Thomas P. Agresti, Judge, United States Bankruptcy Court.
Presently before the Court are two motions filed by Lancer Insurance Company ("Lancer"), a
The "Appeal" in the Appeal Motion is the one that Debtor Guru Global Logistic, LLC ("Guru") took from the large judgment obtained against it by Vickie and Mark McConnell in the Court of Common Pleas of Lawrence County, Pa. in August 2014 arising out of a fatal motor vehicle accident.
This is not the first time the subject of the Appeal has come before this Court, and consideration of what previously transpired is necessary in deciding the current Appeal Motion. Early on in the bankruptcy the Trustee filed a Motion by Trustee for Leave to Dismiss Pre-Petition Appeal with Prejudice ("Trustee's Motion to Dismiss"), Doc. No. 36, in which she alleged that she did not believe the continued prosecution of the Appeal would be in the best interests of the bankruptcy Estate or the creditors. The Trustee also alleged that she had considered the possibility of abandoning the Appeal to Guru and Lancer, but concluded that a dismissal would be
Lancer and Guru both filed responses opposing the Trustee's Motion to Dismiss, see Doc. Nos. 45, 46. A status conference regarding the Trustee's Motion to Dismiss was held on April 20, 2015, and the Parties sharply disputed whether the Trustee should be granted the relief she was seeking. The Court took the matter under advisement. On May 7, 2015, the Trustee filed a "Response" in further support of her motion. Doc. No. 63. On June 10, 2015, the Court issued an order scheduling an evidentiary hearing for June 30th on the issue raised by Lancer as to whether the Trustee's proposed special counsel, Jeffrey Killino ("Killino"), would have a conflict of interest, an issue the Court found had to be decided before it could rule on the Trustee's Motion to Dismiss. Subsequently, an issue arose as to whether Lancer would have standing to oppose the Trustee's Motion to Dismiss if its claim (which was and is the subject of an objection by the McConnells and the Trustee) were to be dismissed. The Court ordered briefing on that issue and provided it would also be part of the June 30th hearing.
It was in that context, with an impending evidentiary hearing, that Lancer and the Trustee filed a Stipulation on June 29, 2015, at Doc. No. 89. That Stipulation provided for Lancer's withdrawal of all of its objections to the employment of Killino as special counsel for the Trustee, and also provided:
As a result of the Stipulation, the scheduled evidentiary hearing did not occur and was instead converted essentially into a status conference. The Court approved the Stipulation on July 1, 2015. See, Doc. No. 95. Nothing further was heard about the Appeal until the Appeal Motion was filed by Lancer on May 3, 2016.
Turning then to the Appeal Motion itself, as to Lancer's preferred remedy of abandonment, the Bankruptcy Code provides that:
11 U.S.C.A. § 554(b). A party seeking to compel abandonment pursuant to Section 554(b) has the burden of proving by a preponderance of the evidence that the property at issue is burdensome to the estate or of inconsequential value or benefit to the estate. In re Winsted Memorial Hospital, 249 B.R. 588, 595 (Bankr. D.Conn.2000) (citing In re Paolella, 79 B.R. 607 (Bankr.E.D.Pa.1987)). Additionally, while there is relatively little case law under Section 554(b) itself, drawing by analogy from trustee-initiated abandonments
It is thus readily apparent that Lancer faces a demanding standard if it is to obtain an order directing an abandonment of the Appeal over the objection of the Trustee. Lancer has failed to meet that standard. In the first instance, Lancer has not shown that the Appeal is in any way burdensome to the Estate, particularly in its current "stayed" status. The Appeal is an intangible property right that requires no dedication of time, resources or effort by the Trustee to maintain it in existence. It does not need to be stored, or guarded, or insured. In short, the Appeal imposes no burden on the Estate.
Lancer has also failed to meet its alternative burden of proving that the Appeal is of inconsequential value or benefit to the Estate. In evaluating this issue, the Court begins with the understanding that the nature of the Appeal when viewed strictly as an item of property is such that any estimation of its value or benefit to the Estate is bound to be speculative since there are so many variables and contingencies involved. What is the chance the judgment against Guru would be overturned by the Appeal? If the judgment is overturned, what is the likelihood the case would be remanded for a new trial? If the case is remanded for a new trial, what is the likelihood of another verdict against Guru, and in what amount? What would the effect be on the bad faith claim against Lancer? None of those questions, and many others that could be raised, can be answered in advance with any sort of assurance, thus making for a wide scope of possible opinion as to the value or benefit of the Appeal.
The uncertainty concerning the Appeal would thus seem to bear out the wisdom of deferring to the reasonable business judgment of the Trustee. Lancer nevertheless attempts to advance several reasons why the Court should find that the Appeal lacks value or benefit despite the Trustee's business judgment, but none are persuasive.
Lancer first says that since the time the Stipulation was approved the Trustee has initiated a new multiple-count case in Lawrence County against Lancer ("the Trustee Action"),
Lancer's argument might have some merit if the Trustee Action were in fact strictly limited to an allegation that Lancer's bad faith consisted solely of a failure to make a settlement offer. The Trustee argues, however, that the allegations of bad faith made in the Trustee Action are broader than that, and after reviewing the complaint filed in the case the Court agrees.
