IN THE UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 92-2731
IN THE MATTER OF: VITEK, INC.,
Debtor.
CHARLES AND ANN HOMSY,
Appellees,
versus
BEN B. FLOYD, Trustee,
Appellant.
Appeal from the United States District Court
for the Southern District of Texas
(April 25, 1995)
Before VAN GRAAFEILAND*, SMITH, and WIENER, Circuit Judges.
WIENER, Circuit Judge:
Vitek, Inc. (Vitek) and Plaintiffs-Appellees Charles and Ann
Homsy (the Homsys), as directors and officers of Vitek, were sued
by over 400 plaintiffs, who claimed to have been injured by
allegedly defective prostheses manufactured by Vitek. As a result,
Vitek filed for bankruptcy protection under Chapter 7. During the
ensuing bankruptcy proceedings, Defendant-Appellant Ben B. Floyd
(Floyd), the trustee of Vitek's bankruptcy estate (the Estate),
*
Circuit Judge of the Second Circuit, sitting by
designation.
petitioned the bankruptcy court for authority to compromise with
Vitek's liability insurance carriers. These compromises (the
Settlements) provided that Vitek's liability insurance carriers
would be protected from third-party suits by injunctive orders of
the bankruptcy court in exchange for paying the remainder of the
limits of the liability policies (the Policies) to the Estate for
the benefit of creditors. The bankruptcy court approved the
Settlements, issuing an injunctive order that protected Vitek's
insurance carriers from third-party liability.
The Homsys objected, arguing that the Settlements left them
exposed to suits while denying them defense and liability coverage
under the Policies, despite their being coinsureds with Vitek under
the Policies. The bankruptcy court rejected this argument, finding
that the Homsys had no property interests in the Policies. The
Homsys appealed to the district court, which reversed, holding that
the Homsys had independent property rights in the proceeds of the
Policies (the Proceeds). The district court remanded the case to
the bankruptcy court with orders to extend the protection of its
injunctive order to cover the Homsys. Floyd timely appealed to
this court, arguing that Vitek's Policies (and the Proceeds) are
property of the Estate, and that his authority as trustee to enter
into settlements with Vitek's insurance carriers should not be
conditioned on extension of the bankruptcy court's injunctive order
to cover the Homsys. For the reasons set forth below, we reverse
the ruling of the district court; and we modify the original order
of the bankruptcy court and reinstate that order as modified.
2
I
FACTS AND PROCEEDINGS
Between 1974 and 1980 Vitek marketed temporomandibular joint
(TMJ) implants for persons suffering from TMJ disorders.1 Alleged
defects in some models of these implants resulted in the filing of
numerous lawsuits in many jurisdictions. Essentially every suit
contained allegations that the implants were defective or that
Vitek failed adequately to warn consumers of possible dangers
attending the use of those implants, or both. At the time that the
events underlying these lawsuits were occurring, the Homsys were
officers, directors, and principal shareholders of Vitek.
Vitek filed a voluntary petition for relief under Chapter 7 of
the United States Bankruptcy Code, and within days Floyd was
appointed acting Chapter 7 Trustee of Vitek's bankruptcy estate.
At the time that Vitek filed for bankruptcy approximately 426
lawsuits were still pending against it. Many of these suits also
named one or both of the Homsys as defendants.
The Estate's remaining assets consisted primarily of liability
insurance policies purchased by Vitek, a named insured on each of
the Policies. The Homsys were listed either as coinsureds or as
additional named insureds under each of the Policies, being covered
thereunder as officers, directors, or stockholders of Vitek.
Significantly, the Parties to the instant litigation have
stipulated that the Homsys are coinsureds in all Policies. Under
1
The temporomandibular joint permits a person's jaw to move,
thereby allowing the mouth to open and close.
3
the terms of the Policies, the insurers must both indemnify and
defend Vitek and the additional insureds (here, the Homsys) until
the policy limits are exhausted.
As Trustee for the Estate, Floyd contacted counsel for
plaintiffs in most of these suits, encouraging formation of a
confederation, eventually called the Plaintiffs' Steering
Committee. Floyd also initiated discussions with representatives
of Vitek's several insurance carriers in an effort to obtain and
distribute the Proceeds.
