American Bankers Insurance v. Maness

Filed: December 16, 1996
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
Nos. 95-2641(L)
(CA-94-312-2)
American Bankers Insurance Company of Florida,
Plaintiff - Appellant,
versus
Jack D. Maness, etc.,
Defendant - Appellee.
O R D E R
The Court amends its opinion filed November 27, 1996, as
follows:
On page 17, third full paragraph, line 1 -- the phrase "grant
of summary judgment" is corrected to read "denial of summary
judgment."
For the Court - By Direction
/s/ Patricia S. Connor
Clerk
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
AMERICAN BANKERS INSURANCE
COMPANY OF FLORIDA,
Plaintiff-Appellant,
and
UNITED STATES FIDELITY &
GUARANTY COMPANY,
Plaintiff,
v.
No. 95-2641
JACK D. MANESS, Trustee for the
Bankruptcy Estate of Joseph L.
Houska and Judy C. Houska,
Defendant-Appellee,
and
JOSEPH L. HOUSKA; JUDY C. HOUSKA;
CENIT BANK, F.S.B.,
Defendants.
UNITED STATES FIDELITY &
GUARANTY COMPANY,
Plaintiff-Appellant,
and
AMERICAN BANKERS INSURANCE
COMPANY OF FLORIDA,
Plaintiff,
v.
No. 95-2642
JACK D. MANESS, Trustee for the
Bankruptcy Estate of Joseph L.
Houska and Judy C. Houska,
Defendant-Appellee,
and
JOSEPH L. HOUSKA; JUDY C. HOUSKA;
CENIT BANK, F.S.B.,
Defendants.
2
UNITED STATES FIDELITY &
GUARANTY COMPANY; AMERICAN
BANKERS INSURANCE COMPANY OF
FLORIDA,
Plaintiffs-Appellees,
v.
JACK D. MANESS, Trustee for the
No. 95-2643
Bankruptcy Estate of Joseph L.
Houska and Judy C. Houska,
Defendant-Appellant,
and
JOSEPH L. HOUSKA; JUDY C. HOUSKA;
CENIT BANK, F.S.B.,
Defendants.
Appeals from the United States District Court
for the Eastern District of Virginia, at Norfolk.
Robert G. Doumar, Senior District Judge.
(CA-94-312-2)
Argued: September 23, 1996
Decided: November 27, 1996
Before HALL, WILLIAMS, and MOTZ, Circuit Judges.
_________________________________________________________________
Nos. 95-2641 and 95-2643 affirmed and remanded, and No. 95-2642
reversed and remanded by published opinion. Judge Motz wrote the
opinion, in which Judge Hall and Judge Williams joined.
_________________________________________________________________
COUNSEL
ARGUED: W. Charles Waddell, III, WADDELL & BARNES, P.C.,
Newport News, Virginia, for Appellant USF&G; Clayton Henson
3
Farnham, DREW, ECKL & FARNHAM, Atlanta, Georgia, for
Appellant American Bankers. Robert Vincent Roussos, ROUSSOS &
LANGHORNE, P.L.C., Norfolk, Virginia, for Appellee. ON BRIEF:
J. H. Revere, III, WADDELL & BARNES, P.C., Newport News, Vir-
ginia, for Appellant USF&G; Phillip C. Griffeth, DREW, ECKL &
FARNHAM, Atlanta, Georgia, for Appellant American Bankers.
_________________________________________________________________
OPINION
DIANA GRIBBON MOTZ, Circuit Judge:
In this diversity case, two insurers appeal the district court's hold-
ing that the trustee for a bankruptcy estate was entitled to an interest
in the payouts from one of two insurance policies covering the debt-
ors' residence. The trustee cross appeals, asserting that the bankruptcy
estate was entitled to an interest in the payouts of both policies.
Because neither policy (nor the payouts from either of them) consti-
tuted property of the bankruptcy estate, the trustee had no right to
funds stemming from either policy. Accordingly, we affirm the dis-
trict court's grant of summary judgment to one insurer, we reverse the
court's denial of summary judgment to the other insurer, and we
remand for further proceedings.
