Nos. 04-00757-W11 (Lead Case), 04-00758-W11.United States Bankruptcy Court, E.D. Washington.
September 7, 2005
ANDREW A. GUY, WSBA, Stoel Rives LLP, Seattle, WA, Attorneys for PJM Associates, Inc. and William Sears, and Patricia Sears-Million
ORDER ON THE SEARS’ MOTION RE APPLICABILITY OF STAY, AND MODIFYING STAY
PATRICIA WILLIAMS, Chief Judge, Bankruptcy
This motion came before the Court upon the motion (the “SearsMotion”) of PJM Associates, Inc., William E. Sears, and Patricia Jean Sears-Million (the “Sears Parties”), seeking rulings from this Court as to the following issues:
(a) whether, in view of this Court’s Memorandum Decision (the “June 20 Decision”) entered on June 20, 2005 in the Metropolitan Mortgage Securities Co., Inc. et al. v. Cauvell adversary proceeding (Case no. 04-00061, Docket Not 223), the automatic stay of 11 U.S.C. § 362 applies to the negotiation and use of the proceeds of a check the Sears Parties’ counsel has received from American International Specialty Lines Insurance Company (“AISLIC”), one of the insurance companies providing insurance in which the above-captioned chapter 11 debtors and Metropolitan Investment Services, Inc. (“MIS”), a chapter 7 debtor in a separate case filed in this Court under Case No. 04-00756-PCW7 (collectively, “Debtors”) each have an interest, and that provides Errors Omissions coverage for former registered representatives of MIS;
Page 2
(b) whether, if the stay applies, it should be modified to allow negotiation and use of the proceeds of the AISLIC check as specified in the Sears Motion; and
(c) whether the stay prevents continued presentation of fee statements to the Debtors’ insurers pursuant to the terms of the Stipulation and Order re Procedures for Review and Payment of Attorney Fees from Insurance Proceeds (the “Procedures Order”), filed October 28, 2004 under Docket No. 1589 in the administratively consolidated main case.
Objections to the Sears Motion were filed by the Scott Group Claimants (Docket No. 6189) and jointly by the Trustee, Debtors, Unsecured Creditors’ Committees (Docket No. 6190). Certain individual defendants took the position that the Sears Motion was unnecessary. (Docket No. 6185).
Counsel for the Sears Parties, the objecting parties, certain individual defendants and other interested parties presented oral argument on the Sears Motion during a telephone hearing held on August 24, 2005. At the conclusion of the argument, the Court made oral findings and conclusions, announced an oral ruling, and directed counsel for the Sears Parties to prepare and circulate to those present at the hearing an order reflecting the Court’s ruling.
Findings and Conclusions Pertaining to the Procedures Order
A. Numerous claims have been asserted against the Debtors’ former directors and officers and former registered representatives of MIS in state court, federal court and in proceedings conducted by or before the National Association of Securities Dealers (collectively, the “Related LitigationMatters”).
B. Although there are issues as to whether particular defendants or particular defense costs may be covered under the Debtors’ insurance policies (and without deciding those issues at this time and otherwise without prejudice to any rights any defendants may have under those policies), the Court recognizes that a number of the defendants in the Related Litigation Matters have made claims for coverage under one or more of the Debtors’ insurance policies, including policies issued, respectively, by Federal Insurance Company (“Federal”), American
Page 3
International Specialty Lines Insurance Company (“AISLIC”), National Union Insurance Company (“National Union”), and St. Paul Mercury Insurance Company (“St. Paul”). (Hereinafter, these insurers are collectively designated as the “Debtors’Insurers” and the policies issued to one or more of the Debtors by these three insurers are designated as the “Debtors’Policies”).
C. Until the end of June 2005, the defendants in the Related Litigation Matters and their counsel relied on the Procedures Order and reasonably believed that costs of defending claims asserted in the Related Litigation Matters would be reimbursed by proceeds of the Debtors’ insurance policies.
D. It would not be fair to the defendants in the Related Litigation Matters or their counsel to penalize them retroactively for responding to all of the various securities and related litigation in an appropriate manner before the June 20 Decision was entered. The cutoff date should be June 30, 2005 for law firms that operate on a monthly billing cycle.
E. Accordingly, the provisions of the Procedures Order should remain in full force and effect as to all fees and costs incurred through June 30, 2005. The insurance policy proceeds have been, or will soon be deposited in interpleader actions filed in this Court by Federal (Adversary Proceeding No. 05-80126-PCW), National Union and AISLIC (Adversary Proceeding No. 05-80135-PCW), and St. Paul (Adversary Proceeding No. 05-80138-PCW). (These interpleader actions, together with any and all interpleader actions that may be filed in connection with insurance policies in which one or more of the Debtors may claim an interest as an insured, pertaining to claims and/or defense fees and costs asserted in connection with any of the Related Litigation Matters, are collectively designated herein as the”Interpleader Actions.”) Orders allowing the Debtors’ Insurers to make these deposits have been entered in Adversary Proceeding 05-80135 at Docket No. 104, and in 05-80126 at Docket No. 33.