While allegations of a failure to make a settlement offer are prominent, the Trustee Action complaint also contains allegations such as that Lancer provided only a "gratuitous defense" to Guru, that it "haphazardly proceeded" to trial knowing that it would have a second bite at escaping liability through subsequent declaratory judgment coverage litigation, that by voluntarily undertaking Guru's defense and taking control of the decision to settle or litigate it assumed a position of trust and confidence calling for an exercise of utmost good faith, and that Lancer knew there was no reasonable basis for a favorable verdict. These sorts of allegations leave open the possibility that bad faith might be found for a number of reasons, some of which could potentially be affected by Lancer's conduct in a trial on remand ordered in the Appeal. In other words, the Trustee still has a basis for concern about how the outcome of the Appeal might impact the bad faith claim.
Lancer also argues that by allowing the Appeal to remain stayed the Trustee is breaching the duty of an insured to cooperate, which Lancer is confident will result in a bar of the bad faith claim. Lancer also asserts that there is unfairness and possible conflict of interest in the Trustee Action in that the Trustee is seeking access to the records of the law firm that is representing Guru in the Appeal, which could compromise the Appeal. Lancer concedes that it has raised both of these issues in the Trustee Action, but says that they warrant "renewed consideration" by this Court as well with respect to the Trustee's ongoing decision to retain the Appeal and keep it stayed. Neither of these issues appears to go directly to the value or benefit of the Appeal to the Estate, which is the focus of the inquiry under Section 544(b). Furthermore, to the extent they may be said to indirectly implicate value or benefit, the Court is satisfied that the Trustee has factored them in to her decision and still concluded that maintaining the Appeal as property of the estate, and maintaining the stay in place, are of value or benefit to the Estate, and it is not this Court's role to second guess that decision, at least where it is not obviously unreasonable. The Court's conclusion is also bolstered by the fact that Lancer, by its own admission, can and has raised these very issues in the Trustee Action where they can be addressed by the Lawrence County court. Lancer's due process rights are thus not being impinged by a refusal to require abandonment of the Appeal.
As its final argument in support of abandonment, Lancer says that the only parties that stand to benefit from a continued stay of the Appeal are the McConnells and the Trustee because, if the Appeal goes forward and the judgment against Guru is reversed, that would eliminate the McConnells claim, to the benefit of the other creditors. According to Lancer, by refusing to proceed with the Appeal the Trustee is thereby favoring the McConnells over these other creditors of the bankruptcy Estate. The problem with this argument is that, aside from the claim of Lancer itself,
Lancer has therefore failed to meet its burden of proof to convince the Court that the Trustee should be ordered to abandon the Appeal against her will. In the alternative, Lancer asks that the Trustee be directed to proceed with the Appeal. Lancer argues that such an order would benefit the Estate because a successful appeal could potentially result not just in a remand for a new trial, but in a judgment notwithstanding the verdict ("JNOV") by the Superior Court, which would at one stroke eliminate the McConnells as creditors in the bankruptcy, thus benefitting other creditors. As was just discussed, however, there are no other creditors in the case. And, while a JNOV is certainly a possibility in the Appeal, the Court has been provided with no evidence to show how likely a possibility it is under the facts and circumstances of the case. In the absence of such evidence, the Court can only presume that the Trustee has factored into her decision the possibility of a JNOV and concluded that it is not sufficient to change her decision to continue with a stay of the appeal. The Court cannot find that to be an unreasonable decision.
Lancer's final argument is that a continued stay of the appeal also thwarts the Pennsylvania policy that cases be "decided on the merits." The Court is unclear on the exact policy to which Lancer refers, and how it may be implicated by a continued stay of the Appeal. The two federal cases cited by Lancer in its Appeal Motion on the point deal with the preference for cases to be decided on the merits rather than by default judgments. They are inapplicable here because the state court judgment against Guru was the result of a jury verdict, not a default judgment. The lone Pennsylvania case cited by Lancer is a criminal case from 1839 in which the court cited a policy "to sustain all fair trials on merits" in upholding the result of a jury trial as against an argument by the defendant that by "standing mute" prior to the trial, rather than pleading, he had preserved the right to raise errors concerning the jury panel. Based on that case, the Court fails to see how a continued stay of the Appeal in the present case violates any policy of Pennsylvania law.
Aside from the weakness of the Lancer arguments, there are two other reasons why the Court will not order the Trustee to proceed with the Appeal. The first is a
Stipulation dated June 29, 2015, at Doc. No. 89. (emphasis added) Lancer resists that characterization of the Stipulation, but it is difficult for the Court to see the Stipulation as anything but a quid pro quo in connection with the Trustee's Motion to Dismiss whereby the Trustee agreed to stay the Appeal rather than dismiss it and in exchange Lancer withdrew its objection. To now order the Trustee to proceed with the Appeal against her will, at least in the absence of a material change of circumstances — which has not been demonstrated here — would be to trample the intent of the Stipulation without justification.
The Stay Motion seeks an order that would authorize Lancer to pursue an action it started pre-petition in the District Court ("the Lancer Action").