I.
Although the parties do not dispute the material facts, the facts
themselves are complicated. Furthermore, the timing of events is criti-
cal to our discussion. Accordingly, we set forth a chronology, which
includes only those facts necessary to understand our holding. The
opinion of the district court presents the facts in greater detail. See
United States Fidelity & Guar. Co. v. Houska, 184 B.R. 494 (E.D.
Va. 1995).
On August 27, 1991, Joseph and Judy Houska filed a bankruptcy
petition under Chapter 11. On October 25, 1991, their creditors held
a meeting pursuant to 11 U.S.C. § 341 (1988), at which Mr. Houska
confirmed that a policy issued by the Home Insurance Company
("Home") covered the real property at issue here, a residence in Vir-
4
ginia Beach, Virginia. On April 30, 1992, the Houskas converted their
Chapter 11 case to one under Chapter 7. On May 20, the court
appointed Jack Maness as trustee of the estate, thereby removing con-
trol of the estate from the Houskas as debtors-in-possession. The con-
version to Chapter 7 prompted another § 341 creditors' meeting, held
on June 22. No one mentioned insurance coverage at this meeting.
Prior to the June 22 creditors' meeting but subsequent to the May
20 appointment of the trustee, the Houskas decided to change their
homeowners insurance coverage. The Houskas decided to change
insurers because Home refused to continue to provide them automo-
bile insurance, and the Houskas, at the suggestion of their insurance
agent, hoped to purchase a policy that would provide both car and
home insurance at a discounted premium.1 USF&G agreed to provide
this coverage, and the Houskas determined to switch to that insurer.
The USF&G policy that the Houskas chose became effective on June
19, 1992. On that date the Home policy expired, as the Houskas had
cancelled the plan's automatic renewal. The Home and USF&G poli-
cies provided identical limits of liability: $662,000 for the "dwelling,"
and $496,500 for personal property.
_________________________________________________________________
1 The record provides no clear information as to when the Houskas
decided to switch the policies. Home notified them of non-renewal of the
Home automobile policy in a letter dated May 1, 1992; this letter pro-
vided the Houskas with the initial incentive to change insurers. But the
record indicates that the Houskas took no action on this front until after
they were relieved of their duties as debtors in possession by the trustee's
appointment on May 20, 1992. Joseph Houska executed the cancellation
of the homeowners portion of the Home policy on June 15, 1992, effec-
tive June 19, 1992. USF&G issued its policy on June 28, 1992, with
retroactive coverage from June 19, 1992. These facts suggest that the
Houskas made the decision to purchase the USF&G insurance not only
after the May 20 appointment of Maness as the bankruptcy trustee but
also after the June 22 creditors' meeting. Thus the record cannot support
the argument that in arranging the USF&G policy, Mr. Houska was a
debtor in possession and, therefore, was the acting trustee, purchasing the
policy for the estate. The trustee at the time of the change of insurers was
Maness, and he was not involved in the decision to cancel the Home pol-
icy or purchase the USF&G policy, nor at any time did he attempt to
alter the USF&G policy to add the estate as an insured or a loss payee.
5
On August 7, 1992, fire destroyed the Virginia Beach residence.
Local authorities determined that someone had intentionally set the
fire, but as of the time of the district court opinion, authorities had not
yet brought arson charges.
There were two deeds of trust on the property. Household Mort-
gage Corporation ("Household") held the first deed of trust. The
USF&G policy listed the Houskas as the insured and Household as
the named mortgagee. Household also had a contractual relationship
with American Bankers Insurance Company ("American Bankers")
compelling American Bankers to "force place" an insurance policy on
any property in which Household was the mortgagee if either party
determined that no other insurance covered it. In March 1993, after
the fire loss, American Bankers mistakenly issued a policy that retro-
actively covered the Houskas' residence at the time of the fire. The
American Bankers policy similarly lists the Houskas as the insured
and Household as the named mortgagee.2
After the fire, the Houskas filed claims under both the USF&G and
American Bankers policies, claiming losses of $1,243,096.01 for the
dwelling and $647,350.05 for their personal property.3 In view of the
Houskas' claims that some of the real property and some of the per-
sonal property were exempt, the Houskas and trustee ultimately
agreed to divide their claims. The Houskas abandoned any claim to
insurance proceeds payable on the loss of real property, and agreed
to pursue insurance payouts for the loss of the personal property only.
