### IN THE UNI TED STAT ES COURT OFAPPEALS FOR THE FIF TH CIRCU IT

No. 11–31134

TIM SOSEBEE; MARK WRITESMAN; DALE PATILLO, Plaintiffs - Appellees
v. STEADFAST INSURANCE COMPANY, Defendant - Appellant

Appeal from the United States District Court for the Eastern District of Louisiana

Before JONES, GARZA, and PRADO, Circuit Judges. GARZA, Circuit Judge: Appellant Steadfast Insurance Co. (“Steadfast”) appeals from the district court’s order denying Steadf a s t summary judgment and granting summary judgment to Appellees Sosebee, Writesman, and Patillo (“Sosebee”). The district court held Steadfast waived its coverage defense. We REVERSE and render summary judgment in favor of Steadfast. I Tim Sosebee, Mark Writesman, and Dale Patillo were passe n gers on a chartered fishing boat insured by St. Paul Fire when they were involved in an accident with a utility boat owned by non-party Harvest O i l (“Harvest”) and U n i te d S ta te s C o u rt o f A p p ea l s

F i ft h C i rc u i t 

### F I L E D Novembe r 27, 20 12 Lyle W . Cayce Clerk Case: 11-31134 Document: 00512065053 Page: 1 Date Filed: 11/27/2012No. 11–31134

insured by Steadfast Insurance Company (“Steadfast”). One week after the accident St. Paul Fire initiated a declaratory judgment action against Sosebee and the owner and opera tor of the fishing boat. Sosebee filed a third-party complaint agains t H arvest, alleging substantial personal injuries. Harvest answered the complaint on Decembe r 3 , 2 0 08 through Slattery, Marino & Roberts, its corporate counsel. After Steadfast became aware o f the accident and the lawsuit, Harvest received a letter, dated February 23, 2009, titled: “Reservation of Rights: Please read carefully.” The letter is on the letterhead of Zurich North America, and is signed, “Sincerely, Zurich American Insurance Company.” The letter contains the name Zurich American Insurance Company (“Zurich”) five times and the

name Steadfast two times. The letter refers to Sosebee’s complaint and thir d

party complaint against Harvest in the 2008 case, cites th e Steadfast policy number, quotes the watercraft exclusion in the policy, and states the exclusion “might appl y . ” T h e p a rties do not dispute that the plain language of the watercraft exclusion quoted in the letter would exclude coverage for S o s eb e e’s claims. The letter requests additional information regarding the ownership and length of the vessel involved in the accident. The letter states Zurich will “proceed with investigation of the case and allegations s ubj e ct to a full Reservation of Rights.” Zurich is a separate insurance company, and both Zurich and Steadfast

are members of Zurich North America. Zurich North Am eric a h an dles insurance claims for its member companies, including Zurich and Steadfast. At the time of the accident Harvest had a comprehensive general liability p o l i c y a nd an umbrella policy with Steadfast, as well as a commercial auto liability policy with

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Zurich. On March 31, 2009 Saratoga Resources, Inc., a Texas corporation and sole member of Harvest, filed for bankruptcy under Chapter 11. Harvest is 1 represented in its bankruptcy case by its own counsel. At the time Harvest filed for bankruptcy, all of the twenty largest unsecured claims against Harvest were for “Vendor/Trade Debt”, not tort liability. Creditors have a total of 207 claims against Harvest, totaling $226,754,130.85 in secured claims and $20,592,114 in

unse c ured claims. Harvest’s personal property totals $25,659,388 and its real property totals $146,118,745. On August 9, 2009, Sosebee filed a claim against Harvest in the bankruptcy case for an amount “to be determined.” Harvest immediately filed an objection to Sosebee’s claim. The court has not yet held an adversary proceeding to quantify Sosebee’s claim. On April 1 4 , 2 0 09, Harvest filed a notice of filing of bankruptcy in Sosebee’s case against Harvest. On April 22, 2009, Harvest moved to change its

c ounsel from Slattery, Marino & Roberts to a firm employed by Steadfa s t , Anderson, Stephens & Grace (hereinafter Stephens & Grace). On the same day the court he l d a status conference with the parties and stayed and administratively closed the case because of Harvest’s bankruptcy filing. On June 17, 2009, Sosebee filed this suit against the owner and operator of the boat, St. Paul, and Steadfast, alleging substa n t i al personal injuries. Soseb e e di d not include Harvest in this suit because Harvest had filed for

Purs uant to F E D

. R. EVID

. 201(b), we are enti tle d to tak e judic ial noti ce of adjudicat ive 1 fac ts fr om reli able so urc es “w hos e acc urac y canno t reas onably be ques tio ned. ” But “[i]f the cour t tak es judic ial noti ce bef ore noti fying a par ty, the par ty, on requ es t, is st ill enti tle d to be hear d. ” F E D

. R. E VID

. 201(e)

.

