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Judge Carey Denies Motion to Enforce Plan Injunction

By Evan T. Miller

On May 28, 2015, Judge Kevin J. Carey, of the United States Bankruptcy Court for the District of Delaware, issued a Memorandum Denying Debtors’ Motion to Enforce the Permanent Injunction in In re SelectBuild Illinois, LLC, et al., Case No. 09-12085 (KJC).  The decision permits The Ryland Group, Inc. (“Ryland”) to seek indemnification under an insurance policy through ACE American Insurance Company (“ACE”), notwithstanding SelectBuild Illinois, LLC’s (“Debtor”) argument that doing so would violate the discharge injunction provided by their confirmed plan.

In January 2005, the Debtor and Ryland entered into a construction contract under which the Debtor was to work as a subcontractor for Ryland.  The contract and its addendums (collectively, the “Contract”) provided that the Debtor would indemnify Ryland in certain situations and was therefore required to maintain minimum insurance, naming Ryland as an additional insured.  In compliance therewith, the Debtor maintained such a policy through ACE, securing their obligations to ACE by two irrevocable standby letters of credit (the “LOCs”).  Thereafter, three employees (the “Employees”) of the Debtor were injured at a Ryland construction site for which the Debtor was providing subcontractor services under the Contract.  The employees subsequently filed workers’ compensation claims against the Debtor which were paid in full by the Debtor.

On June 16, 2009 (the “Petition Date”), the Debtor and its affiliates (collectively, the “Debtors”) filed for protection under chapter 11 of the Bankruptcy Code.  The bar date for filing proofs of claim (“POCs”) was set as August 31, 2009, but Ryland failed to file such a claim.  In December 2009, the Court entered an order confirming the Debtors’ joint plan of reorganization (the “Confirmation”), a plan (the “Plan”) which provided for a discharge injunction (the “Injunction”) pursuant to, inter alia, section 524 of the Bankruptcy Code.  In December 2011, the Court entered a final decree closing the Debtors’ cases.

Prior to the closure of the Bankruptcy Cases but following Confirmation, the Employees filed a state court complaint against Ryland with respect to their injuries.  Accordingly, Ryland sent letters to the Debtor and ACE to tender Ryland’s defense in the state court proceeding, which the Debtor ultimately agreed to do and has compensated Ryland’s counsel since.

In August 2013, ACE advised Ryland that it qualified as an “additional insured” subject to a reservation of rights.  Ryland committed to pay $100,000 towards the resolution of the claims asserted in the state court action, which would purportedly satisfy the Retained Limit in the policy.  In July 2013, the Debtor filed a motion to reopen its chapter 11 case, which was granted.  The Debtors then filed the Motion to Enforce the Injunction Against Ryland (the “Motion”), which forms the basis for the instant opinion.

In the Motion, the Debtors argue that the Injunction precludes indemnification under the ACE policy, as it is an attempt to collect a prepetition claim against the Debtors, for which no POC was filed; Ryland’s claim (the “Claim”) against ACE is a claim against the Debtors’ estate (i.e., the LOCs) because the action will trigger a claim by ACE against the Debtor for the full amount of the deductible secured by the LOCs; and because the amount of the deductible and insurance limit “per occurrence” are the same, the Debtors effectively were self-insured, in which case the Claim is an end-run around the Injunction.

In response, Ryland argued that the Injunction does not bar the Claim because as an additional insured under the policy, it had independent rights; even if the indemnification request can be considered a claim against the Debtor, it is a post-petition claim that was not subject to the Plan, given that the Employees did not file their state court complaint against Ryland until after the Petition Date.

The Court first addressed when the indemnification claim arose, finding that the Third Circuit’s test in Avellino & Bienes v. M. Frenville Co., Inc. (In re M. Frenville Co., Inc.) would apply as to whether Ryland could assert a claim against the Debtor.  The Court found that since the Claim is a prepetition, contingent claim, arising when the Contract was signed in 2005, Ryland should have filed a POC.  However, the Court found that Ryland’s failure to do so does not bar it from recovering against the Debtor’s insurer, ACE.  Moreover, a discharge injunction does not extend to third parties, nor does it preclude a suit brought nominally against a debtor in order to seek relief against its insurer.  As such, regardless of whether the Debtors may ultimately be responsible for the Claim or that ACE may draw against the LOCs to satisfy its claim against the Debtors, there are independent obligations among the parties here.  ACE’s liability to Ryland is not dependent on whether there exists a source of payment from the Debtors, but upon Ryland’s direct rights as an additional insured under the policy.  The Court rejected the Debtors’ analogy to D&O coverage cases, as the Debtors failed to allege that Ryland’s Claim would in any way impair the Debtors’ ability to obtain proceeds for its own claims; moreover, the continued collateralization of the deductible obligations was a specific commitment made through the confirmed Plan.

Thus, the Court denied the Motion.  A copy of the memorandum is available here.

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