Chatz v. Cont'l Cas. Co. (In re CFB Liquidating Corp.)

581 B.R. 317

IN RE CFB LIQUIDATING CORPORATION, f/k/a Chicago Fire Brick Co., an Illinois Corporation, et al., Debtors.

Barry A. Chatz, as Trustee for the CFB/WFB Liquidating Trust, Plaintiff,

v.Continental Casualty Company, Defendant.

Case No. 01–45483 RLE Jointly Administered

Adversary No. 15–4136

United States Bankruptcy Court, N.D. California, Oakland Division.

Signed November 15, 2017

Entered November 16, 2017

Peter C. Califano, Cooper, White and Cooper, San Francisco, CA, Joseph D. Frank, Law Offices of Frank and Gecker, Chicago, IL, for Plaintiff.

Suzanne R. Fogarty, Duane Morris LLP, San Francisco, CA, Jeff D. Kahane, Duane Morris LLP, Raymond J. Tittmann, Wargo & French LLP, Los Angeles, CA, Robert Whitney, Young Moore & Henderson, P.A., Raleigh, NC, for Defendant.

MEMORANDUM DECISION ON TRUSTEE'S MOTION FOR AWARD OF ATTORNEYS' FEES, COSTS, AND PENALTY PURSUANT TO ILLINOIS INSURANCE CODE 215 ILCS 5/155

Roger L. Efremsky, U.S. Bankruptcy Judge

I. Introduction

Before the Court is the motion of Barry A. Chatz, the trustee of the CFB/WFB Liquidating Trust (the "Trustee" and the "Trust") for an award of fees, costs, interest, and penalty to be assessed against Continental Casualty Company ("Continental") under Illinois Insurance Code 215 ILCS 5/155 for vexatious and unreasonable conduct (the "§ 155 Motion" and the "§ 155 Issues").

The § 155 Motion has been fully briefed and argued. These are the Court's findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052. For the reasons explained below, the Court grants the § 155 Motion.

II. Jurisdiction

This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334(b). This is a core proceeding within the meaning of 28 U.S.C. §§ 157(b)(2)(A), (B), (L), and (O).

In the alternative, if it is determined that this is not a core proceeding, the Court finds it is otherwise related to this chapter 11 case and this decision shall be treated as proposed findings of fact and conclusions of law. 28 U.S.C. § 157(c) ; Montana v. Goldin (In re Pegasus Gold Corp. ), 394 F.3d 1189, 1194 (9th Cir. 2005) (applying "close nexus" test for post-confirmation "related to" jurisdiction).

The Court also retained jurisdiction to resolve this matter in the Joint Plan of CFB Liquidating Corporation, f/k/a Chicago Fire Brick Company, and WFB Liquidating Corporation, f/k/a Wellsville Fire Brick Company, as modified (the "Plan") and the Order Confirming the Plan (the "Confirmation Order"). Main Case Docket nos. 421, 460.

III. Background

A. The Plan

As explained in greater detail in the Court's Summary Judgment Decision issued in November 2016, the Plan was designed to provide a comprehensive mechanism to resolve Asbestos Claims—as defined in the Plan—in an efficient, centralized, and equitable manner. AP Docket no. 44. (The Summary Judgment Decision is incorporated herein by reference.¹ )

The Debtors' settlements with their solvent insurers other than Continental were incorporated into the Plan and these insurers' policy proceeds funded the Trust with approximately $16 million to be used to pay Allowed Asbestos Claims. Main Case Docket no. 421.

Continental did not enter into the same sort of settlement as the other insurers but agreed to Plan provisions that created a mechanism for Continental to provide its insurance coverage to pay the Asbestos Claims that triggered its Policies (the "Tendered Claims"). Plan, § 8.3 ("Handling of Claims for which Continental May Have Financial Responsibility").²

In short, after the Asbestos Claims were allowed pursuant to the requirements of the Trust Distribution Procedures (the "TDP"), the Plan provided that the Trustee would submit Proposals to Continental stating the liquidated value of each Asbestos Claim for which it contended Continental's Policies provided coverage, including supporting evidence using a Court-approved proof of claim form. The Plan also provided that the Trustee could submit only 660 Claims per quarter and 2,500 per calendar year and Continental had 90 days to respond to a Proposal. During the 90–day period after receipt of a Proposal, Continental could seek additional information from the Trustee or the Claimant, and had to inform the Trustee in writing whether it accepted or rejected the terms of the Proposal. Plan, § 8.3. If Continental accepted a Proposal, it agreed to pay its allocated percentage of the liquidated value of the Tendered Claims, or any different amount agreed upon with the Trustee. Plan, § 8.3(a). To the extent Continental had coverage defenses, the Plan provided it with a way to assert them. Plan, § 8.3(b).

