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Eleventh Circuit Bankruptcy Decision Has Important Implications For Insurance Companies And Their Lawyers – Insolvency / Bankruptcy / Restructuring



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The Eleventh Circuit recently ruled that an insurer’s effort to intervene in an underlying wrongful death action was subject to automatic stay and that the insurer was not deprived of due process as a result.

The part of the opinion devoted to the due process issues raised on appeal by the insurer and, in particular, the opportunities which the Court considered that the insurer had exhausted and those which it had miscalculated was important for insurers and their lawyers. The Court’s review of the automatic provisions of the United States Bankruptcy Code applied to insurers is a useful reference for those who practice at the intersection of choosing the right bankruptcy attorney law and insurance law. In re Gaime, No. 20-12240, 2021 WL 5321974, at * 2–3 (11th Cir. November 16, 2021).

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The facts of the case are heartbreaking. A mother drugged her two young sons, then attempted suicide and her children in a garage with their car running. The mother was convicted of second degree murder for one of her sons. She had auto and home insurance with the insurer. The estate of the deceased child, his brother and his father (“Survivors”) filed a wrongful death and personal injury claim against the mother in state court. Although initially agreeing to defend the mother, the insurer filed a parallel declaratory judgment action in state court to determine that the policies did not cover the incident and that it had no obligation to defend it or compensate it.

The survivors filed a fourth amended claim in the wrongful death lawsuit, and the mother filed a motion to dismiss, on which the state court reserved its decision until coverage and obligation to defend the issues be resolved. Around the same time, the Survivors were in settlement talks with the lawyer the insurer had appointed to represent the mother. In the subsequent appeal of the bankruptcy court opinion, the Survivors alleged that the insurer rejected a settlement offer that the mother wished to accept and which would have enabled her to avoid further liability.

The state court ruled in favor of the insurer in the declaratory judgment actions, ruling that the insurer’s policies did not cover the incident and that the insurer had no obligation to defend the mother. The insurer subsequently withdrew its defense of the mother in the wrongful death lawsuit. The survivors filed a fifth untimely amended complaint in the wrongful death action. The mother, still in jail, did not respond to the complaint, leading the state court to issue a default judgment against her on the liability issue, and the case went to trial before jury on damages. The jury returned a verdict in favor of Survivors in the amount of nearly $ 505 million. The Survivors filed for involuntary bankruptcy against the mother, the petition went unanswered, and the court approved the petition and appointed Dawn Carapella as trustee. The sole liability in the mother’s bankruptcy was the half-billion dollar verdict, and the only assets were the bankruptcy estate’s claims against the insurer for bad faith and malpractice for rejecting the offer. settlement. The Chapter 7 trustee sued the insurer in state court for bad faith.

The insurer asked to intervene, after the judgment, in the wrongful death action against the mother in order to set aside the half-billion dollar judgment against the mother on the grounds that the fifth amended complaint was late and that the default judgment was therefore null. The Eleventh Circuit states in its opinion that it assumed that the insurer hoped that if it could successfully overturn the state court judgment against the mother, the survivors would have nothing to sue in bankruptcy court and , therefore, no bad faith claims against this. The insurer filed a motion for a stay to allow it to file its motion for intervention and annulment. The bankruptcy court and the district court on appeal both refused a stay order.

The Eleventh Circuit Decision

The Eleventh Circuit found little support for the insurer’s arguments that the automatic stay did not apply to the underlying application for intervention. The Court noted that the wrongful death action had been filed before the filing of the bankruptcy petition and that the motion to intervene to set aside the judgment had been filed against an interest of the debtor. Further, the court ruled that an insurer is exactly the type of entity to which the suspension applies.