Page 4
F. Subject to the need to look first to other potentially applicable insurance, as provided in paragraph H below, and subject to the right of the Debtors’ Insurers to make an independent determination as to coverage as provided in paragraph 6 of the Procedures Order, (a) the defendants in the Related Litigation Matters may make demand upon the Court for all defense fees and costs incurred through June 30, 2005, pursuant to procedures specified in an order amending the Procedures Order entered on or about the same date as this order is entered.
G. With respect to defense fees and costs incurred from and after July 1, 2005, the defendants in the Related Litigation Matters should be allowed to assert claims for recovery of defense fees and costs and indemnity in any of the Interpleader Actions; provided, however, that, based on marshaling principles, if defendants have a claim to coverage for defense fees and costs under a policy issued by Arch Insurance Company (“Arch”) or any other policy that is not one of the Debtors’ Policies, those policies are primary over AISLIC and defendants must look first to payment from Arch or such other insurer, as applicable, and may obtain recovery under one or more of the Debtors’ Policies (whether or not the policy proceeds have been interpled as part of one or another of the Interpleader Actions) only if Arch or such other insurer, as applicable, fails to make full payment.
H. The Procedures Order should be amended to reflect the procedures outlined herein.
Findings and Conclusions Pertaining to the AISLIC Check Proceeds
I. The Sears Parties and AISLIC have agreed that the portion of the AISLIC payment related to fees and costs incurred in connection with defense of matters pertaining to Department of Justice (“DOJ”) or Securities and Exchange Commission (“SEC”) investigations was not covered by the AISLIC policy and should be returned to AISLIC. The balance of the AISLIC payment received by Stoel Rives represents one-half of fees and costs incurred by the Sears Parties
Page 5
through Stoel Rives for billing periods prior to July 31, 2004.
J. The Sears Parties previously received payment, under insurance policies issued to them by Arch, for all of the fees and costs included in the AISLIC payment other than the DOJ- and SEC-related matters.
K. The Arch policy is not property of the Debtors’ bankruptcy estates, and the automatic stay does not apply to the Arch policy. Marshaling principles require the Sears Parties to attempt to obtain payment from Arch before looking to AISLIC or any of the Debtors’ insurance policies.
L. Because Arch has previously paid all of the fees and costs covered by the AISLIC check except that portion that the Sears Parties and AISLIC agree are not covered by the AISLIC policy, the Sears Parties should return the AISLIC check to AISLIC. Upon return of the check, AISLIC should deposit the funds represented by the check into the pending interpleader action in which AISLIC is a party. If Arch wishes to seek reimbursement of any defense fees or costs or indemnity it has paid or hereafter pays to or for the benefit of the Sears Parties and that Arch contends are AISLIC’s responsibility, Arch must itself intervene in the interpleader action filed by the Debtors’ Insurers and seek such recovery, including any contribution rights, from the interpled funds.
Now, therefore, it is hereby ORDERED:
1. The automatic stay of 11 U.S.C. § 362(a) applies to attempts to recover from the Debtors’ Insureds defense fees and costs incurred by defendants in the Related Litigation Matters.
2. The Sears Parties shall return the June 25, 2005 AISLIC check in the amount of $108,930.44 to AISLIC, and AISLIC shall deposit the funds represented by the check into the pending interpleader action in which AISLIC is a party. If Arch wishes to seek reimbursement of any defense fees or costs or indemnity it has paid or hereafter pays to or for the benefit of the Sears Parties and that Arch contends are AISLIC’s responsibility, Arch must itself intervene in one or more of
Page 6
the Interpleader Actions and seek such recovery, including any contribution rights, from the interpled funds.
3. Pursuant to marshaling principles, the Arch policy is primary and the Sears Parties must seek payment from Arch for payment or reimbursement of fees and costs incurred in connection with the Related Litigation Matters before seeking reimbursement from AISLIC or the Interpleader Action in which AISLIC is a party.
4. If, and to the extent that, Arch fails to pay Stoel Rives or to reimburse the Sears Parties for such fees and costs, the Sears Parties may seek payment from the interpled funds in the Interpleader Action to which AISLIC is a party for payment of all such fees and costs incurred through June 30, 2005. The Sears Parties shall follow the procedures set forth in the Amended Procedures Order in seeking payment from the interpled funds for fees and costs incurred through June 30, 2005.
5. Without limiting any other legal avenues that may be available to the Sears Parties or other defendants in the Related Litigation Matters with respect to recovery of defense fees and costs incurred after June 30, 2005, and subject to the provisions in paragraph 3 of this Order, the Sears Parties and other defendants in the Related Litigation Matters shall have the right to assert claims in the Interpleader Actions to recover the respective defense fees and costs they have incurred in connection with one or more of the Related Litigation Matters after June 30, 2005.
Page 7
6. The Procedures Order shall be amended in a separate order to reflect the findings and conclusions recited in paragraphs A through H above.