B. The Tendered Claims and Continental's Response

Between May 2015 and September 2015, the Trustee submitted four Proposals to Continental covering 249 Claims with a liquidated value sufficient to exhaust Continental's $2.5 million in Policy limits. In each Proposal, the Trustee contended that Continental's allocated percentage was 100% of the liquidated value of the Tendered Claims. The cover letter for each of the Trustee's Proposals stated that:

[E]ach claim results from repeated exposure to one or more asbestos-containing products for which one of the Debtors has legal responsibility, including exposure during the coverage period of the Continental Policies.

AP Docket no. 15, Ex. D (Trustee's May 7, 2015 letter to Continental tendering claims); AP Docket no. 52, Dec. Frank, ¶ 7–12.

Continental's response to these Proposals, and those sent after this litigation commenced, was that they did not constitute Proposals within the meaning of § 8.3 of the Plan because 100% was not a permitted allocation unless the evidence showed that the Claimant was exposed to asbestos exclusively during Continental's Policy periods:

You may be expecting us to infer a 100% allocation to Continental for each of the Tendered Claims. If so, then the Letters and their enclosures provide insufficient information from which we can confirm exposure for each holder of one of the Tendered Claims to a Chicago Fire Brick product exclusively during periods for which Continental may bear responsibility ...."³

AP Docket no. 52, Dec. Frank, Ex. 1 (Continental's August 4, 2015 letter to Trustee) (emphasis added).

The pre-litigation correspondence between Continental and the Trustee shows that the Trustee relied on the holding of Zurich Ins. Co. v. Raymark Industries, Inc., 118 Ill.2d 23, 112 Ill.Dec. 684, 514 N.E.2d 150 (1987) that each primary insurer whose policy is triggered is jointly and severally liable and must pay 100% (i.e. , "all sums") on covered claims. Zurich holds that coverage under policies with language identical to Continental's is triggered by the occurrence of three conceivable events: (1) exposure to asbestos during a policy period; (2) manifestation of asbestos-related disease during a policy period; and (3) diagnosis of asbestos-related sickness during a policy period. Id. at 47, 112 Ill.Dec. 684, 514 N.E.2d 150. The Zurich court concluded that

[T]he plain language of the policies unambiguously provides that the insurable event which gives rise to the insurer's obligation to provide coverage (i.e. , the "trigger of coverage") is not the exposure to conditions, but the resulting "bodily injury." "Bodily Injury," which gives rise to the insurer's duties under the policies, is defined as "bodily injury, sickness or disease."... [T]hese terms must be read as separate and distinct triggers of coverage.

Id. at 44, 112 Ill.Dec. 684, 514 N.E.2d 150.

While it may seem like an unnecessary detour to review the Zurich decision in this detail, the Court finds it necessary due to Continental's repeated misstatement of controlling law that a Tendered Claim must include evidence that a Claimant suffered a sickness or disease resulting from exposure during its Policy periods . See, for example, AP Docket no. 69, Dec. Tittman, ¶ 5; AP Docket no. 125–2, Dec. Tittman, ¶ 13, AP Docket no. 125 at 10:4, 24:26–25:3. To be clear, under Zurich , coverage is triggered if a claimant manifests sickness or is diagnosed with disease during Continental's Policy periods. Id. at 45–46, 112 Ill.Dec. 684, 514 N.E.2d 150. Adding the phrase "resulting from exposure during its Policy periods " is an inappropriate gloss on the Policy language and the applicable standard.

In asserting the 100% allocation, the Trustee also relied on the liquidated value of the Allowed Claims ($46 million) and the limited fund from which to pay them (roughly $14 million at that time). Main Case Docket nos. 533, 543.⁴

C. The Adversary Proceeding and Summary Judgment Decision

When Continental had not responded after the 90 days had run from the Trustee's September 2015 Proposal, the Trustee sued Continental for declaratory relief and $2.5 million in damages for breach of the Plan and breach of Continental's Policies, plus extra-contractual damages under § 155. AP Docket no. 15 (First Amended Complaint).

Continental's Answer denied the allegations of the First Amended Complaint and stated eighteen affirmative defenses, many of which raised insurance coverage issues. AP Docket no. 19. Continental also stated a Counterclaim for declaratory relief on the grounds that § 8.3 of the Plan precluded a contention that Continental's allocated percentage was 100% of the liquidated value of any Tendered Claim. AP Docket no. 19.

At the first Adversary Proceeding status conference on May 3, 2016, referring to the disputed allocation issue, Continental's counsel stated:

[If the Court] says that the allocated percentage means 100%, then the case is over, right? Because then that is effectively saying we have to pay everything, and so we pay everything .

AP Docket no. 121, Ex. A, Hr'g Tr. (May 3, 2016) at 22:19–23 (emphasis added).

The Trustee's counsel asked the Court to set a trial date, but Continental's counsel urged the Court to instead set a briefing schedule for a summary judgment motion that he argued would resolve the entire case. Continental prevailed and the Court set a briefing...