In return, the bankruptcy trustee, Maness, agreed to drop all claims
to insurance payments due on the loss of personalty and seek payment
from the insurers solely for the damage to the real property.
_________________________________________________________________
2 Cenit Bank ("Cenit") holds a second deed of trust on the property in
the amount of $200,000 plus interest and attorney's fees. Neither the
USF&G nor the American Bankers policy lists Cenit as a named mort-
gagee, but under Virginia law, Cenit's security interest extends to insur-
ance proceeds stemming from loss or damage to the collateral. See Va.
Code Ann. § 8.9-306 (Michie 1991).
3 In their bankruptcy petition, the Houskas valued their personal prop-
erty at $13,190, claiming all of it as exempt. The government has
indicted the Houskas for bankruptcy fraud in connection with this valua-
tion, but that proceeding has no bearing on the determination of the
issues in this case.
6
Collectively, the insurers paid the named mortgagee, Household, at
least $571,633.91,4 and in return, Household assigned the mortgage
to them. Thereafter, on March 22, 1994, the insurers filed a complaint
for declaratory judgment against the Houskas. The insurers alleged
that the Houskas intentionally burned the house and falsely testified
under oath as to the value of the destroyed property. For these rea-
sons, the insurers asked the court to declare the policies void and the
insurers not liable to the Houskas under the policies.
Both insurance policies have a provision which mandates that all
claims be brought within two years of the date of loss. Although the
record indicates that by March of 1993 the bankruptcy trustee,
Maness, knew of the likely refusal of the insurance claim, at no time
during the two years following the loss did he attempt to bring a claim
on behalf of the estate. In December 1994, after the two year period
had ended, the district court urged the trustee to intervene because the
attorney for the Houskas sought leave to withdraw and the court
feared that the Houskas would be proceeding pro se. Maness filed a
motion to intervene; the court granted that motion on January 27,
1995.
The insurers moved for summary judgment against Trustee Maness
on the grounds that he had failed to bring suit within the two year
period required by the policy and was barred from recovery by the
Houskas' arson and fraud. The insurers also argued that, in any event,
the trustee had no interest in the insurance policies because they were
issued post-petition. Maness filed a cross motion for summary judg-
ment. He maintained that his claim was timely and moreover, that as
the bankruptcy trustee, under this court's holding in Kremen v. Har-
ford Mut. Ins. Co. (In re J.T.R. Corp.), 958 F.2d 602 (4th Cir. 1992)
(per curiam), he was not subject to the insurers' defenses of fraud and
arson that were available against the Houskas.
In ruling on the summary judgment motions, the district court held
that "[u]nder Virginia law, payments pursuant to a contract of insur-
_________________________________________________________________
4 The record is unclear as to exactly how much the insurers paid to
Household. The checks in the record and the accompanying cover letter
indicate a total of $571,633.91; the lower court opinion states that the
total amount was $679,316.75.
7
ance protecting against damage to property are not considered to be
proceeds derived from the property itself . . . ." 184 B.R. at 501. For
this reason the court determined that Trustee Maness had no interest
in the proceeds of the American Bankers insurance policy, which had
been issued post-petition, and so granted summary judgment to Amer-
ican Bankers with regard to the proceeds of that policy. Although the
USF&G policy had also been issued post-petition, the court refused
to apply the same rule to it. Instead the court concluded that the
trustee had an interest in the USF&G policy because it was a "re-
placement policy" for the Home policy that became part of the bank-
ruptcy estate at the time of petitioning. For this reason, the court
denied summary judgment to USF&G.5
Upon the motion of the trustee, the district court certified its order
for interlocutory appeal to this court pursuant to 28 U.S.C. § 1292(b)
(1994). Both insurers and the trustee then noted appeals, and we
agreed to consider the case.