Several months later Floyd filed a number of motions with the
bankruptcy court seeking authority to compromise with most of
Vitek's insurance carriers. Under the terms of these agreements
the carriers would be required to remit all remaining Proceeds, up
to the limits of their respective policies, in full satisfaction of
the carriers' obligations. In return, the carriers would be
protected by the injunctive order of the bankruptcy court from
incurring additional liability and defense costs. The Homsys
objected to these settlements, arguing that as coinsureds they were
being deprived of their rights under the Policies: The Homsys were
to be enjoined from suing the carriers, but they would not
themselves be protected from third-party suits.
The bankruptcy court approved the Settlements, concluding that
(1) the Estate was the sole owner of the Policies and the Proceeds,
(2) the Settlements were in the best interest of all relevant
parties, and (3) the Homsys' interests were adequately protected by
their unsecured claims against the Estate. The district court
4
disagreed, concluding that the bankruptcy court erred when it ruled
that the Homsys had no independent property interests in the
Proceeds. The district court did not mention corresponding
interests in the Policies themselves.
Finding that the Proceeds were owned "by both the Homsys and
Vitek because they are coinsureds," the district court concluded
that the Homsys' portion of the Proceeds could not be regarded as
property of the Estate. Therefore, reasoned the court, the
bankruptcy court lacked authority to shield the insurance carriers
from liability to the Homsys. The district court also concluded
that granting the Homsys an unsecured claim against the Estate did
not adequately protect their interests. Despite its determination
that the Homsys' interest in the proceeds were not estate property,
the district court in remanding the case to the bankruptcy court
directed that court to extend its injunction to cover the Homsys.2
Floyd timely appealed.
II
ANALYSIS
This case involves the interfacing of federal bankruptcy law
with state insurance law. The central issue here is, when one of
two or more coinsureds declares bankruptcy and seeks protection
2
As discussed later, we perceive a contradiction between the
district court's conclusion that the Homsys' portion of the
Proceeds were not part of the Estate, and that court's
instruction that the bankruptcy court extend its injunctive
orders to protect the Homsys as well as the Estate.
5
under Chapter 7,3 what part of the proceeds of a liability policy
that covers the non-bankrupt coinsureds should enrich the estate of
the coinsured debtor? The district court attempted to answer this
fundamental question by reference to insurance law. Relying on the
notion))purportedly grounded in state insurance law))that "[a]n
insurance company cannot prefer one of its insureds over another,"4
the district court reversed the bankruptcy court. In so doing, the
court concluded that the Homsys had property interests in the
Proceeds even though Vitek was the sole owner of the Policies, and
that the bankruptcy court could not therefore effect a settlement
that excluded the Homsys from any share of the Proceeds. We
consider the bankruptcy and insurance aspects of this case in turn.
A. Bankruptcy Aspects
The district court correctly noted that under § 541(a)(1) of
the Bankruptcy Code, a bankruptcy estate includes "all legal or
equitable interests of the debtor in property as of the
commencement of [a bankruptcy] case."5 Interpreting this
provision, the Supreme Court has declared that "[t]he scope of
3
The issues here considered are more frequently encountered
in proceedings in Chapter 11 reorganizations than in Chapter 7
liquidations. Consequently, any analogical crossovers into
Chapter 11 jurisprudence is problematical, particularly those
Chapter 11 proceedings that implicate mass tort litigation, e.g.,
asbestos, birth control devices, etc. In the same vein, the
precedentialSQor even merely instructionalSQvalue of this opinion
to future Chapter 11 cases should probably be "little or none."
4
A. Windt, Insurance Claims and Disputes, § 5.09 (2d ed.
1988). As noted later, apparently no Texas case either supports
or rejects this supposedly well-established principle of
insurance law.
