Lawsky v. Frontier Ins. Grp., LLC (In re Frontier Ins. Grp., Inc.)Lawsky v. Frontier Ins. Grp., LLC (In re Frontier Ins. Grp., Inc.)
Before the Court is the appeal of Plaintiff-Appellant Benjamin Lawsky, Superintendent of Financial Services of the State of New York
I. BACKGROUND
A. Facts
1. Parties
In 2001, the Supreme Court of the State of New York placed FIC in a temporary rehabilitation proceeding under the New York Insurance Law, and subsequently entered a final rehabilitation order. (Bankr. Doc. 74-23.) The rehabilitation order vested the Superintendent of Insurance (the "Rehabilitator") with ownership and possession of FIC's property. (Bankr. Doc. 55 ¶ 46.) The Superintendent of Insurance is the statutory predecessor of the Superintendent of Financial Services, meaning the Rehabilitator is Plaintiff-Appellant's predecessor. (Id. ¶ 45.)
Frontier Insurance Group, Inc. ("FIGI") was the corporate parent of FIC, and on July 5, 2005, FIGI filed a voluntary petition in the U.S. Bankruptcy Court for the Southern District of New York for relief under chapter 11 of title 11 of the United States Code. In re Frontier Ins. Grp., Inc. , No. 05-36877 (Bankr. S.D.N.Y.), Doc. 1. Under FIGI's chapter 11 plan, FIGL became FIGI's successor. (See Bankr. Doc. 52-4 (the "Plan").)
2. Parcels A, B, and C
In 1991, FIC purchased a 15.23-acre site in Sullivan County, (Bankr. Doc. 74-1), which is now considered Parcel A. In 1993, FIGI purchased an adjacent 15.667-acre site, (See Bankr. Doc. 74-2), 2.7 acres of which are now considered Parcel B and 12.967 acres of which are now considered Parcel C. At the outset and through FIGI's bankruptcy proceedings, the properties were not referred to as Parcels A, B, and C, (together, the "Rock Hill property"); those designations were not used until the events giving rise to the instant dispute occurred. (See Bankr. Doc. 60 at 99:2-6, 137:4-19; see also Trial Dec. at 2.)
Prior to FIGI's bankruptcy proceedings, FIC and FIGI shared a building as their headquarters on Parcel A, with an address of 195 Lake Louise Marie Road, Rock Hill, New York (the "Headquarters"). (See Bankr. Doc. 52-1; Trial Dec. at 2.) There were two additional structures on the Rock Hill property: a daycare center referred to as "Nana's House" and a tool shed referred to as the "pole barn," both on Parcel C. (See Bankr. Doc. 52-2.) Nana's House's address was 16 Frontier Drive, Rock Hill, New York, and the pole barn's address was 195 Lake Louise Marie Road, the same as the Headquarters. (Id. ) Other portions of Parcel C as well as Parcel B were used for parking. (See Doc. 7 ("Mem.") at 7 (aerial photo of the Rock Hill property.)
In connection with development of the Rock Hill property, FIGI, FIC, and the County of Sullivan Industrial Development Authority ("CSIDA") entered into a Payment in Lieu of Taxes ("PILOT") agreement, which provided tax relief to FIGI and FIC subject to periodic payments for a twenty-year period commencing on February 28, 1994. (Bankr. Doc. 74-12 at 2.) As collateral under the PILOT agreement, FIC transferred Parcel A to CSIDA in 1993, FIGI transferred Parcel B to CSIDA in 1994, and, in 1997, FIGI deeded Parcel C to FIC, which that same day deeded Parcel C to CSIDA. (Bankr. Docs. 74-5,
3. FIGI's Bankruptcy
In 2003, the Insurance Management Group, Inc. ("IMG") bought the debt secured by a first lien on substantially all of FIGI's assets. (Bankr. Doc. 48 ¶¶ 3-4.) FIGI then commenced its chapter 11 case with the goal of enabling IMG to obtain FIGI's interest in FIC, along with FIGI's other property. (Id. ¶ 4.) In connection with its chapter 11 petition, pursuant to
On August 29, 2005, Neal Conolly, the administrator of FIC designated by the Rehabilitator, filed a $ 43,230,580 proof of claim against FIGI, but it made no claim to Nana's House, the pole barn, the neighboring parking lots, any real estate, or any rights concerning real estate. (See Bankr. Doc. 52-12 at 92:22-93:4; Bankr. Doc. 52-7.) FIC and FIGI then entered into negotiations to "resolve everything that was outstanding." (Bankr. Doc. 52-11 at 50:24-51:4.) During the negotiations, it was Conolly's and FIC's understanding that FIGI owned Nana's house, the pole barn, and the adjacent parking lots, which together make up Parcels B and C. (Id. at 50:9-20.) Even though the PILOT agreements indicated that the reversionary interest belonged to FIC, FIC believed those provisions of the PILOT agreements were drafted in error. (Bankr. Doc. 52-12 at 87:6-9, 89:14-19, 90:5-24.) FIGI too believed that it owned the reversionary interest in Parcels B and C. (Doc. 49 ¶ 5.)
