Olah v. Baird

FILED
United States Court of Appeals
Tenth Circuit

June 3, 2009
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

In re:

RONALD LAVAR BAIRD and
JANEL JENSEN BAIRD,

Debtors.

_______________________________

ROBERT AND PAEA OLAH,
individually and on behalf of Olena
Olah, a minor,

Plaintiffs-Appellants,

v. No. 07-4282

RONALD LAVAR BAIRD; J. KEVIN
BIRD in his capacity as Trustee of the
bankruptcy estate of Ronald Lavar
Baird; and UTAH MEDICAL
INSURANCE ASSOCIATION,

Defendants-Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH
(D.C. No. 2:07-CV-382-BJS No. 06-22419)
Joel T. Marker (Jamie L. Nopper, McKay, Burton & Thurman, Salt Lake City,
Utah, and David R. Olson and Ruth Lybbert, Dewsnup, King & Olson, Salt Lake
City, Utah, with him on the brief), McKay, Burton & Thurman, Salt Lake City,
Utah, for Plaintiffs-Appellants.

Michael R. Johnson (David H. Leigh, Snell & Wilmer LLP, Salt Lake City, Utah,
Shawn McGarry and Nan T. Bassett, Kipp & Christian, Salt Lake City, Utah, for
appellee Ronald L. Baird; George A. Hunt, Williams & Hunt, Salt Lake City,
Utah, for appellee Utah Medical Insurance Corporation, with him on the brief),
Snell & Wilmer LLP, Salt Lake City, Utah, for Defendants-Appellees.

Before McCONNELL, EBEL and GORSUCH, Circuit Judges.

McCONNELL, Circuit Judge.

Robert and Paea Olah sued Dr. Robert Baird for malpractice, based on

alleged injuries to their daughter. While the state malpractice litigation was still

in pretrial stages, Dr. Baird declared bankruptcy. The Olahs asked the trustee of

Dr. Baird’s bankruptcy estate to “sell” them Dr. Baird’s right to consent to

settlement under his medical liability insurance policy. The trustee balked,

writing that by the terms of the insurance contract he did “not believe that there

was any asset which the trustee could assume and assign to” the Olahs. The

Olahs filed suit in district court, seeking a declaration that the “right to settle”

was indeed part of the estate. They lost, and now appeal.

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 We reverse, holding that the liability policy is properly part of the estate.

We further hold that the trustee has discretion to exercise Dr. Baird’s rights under

the policy, or to assign those rights to the Olahs.

I. FACTUAL BACKGROUND

The legal issues in this case are complicated, but the facts are not. In

March 2004, Robert and Paea Olah filed a complaint in Utah state court against

Dr. Robert Baird, alleging that he was negligent in the delivery of their daughter,

Olena, causing substantial injuries including permanent brain damage. 1 At the

time the Olahs made their claim, Dr. Baird was insured under a liability policy

(“Liability Policy”) issued by the Utah Medical Insurance Association (UMIA),

with a policy term of January 1, 2003 to January 1, 2004, and a policy limit of $1

million. The policy provided that UMIA would “defend [Dr. Baird] and provide

insurance protection against medical professional liability claims for damages

which are brought against” him. Under the policy, UMIA was obligated not to

settle any claim against Dr. Baird without his consent; in addition, the policy

restricted Dr. Baird’s ability to assign the policy to a third party without the

consent of the UMIA.

Two years later, in July 2006, Dr. Baird filed for bankruptcy, causing an

automatic stay in the state court malpractice proceedings. He was discharged in

1
The Olahs also asserted claims against other defendants involved in the
delivery. Those claims have been settled.

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bankruptcy in October of that year, and the automatic stay was lifted. Prior to the

discharge, but after Dr. Baird filed for bankruptcy, the Olahs offered the trustee

of Dr. Baird’s bankruptcy estate $20,000 for the “estate’s interest in the

[Liability] Policy and all powers exercisable under the Policy by the debtor or the

estate.” The attorneys representing Dr. Baird sent the trustee a letter

recommending he reject the offer, arguing, among other things, that Dr. Baird’s

right to consent to a settlement was non-assignable.