II.
Our review of these summary judgment orders is de novo and we
view all evidence in the light most favorable to the non-moving party.
Pittman v. Nelms, 87 F.3d 116, 118 (4th Cir. 1996). The critical ques-
tion in this case is whether the payouts of the USF&G and American
Bankers policies are the property of the bankruptcy estate. If the pay-
outs are not the property of the bankruptcy estate, the trustee has no
interest in or right to those funds. On the other hand, if the payouts
are the property of the bankruptcy estate, the trustee does have an
interest in them and can make claim to them.
In determining what property is included in the bankruptcy estate,
we look initially at what property the debtors (the Houskas) possessed
at the time they filed their Chapter 11 petition (August 1991). "The
commencement of a case under [the Bankruptcy Code] creates an
estate. Such estate is comprised of . . . all legal or equitable interests
_________________________________________________________________
5 The court also ruled on various other arguments propounded by the
parties and the parties appeal those rulings. In view of our holding, we
need not reach those questions.
8
of the debtor in property as of the commencement of the case." 11
U.S.C. § 541(a) (1994).
At the time the Houskas filed their Chapter 11 petition they
unquestionably owned the Home insurance policy. That policy thus
became an asset of their bankruptcy estate; debtors' insurance policies
clearly constitute "interests" under § 541(a) of the Bankruptcy Code.
A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1001 (4th Cir.) (holding
that insurance policies existing at time of petition are property of
estate), cert. denied, 479 U.S. 876 (1986); Houston v. Edgeworth (In
re Edgeworth), 993 F.2d 51, 55 (5th Cir. 1993) (collecting cases); 2
Collier on Bankruptcy ¶ 362.04 [3] (Lawrence P. King, 15th ed.
1996) ("The prevailing view is that an insurance policy is property of
the estate . . . ."). However, the Home insurance policy was not in
effect at the time of the fire, and the policies that were in effect at the
time of the fire did not exist when the Houskas filed their Chapter 11
petition. Therefore we must determine whether insurance policies or
payouts from those policies that were not property of the bankruptcy
estate upon petitioning can later become estate property.
Generally, property not owned at the time of petition but only sub-
sequently acquired by the debtor does not become property of the
bankruptcy estate. See Vogel v. Palmer (In re Palmer), 57 B.R. 332,
333-34 (Bankr. W.D. Va. 1986). There are limited exceptions to this
rule. Only two are arguably applicable here; both "[p]roceeds . . . of
or from property of the estate" and "[a]ny interest in property that the
estate acquires after the commencement of the case" can become part
of the estate post-petition. 11 U.S.C. §§ 541(a)(6), 541(a)(7). Thus to
prevail, the trustee must demonstrate that funds payable from the
insurance policies are either "proceeds" of the underlying property,
rather than just "proceeds" of the policies, or that the insurance poli-
cies themselves were property that the estate acquired after the com-
mencement of the bankruptcy case.6
_________________________________________________________________
6 During oral argument, Maness suggested that § 541(a)(5) of the Bank-
ruptcy Code provides a third avenue through which property acquired
post-petition could enter the estate. Under § 541(a)(5), "[a]ny interest in
property that would have been property of the estate if such interest had
been an interest of the debtor on the date of the filing of the petition, and
9
Although the trustee claims that the estate became a co-insured on
the policies, he makes no claim that the estate, acting through its rep-
resentative, acquired either policy. Nor does the trustee assert that
estate funds were used to purchase either policy. Therefore the only
way for Trustee Maness to claim an interest in the insurance payouts
is if those funds were "proceeds" of the destroyed house, which was
property of the estate, not merely proceeds of the USF&G and Ameri-
can Bankers insurance policies, which were not property of the estate.
The Supreme Court directed in Butner v. United States, 440 U.S.
48, 55 (1979), that:
Property interests are created and defined by state law.
Unless some federal interest requires a different result, there
is no reason why such interests should be analyzed differ-
ently simply because an interested party is involved in a
bankruptcy proceeding.