5
11 U.S.C. 541(a)(1).
6
. . . [§ 541(a)(1)] is broad. It includes all kinds of property,
including tangible or intangible property, causes of action . . .
and all other forms of property currently specified in section 70a
of the Bankruptcy Act."6 The language of § 541(a)(1) is
unquestionably broad enough to cover a debtor's interest in
liability insurance.7 Indeed, an overwhelming majority of courts
have concluded that liability insurance policies fall within §
541(a)(1)'s definition of estate property.8 This consensus is
understandable: "[a] products liability policy . . . is a valuable
property of a debtor, particularly if the debtor is confronted with
substantial liability claims."9 Often, as in this case, liability
policies constitute "the most important asset of . . . [the
debtor's] estate."10 As one court put it, "language, authority, and
reason all indicate that . . . liability insurance polic[ies] are
6
United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05
& n.9, 103 S. Ct. 2309, 2313 & n.9, 76 L. Ed. 2d 515 (1983).
7
Tringali v. Hathaway Machinery Co., Inc., 796 F.2d 553 (1st
Cir. 1986).
8
MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89, 92 (2nd
Cir. 1988); Tringali, 796 F.2d at 560-61; A.H. Robins Co., Inc.
v. Piccinin, 788 F.2d 994, 1001-02 (4th Cir. 1986); In re Minoco
Group of Cos., Ltd., 799 F.2d 517, 519 (9th Cir. 1986); In re
Davis, 730 F.2d 176, 184 (5th Cir. 1984) ("the weight of
authority supports the New York district court's conclusion" that
insurance policies and their proceeds are property of the
estate); In re Circle K Corp., 121 B.R. 257, 259 (Bankr. D. Ariz.
1990) (involving directors and officers' liability policies); In
re Forty-Eight Insulations, Inc., 54 B.R. 905, 907-909 (Bankr.
N.D. Ill. 1985); In re Johns-Manville Corp., 26 B.R. 405, 436
(Bankr. S.D.N.Y. 1983), aff'd 40 B.R. 219, 230-31 (S.D.N.Y.
1984).
9
A.H. Robins, 788 F.2d at 1001.
10
Id. (quoting In re Johns-Manville Corp., 40 B.R. at 229).
7
`property of the estate.'"11
In In re Louisiana World Exposition, however, we distinguished
titular ownership of a policy from total ownership of the proceeds
of that policy,12 holding that the proceeds of Directors and
Officers (D&O) liability insurance policies were not part of a
corporation's bankruptcy estate even though the policies were
purchased and owned by the corporation.13 The policies at issue in
that case provided liability coverage only for the corporate
debtor's directors and officers and for the obligation of the
corporation to indemnify those directors and officers.14 Thus,
under the D&O policies, the insurance companies' obligations flowed
only to the corporate debtor's directors and officers, who were the
only insureds under the policies.15 The policies did not afford the
debtor corporation any direct coverage for liability to third-party
claimants.16 In that narrow factual context, we concluded that the
debtor corporation's ownership of the policies was not enough to
render the proceeds of those policies property of the corporation's
bankruptcy estate. Consequently, despite the debtor's legal
ownership of the policies qua policies, this court determined that
the directors and officers were the equitable owners of all of the
11
Tringali, 796 F.2d at 560.
12
832 F.2d 1391 (5th Cir. 1987).
13
Louisiana World Exposition, 832 F.2d at 1398-1400.
14
Id. at 1398.
15
Id. at 1399.
16
Id.
8
proceeds of those policies, pretermitting inclusion of the proceeds
in the estate of the debtor.
In the time since Louisiana World was decided, the distinction
drawn in that case between ownership of liability policies and
ownership of the proceeds of those policies has not been broadly
applied: It arguably remains confined to cases involving D&O
liability policies, given their unique nature among liability
insurance products.17 Faced with the typical situation in which a
debtor corporation's liability policies provide the debtor and thus
the estate with direct coverage against third party claims,
virtually every court to have considered the issue has concluded
that the policies))and clearly the proceeds of those policies))are
part of debtor's bankruptcy estate, irrespective of whether those
policies also provide liability coverage for the debtor's directors
17
But see In re Edgeworth, 993 F.2d 51 (5th Cir. 1993)
(holding that the proceeds of a physician's liability policy were
not part of the physician's bankruptcy estate). In the Edgeworth
opinion, the panel did include some general language that appears
to broadly endorse the policy)proceeds dichotomy introduced in
World Exposition. For example, the panel suggested that "under
the typical liability policy, the debtor will not have a
cognizable interest in the proceeds of the policy," because the
proceeds truly inure to the benefit of third parties. 993 F.2d
at 56. This language was, however, dicta.
