In re Kossoff PLLC

1

In the Matter of KOSSOFF PLLC, Debtor.

No. 21-10699 (DSJ)

United States Bankruptcy Court, S.D. New York

May 10, 2023

Chapter 7

APPEARANCES:

CNA COVERAGE LITIGATION GROUP Counsel to Continental Casualty Company By: Janet J. Lee, Esq.

WILEY REIN LLP Counsel to Continental Casualty Company By: Morgan L. Chinoy, Esq.

TOGUT SEGAL & SEGAL LLP Counsel for the Chapter 7 Trustee By Neil Berger, Esq., Jared C. Borriello, Esq.

MEMORANDUM OF DECISION AND ORDER GRANTING MOTION FOR RELIEF FROM THE AUTOMATIC STAY

DAVID S. JONES UNITED STATES BANKRUPTCY JUDGE

Debtor's former liability insurer, Continental Casualty Company ("Continental"), moves for relief from the automatic stay so that Continental can add Debtor Kossoff PLLC, a former New York law firm, as a defendant in pending District Court litigation concerning whether Continental is obliged to provide coverage for liability claims brought against the firm and its attorneys, including claims arising from criminal conduct by Debtor's principal, attorney Mitchell H. Kossoff ("Kossoff").

This bankruptcy case arises from Kossoff's misappropriation of millions of dollars of client funds. Before the revelation of Kossoff's theft and the commencement of Debtor's bankruptcy, Debtor applied for and Continental issued a professional liability insurance coverage policy (the "Policy"). In issuing the Policy, Continental relied in part on representations made by Kossoff that he and the firm were unaware of any acts or omissions by firm attorneys that could be expected to give rise to claims against the firm.

When creditors of the firm learned of the misappropriation, they filed an involuntary petition for relief in this Court under Chapter 7 of the Bankruptcy Code, thus commencing bankruptcy proceedings as to Kossoff PLLC, but not as to Kossoff individually. Kossoff later pled guilty to criminal misappropriation of client funds before, during, and after the time when Debtor applied for the Policy. Subsequently Continental brought a declaratory judgment action in the United States District Court for the Southern District of New York (the "District Court") against multiple defendants seeking a determination that Continental is entitled to rescind the Policy due to material misrepresentations in Debtor's insurance application, and that Continental has no obligation to provide defense or indemnity coverage for claims arising from Kossoff's misconduct or otherwise involving the firm (the "Coverage Action"). Continental contends that Debtor, as named insured on the Policy, is a necessary party to the Coverage Action. Yet, barred by the automatic stay, Continental was and is unable to join Debtor as a defendant in the District Court proceeding. Continental therefore seeks an order lifting the stay so that Continental can add Debtor as a defendant to its already-pending coverage suit.

In its lift-stay motion, Continental contends that it is at risk of near-term economic harm if it does not secure a prompt ruling on its coverage obligations, that the coverage dispute must be adjudicated eventually, and that a comprehensive adjudication in the District Court is the most efficient means to that end. The Chapter 7 Trustee (the "Trustee") opposes, arguing that he has limited resources and faces pressing litigation constraints ahead of a looming May 12 deadline to file asset-recovery actions. The Trustee argues that immediate litigation against Continental would harm the interests of creditors and the bankruptcy Estate by diverting the Trustee from pressing these efforts.

As explained below, Continental has shown cause for relief so that its coverage obligations can be determined. The Trustee has not identified stronger reasons not to lift the stay. The stay therefore is lifted effective May 26, 2023, for the limited purpose of joining Kossoff PLLC as a defendant in the Coverage Action.

I. BACKGROUND

Debtor Kossoff PLLC was a New York law firm led by attorney Mitchell H. Kossoff. In July 2020, Debtor applied for professional liability insurance coverage from movant Continental. [See ECF No. 448-2 at 53-61 of 66]. In the application, prepared by Kossoff as authorized representative of the Debtor, Debtor represented that no attorney in the firm was aware of any "actual or alleged act [or] omission . . . that a reasonable attorney would recognize might reasonably be expected to result in a claim being made against the firm . . . or against any attorney currently or formerly affiliated with the firm." [Id. at 58 of 66; see id. at 61 of 66]. Relying in part on this representation, Continental issued Policy No. 425173386 for the period of August 1, 2020, to August 1, 2021. [Id. at 20-45 of 66].

The Policy is a "claims-made" policy, which is limited to liability for claims first made against the insured during the policy period. [Id. at 20 of 66]. While Kossoff PLLC is the named insured, the Policy also covers partners and associates of the firm and lists by name twenty-four insured attorneys. [Id. at 22, 27 of 66].