The trustee, Kevin Bird, rejected the offer. He wrote in a letter to the

Olahs’ attorney that it was his conclusion that “any contract rights” held by Dr.

Baird under the insurance contract were “non-assignable.” “As a result,” Mr.

Bird reasoned, he was unable to accept the offer. He suggested that if the Olahs

disagreed with this conclusion they could file for a “determination as to the extent

of the estate’s interest in the contract.” In the event that the Olahs were able to

obtain a judgment declaring Dr. Baird’s rights under the policy to be assignable,

he would “certainly [be] willing to entertain [the Olahs’] offer again.”

The Olahs filed suit in bankruptcy court, seeking a declaration that the

liability policy was part of Dr. Baird’s estate and “that the trustee may administer

[it] pursuant to provisions of the Bankruptcy Code[.]” Dr. Baird moved to

dismiss, making the non-assignability argument and adducing public policy

considerations against allowing the assignment of rights to consent. UMIA in its

brief contended that the policy could not be assigned without its written consent.

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UMIA asserted, as well, that Dr. Baird’s policy was “most probably” an

“executory contract” and, because the trustee had not assumed the contract into

the estate within 60 days of Dr. Baird’s bankruptcy discharge, he—by

statute—had rejected it. 2

In their response, the Olahs first disagreed with UMIA that Dr. Baird’s

policy was an executory contract: they argued that an executory contract exists

only when there are ongoing material obligations on both sides, and non-

performance of one party would excuse the non-performance of the other. Dr.

Baird, the Olahs claimed, had already fulfilled all of his obligations under the

policy; accordingly, there was no time bar to assigning the asset. They further

argued that the non-assignment provision of the policy was no longer enforceable

because the loss—which they defined as the injury to their daughter—had already

occurred, and under Utah law, “non-assignment provisions are enforceable only

prior to the occurrence of loss.” In addition, they asserted that public policy

reasons did not forbid the assignment of Dr. Baird’s policy rights to them.

2
According to 11 U.S.C. § 365(d)(1),

In a case under chapter 7 of this title, if the trustee does not assume
or reject an executory contract or unexpired lease of residential real
property or of personal property of the debtor within 60 days after
the order for relief, or within such additional time as the court, for
cause, within such 60-day period, fixes, then such contract or lease is
deemed rejected.

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 The bankruptcy court ruled against the Olahs. The court saw the case as

turning on whether or not the policy was an “executory contract.” If the contract

was executory, then the trustee would have had sixty days to decide whether to

accept or reject the contract. Because the trustee did not act, the contract must be

deemed to have been rejected. In reaching this conclusion, the bankruptcy court

first discussed a decision by the United States District Court for the District of

Utah, which adopted the definition of an executory contract developed by

Professor Vern Countryman in 1973. Vern Countryman, Executory Contracts in

Bankruptcy: Part 1, 57 Minn. L. Rev. 439, 460 (1973). The so-called

“Countryman” definition looks to whether

the obligation of both the bankrupt and the other party are so far
unperformed that the failure of either to complete performance would
constitute a material breach excusing performance of the other.

Bkrptcy Op. 4 (quoting Thomas American Stone & Bldg., Inc. v. White, 142 B.R.

449, 452-53 (D. Utah 1992)). But the court also noted that a Tenth Circuit

decision had held that an executory contract “is a contract that has not as yet been

fully completed or performed and in which future obligations remain.” Bkrptcy

Op. 5 (citing In re Myers, 362 F.3d 667, 673 (10th Cir. 2004)). The court thought

the Tenth Circuit definition might be “broader” than the Countryman test, because

it seemed that the Tenth Circuit definition might find a contract executory if any

obligations were remaining. Because the bankruptcy court found that not all of

the obligations owing under the policy had been fully performed, the contract was

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executory. Because the contract was executory, and the trustee of the estate did

not timely assume the policy, the bankruptcy court ruled that it was not the

property of the estate. Bkrptcy Op. 6.

The Olahs appealed to federal district court, urging that a contract is

executory only when the obligations on both sides are “material” or “complex.”

