Opinion
Civil Action No. 02-3661.
August 12, 2003
Stephen R. Bishop, Esq., John C. Sullivan, Esq., Post Schell, P.C., Voorhees, New Jersey, Attorneys for Defendant Old Republic Insurance Company.
Edward R. Murphy, Esq., Murphy and O'Connor, LLP, Commerce Center, Cherry Hill, New Jersey, Attorneys for Plaintiff, Cape May Mall, Limited Partnership.
OPINION
This action involves a dispute over the scope of insurance coverage under two liability insurance contracts. Plaintiff, Cape May Mall, Limited Partnership ("Cape May Mall"), and one of the two Defendants named in this action, Old Republic Insurance Company ("Old Republic"), have filed cross-motions for summary judgment. In this action for declaratory judgment, Cape May Mall seeks defense and indemnification from Old Republic for a personal injury action brought against it. Old Republic, in turn, argues that it is only obligated to provide indemnification once the limit of a separate insurance policy, issued by Crum Forster Insurance ("Crum Forster"), has been exhausted.
Old Republic's insured is Ames Department Stores, Inc. ("Ames"), which filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York in 2001 and remains subject to Chapter 11 protection. As a debtor in Chapter 11, Ames is entitled to the protection of 11 U.S.C. § 362, which, inter alia, operates to stay any action to obtain the property of the debtor's estate unless the claimant has first received the bankruptcy court's permission by way of relief from the stay. The principal issue decided here is whether the Old Republic general liability policy is property of Ames' estate, such that this action is subject to the automatic stay under 11 U.S.C. § 362.
For the reasons set forth below, the cross-motions for summary judgment shall be dismissed without prejudice, and this civil action shall be dismissed without prejudice to Cape May Mall's right to reinstate this action in the event it successfully petitions the United States Bankruptcy Court for the Southern District of New York for relief from the automatic stay pursuant to 11 U.S.C. § 362(d).
I. FACTUAL AND PROCEDURAL BACKGROUND
This declaratory judgment action arises from a personal injury action filed by Edna O'Malley ("O'Malley") against Cape May Mall in New Jersey state court under the caption O'Malley v. Cape May Mall Ltd. P'ship, Docket No. CPM-L-221-00 (N.J.Super.Ct. Law Div. Aug. 12, 2002). See Certification of John C. Sullivan ("Sullivan Certif."), 2/21/03, Ex. A. Except where otherwise stated, the following are undisputed material facts as set forth in Old Republic's 56.1 Statement ("Def.'s 56.1 Statement").
Ames entered into a lease agreement with Cape May Mall on January 12, 1998. Def.'s 56.1 Statement, ¶ 12. Under the lease agreement, Ames agreed to maintain Commercial General Liability Insurance written on an occurrence basis. Id. ¶ 13. The coverage was to be $1,000,000 combined single limit for each occurrence. Id. ¶ 14. The lease further provided that if the policy included a general policy aggregate, then Ames was to purchase minimum limits of $1,000,000 per occurrence and $2,000,000 aggregate per location, subject to deductible or self-insured retention not to exceed the sum of $500,000 per occurrence. Id. ¶ 15. The lease also provided that Ames was to designate Cape May Mall Limited Partnership as an additional insured. Id. ¶ 16; see also Att'y Certif. of Edward R. Murphy, 2/14/03, ¶¶ 5-6.
Old Republic issued "Excess General Liability Coverage," Policy No. MWZRD-1027, to Ames. See Sullivan Certif., Ex. H; Pl.'s Response to Def.'s 56.1 Statement ("Pl.'s 56.1 Statement"), ¶ 17. The Old Republic policy provided general liability coverage of $1,000,000 per occurrence, in excess of a $500,000 retained limit. Id.; Def.'s 56.1 Statement, ¶ 18. The policy also had an aggregate of $2,000,000 per location with a policy period of October 1, 1997 to October 1, 1998. Id. ¶ 19. Old Republic has stipulated that Cape May Mall qualifies as an insured under Old Republic Policy No. MWZRD-1027. See Murphy Certif. ¶ 11, Ex. C.
On April 17, 1998, O'Malley, an Ames employee, was working at the Ames store located in the Bay Shore Mall when a shelving system fell on her. Def.'s 56.1 Statement, ¶ 4. The shelving system fell apart when the front feet broke through the plywood floor of the storage area. Id. ¶ 5. O'Malley filed a state court action in which she claimed that Cape May Mall, as the landlord of the Bay Shore Mall, was responsible for maintaining a safe working condition, but failed to do so. Id. ¶ 6; see also Murphy Certif. ¶ 9. O'Malley's theory of liability was that inadequate flooring in the storage area caused the shelving system to fall on her, and that the flooring was Cape May Mall's responsibility. Def.'s 56.1 Statement ¶ 7.
