Martinez v. OGA Charters, L.L.C. (In re OGA Charters, L.L.C.)

901 F.3d 599

IN RE: OGA CHARTERS, L.L.C., Debtor

Myra Lynn Martinez, Individually and as Representative of the Estate of Maricela Vega Lopez, Deceased; Jorge Lopez, Individually and as Representative of the Estate of Maricela Vega Lopez, Deceased; Elizabeth Navarro, Individually and as surviving child of Jaime Navarro, Sr., Deceased; Jaime Navarro, Individually and as surviving child of Jaime Navarro, Sr., Deceased; Jesus Navarro, Individually and as surviving child of Jaime Navarro, Sr., Deceased; Maria Del Rosario Navarro, Individually and on behalf of the Estate of Jaime Navarro, Sr., Deceased; Maria Elva Cantu; Maria Eugenia Martinez, Individually and as surviving child of Dora N. Gonzalez, Deceased; Maribel Campa, Individually and as surviving child of Dora N. Gonzalez, Deceased; Yvette Aguilar, Individually and as surviving child of Altagracia Torres, Deceased; George Garza; Olga Garza; Odella Rickard, Individually and on behalf of the Estate of Emma R. Samudio; Suzanne Hughes ; Beatrice Garcia, Appellants

v.OGA Charters, L.L.C ; Imelda Guerrero Ochoa, as Representative of the Estate of Francisca Guerrero, Deceased; Marta Villareal; Idolina Rivera; Mario Alberto Zuniga; Lizbeth Rangel; Thelma Hernandez; Manuel Salinas; Carlota Salinas ; Jaime Garza, on behalf of the Estate of Adelfa Garza; Hortencia Robles; Natalie Alaniz; Guadalupe Carrillo; Elizabeth Cristina Carrillo; Jose Cardenas; Irma Cardenas; Dora Pena; Jomara Weatherby, on behalf of the Estate of Maria de Jesus Musquiz, Deceased; New York Marine and General Insurance Company; Lisa Garza; Michael B. Schmidt, Trustee, Appellees

No. 17-40920

United States Court of Appeals, Fifth Circuit.

FILED August 24, 2018

Eric B. Terry, San Antonio, TX, for Appellants.

Tracy Spillman, Kittleman Thomas, P.L.L.C., Michael A. McGurk, Walsh McGurk Cordova Nixon, P.L.L.C., McAllen, TX, for Beatrice Garcia.

Michael B. Schmidt, Pro Se.

Kay B. Walker, Law Office of Kay B. Walker, Corpus Christi, TX, for Michael B. Schmidt.

Shelby Arthur Jordan, Nathaniel Peter Holzer, Jordan, Hyden, Womble, Culbreth & Holzer, P.C., Corpus Christi, TX, for Marta Villareal, Idolina Rivera, Mario Alberto Zuniga, Lizbeth Rangel, Thelma Hernandez, Manuel Salinas, Carlota Salinas, Guadalupe Carrillo, Elizabeth Cristina Carrillo, Jose Cardenas, Irma Cardenas, Dora Pena, Imelda Guerrero Ochoa, Hortencia Robles, Natalie Alaniz, Jaime Garza, Jomara Weatherby, and Lisa Garza.

Before REAVLEY, GRAVES, and COSTA, Circuit Judges.

REAVLEY, Circuit Judge:

This is a direct appeal from the bankruptcy court. The primary issue is whether proceeds of the debtor's liability policy are property of the bankruptcy estate. The bankruptcy court found the proceeds were property of the estate. We AFFIRM.

I.

The facts of this case are tragic yet uncomplicated. In May 2016, a bus owned by OGA Charters, LLC rolled over while on its way to the Kickapoo Lucky Eagle Casino in Eagle Pass, Texas. The single-vehicle crash killed nine passengers and injured more than 40 others. The accident gave rise to personal-injury, wrongful-death, and survival claims against OGA. However, OGA owned only two busses and had limited resources. As is often the case, the search for assets began.

Through New York Marine & General Insurance Company ("NYM"), OGA owned an insurance policy that provided $5 million in liability coverage for "covered autos." The policy also provided collision and comprehensive coverage. A small group of victims and their representatives (the "Settled Claimants") quickly entered into settlements with NYM that—if valid and enforceable—would exhaust the $5 million in liability coverage.¹ Less than two months after the accident, the victims without settlements (the "Unsettled Claimants") filed an involuntary bankruptcy petition against OGA. The Unsettled Claimants also initiated an adversary proceeding against OGA and NYM. The Settled Claimants intervened in the adversary proceeding, and the bankruptcy court preliminarily enjoined NYM from paying out any policy proceeds.