FIC and FIGI reached an agreement, which was later incorporated into the Plan. (Bankr. Doc. 52-6 ¶ 1; see Bankr. Doc. 52-8.)
On October 17, 2005, FIGI filed the Plan with the bankruptcy court. The Plan defined FIGI's "Assets" as including "all ... real property interests." (Plan at 3.) FIGI's First Amended Disclosure Statement noted that "the Assets of the Debtor [FIGI], except for the Trust Assets [not relevant here], shall revest in the Reorganized Debtor [FIGL] free and clear of all Liens, Claims and Equity Interests pursuant to Section 11.01 of the Plan." (Bankr. Doc. 52-5 ("Disclosure Statement") at 33.) The Disclosure Statement also made specific reference to the Schedule A and Amended Schedule A that FIGI had filed with the court. (See
As a condition precedent to confirmation of the Plan, FIGI required the bankruptcy court to enter a final order approving its Disclosure Statement. (Plan § 10.01). On December 1, 2005, the bankruptcy court confirmed the Plan and Disclosure Statement. (Bankr. Doc. 52-10 at 14 ¶ 2.)
4. FIC's Liquidation Proceedings
In 2012, the Albany County Supreme Court converted FIC's rehabilitation proceeding to a liquidation proceeding, vesting the Liquidator with "title to all of [FIC's] property, contracts and rights of action" and directing the Liquidator to liquidate all of FIC's business and affairs in accordance with New York insurance law. (Trial Dec. 3-4 (quoting In re Liquidation of Frontier Ins. Co. , No. 97-06 (Sup. Ct. Nov. 9, 2012) ). FIGL did not make any claim in the FIC receivership proceeding asserting an interest in Parcels B or C. (Bankr. Doc. 60 at 126:22-127:9.)
B. The Proceedings Below
On February 24, 2014, the Liquidator filed a verified petition in Albany County Supreme Court, requesting an order declaring that FIC is the sole beneficial owner of the Rock Hill property and directing CSIDA to execute a deed conveying the Rock Hill property to FIC. See Lawski v. Frontier Ins. Grp., LLC (In re Frontier Ins. Grp., LLC. ),
Chief Judge Cecelia G. Morris of the bankruptcy court denied the Liquidator's motion to remand, and added:
The Court need not step on the toes of the state court by making a determination on whether the various contracts between and among the parties grant a right of reversion to the Reorganized Debtor. The Court need only look to theplan and confirmation order to determine whether [Parcels B and C were] included in the plan, whether the Liquidator's claim was dealt with in the plan, whether the Liquidator is enjoined from proceeding against the Debtor, whether the Reorganized Debtor is released from any liability and whether a violation of the discharge has occurred, as was alleged by the Reorganized Debtor. The Court believes that it is in a better position than the state court to make such determinations and that doing so would assist, rather than hinder, the state court. If the Court determines that this issue was not covered by the plan, it will send the matter back to state court so that the issue can be decided under state law.