They contended that Dr. Baird’s obligations remaining on the policy were neither

material nor complex; in the alternative, they asked for a remand to the

bankruptcy court for a determination of whether the remaining obligations were

either material or complex. In its brief, UMIA countered that the remaining

obligations of both Dr. Baird and UMIA were “significant.” Dr. Baird contended

that under the Tenth Circuit’s decision in Myers, “if there are future material

obligations due by both sides under a contract, then the contract is an executory

contract.” He then proceeded to list the remaining obligations Dr. Baird and

UMIA had under the insurance contract.

The district court affirmed the judgment of the bankruptcy court and

adopted its reasoning. The Olahs now appeal to this court.

II. DEFINING AN EXECUTORY CONTRACT

The appellants argue that this case hinges on the correct definition of

‘executory contract’ under 11 U.S.C. § 365(d)(1). Section 365(d)(1) specifies

that if the trustee of an estate in bankruptcy does not assume an executory

contract within sixty days of the order of relief, then that contract is deemed

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rejected. Accordingly, if we determine that Dr. Baird’s policy was an executory

contract, then the contract was rejected. We agree that this is a key issue in the

case.

The first step is to determine the proper definition of executory contract,

something that was the subject of much back and forth in the prior proceedings.

The bankruptcy court saw a tension between the two definitions offered in the

cases it discussed. One—the Countryman definition—seems to count only the

remaining material obligations of both parties in determining whether a contract

is executory. Thomas American Store & Building, 142 B.R. at 452–53. The

Myers definition, at least on the bankruptcy court’s interpretation of it, holds that

if there are any remaining obligations “on both sides” then the contract is

executory. In re Myers, 362 F.3d at 673.

We do not agree with this interpretation of Myers. To be sure, Myers stated

that “[a]n executory contract is ‘a contract that has not as yet been fully

completed or performed’ and in which future obligations remain.’” Myers, 362

F.3d at 673 (quoting Black’s Law Dictionary 395 (6th ed. 1991)). But the court

in Myers went on to hold that the contract in question was executory because

“material performance” remained on both sides. Myers, 362 F.3d at 673. Read in

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context, the reference to “future obligations” was confined to future “material

obligations.”

If Myers stood for the proposition that any contract was executory that had

“future obligations” left unfulfilled, however immaterial, then the “definition

would render almost all agreements executory since it is the rare agreement that

does not involve unperformed obligations on either side.” In re Streets & Beard

Farm P’ship, 882 F.2d 233, 235 (7th Cir. 1989). Rather, the remaining

obligations have to be significant, which, following Countryman and Thomas

American Stone & Building, we construe to be obligations which, if either side

failed to perform them, would constitute a breach. We therefore take this

occasion to formally adopt the Countryman definition, and construe Myers to be

consistent with that definition. Other courts have construed § 365’s use of

executory contract similarly. See Thomas Am. Stone, 142 B.R. at 452 (noting that

“courts have construed Congress’ intent to be in accord with Professor

Countryman’s definition of executory contracts”); In re Evatt, 112 B.R. 417, 419

(W.D. Okla 1990) (collecting cases).

III. THE LIABILITY POLICY IS NOT AN EXECUTORY CONTRACT

Applying the Countryman definition of an executory contract, the Olahs

contend that the liability policy between Dr. Baird and UMIA was not executory

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at the time Dr. Baird declared bankruptcy because the relevant policy period,

which was January 1, 2003 to January 1, 2004, had expired, and Dr. Baird had

already paid for the policy for that period. No other obligations, they contend,

are material. They rely on two cases which, they contend, hold that if the

coverage period on the policy has expired, the policy cannot be executory even

when there are ongoing obligations to the debtor. The two cases stand for

roughly the same principle. The first, Beloit Liquidating Trust v. United Ins. Co.,

287 B.R. 904, 906 (N.D. Ill. 2002), stands for the proposition that “insurance

policies where the policy coverage period has expired prior to the insured’s

bankruptcy are not executory contracts despite ongoing obligations of the debtor.”

The second, In re Vanderveer Estates Holding, LLC, 328 B.R. 18, 26 (Bankr.

