Acands Inc v. Travelers Cslty ( 2006 )

Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit
1-19-2006
Acands Inc v. Travelers Cslty
Precedential or Non-Precedential: Precedential
Docket No. 04-3926
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________________
Nos. 04-3926 and 04-3929
____________________
ACANDS, INC.,
Appellant
v.
TRAVELERS CASUALTY
AND SURETY COMPANY
____________________
ON APPEAL FROM THE UNITED STATES
DISTRICT COURT FOR THE
EASTERN DISTRICT OF PENNSYLVANIA
District Court Judge: Honorable Petrese B. Tucker
(D.C. Nos. 00-cv-04633 & 03-mc-00222)
____________________
Argued: July 11, 2005
Before: ALITO and BECKER, Circuit Judges, SHADUR
District Judge*
(Opinion Filed: January 19, 2006)
_______________________
* Honorable Milton I. Shadur, United States District Judge for
the Northern District of Illinois, sitting by designation
John E. Heintz (argued)
David B. Killalea
Donna L. Wilson
Marla H. Kanemitsu
Glenn Schlactus
Gilbert Heintz & Randolph LLP
1100 New York Avenue, NW
Washington, DC 20005
Laura Davis Jones
Curtis A. Hehn
David W. Carickhoff, Jr.
Pachulski, Stang, Ziehl, Young,
Jones & Weintraub PC
919 North Market Street
Wilmington, DE 19801
Counsel for Appellant
Barry R. Ostrager (argued)
Mary Beth Forshaw
Bryce L. Friedman
Simpson, Thatcher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
Samuel J. Arena, Jr.
Stradley, Ronon, Stevens & Young LLP
2600 One Commerce Square
Philadelphia, PA 19103
Counsel for Appellee
___________________
OPINION OF THE COURT
____________________
ALITO, Circuit Judge:
This case involves the applicability of the Bankruptcy
2
Code’s automatic stay provision, 11 U.S.C. § 362(a), to an
arbitration panel’s resolution of an insurance coverage dispute. We
hold that the arbitration proceeding became subject to the
automatic stay after Travelers Casualty (“Travelers”) submitted
arguments supporting an award against the debtor ACandS, and
that the panel’s award granting Travelers affirmative relief violated
the automatic stay by diminishing the bankruptcy estate. We
therefore reverse the order of the District Court.
I.
For decades, ACandS, formerly Armstrong Contracting and
Supply and now a subsidiary of Irex Corporation, was one of the
nation’s largest installers of asbestos insulation. Since the early
1970’s, the company has been embroiled in asbestos litigation. On
September 16, 2002, after selling many of its assets to Irex,
ACandS filed for bankruptcy and began to devote its full attention
and resources to the issues surrounding the asbestos claims and
related insurance matters. See In re ACandS, Inc., 311 B.R. 36
(Bankr. D. Del. 2004). This appeal combines two related disputes
arising out of the same set of insurance policies issued to ACandS
between 1976 and 1979 by Travelers’ predecessor, the Aetna
Casualty & Surety Co.
Each of the four identical policies provides two types of
coverage: broad coverage for operations claims and more limited
coverage for products claims. The products coverage in each
policy was capped by a $1 million per occurrence limit and a $1
million aggregate limit. ACandS does not dispute that the coverage
provided for products claims has been exhausted. The operations
coverage is limited by a $1 million per occurrence limit but has no
aggregate cap, meaning that Travelers’ exposure to asbestos claims
arising from ACandS’s operations during the years 1976-79 was
potentially unlimited. The present dispute turns on the
classification of products versus operations claims and a
disagreement over whether all of ACandS’s asbestos operations
can be considered a single occurrence.
In 1988, seeking to avoid the cost and difficulty of
classifying large pools of claims, the parties reached an agreement
(the “Letter Agreement”) allocating set percentages of asbestos
3
claims to either products or operations. The Letter Agreement
initially allocated 55% of the claims to products and the remaining
45% to operations. Because of the aggregate limit on products
coverage, Travelers remained liable only for the 45% of claims
allocated to operations after the company paid the first $1 million
of products claims under each policy. The Letter Agreement also
established a three-step process for changing the allocation. First,
after two years had passed and at any time thereafter, either party
could make a demand on the other for a change in the allocation.