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bankruptcy. Steph e n s & G race, the same firm employed by Steadfast to represent Harvest in the 200 8 c a se, represented Steadfast in this case. Stephens & Grace also represented a Harvest employee in a deposition taken by the owner and operator of the fishing boat. In its initial answer to the complaint Steadfast asserted no affirmative defenses and made no mention of the watercraft exclusion. When Sosebee asked Steadfast to produce any insurance policies that

wo u l d p r o vide coverage for Sosebee’s injuries, Steadfast produced its primary and umbrella policies. At this time St e a df ast was unaware that its policy excl uded coverage because three separate Steadfast insurance adjusters mistakenly interpreted Steadfast’s policy as covering Harvest’s claim. The court set a trial date for October 18, 2010, and then granted motions to continue the trial to August 15, 2011. On September 29, 2 0 1 0 , S o sebee received leave to file a first amended complaint, adding a cla i m a g a i nst Steadfast under Harvest’s umbrella policy. On April 1, 2011, after an insurance adjuster discovered Steadfast’s policy excluded coverage, Steadfast filed an answer to the amended complaint, asserting for the first time the watercraft exclusion. On April 14, 2011, the district c o u rt granted Steadfast’s motion to substitute new counsel in place of Stephens & Grace. Stephens & Grace sent a letter to Harvest on April 21, 2011 stating that:

A s you know, this firm was assigned to represent [H a rv e s t] and [Steadfast] in the Sosebee Writesman and Patillo suit pending in the United States District Court for the Ea s t e r n District of Louisiana. The lawsuit has been p r oceeding forward against Steadfast onl y u n d e r the direct action statute after the notice of bankruptcy of Harvest. Steadfast h as decided to assert policy

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defenses and they have reassigned their defense . . . WE WILL NO LONGER REPRE S E NT HARVEST OR STEADFAST IN THIS MATTER. WE STRONGLY URGE YOU TO CONSULT YOUR OWN ATTORNEY TO PROTECT YOUR INTERESTS.

On April 19, 2011, Sosebee moved to strike Steadfast’s amended answer, arguing Steadfast did not a s s ert the watercraft exclusion in a timely manner. The district court denied the motion on the basis that the amended answer was

n o t so untimely as to prejudice Sosebee. The district court continued the t ri a l date to permit Sosebee to take discovery related to the watercraft exclusion. In a deposition in this case, Harvest’s de s ignated representative, Brian Daigle, testified that the entire time S tephens & Grace represented Harvest, Harvest was unaware that Stea df a st intended to invoke the exclusion. Mr. 2

The rele vant por tio n o f Mr

. Da igle’s d epo sit ion is excer pt ed below : 2 Q. Now did Ste adf ast Insu r a nce Com pany ever se nd you a res ervat ion of r i gh t s let ter sim ilar to the one that Zuric h Ame ric an Insur ance Com pany se nt you? A. N o.

. . . Q. D i d Ste adf

ast Insur ance Com pany ever info rm you that they we re res erving thei r right s to cover age o n t hisp art icular clai m? A. Theon ly le tte r I re ceive d wa s fr omZur ich rightt here

. Q. Ok ay. At so me poi nt, did Ha rves t Oi l event ually lear n that Ste adf ast wa s b e i n g sue d dir ect ly by the plai ntif fs in this cas e on this par tic ular clai m? A. Ats om e p oint , yeah.