Although the Bankruptcy Code superseded the specific holding of
Butner, the Supreme Court has subsequently reiterated the Butner
approach. See Barnhill v. Johnson, 503 U.S. 393, 397-398 (1992)
("[T]ransfer" is a term governed by federal law, as defined in the
Bankruptcy Code, but "that definition in turn includes references to
parting with `property' and `interest in property.' In the absence of
any controlling federal law, `property' and `interests in property' are
creatures of state law.") See also Nobelman v. American Sav. Bank,
508 U.S. 324, 329 (1993) (referring to state law to determine the defi-
nition of a creditor's "rights" because the Bankruptcy Code does not
define the term) (specific holding superseded by statute); Ohio v.
Kovacs, 469 U.S. 274, 285-86 (1985) (O'Connor, J., concurring) (not-
ing that whether state's interest in bankrupt's obligation to clean up
_________________________________________________________________
that the debtor acquires or becomes entitled to acquire within 180 days
after such date" will enter the estate post-petition. However this "180 day
rule" is strictly limited to property interests conveyed under particular
enumerated circumstances, such as inheritance, divorce, or payment
under a life insurance policy. Thus, § 541(a)(5) does not apply to this
case.
10
hazardous waste is a lien on property, a perfected security interest, or
an unsecured claim depends on state law).
To summarize then, while federal law creates the bankruptcy
estate, Butner and the cases following it establish that state law,
absent a countervailing federal interest, determines whether a given
property falls within this federal framework. Thus, we must first
decide if a countervailing federal interest requires that we determine
property interests here in a way different from that mandated by state
law.
III.
Section 541(a)(6) of the Bankruptcy Code provides that the bank-
ruptcy estate includes "proceeds" of estate property, without ever
defining "proceeds." The statute's legislative history indicates that the
term "[p]roceeds . . . is not used in a confining sense, as defined in
the Uniform Commercial Code . . . ." S. Rep. No. 989, 95th Cong.,
2d Sess. 83 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5869; H.R.
Rep. No. 595, 95th Cong., 1st Sess. 368 (1977), reprinted in 1978
U.S.C.C.A.N. 5963, 6324. Rather, "proceeds" "is intended to be a
broad term to encompass all proceeds of property of the estate. The
conversion in form of property of the estate does not change its char-
acter as property of the estate." Id.
Extrapolating from these pieces of legislative history, the Second
Circuit has concluded that § 541(a)(6) dictates that insurance pay-
ments be regarded as proceeds of the damaged property itself, not just
of the insurance policy. Bradt v. Woodlawn Auto Workers, F.C.U.,
757 F.2d 512, 515 (2d Cir. 1985) ("[T]he insurance payment for
repairs to an automobile that is property of the estate unquestionably
is also property of the estate."). Some courts, purportedly following
Bradt, have asserted that § 541 "supersedes state law." See In re Asay,
184 B.R. 265, 267 (Bankr. N.D. Tex. 1995). See also In re
Hoffmeister, 191 B.R. 875, 878-879 (D. Kan. 1996) (following Bradt
as alternative holding), aff'd, ___ F.3d ___ (10th Cir. 1996); Payne
v. Wood, 775 F.2d 202, 204 (7th Cir. 1985), cert. denied, 475 U.S.
1085 (1986).
It is not at all clear to us that the legislative history of § 541(a)(6)
supports this result. See Unsecured Creditors Comm. v. Marepcon
11
Fin. Corp. (In re Bumper Sales, Inc.), 907 F.2d 1430, 1437 (4th Cir.
1990) (dismissing similar Congressional statement regarding interpre-
tation of "proceeds" under 11 U.S.C. § 552 as "a vague and isolated
piece of legislative history"). We note that in another portion of the
legislative history, Congress stated that § 541 "is not intended to
expand the debtor's rights against others more than they exist at the
commencement of the case." S. Rep. No. 989, at 82, 1988
U.S.C.C.A.N. at 5868; H.R. Rep. No. 595, at 367, 1988 U.S.C.C.A.N.
at 6323.