Upon the making of the demand, both parties were to conduct a
“claims study” in order to determine the proper allocation of
claims. If the parties failed to reach agreement on a new allocation,
the parties were to submit to non-binding dispute resolution
overseen by a neutral mediator. Finally, if the mediation failed, the
parties agreed to submit to binding arbitration. In the arbitration,
the party seeking the adjustment of the allocation bore the burden
of establishing that the existing allocation should be changed.
Both parties quickly explored ways of modifying the
bargain. In 2000, Travelers sought to limit its exposure to
operations claims by informing ACandS that it would treat all of
the operations claims as arising out of the same occurrence
(ACandS’s use of asbestos), thereby subjecting the claims to the $1
million per occurrence limit. ACandS filed a motion for
declaratory judgment in the District Court for the Eastern District
of Pennsylvania seeking to have each claim recognized as a
separate occurrence (“Number of Occurrences Action”). See JA6-
1438 (Complaint, filed September 12, 2000). On November 8,
2000, the District Court granted a joint motion for a stay pending
mediation and arbitration. JA6-1455 (Order, filed November 8,
2000). It is this action that the District Court dismissed as moot in
the order now on appeal.
Following a different track, ACandS sought to increase its
potential recovery under the policies by submitting a demand
seeking an increase in the allocation of claims to operations. On
January, 31, 2001, the company filed a formal demand pursuant to
the 1988 Letter Agreement. Although the demand did not specify
the desired reallocation, it stated that the allocation to operations
should approach 100%, and acknowledged Travelers’ position
“that all of the asbestos bodily injury claims pending against
4
ACandS are [products] claims.” Although the Letter Agreement
contemplates a collaborative approach to reallocation, ACandS did
not invite Travelers to participate in the claims study it conducted
in 2000.1 No agreement was reached regarding reallocation, and
a mediation was held in August 2001 under the direction of
Professor James J. White. After mediation failed to resolve the
dispute, the parties proceeded to arbitration. The panel instructed
both parties to submit statements of their position. See JA2-467
(Statement of Position of ACandS, Inc., submitted July 31, 2002);
JA2-505 (Travelers Casualty and Surety Company’s Statement of
the Case, submitted August 6, 2002). ACandS’s statement largely
tracks its demand letter. Travelers’ statement says that it would
“demonstrate during this proceeding [that] the correct allocation .
. . would allocate no claim payments to non-products coverage.”
JA2-506.
In arguments submitted to the panel, the parties presented
conflicting definitions of “operations claims.” The arbitration
panel agreed with Travelers’ interpretation that operations claims
encompassed only those claims arising from asbestos exposure
during the policy period. JA2-531 (Arbitration Award, filed July
31, 2003). The panel found, as a matter of fact, that ACandS had
ceased manufacturing and installing asbestos in 1974.2 The Panel
concluded that any claim arising during the policy period was
necessarily a products claim and therefore allocated 100% of the
1
In a collateral proceeding not directly relevant to this
appeal Travelers sought to forestall ACandS’s resort to the Letter
Agreement’s dispute resolution process. See JA2-423 (Complaint,
filed February 15, 2001). Travelers’ argument was that it could not
be required to arbitrate the allocation dispute because ACandS
failed to satisfy the prerequisites to arbitration as set forth in the
Letter Agreement, primarily the requirement that there be a joint
claims study. The Connecticut District Court denied a preliminary
injunction and later stayed the action pending the outcome of the
arbitration. See JA4-1018 (Order, filed October 16, 2001).
2
Any challenge to this finding was waived when
ACandS failed to raise it before the District Court. See JA2-374
(ACandS’s motion to vacate, filed October 30, 2003).
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claims to the products coverage.
After the arbitration panel was constituted, but before the
award was issued, ACandS settled a raft of asbestos claims,
totaling more than $2.6 billion. Shortly thereafter, the company
filed for Chapter 11 bankruptcy in the District of Delaware. JA4-
1050 (Bankruptcy filing, September 16, 2002). The Bankruptcy
Court refused to confirm the reorganization plan because it treated
similarly situated claimants differently based on the order in which
they filed their claims. In re ACandS, 311 B.R. at 43. As a result,
the company remains in receivership, and the bulk of the settled
claims persist in a state of limbo.
ACandS filed a motion in the District Court for the Eastern
District of Pennsylvania, seeking to have the arbitration award
vacated. The District Court denied the motion and affirmed the
arbitration award. The District Court also dismissed the Number
of Occurrences Action on the ground that the award’s finding that
no claims arose from operations rendered the question presented
moot. The two matters were joined for the purposes of this appeal.
II.