More importantly, this language confutes the broad
understanding-recognized even in World Exposition))that when a
liability policy "provides coverage for judgments against or
losses of the bankrupt corporation itself," the debtor owns both
the policy and the proceeds of that policy. World Exposition,
832 F.2d at 1399-1400. As indicated infra the vast majority of
courts do not bother to distinguish ownership of insurance
policies from ownership of the proceeds of those policies, but
view that the two go hand-in-hand. Thus, the scope of the
policy-proceeds distinction enshrined in World Exposition is
still in ferment: whether that distinction will be extended more
broadly has yet to be determined.
9
and officers.18 Most courts do not even recognize a technical
distinction between ownership of insurance policies and ownership
of the proceeds of those policies: They simply conclude that such
policies))and, by implication, the proceeds of such policies))are
valuable properties of debtors' bankruptcy estates.19
Indeed, some courts that have considered World Exposition's
policy-proceeds dichotomy have rejected it because it exposes a
debtor's insurance policies to suit outside the ambit of the
bankruptcy estate.20 These courts evidently fear that splitting the
proceeds of a liability policy between bankrupt and non-bankrupt
insureds would create a race to the courthouse whenever potential
liability exceeds total proceeds, as creditors scurry to see who
can be first to get a judgment against the non-bankrupt insureds
(worth a dollar on the dollar) instead of a claim against a
18
World Exposition 832 F.2d at 1399-1400 (citing numerous
cases).
19
See, e.g., MacArthur Co. v. Johns-Manville Corp., 837 F.2d
89, 92 (2nd Cir. 1988); Tringali v. Hathaway Machinery Co., Inc.,
796 F.2d 553, 560-61 (1st Cir. 1986); In re Davis, 730 F.2d 176,
184 (5th Cir. 1984); In re Forty-Eight Insulations, Inc., 54 B.R.
905, 907-909 (Bankr. N.D. Ill. 1985); In re Johns-Manville Corp.,
26 B.R. 420, 436 (Bankr. S.D.N.Y. 1983), aff'd 40 B.R. 219, 230-
31 (S.D.N.Y. 1984).
20
See, e.g., In re Minoco Group of Cos., Ltd., 799 F.2d 517,
519 (9th Cir. 1986) ("[W]e see no significant distinction between
a liability policy that insures the debtor against claims by
consumers and one that insures the debtor against claims by
officers and directors"); A.H. Robins Co., Inc. v. Piccinin, 788
F.2d 994, 1001-02 (4th Cir. 1986); In re Circle K Corp., 121 B.R.
257, 260, 262 (Bankr. D. Ariz. 1990) ("[T]he Louisiana World
analysis fails to consider the . . . Minoco rationale for holding
insurance is estate property: the estate was worth more with
than without it"). But see In re Daisy Systems Securities
Litigation, 132 B.R. 752, 755 (Bankr. N.D. Cal.).
10
bankrupt debtor's estate (often worth but pennies on the dollar, if
anything).21
In this circuit, we are therefore in the position of knowing
how to resolve cases on either end of the continuum, but we have
not yet decided how to resolve cases lying somewhere along the
continuum. On one extreme, when a debtor corporation owns a
liability policy that exclusively covers its directors and offices,
we know from World Exposition that the proceeds of that D&O policy
are not part of the debtor's bankruptcy estate.22 On the other
extreme, when a debtor corporation owns an insurance policy that
covers its own liability vis-a-vis third parties, we))like almost
all other courts that have considered the issue))declare or at
least imply that both the policy and the proceeds of that policy
are property of the debtor's bankruptcy estate.23 But we have not
yet grappled with how to treat the proceeds of a liability policy
when (1) the policy-owning debtor is but one of two or more
coinsureds or additional named insureds, (2) the rights of the
21
Tringali, 796 F.2d at 560; In re Forty-Eight Insulations,
Inc., 54 B.R. 905, 908 (Bankr. N.D. Ill. 1985). Such a "race to
the courthouse" arguably offends one of the most fundamental
policies underlying bankruptcy law: preservation of the debtor's
estate and the status quo ante long enough to allow a fair,
ratable, systematic liquidation of the estate's assets among all
claimants. 796 F.2d at 560.