Nor is it clear that Bradt and the cases following it really held that
§ 541(a)(6) required, as a matter of federal law even if state law pro-
vided to the contrary, that payments from insurance policies issued
post-petition be regarded as property of the bankruptcy estate just
because the property that those policies insured was property of the
estate. In Bradt itself the court concluded that state law required the
same result as that which the court believed to be mandated by § 541.
See Bradt, 757 F.2d at 514-15. Furthermore, nothing in Bradt or any
of the cases following it suggests that those cases involved insurance
policies issued post-petition. Rather, it appears that the insurance poli-
cies considered in Bradt (and its progeny) were issued pre-petition
and so the policies themselves constituted property of the bankruptcy
estate. Any payments from pre-petition policies are indisputably "pro-
ceeds" of estate property; these additional facts would make the hold-
ing of Bradt an unremarkable one.
Indeed, the only case squarely to have confronted policies issued
post-petition has held, under state law similar to that of Virginia, that
payouts from post-petition policies are merely proceeds of the poli-
cies, not proceeds of the underlying property, and therefore not prop-
erty of the estate. See In re CS Associates, 161 B.R. 144, 147 (Bankr.
E.D. Pa. 1993) ("Under Pennsylvania law, an interest in the Debtor's
real property and an interest in the [hazard] insurance proceeds arising
from damages to that Property are two distinct things. Specifically,
Pennsylvania courts have consistently held that insurance contracts
are personal contracts of indemnity and that they protect the insured's
interest in the property, but that they are not an indemnity on the
property itself."), aff'd, 184 B.R. 458 (E.D. Pa. 1994).
In any event, we refuse to hold that § 541(a)(6) requires as a matter
of federal law, that payouts from insurance policies be regarded as
12
proceeds of property of the bankruptcy estate merely because the
property insured is part of the bankruptcy estate. American common
law has long and firmly held that casualty payments from insurance
policies do not stand in the place of the damaged property. "It is well
established that . . . proceeds of a fire policy . .. [do] not arise from
property, but from a personal contract between insurer and insured."
4 Collier on Bankruptcy ¶ 541.12 (15th ed. 1996); Columbia Ins. Co.
v. Lawrence, 35 U.S. (10 Pet.) 507, 512 (1836) (citing "Lord Chancel-
lor King, in Lynch v. Dalzell, (3 Bro.P.C. 497 s.c., 2 Marsh on Ins.
b. 4, ch. 4, p. 803) . . . [as] saying, `these policies are not insurances
of the specific things (goods) mentioned to be insured; nor do such
insurances attach to the realty, or in any manner go with the same, as
incident, . . . but they are only special agreements with the persons
insured against such loss or damage as they may sustain.'"); Hopkins
Ill. Elevator Co. v. Pentell (In re Pentell), 777 F.2d 1281, 1284 (7th
Cir. 1985) ("[T]he insurance proceeds are not considered to be
derived from the real property . . . ."). We think it unlikely that
§ 541(a)(6)'s mixed legislative history indicates a Congressional
intent to reject this extensive body of common law.
Thus we are left without any countervailing federal interest requir-
ing that the term "proceeds" be defined differently than it would be
under state law.
IV.
Accordingly, we look to state law. See In re Estate of Medcare
HMO, 998 F.2d 436, 441 (7th Cir. 1993) ("[W]hen Congress has not
provided an explicit alternative to state law, we are mindful that the
Bankruptcy Code was written in the shadow of state law and conclude
that Congress intended state law to fill the interstices."). Specifically,
we examine Virginia law to determine if these insurance payouts are
proceeds of estate property or only proceeds of the policy. See, e.g.,
Fairfield v. United States (In re Ballard), 65 F.3d 367, 371 (4th Cir.
1995) (finding that Virginia property law determined whether credi-
tors could reach proceeds of sale of jointly held estate property);
Steyr-Daimler-Puch of America Corp. v. Pappas, 852 F.2d 132, 136
(4th Cir. 1988) (holding that under Virginia law, corporation has equi-
table interest in assets of alter ego and therefore alter ego claim at
issue was "property of the estate" under § 541(a)(1)).