ACandS’s challenge to the validity of the arbitration award
raises three issues related to the panel’s decision to grant Travelers
affirmative relief by revising the allocation of operations claims to
zero: (1) whether the panel exceeded its authority by granting
Travelers affirmative relief despite Travelers’ failure to file a
formal demand, (2) whether the relief granted Travelers violated
the Bankruptcy Act’s automatic stay provision in 11 U.S.C. § 362,
and (3) whether ACandS was prejudiced by inadequate notice
regarding Travelers’ intent to seek affirmative relief in the
arbitration proceeding. Because we hold that the proceeding and
award violated the automatic stay, it is unnecessary to address the
remaining issues. Because the award must be vacated, the
allocation of claims under the Letter Agreement remains at 45%
operations and 55% products. Accordingly, ACandS’s action
seeking a declaratory judgment regarding the number of
occurrences is not moot.
A.
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The District Court’s determination that the award did not
violate the Bankruptcy Code’s automatic stay provision is a purely
legal question subject to plenary review. In reviewing a District
Court decision concerning the validity of an arbitration award, our
assessment of the arbitration panel's actions is governed by the
same standard that governed the District Court's review.
Metromedia Energy, Inc. v. Enserch Energy Servs., Inc., 409 F.3d
574, 578 (3d Cir. 2005). An arbitration award will be enforced if
its form can be rationally derived from either the agreement
between the parties or the parties’ submissions to the arbitrators
and the terms of the arbitral award are not completely irrational.
Mut.Fire, Marine & Inland Ins. Co. v. Norad Reins. Co., 868 F.2d
52, 56 (3d Cir. 1989); see also Swift Indus., Inc. v. Botany Indus.,
Inc., 466 F.2d 1125, 1131 (3d Cir. 1972); Ludwig Honold Mfg. Co.
v. Fletcher, 405 F.2d 1123, 1128 (3d Cir. 1969).
A long-standing exception to this general rule provides that
courts may refuse to enforce arbitration awards that violate well-
defined public policy as embodied by federal law. See Exxon
Shipping Co. v. Exxon Seamen’s Union, 11 F.3d 1189 (3d Cir.
1994) (vacating labor arbitration award that required the
reinstatement of an able bodied seaman who was found to be
highly intoxicated while on duty). We hold that the automatic stay
provision of the Bankruptcy Act promotes a public policy sufficient
to preclude enforcement of an award that violates its terms or
interferes with its purposes. See In re Cavanaugh, 271 B.R. 414,
424 (Bankr. D.Mass. 2001) (“[T]he automatic stay is the single
most important protection afforded to debtors by the Bankruptcy
Code.”); see also Exxon Shipping, 11 F.3d at 1193 n.7 (“[A]n
award may properly be vacated either because it ‘violates a specific
command of some law’ or ‘because of inconsistency with public
policy.’”’) (quoting Honold, 405 F.2d at 1128 n.7) (emphasis
supplied).
The District Court’s order dismissing the Number of
Occurrences action as moot is subject to plenary review. See
Ruocchio v. United Transp. Union, Local 60, 181 F.3d 376, 382
n.8 (3d Cir. 1999) (“The plenary standard of review seems
appropriate since mootness doctrine relates to courts’ constitutional
authority to hear a case. . . .”).
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B.
ACandS argues that, because the arbitration panel
considered and accepted the argument that operations should be
zero, the arbitration proceeding and award violated the automatic
stay provision of 11 U.S.C. § 362. Section 362 of the Bankruptcy
Act provides in part:
Automatic Stay.
(a) Except as provided in subsection (b) of this
section, a petition filed under section 301, 302, or
303 of this title . . . operates as a stay, applicable to
all entities, of--
(1) the commencement or continuation, including the
issuance or employment of process, of a judicial,
administrative, or other action or proceeding against
the debtor that was or could have been commenced
before the commencement of the case under this title
....
(3) any act to obtain possession of property of the
estate or of property from the estate or to exercise
control over property of the estate
11 U.S.C. § 362(a).
The stay mandated by this provision is automatic in that the
debtor does not have to make any formal request that it be issued
or that it apply to a particular proceeding. Rather, the onus is on
the party seeking to proceed to petition the Bankruptcy Court for
relief from the stay. See 11 U.S.C. § 362(d). The scope of the
automatic stay is broad and covers all proceedings against a debtor,
including arbitration. Ass’n. of St. Croix Condominium Owners v.