On January 6, 2015, the case was transferred from Judge Morris to Judge Robert D. Drain, (Bankr. Doc. 25). Judge Drain recognized the principle that a creditor with an interest in an asset may lose it if, knowing the debtor claims a contrary interest, the creditor allows a plan to be confirmed without contesting the issue. (Trial Dec. at 12.) Under
After trial, Judge Drain found (and the Liquidator does not dispute) that "the Rehabilitator (and thus his successor, the Liquidator), 'participated' in FIGI's case for purposes of section 1141(c) of the Bankruptcy Code under In re Northern New England Telephone Operations ,
Then, turning to the issue most critical to this appeal, Judge Drain found that FIGI's reversionary interest in Parcels B and C was sufficiently identified during FIGI's chapter 11 case. Under the pre-bankruptcy documents, i.e. , the PILOT agreements, "FIC, not FIGI had the reversionary interest in all three parcels." (Id. at 18.) But Judge Drain found that the trial record was equally clear that during
Next, the bankruptcy court took up whether FIGL was judicially estopped from claiming Parcel B as an asset due to FIGI's failure to specifically disclose Parcel B in its Disclosure Statement or Schedule A. First, the court found that FIGI's failure to disclose Parcel B was harmless and not malicious. (Id. at 26-27.) Parcel B would not revert to FIGI for several years "even if FIGI had the wherewithal to make the PILOT payments - which it lacked without the assistance of FIGL's parent, IMG - [and thus] the asset's disclosure on FIGI's schedules would not have been material" to the general creditors or any party other than IMG and the Rehabilitator. (Id. at 26.) Further, the non-disclosure was by FIGI, not FIGL or IMG which were now claiming an interest in Parcel B. (Id. at 26.) Moreover, the terms "Parcel B" and "Parcel C" were not used at the time of the bankruptcy proceedings, but rather, the property was referred to as Nana's House, the pole barn, and their neighboring parking lots. (Id. at 27.) Accordingly, the bankruptcy court found that by scheduling Nana's House and the pole barn, "FIGI came almost as close to identifying what the parties now refer to as Parcel B, the parking lot next to them, as they did to identifying Parcel C." (Id. )
The bankruptcy court concluded that "most importantly, ... FIGI, IMG and - critically - the Rehabilitator understood when the Plan was confirmed that FIGI, not FIC, had the reversionary interest not only in Parcel C but also Parcel B." (Id. ) The court primarily relied on Mr. Conolly who stated that as administrator of FIC, he entered into the settlement with FIGI with the understanding that FIGI had the reversionary interest in Nana's House, the pole barn, and the adjacent parking lots, otherwise known as Parcels B and C. (Id. at 28-29.) Among the evidence corroborating Mr. Conolly's testimony was the testimony of Al Escobar - the Chief Executive Officer of FIC during Rehabilitation - that Nana's House, the pole barn, and some of the parking lots heading towards [the Headquarters]" were to revert back to FIGI under the PILOT agreements, (Bankr. Doc. 60 at 79:1-3), and the testimony of FIGI's representative "that the reversionary interest in Parcels B and C
The bankruptcy court held that "under the Plan the reversionary interests in Parcels B and C are property of FIGL, and the Liquidator is precluded by the Plan and the Confirmation Order from interfering with those interests," and thus the CSIDA was ordered to promptly transfer title to Parcels B and C to FIGL. (Id. ; Bankr. Doc. 72 at 3.)
Judge Drain entered partial judgment on March 13, 2018, (Bankr. Doc. 72), and on April 12, 2018, Plaintiff-Appellant filed his notice of appeal, (Doc. 1).
II. LEGAL STANDARD
This Court has jurisdiction pursuant to
III. DISCUSSION
A. Judge Drain Properly Considered FIGI's Amended Schedule A
Plaintiff-Appellant argues that Judge Drain erred because neither the Amended Plan nor the Amended Disclosure Statement indicated that FIGI claimed any interest in Parcels B or C, and the court's confirmation order made no reference to them. (Mem. at 20; see
Plaintiff-Appellant offers no support for the notion that a Schedule A must be "explicitly incorporated" into a Disclosure Statement or Plan to be considered by the bankruptcy court. The case on which Plaintiff-Appellant relies, In re Arcapita , involved a plan in which the debtor defined its "Assets," in part, as "all property disclosed
Additionally, where a reorganization plan is ambiguous, bankruptcy courts are permitted to examine the case context to determine what creditors are bound by the plan and what property was within the debtor's estate. See Harper v. Oversight Comm. (In re Conco, Inc. ),
B. Judge Drain Did Not Clearly Err in Finding Parcels B and C Sufficiently Identified
Following trial, Judge Drain found that Parcels B and C were included among FIGI's assets under the Plan because of the Amended Schedule A's reference to Nana's House and the pole barn, as well as the parties' understanding that FIGI possessed the reversionary interest in Nana's House, the pole barn, and their adjacent parking lots. (Trial Dec. at 20.) "Where ... a contract is ambiguous, its interpretation in the presence of extrinsic evidence of meaning is a question of fact. Therefore, a district court may reverse a bankruptcy court's interpretation of an ambiguous contract only if it is clearly erroneous." Castillo v. Gen. Motors, LLC (In re Motors Liquidation Co. ),
Judge Drain found that it would have been misleading to identify Parcel C by the Rock Hill property address on the Amended Schedule A because that address also applied to Parcel A. (Trial Dec. at 20). Judge Drain also relied on the fact that the designations Parcels A, B, and C were not used by the parties while the bankruptcy proceedings were taking place, so identifying Parcel C by listing buildings on that property was a reasonable means to put creditors and others on notice of FIGI's claim to those buildings and the land on which they sat, and would also have flagged FIGI's interest in the neighboring area on Parcel B. (Id. at 2, 21, 27.) Finally, and "most importantly," Judge Drain relied on testimony from representatives of FIC, the Rehabilitator, and FIGI to conclude that all of the parties "understood when the Plan was confirmed that FIGI, not FIC, had the reversionary interest not only in Parcel C but also Parcel B." (Id. at 27.)