13
Under Virginia law, payments made pursuant to insurance con-
tracts protecting against damage to property are not proceeds derived
from the property itself. Thompson v. Gearheart, 119 S.E. 67, 69 (Va.
1923). See also Lynch v. Johnson, 84 S.E.2d 419, 422-23 (Va. 1954).
This holding accords with the body of common law referred to above,
defining the insurance contract as a personal contract between the
insurer and insured, totally separate from the insured property. See,
e.g., Columbia Ins. Co., 35 U.S. (10 Pet.) at 512; In re Pentell, 777
F.2d at 1284.
The district court recognized this well established Virginia law. On
the basis of it, the court correctly held that payouts from the American
Bankers policy on the Houskas' house were not proceeds derived
from the house itself, but only proceeds of a policy issued post-
petition that never became part of the bankruptcy estate. Accordingly,
the court properly granted summary judgment to American Bankers.
Although the USF&G policy, like the American Bankers policy,
was not issued until long after the Houskas filed their bankruptcy
petition and a significant amount of time after the Houskas ceased
being debtors in possession, the district court found that the bank-
ruptcy estate did have an interest in payouts from the USF&G policy.
The court reasoned that the Houskas' creditors could have reasonably
assumed that some insurance policy on the house continued in force,
similar in terms to the Home policy, which had been disclosed at the
first § 341 meeting in October of 1991. The court concluded that
because the USF&G policy covered the same property, to the same
extent, and was purchased through the same insurance agent as the
Home policy, it was a "replacement policy" and so the court should
treat it as if it were in fact the Home policy. According to the district
court, the Houskas bought the USF&G policy in order to benefit the
estate, feeling an obligation to maintain insurance protection at the
same level as it had been at the time of petitioning. 184 B.R. at 502.
Following this line of reasoning, the court held that the estate was, by
implication, a third party beneficiary of the USF&G policy.
Under Virginia law, if someone purchases an insurance policy with
the intent to benefit someone else, that third person does have a claim
on the policy's proceeds. See Va. Code Ann.§ 55-22 (Michie 1995);
Lynch, 84 S.E.2d at 423. However, this third party beneficiary doc-
14
trine only applies when "parties to [the contract to benefit the third
party] `clearly and definitely intended' to confer a benefit upon him."
Copenhaver v. Rogers, 384 S.E.2d 593, 596 (Va. 1989) (citations
omitted) (holding that third party must be intended beneficiary of the
contract, not just beneficiary of the estate and that "[t]he essence of
a third-party beneficiary's claim is that others have agreed between
themselves to bestow a benefit upon the third party"). Thus, Virginia
law requires that both parties to the contract intend to benefit the third
person. Richmond Shopping Ctr., Inc. v. Wiley N. Jackson Co., 255
S.E.2d 518, 523 (Va. 1979) ("[T]he third party must clearly show that
the contracting parties definitely intended the contract to confer a ben-
efit upon him; incidental beneficiaries may not sue thereon.") (cita-
tions omitted); Levine v. Selective Ins. Co. of America, 462 S.E.2d 81,
82-83 (Va. 1995) (finding Levines may be third party beneficiaries of
insurance contract, noting that even though contract made no mention
of the Levines, "all parties expressly understood that the beneficiaries
of such Policy were the Levines").
Here, nothing evidences the requisite intent by both parties to the
USF&G insurance contract. Even if the Houskas intended to benefit
the bankruptcy estate, USF&G did not. USF&G may not have even
known the Houskas were bankrupt. No mention of the estate appeared
on the policy as an insured or a loss payee, although the Houskas cer-
tainly could have asked USF&G to write the policy that way, given
that they were already Chapter 7 petitioners when they purchased the
policy. No extrinsic evidence suggests that the parties to the contract
agreed that anyone other than the Houskas and Household, the named
loss payee, would benefit. Therefore, under Virginia law, the trustee
had no more interest in the USF&G policy than in the American
Bankers policy. Accordingly, the district court erred in refusing to
grant summary judgment to USF&G.
V.
Although the trustee concedes that the district court erred in hold-
ing that the estate was a third-party beneficiary of the USF&G insur-
ance policy, Appellee's Opening Brief at 23, the trustee nonetheless
claims the estate has an interest in both policies for two reasons.