Cape May Mall tendered the defense of the O'Malley action to Ames, and Ames agreed to provide Cape May Mall with a defense.Id. ¶ 8. On August 20, 2001, however, Ames and its various divisions filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York. Id. ¶ 9; Sullivan Certif. Ex. D. After filing for bankruptcy protection, Ames withdrew its defense of Cape May Mall, and the law firm that Ames had retained to defend Cape May Mall withdrew as defense counsel. Def.'s 56.1 Statement ¶ 10.
Since that time, Cape May Mall, as the named insured under both primary and umbrella commercial liability policies with Crum Forster, as issued through United States Fire Insurance Company, has been defended by counsel selected by Crum Forster. Def.'s 56.1 Statement, ¶¶ 11, 24. The same counsel is also representing Cape May Mall in this declaratory judgment suit. Id. ¶ 11. The Crum Forster primary policy has limits of $1,000,000 for each occurrence, with a general aggregate limit of $2,000,000. Id. ¶ 25. Cape May Mall's umbrella policy with Crum Forster has limits of $4,000,000 for each occurrence with a general aggregate limit of $8,000,000. Id. ¶¶ 28-29.
On June 21, 2002, Cape May Mall filed an Amended Declaratory Judgment Complaint in the Superior Court of New Jersey, Cape May County, Law Division, seeking defense and indemnification from Old Republic for the O'Malley action. Def.'s 56.1 Statement, ¶ 2. On July 30, 2002, Old Republic removed the declaratory judgment action to the United States District Court for the District of New Jersey. Id. ¶ 3.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1332(a)(1) (2003), as it involves a controversy between citizens of different States and an amount in controversy exceeding $75,000, exclusive of interest and costs. I have considered the submissions of the parties and decided this motion on the papers without oral argument pursuant to Fed.R.Civ.P. 78 (2003).
II. DISCUSSION
Cape May Mall seeks declaratory judgment that Old Republic, Ames' insurer, is required to defend and indemnify Cape May Mall in connection with the suit filed by O'Malley. Old Republic, in turn, argues that it only owes a duty of indemnity once Cape May Mall's own insurance policy with Crum Forster has been exhausted to the $1 million policy limit. Old Republic further argues that this action must be dismissed based on the automatic stay imposed as a result of Ames' filing for bankruptcy. Before addressing the cross-motions for summary judgment, the court must first consider whether its jurisdiction to do so is foreclosed by the temporary stay provision of the Bankruptcy Code, 11 U.S.C. § 362.
The filing of a bankruptcy petition operates to stay "any act to obtain possession of property of the estate or of property of the estate or to exercise control over property of the estate." 11 U.S.C. § 362(a)(3) (West 2003); Raymark Indus., Inc. v. Lai, 973 F.2d 1125, 1129-30 (3d Cir. 1992). Property of the bankruptcy estate is defined as "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1); In re Nejberger, 934 F.2d 1300, 1301 (3d Cir. 1991). This is an intentionally broad definition, which fosters the congressional goals of encouraging business reorganizations and protecting the interests of secured creditors. See United States v. Whiting Pools, Inc., 462 U.S. 198, 204-5 (1983).
As a general rule, insurance liability policies are considered property of the bankruptcy estate. See Matter of Vitek, Inc., 51 F.3d 530, 533 (5th Cir. 1995); First Fidelity Bank v. McAteer, 985 F.2d 114, 116 (3d Cir. 1993); In re Louisiana World Exposition, Inc., 832 F.2d 1391, 1399 (5th Cir. 1987); A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 1001 (4th Cir. 1986). "Insurance policies are property of the estate because, regardless of who the insured is, the debtor retains certain contract rights under the policy itself." In re Edgeworth, 993 F.2d 51, 55 (5th Cir. 1993).
What is less clear is when the proceeds of an insurance liability policy constitute property of the estate under the broad provisions of 11 U.S.C. § 541(a)(1). See McAteer, 985 F.2d at 117 ("Ownership of a life insurance policy . . . does not necessarily entail ownership of the proceeds of that policy."). In general, the proceeds from a liability insurance policy are considered part of the debtor's estate. See Maertin v. Armstrong World Indus., Inc., 241 F. Supp. 2d 434, 446 n. 6 (D.N.J. 2002) (Simandle, J.); In re Sacred Heart Hosp. of Norristown, 182 B.R. 413, 421 (Bankr. E.D. Pa. 1995). "The language of 541(a)(1) is broad enough to cover an interest in liability insurance, namely, the debtor's right to have the insurance company pay money to satisfy one kind of debt — debts accrued through, for example, the insured's negligent behavior."Tringali v. Hathaway Machinery Co., Inc., 796 F.2d 553, 560 (1st Cir. 1986). When an insurance policyholder assigns the proceeds elsewhere, however, the assignee or beneficiary owns the proceeds, not the bankruptcy estate. See In re Louisiana World Exposition, 832 F.2d at 1401; Maertin, 241 F. Supp. 2d at 446 n. 6; Excelsior Ins. Co. v. Pennsbury Pain Ctr., 975 F. Supp. 342, 353 (D.N.J. 1996). This is because "[t]he estate in bankruptcy only includes property to which the debtor would have had a right if the debtor were solvent." See McAteer, 985 F.2d at 117 (discussing proceeds from life insurance policies).