22
See generally 832 F.2d 1391.
23
Id. at 1399-1400; accord MacArthur Co. v. Johns-Manville
Corp., 837 F.2d 89, 92 (2nd Cir. 1988); Tringali, 796 F.2d at
560-61; In re Davis, 730 F.2d 176, 184 (5th Cir. 1984); Forty-
Eight Insulations, 54 B.R. at 907-909; Johns-Manville Corp., 26
B.R. at 436. But see In re Edgeworth, 993 F.2d 51 (5th Cir.
1991).
11
other coinsured(s) or additional named insured(s) are not merely
derivative of the rights of one primary named insured,24 and (3) the
aggregate potential liability substantially exceeds the aggregate
limits of available insurance coverage.
When ultimately we are faced with such a mid-continuum case,
we shall have to decide which one of two positions to take: either
(1) the proceeds of a liability policy should be wholly included in
the bankruptcy estate of the debtor that owns the liability
policy))even though there are other coinsureds or additional named
insureds who have some "interest" in the proceeds,25 or (2) the
proceeds should be divided among all coinsureds, either per capita
or in proportion to the potential or actual liability faced by each
insured party. The instant case, however, is not the one that
forces us to decide which of these or possibly other positions to
take, for here the district court based its reversal of the
bankruptcy court on what it perceived to be a broad, general
24
See generally MacArthur Co., 837 F.2d at 92 (holding that
MacArthur Co.'s rights as an insured vendor were "completely
derivative" of Manville's rights as the primary insured).
25
See World Exposition, 832 F.2d at 1400 (acknowledging that
some courts have held that the policies))and in fact the
proceeds))of an insurance policy were part of a debtor
corporation's estate, even though the policies also extended
liability coverage to directors and officers); see also In re
Minoco Group of Cos., Ltd., 799 F.2d 517, 519 (9th Cir. 1986) (no
significant distinction between a liability policy that insures
the debtor against claims by consumers and one that insures the
debtor against claims by officers and directors); A.H. Robins
Co., Inc. v. Piccinin, 788 F.2d 994, 1001-02 (4th Cir. 1986)
(worth of bankruptcy estate increased by including proceeds); In
re Circle K Corp., 121 B.R. 257, 260, 262 (Bankr. D. Ariz. 1990);
but see In re Daisy Systems Securities Litigation, 132 B.R. 752,
755 (Bankr. N.D. Cal. 1991).
12
principle of insurance law; and even if we assume arguendo that
such principle is a basic tenet of Texas insurance law, we conclude
that the court misapplied it.
B. Insurance Aspects
As noted, the district court grounded its opinion in what it
perceived to be a recognized principle of insurance law, that "[a]n
insurance company cannot prefer one of its insureds over another."26
Armed with this article of faith, the district court concluded that
"[t]he bankruptcy court erred when it ruled that the Homsys ha[d]
no property interest in the proceeds," and reversed the bankruptcy
court. We discern several difficulties with the district court's
determination.
Ignoring for a moment that court's failure to refer us to
anything other than a single treatise to support this purported
canon of insurance law, we perceive a logical contradiction between
the court's legal reasoning and the injunctive relief that it
ordered. Reduced to its essence, the foundation of the district
court's reversal of the bankruptcy court's decision was the court's
preliminary conclusion that the Homsys owned some portion of the
policy proceeds (or some fractional or undivided interest in all of
the proceeds) and that the Homsys' portion of or interest in the
proceeds was not))and could not be))property of the Estate.27
26
A. Windt, Insurance Claims and Disputes, § 5.09 (2d ed.
1988).