The only significant change of circumstances that Lancer points to as having occurred since the first stay motion was denied is that the District Court, acting through Judge Cathy Bissoon, has now remanded the Trustee Action to state court based on lack of jurisdiction.
The cases addressing the issue of the relevance of the loss of a right to a jury trial for purposes of deciding whether to grant relief from stay seem to be in agreement that, while it is a factor worthy of consideration, it is by no means conclusive. See, e.g., In re Chan, 355 B.R. 494, 501 (Bankr.E.D.Pa.2006) (court stating that it did not perceive the potential loss of jury trial rights to be sufficient a basis, standing alone, to override the Congressional policy embodied in Section 523(c), nor that a litigant's loss of a right to a jury trial outweighed the benefit to the Debtor of a less costly bench trial in the bankruptcy court); In re Vivax Medical Corp., 242 B.R. 211, 215 (Bankr.D.Conn.1999) (while loss of right to a jury trial was a "harm" to be considered in deciding whether to grant relief from stay, it was outweighed by the need for prompt resolution); In re Marvin Johnson's Auto Service, Inc., 192 B.R. 1008, 1019 (N.D.Ala.1996) (a claimant's right to a jury trial should be accommodated if circumstances allow it to be done without substantial prejudice to estate administration).
The Court therefore views Lancer's loss of the possibility of a jury trial as a point weighing in favor of a grant of relief from stay. That additional weight, however, is a slight one because the grant of a relief from the automatic bankruptcy stay by this Court would not necessarily lead to a bad faith jury trial in the Lancer Action. More pointedly, and as the Trustee's counsel aptly pointed out at the oral argument on the Stay Motion, many things would have to fall into place before that would happen, such that the Court views the chance that Lancer would ever actually get a jury trial on the bad faith claim as pretty remote. As a result, the Court finds that the balance still does not tip sufficiently in Lancer's direction to support a grant of the Stay Motion.
A closer look at what would need to happen for Lancer to get a jury trial even with a grant of the Stay Motion is instructive. Lancer would first have to successfully move the District Court to reopen the Lancer Action and lift the stay that was imposed by that court two years ago. That may be difficult to do since the presiding judge in that case, Judge Bissoon, not too long ago remanded the Trustee Action to Lawrence County and is thus well aware that the very same issues that would be addressed in the Lancer Action (and more beside) are already being addressed in the
Even assuming Lancer managed to get the Lancer Action reopened and the stay lifted, there are further hurdles to overcome before a bad faith jury trial would ever occur. There is currently not even a bad faith claim pleaded in the Lancer Action. Presumably, Lancer anticipates that a bad faith claim would be brought into the case as a counterclaim by Guru pursuant to the compulsory counterclaim requirement found in the Federal Rules. See, Fed.R.Civ.P. 13(a). That scenario, however, is complicated by the fact that Guru is now in bankruptcy and no longer controls the bad faith claim, which is an asset of the estate and under the control of the Trustee, who is already pursuing the bad faith claim in the Trustee Action. Does the compulsory counterclaim rule apply in these circumstances? Could the Trustee be prejudiced by Guru's failure to plead a bad faith counterclaim? Would the Trustee need to be joined as a party to the Lancer Action, or substituted for Guru as the real party in interest? These are complex questions which the Court will not even attempt to answer here — they are raised merely to show the many procedural pitfalls that possibly lurk on the pathway to a bad faith claim becoming a part of the Lancer Action.
If a bad faith claim is raised in the Lancer Action, the next question is whether it will be tried to a jury. That is also far from clear. The Trustee Action may have been completed by the time of trial in the Lancer Action, mooting any consideration of the same claim in that case. It is also possible that Lancer's right to demand a jury trial could be challenged. As previously noted, Lancer has filed a proof of claim in the Guru bankruptcy related to its contingent claim for reimbursement should it have to make a payment to the McConnells pursuant to the MCS-90 endorsement.
The Court thus finds that the possible loss of the chance of having a jury trial on
One final point to be addressed is the "first filed rule," which Lancer invokes in support of the Stay Motion. Essentially, Lancer argues that because the Lancer Action was filed prior to the Trustee Action, it should be considered the "favored forum" unless fairness or efficiency considerations require otherwise. The Third Circuit has stated the first filed rule as follows: "in all cases of federal concurrent jurisdiction, the court which first has possession of the subject matter must decide it." E.E.O.C. v. University of Pennsylvania, 850 F.2d 969, 971 (3d Cir.1988) (quoting Crosley Corp. v. Hazeltine Corp., 122 F.2d 925 (3d Cir.1941). Since the Trustee Action is in state court, it can readily be seen that the first filed rule has no application here. See, e.g., Nihon Tsushin Kabushiki Kaisha v. Davidson, 595 F.Supp.2d 363 (D.Del.2009) (first-filed doctrine does not apply when similar actions are pending concurrently in federal and state court), In re Tarragon Corp., 2009 WL 2244598 (Bankr.D.N.J.2009) (same). The Court therefore sees no reason why, for prudential reasons, the Trustee Action should not be permitted to proceed while the Lancer Action is stayed, even though the latter was filed first.