On or around April 7, 2021, Kossoff PLLC attorneys alerted Continental that they believed Kossoff may have misappropriated funds held in the firm's IOLA accounts. [ECF No. 448 at 3]. Representatives of Debtor later notified Continental of a series of claims, potential claims, and disciplinary proceedings against Kossoff PLLC. [Id. at 3-4].

On April 13, 2021, certain creditors whose funds were missing from Debtor's IOLA accounts commenced this bankruptcy case by filing an involuntary petition against Kossoff PLLC. [ECF No. 1]. The commencement of the bankruptcy case automatically stayed the commencement or continuation of any judicial action or proceeding against Debtor. 11 U.S.C. § 362(a)(1).

On May 11, 2021, the Court entered an order for relief and the Chapter 7 Trustee was appointed the following day. [ECF Nos. 14-15]. According to the Trustee and consistent with this Court's observation, in the nearly two years since his appointment, the Trustee "has had to actively litigate to obtain books, records and documents concerning the Debtor's affairs" and "is necessarily focused on formulating and asserting affirmative Estate recovery claims." [ECF No. 498 at 2].

The Trustee is presently occupied filing recovery claims ahead of May 12, 2023, when, according to the Trustee, the section 546(a)(1) statute of limitations will expire on most of the Estate's Chapter 5 claims. [Id.; see, e.g., ECF Nos. 521-57 (Trustee initiating twenty-eight adversary proceedings, eight motions to compel, and one tolling agreement)].

On December 13, 2021, Kossoff entered into a plea agreement, [ECF No. 448-2 at 47-51 of 66], in connection with the criminal proceeding styled People of the State of New York v. Mitchell Kossoff, Case No. 028944/2021, in the Supreme Court of the State of New York, County of New York. Under the Plea Agreement, Kossoff admitted to defrauding clients and others in a "systematic ongoing" fraud spanning "[f]rom at least December 2017 to April 2021." [Id. at 48 of 66]. Kossoff ultimately pled guilty to criminal charges and is currently incarcerated.

On August 18, 2022, Continental filed an action in the U.S. District Court for the Southern District of New York seeking a declaratory judgment that Continental is entitled to rescind the Policy based on alleged material misrepresentations made by Kossoff PLLC in its application. [ECF No. 448-2 at 2-18 of 66; Continental Casualty Co. v. Mitchell H. Kossoff, et al., No. 22-cv-7044 (S.D.N.Y. filed Aug. 18, 2022) ("S.D.N.Y. Dkt.")]. As filed, Continental's complaint names as defendants the twenty-four individual attorneys insured under the policy. The named defendants do not include Debtor, the "Named Insured" on the Policy. [See, e.g., S.D.N.Y. Dkt.; ECF No. 448 at 20 of 66].

Between October 2022 and December 2022, Continental entered stipulations of voluntary dismissal with fourteen of the twenty-four individual defendants in the Coverage Action, whereby the stipulating defendants agreed to be bound by, and barred from collaterally challenging, all rulings of the District Court concerning the declaratory relief sought by Continental in the Coverage Action. [S.D.N.Y Dkt. Nos. 16, 18, 22, 24, 26, 39, 47]. Ten individual defendants remain in that proceeding. [See generally ECF No. 498 at 26-38 of 38 (attaching District Court docket sheet indicating current and "Terminated" defendants)]. The District Court has not fixed dates for trial or other deadlines, discovery has yet to commence, and there has been no motion practice. [See id.].

On November 21, 2022, Continental brought the instant motion seeking an order lifting the automatic stay for the limited purpose of joining Debtor as a defendant in the Coverage Action. [ECF No. 448 (the "Motion")]. On December 2, 2022, the District Court stayed the Coverage Action pending resolution of the Motion. [S.D.N.Y. Dkt., ECF No. 45 ("Given the ongoing bankruptcy proceeding and Plaintiff's plans to amend the complaint, economy urges that this action be stayed pending the resolution of Plaintiff's efforts to obtain a lift of the automatic stay.")].

A hearing on Continental's Motion, originally scheduled for December 8, 2022, was consensually adjourned five times. [ECF Nos. 456, 462, 468, 485, 487]. The Trustee filed an objection on February 23, 2023 [ECF No. 498 (the "Objection")], and Continental replied on February 27, 2023 [ECF No. 499 (the "Reply")]. On March 2 2023, the Court heard oral argument on the Motion. During the hearing, the Court encouraged the parties to attempt to seek agreement on how to proceed, possibly by agreeing to a lift of the stay effective on a date after a May 12 deadline that the Trustee's arguments emphasized. No such agreement has been...