27
A bankruptcy court exercises its broad powers to protect
the assets of the bankruptcy estate. In re Davis, 730 F.2d 176,
183 (5th Cir. 1984). The bankruptcy estate, in turn, consists of
all legal and equitable interests owned by the debtor at the
13
Nevertheless, the district court went on to order the bankruptcy
court to extend "the umbrella of [its] injunction . . . to shield
the Homsys from liability and to protect their interest in the
policies adequately." But, if the Homsys' portion of the Proceeds
is truly not property of the Estate, then the bankruptcy court has
no authority to enjoin suits against the Homsys: The bankruptcy
court's injunctive powers exist only to ensure the preservation and
fair division of Estate assets.28 Therein lies the apparent
contradiction between the district court's legal reasoning and the
injunctive relief that it ordered: If the Homsys own a portion of
the Proceeds, that portion cannot be deemed property of the Estate;
and perforce there can be no justification for shielding such
portion under the bankruptcy court's injunctive orders, the reach
of which extends only to property of the Estate.
More relevant for our purposes, however, is the failure by
either the Homsys or the district court to cite us to any binding
authority for the proposition that "[a]n insurance company cannot
prefer one of its insureds over another."29 The district court
anchored its opinion on this principle, yet provided us with
neither statutes nor case law indicating that the laws of the State
commencement of the bankruptcy case. 11 U.S.C. 541(a)(1). By
definition, the bankruptcy estate does not generally include
property that is not owned by the debtor, see id., and non-debtor
property thus should not ordinarily be shielded by the powers of
the bankruptcy court.
28
In re Davis, 730 F.2d 176, 183 (5th Cir. 1984); see also
footnote 27 supra.
29
A. Windt, Insurance Claims and Disputes, § 5.09 (2d ed.
1988).
14
of Texas embrace such a principle. Neither did the district court
explain exactly how the principle applies in this case. For their
part, the Homsys referred us to two cases))one from New York and
one from an intermediate appellate court in Texas))that purportedly
support the principle: Smoral v. Hanover Insurance Co.30 and Texas
Farmers Insurance Co. v. Soriano.31 But these cases are
distinguishable.
In Smoral, the New York Supreme Court, Appellate Division,
held that an insurance company breached its duty of good faith to
an insured driver (one of two coinsureds) when it tendered the full
limits of an automobile liability policy to a passenger who was
injured in a car accident, in exchange for an agreement to release
from liability the insured owner of the car (the other of two
coinsureds).32 Far from standing for a broad principle that an
insurer may never prefer one of its insureds over another (and thus
may be enjoined from entering a settlement that would do so),
however, the Smoral case merely indicates that an insured may seek
damages under a breach of good faith cause of action if he believes
that an unfair settlement has been effected.33
The intermediate appellate court opinion in Soriano likewise
30
37 A.D.2d 23, 322 N.Y.S.2d 12 (1971). Windt refers to the
Smoral case as the "leading case" in the area of defining an
insurer's duty to settle when there is more than one insured. A.
Windt, Insurance Claims and Disputes, § 5.09 (2d. Ed. 1988).
31
844 S.W.2d 808 (Tex. App.))San Antonio 1992) (rev'd,
881 S.W.2d 312 (Tex. 1994).
32
37 A.D.2d at 26.
33
See generally id.
15
reveals only that, under some circumstances, an insured may
challenge a settlement between his insurer and another party by
filing an action for breach of the duty of good faith and fair
dealing.34 We note first that Soriano does not involve a settlement
between an insurer and one of two or more coinsureds but between
the insurer and one of several third-party claimants. Second,
there is now considerable doubt whether Soriano still stands for
the proposition for which it was cited to us by the Homsys in the
first place: After the instant case was briefed and argued to us
on appeal, the Supreme Court of Texas reversed the intermediate
appellate court and rendered a take-nothing judgment against the
Soriano plaintiffs. In so doing, the state supreme court noted
that it had "never recognized a cause of action for breach of the
duty of good faith and fair dealing where the insurer fails to
settle third-party claims against the insured,"35 emphasizing that
"[w]e have never held and do not hold today that either of these
two standards [(1) the insurer has no reasonable basis for denying
or delaying payment of the claim, or (2) the insurer knew or should
have known that there was no reasonable basis for denying or
delaying payment of the claim] applies to insurers in responding to
third-party claims."36 Thus the Homsys' reliance on Soriano is even
34
844 S.W.2d at 814-17.
35
Soriano, 881 S.W.2d at 317.