St. Croix Hotel Corp., 682 F.2d 446, 448 (3d Cir. 1982) (citing
H.R.Rep.No.95-595, at 340 (1977), reprinted in 1978
U.S.C.C.A.N. 5787, 5963, 6296-97). “Because the automatic stay
serves the interests of both debtors and creditors, it may not be
waived and its scope may not be limited by a debtor.” Maritime
Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1204 (3d Cir.
1992). Sub-sections 362(a)(1) and 362(a)(3) differ in that the stay
of actions and proceedings provided for by § 362(a)(1) applies only
to actions brought against the debtor--“the statute does not address
8
actions brought by the debtor which would inure to the benefit of
the bankruptcy estate.” St. Croix, 682 F.2d at 448. Section
362(a)(3), on the other hand, applies to actions against third parties
as well as actions against the debtor. See In re Krystal Cadillac
Oldsmobile GMC Truck, Inc., 142 F.3d 631, 637 n.11 (3d Cir.
1998).
ACandS argues that the arbitration panel’s award violates
both § 362(a)(1) and § 362(a)(3). We agree that the automatic stay
applied to the arbitration and that the panel should have halted the
arbitration once it became apparent that proceeding further could
negatively impact the bankruptcy estate. We also hold that the
arbitration award is invalid because it diminishes the property of
the estate.
1.
With respect to the application of § 362(a)(1), the District
Court held that the automatic stay did not apply because the
arbitration was an action initiated by the debtor. JA1-18. While in
the context of a trial it is simple to distinguish between claims and
counter-claims that may support judicial relief, in the context of
arbitration, especially in the absence of a joint statement of issues
submitted, it is impossible to definitively classify the arguments
presented. Travelers contends that its arguments in favor of a zero
allocation of claims to the products coverage should be classified
as a permissible defense. Defenses, as opposed to counter-claims,
do not violate the automatic stay because the stay does not seek to
prevent defendants sued by a debtor from defending their legal
rights and “the defendant in the bankrupt’s suit is not, by opposing
that suit, seeking to take possession of it. . . .” Martin-Trigona v.
Champion Fed. Sav. & Loan Ass’n., 892 F.2d 575, 577 (7th Cir.
1989). In the trial context, a defendant’s failure to formally plead
a counter-claim prevents the court from granting affirmative relief
on the basis of the defendant’s arguments. See Fed. R. Civ. Pro. 8.
By contrast, an arbitration award will be affirmed so long as its
form can be rationally derived from either the agreement between
the parties or the parties’ submissions to the arbitrators and the
terms of the arbitral award are not completely irrational. Mut. Fire,
Marine & Inland Ins. Co., 868 F.2d at 56. This procedural
flexibility, which is essential to the utility of arbitration, allows
9
Travelers to make a colorable argument that it respected the stay by
merely defending its interests when there is no question that in the
trial context it would have been required to file a counterclaim in
order to obtain the result it seeks to uphold. See Maritime Elec.
Co., 959 F.2d at 1204 (“[W]ithin one case, actions against a debtor
will be suspended even though closely related claims asserted by
the debtor may continue.”) (emphasis omitted). Despite the
importance of procedural informality, however, the panel’s
authority must yield when a dispute threatens the rights of third
parties in violation of the laws of the United States. To avoid
interfering with the broad purposes served by the automatic stay,
it was necessary for the arbitration proceeding to halt as soon as the
scope of the parties’ submissions supported an award that could
diminish ACandS’s estate. By continuing beyond this point, the
proceeding violated § 362(a)(1), and the panel’s deliberations and
the resulting award are therefore void.
2.
The District Court rejected ACandS’s argument that the
arbitration award itself, as distinct from the proceeding, violated §
362(a)(3) by stripping ACandS of a valuable property right.
ACandS argues that the award’s reallocation of claims under the
Letter Agreement to 0% operations and 100% products deprived
the bankruptcy estate of property covered by the automatic stay by
reducing the amount of insurance coverage available to the debtor.
We agree with this argument because the contractual right secured
by the Letter Agreement allocating 45% of the asbestos claims to
operations was property of the bankruptcy estate. By effectively
terminating ACandS’s insurance coverage, the arbitration award
had a clear adverse effect on that property interest.
The interests classified as “property of the estate” protected
by § 362(a)(3) are defined by 11 U.S.C. § 541. In re Atlantic Bus.
& Community Corp., 901 F.2d 325, 328 (3d Cir. 1990). It has long
been the rule in this Circuit that insurance policies are considered
part of the property of a bankruptcy estate. Estate of Lellock v.