E.D.N.Y. 2005), states a similar principle: “insurance policies for which the

policy periods have expired and the premium has been paid are not executory

contracts, despite continuing obligations on the part of the insured.”

UMIA and Dr. Baird, on the other hand, offer two reasons why the

insurance contract between Dr. Baird and UMIA should be regarded as executory

even under the Countryman definition. First, the policy was a continuing one,

which would automatically be renewed unless either party to the contract

affirmatively decided to discontinue it, which means that both parties had

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material obligations stretching into the future. Specifically, they contend that

“the language of the Liability Policy demonstrates that, although the policy has

separate policy periods and requires new premiums to be paid each year in order

to continue coverage, the policy will automatically be renewed absent some

affirmative act” by either party. Appellees’ Br. 11 (emphasis added). Second,

even viewing the contract as a separate, one-year insurance contract, UMIA and

Dr. Baird contend that both parties owed material duties under the contract. The

bankruptcy court accepted the second argument.

We believe that Dr. Baird and UMIA’s first argument conflates the terms

“policy” and “policy period.” The cases cited by the Olahs stand for the

proposition that if a policy period has expired, then even though the debtor may

have additional obligations, the contract for that period is not executory. The

policy period during which the suit was filed, and for which Dr. Baird had paid

the premium, had indisputably expired. The period was from January 1, 2003 to

January 1, 2004. Even Dr. Baird’s counsel stated below that he would “stipulate

that we’re dealing with a claims made liability policy that deals with policy year

2003. And I’ll stipulate they [the Olahs] made their claim in 2003.” (emphasis

added). This is the contract for which Dr. Baird had paid the premiums.

Although one provision of this contract involved renewal for future periods,

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either party to the contract had the right to discontinue for those future periods,

making it unrealistic to regard the contract as one extending indefinitely into the

future.

The second argument offered by Dr. Baird and UMIA, and accepted by the

bankruptcy court, is that Dr. Baird had continuing material obligations under the

policy, which render the contract executory even under the Countryman

definition. The most important such obligation is the obligation to provide

cooperation in the course of defense to any liability claims. Appellee’s Br. at 15.

We do not agree. Once the debtor has paid his premium for the policy

period, he has then performed in such a way that he can no longer fall so far short

of complete performance (“so far underperformed,” to use the Countryman

definition) that it would entitle UMIA to not defend him. The obligations that

remain are best considered ministerial, and certainly not as “significant” as

UMIA’s continuing obligation to defend Dr. Baird. As the court stated in In re

Sudbury, Inc., 153 B.R. 776, 779 (N.D. Ohio 1993), an insurance company does

not “bargain for the Debtor’s cooperation in handling claims. It bargains for

premiums.” Even if the insured party were to fail to cooperate in breach of his

contractual commitment, this would not excuse the insurer from performing

entirely on the contract. Id. at 779 (insurer’s obligations are not “voided because

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of the Debtor’s failure to cooperate” as cases “establish only that an Insurer may

have a defense against a claim where the Debtor does not cooperate.”); 44 Am.

Jur. 2d Insurance § 786 (insured’s failure to fulfil obligation to cooperate “may

constitute a matter of defense”). Dr. Baird’s failure to perform, in other words,

would not allow UMIA to breach.

This conclusion comports with Utah law, which “prevents an insurance

company from relying on certain technical policy breaches as a basis for denying

coverage.” State Farm Mut. Auto. Ins. Co. v. Green, 89 P.3d 97, 104 (Utah 2003)

(failure to provide notice or proof of loss cannot be the basis of denying coverage

unless insurer was prejudiced by the failure). There is nothing left, after Dr.

Baird has paid his premium for the policy period, that would result in his so far

underperforming that it would relieve UMIA from its obligations. At most he

could commit “technical policy breaches.” Accordingly, under the Countryman

definition, there is no executory contract here. It follows that the liability policy

is an asset of the bankruptcy estate.