Except for Judge Drain's erroneous finding that Nana's House, the pole barn, and the Headquarters shared an address, (id. at 20), all of the bankruptcy court's factual findings above are supported by evidence in the record. And that error was only a partial one, as Judge Drain was correct that the pole barn and the Headquarters shared an address, and thus it would have been at least confusing to attempt to identify Parcel C by that address or to refer to it by the address of Nana's House, which might suggest FIGI was claiming an interest in less than the full Parcel. Further, as noted, the designations "Parcel A," "Parcel B," and "Parcel C" were not used until the events giving rise to this dispute occurred. (See Bankr. Doc. 60 at 99:2-6, 137:4-19.) Thus, as a practical matter, at the time the settlement and Plan were negotiated and consented to by all parties, including the Liquidator's predecessor, the Rock Hill property consisted of 1) the Headquarters, 2) Nana's House and the pole barn, and 3) the parking lots between them. Nobody thought of the land as three parcels. By disclaiming any interest in the Headquarters and the parking lot on its Parcel but claiming an interest in Nana's House, the pole barn and their neighboring parking lots, FIGI indicated - clearly enough for the Liquidator to understand, as he plainly did - that it was claiming an interest in what is now regarded as Parcels B and C but not A.
Finally, testimony from FIC, the Rehabilitator, and FIGI support the finding that they understood, at the time of FIGI's bankruptcy proceeding, that FIGI owned the reversionary interests in Parcels B and C. (See Bankr. Doc. 49 ¶ 5; Bankr. Doc. 52-11 at 50:2-20; Bankr. Doc. 60 at 78:22-79:3.) Even assuming that sitting as the trier of fact I might have "weighed the evidence differently," that is insufficient to find that Judge Drain clearly erred, as there is ample evidence in the record (even discounting, as I am, Judge Drain's erroneous finding that Nana's House did not have an address of its own) that FIGI's interests in Parcels B and C were among its assets under the Plan. See In re Teligent Servs., Inc. ,
C. Development History of Parcels B and C
Plaintiff-Appellant further argues that even assuming it was understood that FIGI had a reversionary interest in the "parking lots" during the bankruptcy proceeding, the parking lots cannot be considered part of Parcels B and C because they were developed to provide parking for the
D. CSIDA Contracts
Plaintiff-Appellant also argues that Judge Drain erred by operating on the mistaken premise that the reversionary interest in Parcel B was an undisclosed asset of FIGI, when it was in fact an FIC asset pursuant to the CSIDA contracts. (Mem. at 15.) But, to the contrary, Judge Drain acknowledged that "under the pre-bankruptcy documents," i.e. , the CSIDA contracts, "FIC, not FIGI had the reversionary interest in all three parcels." (Trial Dec. at 18.) Judge Drain noted, however, that the record was "equally clear" that during the bankruptcy proceedings and post-confirmation, FIGI and the Rehabilitator treated the reversionary interest in Parcel B (and Parcel C) as FIGI's property. (Id. ) Thus, Judge Drain did not rely on any mistaken premises. In fact, Judge Drain avoided "step[ping] on the toes of the state court by making a determination on whether the various contracts between and among the parties grant a right of reversion." In re Frontier Ins. Grp., LLC. ,
E. Judicial Estoppel
Plaintiff-Appellant further argues that because FIGI failed to list Parcel B as an asset in its bankruptcy proceedings, it should be judicially estopped from claiming it now. (Mem. at 15-17.)
Judicial estoppel will generally apply where (1) a party's later position is clearly inconsistent with its earlier position; (2) the party's former position has been adopted in some way by the court in the earlier proceeding; and (3) theparty asserting the two positions would derive an unfair advantage or impose an unfair detriment on the party seeking estoppel.
Edwards v. CGI Grp. Inc. , No. 11-CV-8611,
There is no dispute that FIGI failed to specifically identify Parcel B on its Amended Schedule A, Disclosure Statement, or elsewhere during the bankruptcy proceedings. Judge Drain, however, found that FIGI's non-disclosure was harmless and not malicious, and thus presents a "unique fact pattern" under which judicial estoppel does not prevent FIGL from now claiming Parcel B. I agree.