The Prudential Ins. Co. of Am., 811 F.2d 186, 189 (3d Cir. 1987)
(holding that an insurance policy is property of the estate within 11
U.S.C. § 541 even though the policy has not matured, has no cash
surrender value and is otherwise contingent); see also Tringali v.
10
Hathaway Mach. Co., 796 F.2d 553, 560 (1st Cir. 1986); see
generally 3-362 Collier on Bankruptcy P 362.03 (15th ed. revised)
(“[T]he prevailing view is that an insurance policy is property of
the estate, protected by the automatic stay of § 362(a)(3).”). The
fact that the Letter Agreement is not itself an insurance policy, and
so the rights secured by that contract merely pertain to ACandS’s
right to coverage, does not exclude these contractual rights from
the broad definition of property found in § 541. See Westmoreland
Human Opportunities, Inc. v. Walsh, 246 F.3d 233, 242 (3d Cir.
2001) (definition of property “encompasses rights and interests
arising from ordinary contractual relationships”). Furthermore, the
contractual rights secured by the Letter Agreement and insurance
policies are property of the estate regardless of the fact that all of
the proceeds from any recovery will be exhausted in satisfaction of
outstanding settlements. See Maertin v. Armstrong World Indus.,
Inc., 241 F. Supp. 2d 434 (D.N.J. 2002); In re Johns Manville Corp.,
40 B.R. 219, 230-31 (S.D.N.Y. 1984).
For a claim to fall within the scope of § 362(a)(3), it must
also be shown that the grant of affirmative relief to Travelers
constitutes an act to obtain possession of ACandS’s contractual
right to a 45% allocation of claims to the operations coverage.
Although it cannot accurately be said that Travelers obtained
ACandS’ rights under the policy, we nevertheless hold that the
grant of affirmative relief was an act barred by the automatic stay.
The possession or control language of Section 362(a)(3) has
consistently been interpreted to prevent acts that diminish future
recoveries from a debtor’s insurance policies. See, e.g., A.H.
Robins Co. v. Piccinin, 788 F.2d 994, 1001 (4th Cir. 1986) (noting
that a debtor’s insurance policy may well be the most important
asset of the estate, and that “any action in which the judgment may
diminish this ‘important asset’ is unquestionably subject to a stay
under [11 U.S.C. 362(a)(3)]”) (quoting In re Johns Manville Corp.,
40 B.R. at 229). In Matter of J&L Transport, Inc., 47 B.R. 51
(Bankr. W.D. Wis.), the court held that an insurer was barred by §
362(a)(3) from cancelling the debtor’s policy so long as the debtor
was not in monetary default. Similarly, because the grant of
affirmative relief to Travelers had the effect of terminating
ACandS’s coverage, we hold that it violated the automatic stay.
3.
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Travelers argues that even if the panel’s award violates the
automatic stay, equity precludes its application in this case. This
argument fails because no equitable power to grant relief from an
automatic stay rests with the District Court. To the extent that an
equitable exception to the automatic stay exists, it rests solely in
the Bankruptcy Courts. “Only the bankruptcy court with
jurisdiction over a debtor’s case has the authority to grant relief
from the stay of judicial proceedings against the debtor.” Maritime
Elec. Co., 959 F.2d at 1204.
C.
The District Court dismissed the Number of Occurrences
Action on the grounds that the enforceable arbitration award
rendered it moot. The action was brought by ACandS in response
to Travelers’ stated intention to treat all operations claims as
arising out of the same occurrence, and therefore subject to the $1
million per occurrence cap. The District Court addressed this issue
in footnote 9:
The complaint in this case deals with the “number of
occurrences” under the insurance policies ACANDS
has with Travelers. Since the Arbitration Panel has
rendered this issue moot by ruling that there is zero
remaining coverage under the products policies in
this case, there is no reason for this court to decide
the “number of occurrences” posed by ACANDS in
this case.
JA1-20 (District Court Opinion). As explained above, the panel’s
award violates the automatic stay and is therefore void ab initio.
See Maritime Elec. Co., 959 F.2d at 1206. As a result, ACandS is
still entitled to a 45% allocation of claims to the policies’
operations coverage, and the dispute concerning whether the
asbestos claims present multiple or single occurrences under those
policies is justiciable. Accordingly, the Number of Occurrences
Action should not have been held to be moot.
III.
For the reasons stated above, the order of the District Court
12
is vacated. The case is remanded with instructions to vacate the
arbitration award for resolution of the pending action.
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