Following the appointment of a Chapter 7 trustee, the parties filed cross-motions for summary judgment, disagreeing over whether the proceeds of the insurance policy were property of the bankruptcy estate under 11 U.S.C. § 541(a). The bankruptcy court granted summary judgment in favor of the Trustee and Unsettled Claimants, ruling that the proceeds were property of the estate. The Settled Claimants sought a direct appeal to this court, and the bankruptcy court certified the following question under 28 U.S.C. § 158(d)(2) :

Are proceeds of a debtor-owned liability insurance policy property of the debtor's bankruptcy estate when: (1) the policy covers the debtor's liability to third parties; (2) the debtor cannot make a legally cognizable claim against the policy; and (3) the claims by third parties exceed the coverage limits of the policy[?]

The Settled Claimants argue that the policy proceeds are not property of the estate, meaning they should be allowed to recover the full $5 million despite OGA's pending bankruptcy proceedings. Conversely, the Unsettled Claimants argue that the proceeds should be subjected to the bankruptcy court's process of equitable distribution amongst creditors.² The claims against OGA's estate exceed $400,000,000. Other than the accident victims and their representatives, OGA has one other creditor, with a claim for less than $9,000.

II.

When directly reviewing an order of the bankruptcy court on appeal, we apply the same standard of review that would have been used by the district court. SeaQuest Diving, LP v. S&J Diving, Inc. (In re SeaQuest Diving, LP ), 579 F.3d 411, 417 (5th Cir.2009). Thus, we review the bankruptcy court's grant of summary judgment de novo . Williams v. Placid Oil Co. (In re Placid Oil Co. ), 753 F.3d 151, 154 (5th Cir.2014). Summary judgment is appropriate when "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Kinkade v. Kinkade (In re Kinkade ), 707 F.3d 546, 548 (5th Cir.2013) (quoting FED. R. CIV. P. 56(a) ); FED. R. BANKR. P. 7056 (applying FED. R. CIV. P. 56(a) to adversary proceedings).

III.

The commencement of a bankruptcy case creates an estate under 11 U.S.C. § 541. Section 541 provides that the "estate is comprised of all the following property, wherever located and by whomever held: ... all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a) – (a)(1). The definition is intended to be broadly construed. E.g. , United States v. Whiting Pools, Inc. , 462 U.S. 198, 204–05, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). While a debtor's liability insurance policies are generally property of the estate, our treatment of insurance proceeds has a complicated history. See, e.g. , Sosebee v. Steadfast Ins. Co. , 701 F.3d 1012, 1023 (5th Cir.2012).

In Louisiana World Exposition, Inc. v. Federal Insurance Co. (In re Louisiana World Exposition, Inc. ), 832 F.2d 1391 (5th Cir.1987), a corporate debtor purchased liability insurance for its individual directors and officers. Id. at 1398. The policies at issue covered the directors' personal liability and legal expenses incurred by reason of their positions with the corporation. Id. Importantly, the directors and officers were the "named [ ] and only insureds," and the policy did "not cover the liability exposure of the corporation at all." Id. at 1399–1400. We held that the liability proceeds were not property of the estate and, in doing so, distinguished between ownership of insurance policies and insurance proceeds . Id. at 1399–1401 ("The question is not who owns the policies, but who owns the proceeds.").

We next faced the policy/proceeds distinction in Houston v. Edgeworth (In re Edgeworth ), 993 F.2d 51 (5th Cir.1993). In that case, Dr. Edgeworth filed for Chapter 7 protection shortly after a woman died under his care. Id. at 53. After Edgeworth received a discharge, the woman's daughter sought bankruptcy court approval to file a claim against Edgeworth's malpractice policy. Id. We held the daughter could pursue her claim because the malpractice carrier was not protected by Edgeworth's discharge and the proceeds of the policy were not property of his estate. Id. We explained:

The overriding question when determining whether insurance proceeds are property of the estate is whether the debtor would have a right to receive and keep those proceeds when the insurer paid on a claim. When a payment by the insurer cannot inure to the debtor's pecuniary benefit, then that payment should neither enhance nor decrease the bankruptcy estate. In other words, when the debtor has no legally cognizable claim to the insurance proceeds, those proceeds are not property of the estate.

Id. at 55–56 (footnotes omitted). Under this framework, the policy itself was property of the Chapter 7 estate but the proceeds of the policy were not. Id. at 56. However, the panel added an important caveat:

Dr. Edgeworth has asserted no claim at all to the proceeds of his medical malpractice liability policy, and they could not be made available for distribution to the creditors other than victims of medical malpractice and their relatives. Moreover, no secondary impact has been alleged upon Edgeworth's estate, which might have occurred if, for instance, the policy limit was insufficient to cover appellants' claims or competing claims to proceeds. Consequently , in this case the insurance proceeds were not part of the estate.

Id. at 56 (emphasis added).

The framework laid out in Edgeworth remains applicable in this circuit. See Sosebee , 701 F.3d at 1023–24 (applying Edgeworth to determine whether proceeds of a liability insurance policy were property of the estate); see also Kipp Flores Architects, L.L.C. v. Mid-Continent Cas. Co. , 852 F.3d 405, 413 n.11 (5th Cir.2017).³ However, the inquiry remains, as it has always been, a fact-specific one. See Edgeworth , 993 F.2d at 56 ; In re...