It is undisputed that Ames filed for Chapter 11 bankruptcy protection on August 20, 2001, see Sullivan Certif. Ex. D, before this action was filed in 2002. Nothing in the summary judgment record indicates that Ames, as the named insured under Old Republic Policy No. MWZRD-1027, id. Ex. H, has made any assignment that would exclude insurance proceeds received under the Old Republic policy from Ames' bankruptcy estate, see Louisiana World, 832 F.2d at 1401; cf., Excelsior Ins., 975 F. Supp. at 353 (excluding policy proceeds from bankruptcy estate based on assignment of interest made in settlement agreement). Thus, the proceeds under the Old Republic policy are part of Ames' Chapter 11 bankruptcy estate, and only the Bankruptcy Court judge with jurisdiction over that case can grant relief from the automatic stay, "[o]n request of a party in interest and after notice and a hearing," pursuant to 11 U.S.C. § 362(d). See Constitution Bank v. Tubbs, 68 F.3d 685, 691 (3d Cir. 1995).
This deference to the Bankruptcy Court is essentially automatic because Ames has filed a Chapter 11 bankruptcy petition. The Bankruptcy Court has the inherent discretion to enjoin suits that might interfere with the Chapter 11 reorganization process.See, e.g., MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89, 93-94 (2d Cir. 1988). Cape May Mall argues that because the proceeds of the Old Republic policy do not inure to Ames, the policy proceeds are not part of the bankruptcy estate. See Pl.'s Br. in Oppos. to Def. Old Republic's Mot. for Summ. J., at 11. This argument not only presumes that the Old Republic policy is primary to Cape May Mall's liability policy with Crum Forster, an issue the Court shall not address at this time, but ignores the potential impact that a payment under Ames' policy with Old Republic may have on Ames' bankruptcy estate and on the claims of its creditors. Even if this Court were to assume that Old Republic was required to provide coverage for O'Malley's claim, the fact that the insurance proceeds would not flow directly through the coffers of the Ames estate would not exclude the proceeds from being considered property of the Ames bankruptcy estate under 11 U.S.C. § 541(a)(1). See In re Titan Energy, Inc. Nat'l Union Fire Ins. Co. of Pittsburgh, PA., 837 F.2d 325, 329 (8th Cir. 1988). Thus, this action must be dismissed because it is for the Bankruptcy Court to decide whether the instant action against Ames' insurer may go forward.
III. CONCLUSION
For the reasons set forth above, the cross-motions of Old Republic and Cape May Mall for summary judgment shall be dismissed without prejudice. Moreover, this action shall be dismissed without prejudice to Cape May Mall's right to reinstate this action in the event it successfully petitions the United States Bankruptcy Court for the Southern District of New York for relief from the automatic stay pursuant to 11 U.S.C. § 362(d). The Court shall enter an appropriate form of Order.
ORDER
This matter having come before the Court on the cross-motions of Plaintiff, Cape May Mall Ltd. P'Ship ("Cape May Mall"), and Defendant Old Republic Insurance Company ("Old Republic"), for summary judgment, pursuant to Fed.R.Civ.P. 56, Edward R. Murphy, Esq., Murphy and O'Connor, LLP, appearing on behalf of Cape May Mall; and Stephen R. Bishop, Esq., and John C. Sullivan, Esq., POST SCHELL, P.C., appearing on behalf of Old Republic; and,The Court having considered the submissions of the parties, for the reasons set forth in the Opinion filed concurrently with this ORDER;
IT IS, on this 12th day of August, 2003, hereby ORDERED that:
1. Plaintiff Cape May Mall's Motion for Summary Judgment is DISMISSED without prejudice; and,
2. Defendant Old Republic's Motion for Summary Judgment is DISMISSED without prejudice; and,
3. This action, Civ. A. No. 02-CV-3661, shall be DISMISSED without prejudice to Plaintiff's right to reinstate this action in the event it successfully petitions the United States Bankruptcy Court for the Southern District of New York for relief from the automatic stay pursuant to 11 U.S.C. § 362(d).