In re OGA Charters – 5th Cir. holds that estate subject to mass tort claim has equitable interest in related insurance proceeds.

The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:

SUMMARY:

The Fifth Circuit has held that when a bankruptcy estate is subject to mass tort claims, the estate has an equitable interest in the insurance proceeds, thus precluding extrajudicial settlements by the tort victims.  [In re OGA Charters, LLC, 2018 Westlaw 4057525 (5th Cir.).]

FACTS:  A thinly-capitalized bus charter company owned an insurance policy providing $5 million in liability coverage.  One of the company’s two buses suffered an accident, killing nine passengers and injuring 40 others.  The passengers filed claims against the bus company.  Some of the passengers quickly entered into settlements with the insurance carrier, which would have exhausted the liability coverage.

The victims without settlements filed an involuntary bankruptcy petition against the bus company and initiated an adversary proceeding against the insurance company, seeking to enjoin the payments to the settling passengers.  The bus company’s bankruptcy trustee claimed that the proceeds of the insurance policy were property of the bankruptcy estate under 11 U.S.C.A. §541(a).

The bankruptcy court entered summary judgment in favor of the trustee, and the settling claimants appealed directly to the Fifth Circuit.

REASONING:  The appellate court affirmed. Acknowledging some inconsistencies in the circuit’s own prior decisions, the court articulated its holding:

We now make official what our cases have long contemplated: In the “limited circumstances,” as here, 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. Here, over $400 million in related claims threaten the debtor’s estate over and above the $5 million policy limit, giving rise to an equitable interest of the debtor in having the proceeds applied to satisfy as much of those claims as possible.

AUTHOR’S COMMENT:  Since there does not appear to be a substantial circuit split on this issue as yet, I do not think that we will get a resolution of this issue by the Supreme Court anytime soon.  But I am troubled by the court’s rather breezy conclusion that the estate has an “equitable interest” in the proceeds.  First, under state law, the bankruptcy estate owns the policy but not the proceeds.  Where is the legal basis for this equitable right?   

Second, however, even if the court is right about the estate’s “equitable interest” in the proceeds, the holding is terribly fuzzy.  At what point does this “equitable interest” arise?  Is it only when the aggregate of the tort claims demonstrably exceeds the policy limits?  Or does it exist under all circumstances and at all times?  If the latter, then all mass tort claimants must arrange for settlements within the bankruptcy court. 

These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw.  Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.