36
Id. (emphasis in original). But, as the insurer in
Soriano did not challenge whether, as a matter of law, its
insured could advance a claim for breach of the duty of good
faith and fair dealing for the company's failure to settle a
third-party claim, the Texas Supreme Court was not in a position
16
less efficacious now than it was when cited in their brief to this
court.
Nowhere in either Smoral or Soriano do we find true support
for a general principle of insurance law that forbids an insurer
from settling with one of its coinsureds to the disadvantage of
another one. Rather, those cases recognize nothing more than the
aggrieved insured's right to seek damages from the insurance
company for making such a settlement, by initiating a suit for
breach of good faith.37
In this case, of course, the Homsys have not initiated such a
suit. Relying on nothing more than a general statement in a
hornbook, the Homsys))and apparently the district court))would have
us convert an insured's right to sue for breach of good faith into
a general prohibition that forbids an insurer from entering a
settlement by which it tenders the full limits of a liability
policy exclusively to or for the benefit of one of several
coinsureds. We decline the invitation to expand the holdings of
Smoral and Soriano so extensively.38
to address the existence vel non of such a claim under Texas law;
hence its pronouncements and their inferences remain dictum.
37
The right of an insured to sue his insurer for breach of
good faith is analogous to the right of a party to a contract to
sue for breach of contract.
38
We also note that there is a wide divergence of opinion
concerning the factual predicate that a court must find to
conclude that an insurance company has breached its duty of good
faith in concluding a settlement. See, e.g., Pekin Ins. Co. v.
Home Ins. Co., 479 N.E.2d 1078, 1080, 134 Ill. App. 3d 31 (1985)
("court will only recognize a bad faith claim when an insurer has
acted in a vexatious, unreasonable, or outrageous manner towards
its insured parties"). Clearly, however, whether an insurance
17
III
CONCLUSION
As we perceive a logical contradiction between what we must
infer to be the district court's legal reasoning and the injunctive
relief that it ordered, and as neither the Homsys nor the district
court advanced compelling support for the proposition that an
insurance company may never enter a settlement with one insured
while leaving another insured completely exposed, we are unable to
affirm the judgment of the district court. We therefore reverse
the order of the district court, which itself had reversed the
order of the bankruptcy court; and we affirm and reinstate the
order of the bankruptcy court, which authorized the Settlements
that were proposed by the trustee.39 In so doing, however, we do
company has breached its duty of good faith is a fact-intensive
inquiry, and not one for an appellate court acting upon a cold
and incomplete record.
39
In again cautioning our readership against relying on this
opinion as precedential or instructive beyond its narrow holding
in the context of the particular facts and circumstances of this
case, we are constrained to mention several caveats and pose one
or two rhetorical questions. We wonder "out loud" about the
extent, if any, to which the tools of injunctive relief and
settlement (or "compromise") are appropriateSQnot only in dealing
with the interests of co-insureds in policy proceeds, but also in
dealing with the rights of third party creditors of the
bankruptcy and non-bankrupt debtors to the extent any one or more
of such third party creditors may oppose the settlement confected
by a "steering committee." The broad latitude afforded
bankruptcy courts in fashioning remedies should not be used in a
way that tramples on the rights of dissenters among creditors or
non-parties to the proceedings. Just as § 105 injunctions in
mass tort situations are questionable precedent in guaranty and
partnership contexts, we also caution against analogical
extension of that which we do today to different situations in
bankruptcy, such as guaranties and holders of guaranties or
partners (distinct from the partnership) in § 723 situations (who
appropriately may be enjoined temporarily but who in most
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not intend to hold or even imply that the Homsys may not have the
right to seek recovery from their insurers in an action for breach
of good faith; and we therefore modify the bankruptcy court's order
to permit the Homsys to bring such an action, although we express
no view as to whether Texas law recognizes that cause of action
under these circumstances. As an adjunct of that modification, we
also declare that the bankruptcy court's injunction shall not
prohibit such a suit by the Homsys against their insurers, and that
any applicable statute of limitation has been tolled since the
advent of the Homsys' litigation in Vitek's bankruptcy proceedings.
SO ORDERED.
instances may not appropriately be enjoined permanently).
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