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A.
First, the trustee relies on Kremen v. Harford Mut. Ins. Co. (In re
J.T.R. Corp.), 958 F.2d 602 (4th Cir. 1992) (per curiam). In J.T.R.,
Kenny, a principal of the bankrupt debtor, J.T.R., intentionally burned
J.T.R. property after the filing of J.T.R.'s Chapter 11 bankruptcy peti-
tion, but prior to the appointment of the bankruptcy trustee. When
Kenny committed the arson, J.T.R. was a debtor in possession and as
such the corporation became a fiduciary of its bankruptcy estate. The
filing of the corporation's bankruptcy petition had made Kenny "a
third party to the transaction." Id. at 605. Accordingly, the fraud
defenses that barred Kenny from recovery were not effective against
J.T.R.'s bankruptcy trustee.
J.T.R. is inapposite here because the insurance policy at issue in
J.T.R. had been issued on November 3, 1978, seven months before the
June 1979 filing of the Chapter 11 petition. Kremen v. Harford
Mutual Ins. Co. (In re J.T.R. Corp.), Bankr. No. 79-00999-L, Civ. No.
M 82-1159, at 1-2 (D. Md. Dec. 5, 1986). Thus, in J.T.R., unlike the
case at hand, the policy clearly constituted an asset of the estate.
J.T.R. does not suggest, let alone hold, that insurance policies pur-
chased post-petition are somehow, because of the insured's arson,
converted into estate property. All that J.T.R. holds is that arson by
the debtor's principal after a bankruptcy petition has been filed does
not bar the bankruptcy estate from recovering under an insurance pol-
icy that is itself a part of the bankruptcy estate, even if the principal
would be barred from recovery under the policy.
Contrary to Trustee Maness' suggestion, our holding in this case
does not mean a bankruptcy trustee could never recover under a post-
petition insurance policy that does not designate the estate as the
insured. A trustee could recover under such a policy, but the trustee
would have to do so through an equitable lien on the proceeds. When
pursuing an equitable lien, the trustee could, of course, only recover
if the named insured (the bankrupt) could recover. Thus, in the case
at hand, Trustee Maness' pursuit of an equitable lien would not enable
him to circumvent the arson and fraud defenses available against the
Houskas.
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B.
In addition to his J.T.R. argument, Trustee Maness claims that a
holding that payouts from post-petition insurance policies are not
assets of the bankruptcy estate would place on the bankruptcy trustee
the "impossible burden of policing whether the debtor has named the
bankruptcy trustee on an insurance policy [and] whether [the policy]
is [a] new one or a replacement one." Appellee's Opening Brief at 26.
Our holding does require a trustee to pay attention to the safety of
the bankruptcy estate and preservation of its assets. We do not
believe, however, that requiring the trustee to determine whether
estate property is insured by policies owned by the estate or those in
which the estate or trustee are named insureds imposes an extraordi-
nary burden. See, e.g., Yadkin Valley Bank & Trust Co. v. Northwest-
ern Bank (In re Hutchinson), 132 B.R. 827, 832 (Bankr. M.D.N.C.
1991) ("A trustee . . . has a duty to exercise reasonable diligence to
preserve and protect [estate] property."), aff'd and remanded, 5 F.3d
750, 758 (4th Cir. 1993). If the burden imposed is so onerous as to
defeat the intent and purpose of the Bankruptcy Code, then Congress
must act. But until Congress provides a federal definition of "pro-
ceeds" which clearly includes payouts of insurance policies issued
post-petition and purchased without using estate assets, a court must
look to state law. State law will determine if such payouts constitute
proceeds of estate property. See Butner, 440 U.S. at 35.
VI.
We therefore affirm the district court's denial of summary judgment
to American Bankers and reverse its grant of summary judgment to
USF&G. We remand the case for further proceedings consistent with
this opinion.
Nos. 95-2641 and 95-2643 - AFFIRMED AND REMANDED
No. 95-2642 - REVERSED AND REMANDED
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