The insurer argued that the stay, and therefore both the bankruptcy and district court decisions, deprives them of a forum to rule on the validity of the wrongful death judgment. The Eleventh Circuit noted: “During the pleadings, [the insurer]brought to our attention a December 2020 order of the Hillsborough County Circuit Court ruling, in the context of the trustee’s bad faith trial, that [the insurer] did not have “standing” under Florida law to challenge the underlying default judgment against a third party. . . . ” In re Gaime, n ° 20-12240, 2021 WL 5321974, at * 3 (11th Cir. 16 Nov. 2021) (citing
Dawn Carapella v. State Farm Fla. Ins. Co., n ° 18-CA-007981 (13th Fla. Cir. Ct. December 28, 2020).

The Eleventh Circuit ruled that the insurer has the right to be heard “at some time and in a meaningful way”, but due process “does not guarantee success”. In re Gaime, No. 20-12240, 2021 WL 5321974, at * 3-4 (11th Cir. 16 Nov. 2021) (citing Armstrong vs. Manzo, 380 US 545, 552, 85 S. Ct. 1187, 14 L. Ed. 2d 62 (1965) (quotation marks omitted);see also Grannis v. Ordean, 234 US 385, 394, 34 S.Ct. 779, 58 L.Ed. 1363 (1914)). The Eleventh Circuit said the insurer had two opportunities to challenge the validity of the wrongful death judgment. First, in the wrongful death action, which he withdrew from the defense, and second, as a defense in the bad faith lawsuit brought by the trustee, which the insurer lost.

The Eleventh Circuit concluded that the insurer was motivated by the desire to set aside either the previous unfavorable decisions it had taken or the unfavorable consequences resulting from those decisions. In particular, the insurer made the decision to seek declaratory judgments regarding the coverage and, while this action was pending, advised the mother to reject the Survivors’ offer to settle. Then, once the insurer had favorable declaratory judgments, the insurer terminated its defense of the mother in the wrongful death lawsuit. Notably, the Eleventh Circuit stated that “[w]chicken [the insurer] informed [the mother] to reject the settlement offer while seeking to relieve the obligation to defend herself, she assumed the risk of later being the subject of a bad faith trial. In re Gaime, n ° 20-12240, 2021 WL 5321974, at * 4 (11th Cir. 16 November 2021).

The Eleventh Circuit also focused on the insurer’s arguments in the trustee’s bad faith action, in particular that the delay in the survivors’ fifth amended complaint violated the mother’s due process rights, rendering the null judgment of unjustified death. In this regard, the Eleventh Circuit held that the mere fact that the state court concluded that the insurer did not have standing to assert this argument did not mean that the insurer was deprived of due process. Once again, the Eleventh Circuit explained that due process will not “guarantee success” but simply the meaningful opportunity to present complaints. In re Gaime, n ° 20-12240, 2021 WL 5321974, at * 4 (11th Cir. 16 Nov. 2021) (citing
A m. Bank Nat’l & Tr. Co. v. City of Chicago, 826 F.2d 1547, 1550 (7th Cir. 1987)). The Eleventh Circuit also noted that the insurer has rights of appeal in the state court system where it can challenge the lack of standing order in bad faith action on the basis of due process. , or on any other basis.

Circuit Eleventh was also not influenced by the insurer’s arguments that the automatic stay did not apply to its motion to intervene in the underlying wrongful death action because its attempt to overturn the judgment would benefit the estate. The insurer’s argument was inconsistent with the plain language of bankruptcy law, which does not care whether the stay is sought to defend or protect the estate, simply whether the proposed action is against the estate of the debtor or its interest.

What impacted the Eleventh Circuit was the idea that the insurer would get a ‘second bite to eat’, which would increase the costs to the bankruptcy estate while the denial would not be detrimental. to the insurer because he already had several opportunities to be heard. While the hindsight is always sharp, and strategic decisions don’t always end in legal victory, the Eleventh Circuit provides solid advice on how to handle bankruptcy considerations in a coverage litigation.

Please contact your regular AT attorney, or one of the authors below, if you have any questions or wish to discuss any matters at the intersection of bankruptcy and insurance coverage.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.