(Article from Insurance Law Alert, November 2023)
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Holding
The Fifth Circuit ruled that a pre-petition policy limits settlement payment to a tort victim may be classified as a “transfer of an interest of the debtor in property” pursuant to federal bankruptcy law. Law Office of Rogelio Solis PLLC v. Curtis, 2023 U.S. App. LEXIS 26621 (5th Cir. Oct. 6, 2023).
Background
The dispute arose out of a motor vehicle accident that involved two fatalities. The family of one victim (the Tellez family) filed suit against the tractor-trailer company whereas the family of the other victim (the Gomez family) issued a settlement demand for policy limits. The insurer paid the policy limits to the Gomez family and then notified the Tellez family that the policy had been exhausted. Thereafter, the Tellez family initiated an involuntary bankruptcy proceeding against the tractor-trailer company. The interim trustee commenced an adversary proceeding against the Gomez family, seeking to recover the insurance proceeds paid to the Gomez family pursuant to Bankruptcy Code Section 547, which provides the means by which a trustee may avoid any transfer of an interest of the debtor in property, including those made on or within 90 days before the date of the filing of the petition. The Gomez family moved to dismiss, arguing that the proceeds were not property of the debtor’s estate since the debtor held “neither legal title in nor a contractual right” to the policy proceeds, and otherwise lacked control over the disbursement of those proceeds.
The bankruptcy court denied the motion to dismiss, ruling that the pre-petition payment of the policy proceeds to the first family could be considered a “transfer of interest of the debtor in property” under Section 547 of the Bankruptcy Code. More specifically, the court ruled that the Tellez family’s complaint, alleging over $8 million in claims against a $1 million policy limit, satisfied the “limited circumstances” set forth in Martinez v. OGA Charters, L.L.C., 901 F.3d 599 (5th Cir. 2018), under which a debtor may have an equitable interest in insurance proceeds such that they could be classified as property of the estate. In OGA Charters, the Fifth Circuit specified that such limited circumstances may exist where, as here, tort victims threaten the debtor’s estate over and above policy limits. The Fifth Circuit affirmed.
Decision
The Fifth Circuit ruled the debtor held an equitable property interest in the policy proceeds under the precedent set forth in OGA Charters. In OGA Charters, the court held that “where a siege of tort claimants threaten the debtor’s estate over and above the policy limits, we classify the proceeds as property of the estate.” (Citations omitted). As the Fifth Circuit noted, this property interest allows for a wider distribution of available assets during liquidation of the estate.
Further, the Fifth Circuit deemed OGA Charters controlling, notwithstanding that OGA Charters presented the question of whether insurance proceeds were property of the debtor’s estate pursuant to Section 541 of the Bankruptcy Code (applicable where policy proceeds have not been disbursed prior to petition), rather than Section 547, at issue here, and which deals with pre-petition payments. In so ruling, the court noted that the meaning of the phrase “interest of the debtor in property,” included in Section 541 is coextensive with the meaning of that same phrase in Section 547. The Fifth Circuit stated that:
[T]he purpose of the avoidance provision is to [ ] preserve the property includable within the bankruptcy estate . . . .“[P]roperty of the debtor” subject to the preferential transfer provision is best understood as that property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings.
(Citations omitted). The Fifth Circuit therefore concluded that the bankruptcy court correctly ruled that the trustee had properly alleged a transfer of the debtor’s property as required by Section 547.
Comments
This decision has important implications in the context of mass tort cases involving multiple claimants seeking damages or settlement payments that exceed available insurance proceeds. Under certain limited circumstances, pre-petition payments under an insurance policy made within 90 days of the filing of a bankruptcy may be clawed back under the Fifth Circuit’s rulings in OGA Charters and Curtis.