V. THE CONTRACT CAN BE ASSIGNED BY THE TRUSTEE

Dr. Baird’s insurance policy contains two clauses that arguably might limit

the ability of the trustee to assign the policy or to exercise Dr. Baird’s right under

the policy to veto a settlement: (1) a clause that “specifically restricts the

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Debtor’s ability to assign the policy to a third party without the consent of the

UMIA” (the “non-assignability clause”), and (2) a clause that states UMIA was

“obligated not to settle any claim against the Debtor without his consent” (the

“settlement consent clause”). Bkrptcy Op. 2. Appellees argue that even if we find

that the insurance contract is not executory we should “still affirm the Bankruptcy

Court’s dismissal . . . because the Liability Policy cannot be assigned to the Olahs

(or anyone else for that matter).” Appellees’ Br. 19. We hold that the non-

assignability clause has no applicability under Utah law after the event triggering

the loss has occurred, and that once the settlement consent right is assigned in

bankruptcy to the trustee, there is no limitation on the trustee’s further assignment

of the right to another party.

The appellees do not appear to contend that the non-assignability clause of

the policy prevents the liability policy from being assigned to the bankruptcy

estate itself. Section 541(c)(1) of the Bankruptcy Code clearly speaks to this

point: “an interest of the debtor in property becomes property of the estate . . .

notwithstanding any provision in an agreement, transfer instrument, or applicable

nonbankruptcy law that restricts or conditions transfer of such interest by the

debtor.” 11 U.S.C. 541(c)(1)(A). So it is not the case that the policy cannot be

assigned “to anyone” without UMIA’s consent. The policy can be assigned to the

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trustee, notwithstanding the restriction in the policy. The question then becomes

whether the trustee may further assign the contract to the Olahs (or anyone else)

without UMIA’s consent, or whether either the trustee or an assignee may

exercise Dr. Baird’s right under the contract to approve or veto a settlement.

The question of the assignability of the liability policy is a question of state

law. The parties agree that under Utah law, the assignability question depends on

whether a loss has occurred in this case, because if a loss has occurred, then

restrictions on assignability no longer have force. Time Fin. Corp. v. Johnson

Trucking Co., 458 P.2d 873, 875 (Utah 1969); 44 Am. Jur. 2d Insurance § 786

(“After a loss has been incurred, the claim to recover insurance proceeds may be

effectively assigned by the insured.”). The logic is that an insurance company is

entitled to tailor its liability policy—to decide whether to issue the policy, what

the premiums should be, and what terms to impose—to the risk it perceives to be

taking with regard to the insured. It would be inconsistent with that calculus to

allow the insured to transfer his policy to someone else, whose risk profile might

be different. See Northern Ins. Co. of New York v. Allied Mut. Ins. Co., 955 F.2d

1353, 1358 (9th Cir. 1992) (“Risk characteristics of the insured determine

whether the insurer will provide coverage, and at what rate. An assignment could

dramatically alter the insurer’s exposure depending on the nature of the new

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insured.”). Once a loss has occurred and the insurance company is on the hook to

defend against a tort action and to pay any judgment, this concern about

assignment is obviated: the insured-against event has already happened, and what

is being transferred is not the insurance company’s ongoing responsibility for

future risks, but the insurance company’s liability for the consequences of a past

event. See Time Fin., 458 P.2d at 875 (distinguishing between a before-loss

transfer of a “contractual relationship” and the after-loss transfer of a “money

claim”). Thus, under the law of Utah and most other states, non-assignability

provisions of liability insurance contracts may not be enforced after the event of a

covered loss.

But what is a “loss”? The Olahs want to fix the loss at the time the

accident occurred and the claim was subsequently filed: this, they say, is when the

insurance company’s duty to defend under the contract begins. The UMIA and

Dr. Baird, by contrast, argue that no loss occurs under the contract until there has

been a tort judgment or settlement; until that time, Dr. Baird has not been found

liable for malpractice and may never be found liable.

The parties cite no relevant decisions from Utah or states with comparable

policies regarding assignability during the period after the events giving rise to a

liability claim have occurred (and the tort lawsuit filed) but before there has been

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a judgment or settlement. We believe that the logic of the Utah legal principle

against post-loss non-assignment supports the Olahs’ view.