FIGL's current position is not "clearly inconsistent" with its own or its predecessor's positions during FIGI's bankruptcy proceeding. Evidence in the record shows that during the bankruptcy proceedings, it was FIGI's understanding that it possessed the reversionary interest in Parcel B, (Bankr. Doc. 49 ¶ 5), and that is the same position FIGL takes now. Its failure to list "Parcel B" at a time when nobody thought of the area as "Parcel B" is - given FIGI's identification of the area by reference to nearby structures - not clearly contrary to the position it takes now. Thus, there is no prior inconsistency that would necessitate application of judicial estoppel. And because there was no former inconsistent position taken by FIGI, there was no inconsistent position adopted by the bankruptcy court.
Finally, refraining from applying judicial estoppel will not result in FIGL deriving an unfair advantage, nor would it impose an unfair detriment on the Liquidator. Despite the Liquidator's claims to the contrary now, the evidence is that the Rehabilitator understood during the bankruptcy proceedings that FIGI, not FIC, had the reversionary interest in Parcel B, despite the "mistakes made in paper" in the PILOT agreements with CSIDA. (Bankr. Doc. 52-12 at 89:12-90:12; see Bankr. Doc. 52-11 at 50:16-20 (describing the "realty owned by FIGI" as "the Pole Barn and adjacent parking lot, and Nana's House and adjacent parking lot"). The Rehabilitator acknowledged as much at the time, stating that what is now known as Parcel B was not material to FIC. (Bankr. Doc. 52-12 at 111:2-5.) The Rehabilitator knew that FIGI was claiming the reversionary interest in Parcel B, (Bankr. Doc. 52-11 at 34:2-8, 37:22-38:21, 50:2-20; Bankr. Doc 52-12 at 89:14-93:4), but made no claim to Parcel B and raised no objection to confirmation of the Plan relative to Parcel B, (Bankr. Doc. 52-11 at 42:14-17), likely because the complex settlement it reached with FIGI was beneficial to it.
F. The Extent to Which New York Law Applies
Plaintiff-Appellant argues that because New York law requires that any transfer of property be made via a document containing words of conveyance and a sufficient description of the property to be conveyed, the previous bankruptcy proceedings could not vest the reversionary interest in Parcels B and C in FIGI. (Mem. at 16-17.) But Judge Drain correctly held that Bankruptcy Code § 1141(a)-(c) provides for the vesting of real property upon confirmation of the Plan, even without a deed, and the Plan provides that New York law controls "[e]xcept to the extent that the Bankruptcy Code or Bankruptcy Rules or other federal laws are applicable." (Plan § 14.05.) Here, the Bankruptcy Code is applicable, and thus under the terms of the Plan, the Bankruptcy Code controls in this situation. Therefore, no written conveyance is needed pursuant to New York law.
G. Limiting Effect of FIC's Rehabilitation Status
Plaintiff-Appellant also argues that the bankruptcy court failed to consider that FIC's rehabilitation status granted the state court exclusive jurisdiction over the Parcels and prohibited FIC from transferring any property interests to FIGI without permission from the state court. (Mem. at 24-26.) But Judge Drain did not order that the Liquidator transfer anything to FIGL or find that it had. He only found that under the Plan, the reversionary interests in Parcels B and C rested with FIGL, regardless of who might have owned them pre-bankruptcy. He did not purport to strip the Liquidator of FIC's interests, but rather only found that even assuming FIC had a right to those interests, the Liquidators' predecessor had lost it when, knowing that FIGI claimed the same interests, it consented to the Plan that would vest them in FIGL.
Further, the Bankruptcy Code's concept of "property of the estate is not concerned with title or possession; it expressly embraces all legal or equitable interests of the debtor in property where located, as of the commencement of the case." In re Hudson Valley Ambulance Serv., Inc. ,
IV. CONCLUSION
For the foregoing reasons, the bankruptcy court's order is AFFIRMED in all respects. The Clerk of Court is respectfully directed to close the case.
SO ORDERED.
Notes
The current Superintendent of Financial Services is Maria T. Vullo.
"Bankr. Doc." refers to documents filed in the U.S. Bankruptcy Court for the Southern District of New York under docket number 14-9022.
The transcript of Loughlin's testimony reads that she was asked if she "separated[d] in her mind the structures from the [indiscernible]," (Doc. 60 at 109:7-8 (alteration in original) ), but based on the context, it is clear that the question was whether Loughlin separated the structure from the land on which it sat.
The settlement agreement never became effective because it was not approved by the state court supervising FIC's rehabilitation. (Trial Dec. at 29.)
Plaintiff-Appellant makes a judicial estoppel argument only as to Parcel B.
That this settlement never became effective is immaterial to the issue of whether both parties operated with the understanding that FIGI had the reversionary interest in Parcel B.