alter ego claim against principals of debtor is "property of the estate" warranting an automatic stay under section 362(a)(3)); Koch Refining v. Farmers Union Central Exch., Inc., 831 F.2d 1339 (7th Cir. 1987) (finding creditor's alter ego claim against shareholders of debtor is "property of the estate" warranting an automatic stay under section 362(a)(3)). Here, plaintiffs in effect seek to hold ARCO liable for the period it operated NUMEC. The Court finds appellants' "alter ego" argument inapposite. The Court therefore affirms the bankruptcy court's dismissal of the adversary proceeding.
D. Section 105
Appellants also challenge the bankruptcy court's refusal to grant a discretionary stay under 11 U.S.C. § 105. In pertinent part, § 105 allows a bankruptcy court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. § 105 (a). The Fifth Circuit has held that a court may temporarily enjoin actions against a nondebtor under "unusual circumstances." See In re Zale Corp., 62 F.3d 746, 761 (5th Cir. 1995). Stays under section 105(a) are also subject to the usual rules for the issuance of an injunction under Federal Rule of Civil Procedure 65. See id. at 765. See also In re Eagle-Picher Indus., Inc., 963 F.2d 855, 858 (6th Cir. 1992); In re Commonwealth Oil Refining Co., 805 F.2d 1175, 1188-89 (5th Cir. 1986). Accordingly, the Court must examine whether both "unusual circumstances" and the prerequisites to issuance of an injunction exist so as to stay this litigation against ARCO.
1. "Unusual Circumstances.
As referenced above, this Court may issue a temporary stay of the action against ARCO, a nondebtor, if "unusual circumstances" exist.
These circumstances include 1) when the nondebtor and the debtor enjoy such an identity of interests that the suit against the nondebtor is essentially a suit against the debtor, and 2) when the third-party action will have an adverse impact on the debtor's ability to accomplish reorganization.In re Zale Corp., 62 F.3d at 761. The test is disjunctive and an injunction may be warranted under either set of circumstances. See id. The Court's discussion of appellants' arguments under § 362 disposes of debtor's claim that the suits against ARCO are essentially suits against BW. Further, allowing the action to proceed against ARCO will not hamper the debtor's reorganization efforts. The claims do not involve property of debtor's estate. Further, ARCO is an unrelated third party that will not be involved in the reorganization process. Cf. SAS Overseas Consultants, 2000 WL 140611 at *3 (enjoining suit against debtors' president and officer when suit would divert debtor's energies and resources from reorganization). Moreover, it is unlikely that a re-trial of the claims against ARCO will prejudice debtor's future defense since the witnesses in any subsequent trial will be bound by their previous statements. Therefore, the Court affirms the bankruptcy court's finding that such unusual circumstances do not exist so as to warrant staying the action against ARCO.
2. Merits of Injunctive Relief
Even if unusual circumstances were present, the debtor and ARCO would need to show that the prerequisites for injunctive relief are met. See id. The four prerequisites to issuance of a preliminary injunction are: (1) a substantial likelihood of success on the merits; (2) a substantial threat of irreparable injury if the injunction is not granted; (3) that the threatened injury to the movant outweighs the threatened harm an injunction may cause the party opposing the motion; and (4) that the granting of the injunction will not disserve the public interest. See In re Zale Corp., 62 F.3d at 764 ( citing In re Commonwealth Oil Refining Co., 805 F.2d at 1189)
The Fifth Circuit employs a sliding scale when analyzing the degree of "success on the merits" a movant must demonstrate to justify injunctive relief. In re Hunt, 93 B.R. 484, 492 (N.D. Tex. 1988) ( citing Canal Authority v. Callaway, 489 F.2d 567, 576 (5th Cir. 1974)). This involves "balancing the hardships associated with the issuance or denial of a preliminary injunction with the degree of likelihood of success on the merits." Id. ( quoting Florida Medical Ass'n v. United States, 601 F.2d 199, 203 n. 2 (5th Cir. 1979)). Bankruptcy courts have defined success on the merits as "the probability of a successful plan or reorganization." In re Otero Mills, Inc., 21 B.R. 777, 779 (Bankr. D.N.M.), aff'd, 25 B.R. 1018 (D. N.M. 1982); See also In re Lazarus Burman Assocs., L.B., 161 B.R. 891, 901 (Bankr. E.D.N.Y. 1993); In re Arrow Huss, Inc., 51 B.R. 853, 858 (Bankr. D. Utah 1985). The bankruptcy court found that an action against ARCO would not have any effect on the debtor's plan of reorganization. (See Oct. 6, 2000 Tr. at 29.) Indeed, appellants offered no evidence demonstrating that a suit against ARCO will affect the likelihood of reorganization. The Court finds that the bankruptcy court's determination that the suit against ARCO will not affect debtor's ability to reorganize is not erroneous.
Appellants also argue they will suffer irreparable harm if the Court does not issue an injunction. When addressing the nature of irreparable harm in a proceeding against a nondebtor, the court should focus on whether the debtor will suffer irreparable harm if the proceedings against the nondebtor go forward. See SAS Overseas, 2000 WL 140611 at *4 ( citing In re Electronic Theatre Restaurants Corp., 53 B.R. 458, 462 (Bankr. N.D. Ohio 1985)). Bankruptcy courts have found irreparable harm warranting a stay when, for example, the actions were brought against debtor's officers and directors, and the action would distract them from the debtor's business affairs. See id. Similarly, courts have granted stays when the nondebtor litigation would divert resources from the reorganization efforts. See id. As discussed above, ARCO is an unrelated party and therefore an action against ARCO would not create such a harm. Appellants also claim that if the action against ARCO is allowed to proceed, the debtor could lose the benefit of a legal defense provided by its insurer and that it will suffer prejudice in subsequent proceedings. As discussed above, the bankruptcy court found that debtor did not even allege that its insurance is inadequate. In addition, allowing the action to proceed against ARCO after it has already been tried once against ARCO and debtor will not prejudice the debtor in subsequent proceedings because any witnesses will be bound by their prior testimony.
Further, the injury to the Hall plaintiffs greatly outweighs any threatened injury to the debtor. The Hall action has been pending for nearly seven years. The harm to appellants of allowing plaintiffs to proceed against ARCO is not strong enough to justify preventing plaintiffs from pursuing their claims until after the debtor has successfully reorganized. Moreover, forcing the Hall plaintiffs to wait until the debtor's reorganization will not serve the public interest. Accordingly, the Court finds that the refusal to grant injunctive relief was not an abuse of discretion and affirms the bankruptcy court.
III. CONCLUSION
For the reasons stated, the Court affirms the bankruptcy court's dismissal of the adversary proceeding and refusal to grant injunctive relief.