The rationale for Utah’s legal principle is that prior to a loss, when no one

knows whether a covered loss will occur, the risks of the policy depend heavily

on the identity of the policyholder, but once the loss occurs, the degree of risk is

essentially fixed; the only question is to whom any payments will be owed. The

insurance company’s need to bar assignment therefore ceases to be significant.

This rationale points toward treating the event triggering coverage as being the

loss, because that is the point when the degree of risk is fixed. Subsequent events

may affect to whom payment must be made, but they cannot increase or decrease

the risk to the company. Moreover, after suit has been filed, the insurance

company has a duty to defend, which is an important feature of the insurance

contract. Even if no liability is ultimately imposed, the costs of the legal defense

are, in every realistic sense, a “loss.” Finally, in a formal sense, it makes sense to

distinguish between when the loss occurs and when liability is determined. Even

though we do not know in this case if ultimate liability will ever be imposed,

because we do not know whether Dr. Baird actually committed malpractice, we do

know that if liability is imposed, the moment it fixed was the moment the accident

occurred. Ocean Accident & Guar. Corp. v. Sw Bell Tel. Co., 100 F.2d 441, 444

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(8th Cir. 1939). The judgment against Dr. Baird (if there is one) would merely

confirm that liability was fixed at that point. See id. at 447 (explaining that final

judgment is simply confirmation of the moment at which liability attaches).

Against this interpretation, UMIA argues that allowing assignment to the

Olahs would “drastically impact the risk and burden on UMIA.” Appellee’s Br.

27. Reluctant as we are to second-guess a party regarding its own interest, we are

highly skeptical of this claim. Under the policy, UMIA has control over the

conduct of the malpractice litigation against Dr. Baird. The company has the

right to defend, and the right (subject to any veto rights Dr. Baird may have) to

settle. No one can force the company to settle if the company does not think that

is in its interest. If UMIA negotiates a mutually agreeable settlement of the

malpractice case with the Olahs, it is in the interest of UMIA for the Olahs, not

Dr. Baird, to exercise the right to accept or refuse the settlement. It is hard to see

why an assignment of the settlement acceptance right to the Olahs would increase

UMIA’s risk or burden. Indeed, now that Dr. Baird has received his discharge in

bankruptcy and will not be personally liable for any malpractice judgment, he has

an inefficient and one-sided incentive to frustrate settlement and to insist that

UMIA take the case to trial. Only his reputational interest is now on the line. He

has nothing to lose and everything to gain from blocking settlement and forcing

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UMIA to go to trial. Thus, we do not accept UMIA’s argument that it would

impose unacceptable risk on the insurance company to allow assignment at this

stage. Quite the contrary.

That leaves Dr. Baird’s argument that the settlement consent clause is

personal to him and thus cannot be assigned. Dr. Baird and UMIA mention this

argument only briefly, Appellees’ Br. 29, citing two “personal service” contract

cases, neither of which dealt with insurance policies. In re Tonry, 724 F.2d 467,

469 (5th Cir. 1984) (attorney’s contingent fee contract); In re Carrere, 64 B.R.

156, 159 (Bankr. C.D. Cal. 1986) (contract to perform in the television series

“General Hospital”). But in any event, it appears undisputed that this right under

the contract, like all others, may be transferred to the bankruptcy trustee. 11

U.S.C. 541(c)(1). Once the right to approve or disapprove settlement leaves the

hands of the insured, we see no reason why the trustee may not dispose of that

right in whatever manner he regards as in the best interest of the estate.

Presumably, the trustee could make an agreement with the Olahs to exercise this

right in a particular way, and we see no reason why he should be barred from

making an agreement with the Olahs to “sell” the right in exchange for value to

the estate. Or he could exercise the settlement approval right himself. Even

assuming the right is personal and non-transferrable in the first instance, once it

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has been transferred to the bankruptcy trustee it has ceased to be personal and

there is no reason in law or logic to forbid a further transfer.

CONCLUSION

We therefore REVERSE the district court’s decision that Dr. Baird’s

liability policy is not a part of the debtor’s estate. We also hold that the right to

consent to settlement under the policy can be assigned to the Olahs, at the

discretion of the trustee. The next move belongs to the trustee, and to UMIA.

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