. . . Q. So i f we talk ed about earl ier May 1st of 2008 is wh en the acc ide nt occ urr ed– at any poi nt in 2008, did Ste adf ast info rm Ha rves t that this par tic ular acc ide nt may not be cover ed unde r its p olic ies ? A. Nott hat I’m aw are of. Q. Ok ay. Atany poi nt in 2009, did Ste adf ast info rm Ha rves t that this acc ide nt may not be cover ed unde r its p olic ies ? A. No. 5 Case: 11-31134 Document: 00512065053 Page: 5 Date Filed: 11/27/2012No. 11–31134

Daigle testified Harvest was under the impres s i o n th e February 23, 2009 reservation of rights letter related to Harvest’s policies with Zurich, not Steadfast. Mr. Daigle further testified Steadfast never informed Harvest that Steadfast contested coverage for Sosebee’s claim. Steadfast moved for s u m m ary j u d gm e nt ar guin g b e cause Steadfast did not

owe coverage to Harvest, Sosebee cannot recover from Steadfast. Sosebee moved for summary judgment arguing Steadfast waived its coverage defense. Holding Steadfast waived its right to assert the water c r a f t exclusion as a defense, the district court denied St e adfast summary judgment and granted summary judgment for Sosebee. Steadfast appealed. II To determine whether Steadfast waived its coverage defense the district court ap p l i e d a t wo-prong test, asking (1) whether Steadfast’s conduct was so inconsistent with asse rt i n g th e exclusion as to induce a reasonable belief that Steadfast relinquished its right to assert the exclusion, s e e S t e p t ore v. Masco

Q. At any poi nt in 2010, did Ste adf ast info rm Harves t that this acc ide nt may not be cover ed unde r its p olic ies ? A. N o.

. . . Q. At any poi nt during that pr oce ss o f a ss ist ing in coo rdinati on of dep os itio ns, did anyone fr om Ste adf ast Insur ance Com pany o r t heir att orne ys info rmyou thatt hisc laimm ight not be cover ed? A. No.

. . . Q. Ha d Ste adf

ast brou ght this cover age iss ue to Ha rves t’s att enti on any tim e betw een 2008 and 2011, wh at i f anythin g wo uld have Ha rves t done ? A. We wo uld have im me diat ely cont act ed our cor por ate att orne ys fir st

. Da igle De p. 45: 17–51: 14, July 2 0, 2011.

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Constr. Co. , 643 So. 2d 1213, 1216 (La. 1994); Emery v. Progressive Cas. Ins. Co. , 49 So. 3d 17, 2 1 (L a . App. Ct. 2010), and (2) whether Steadfast’s inconsistent conduct prejudiced Harvest. Scottsdale Ins. Co. v. Gulf Sea Temporaries, Inc. , No. 98-1364, 1999 WL 130633, at *5 (E.D. La. Mar. 10, 1999). O n a p peal S t eadfast contends the district court erred in answering both prongs affirmatively and holding Steadfast thereby waived its cov e rage defense. Soseb e e contends the district court erred in holding Steadfast’s February 23, 2009 letter was a valid reservation of rights. Sosebee contends Steadfast never reserved its right to assert the exclusion as a coverage defense. We review the district court’s grant of summary judgment de novo. Am. Nat’l Gen. Ins. Co. v. Ryan , 274 F.3d 319, 3 2 3 ( 5 th C ir. 2001). “The district court’s interpretation of an insurance contract is a question of law that we also review de novo.” Id. Summary judgment is appropriate only if the evidence in the record shows “there is no genuine dispute as to any m a t e ri a l f act and the movant is entitled to judgment as a matter of law.” F E D
. R. C IV
. P

. 56(a). The parties agree Louisiana law governs the dispute. III Steadfast contends it properly reserved its rights to assert the watercraft exclusion as a defense to coverage. We address the issue of Steadfast’s reservation of rights letter before the question of waiver because under Louisiana l a w waiver of noncoverage defenses is automatic and requires no showing of prejudice where the insurer assumed the insured’s defense without first issuing a reservation of rights letter. See Steptore , 643 So. 2d at 1216. Sosebee contends the district court erred in holding Steadfast’s February 23, 2009 letter reserved its righ t s u n d e r the watercraft exclusion. Sosebee

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contends Steadfast’s letter to Harvest on February 23, 2009 failed to res e rv e Steadfast’s rights under the policy for two reasons. First, Sosebee asserts Zurich authored the letter and reserved Zurich’s rights rather than Steadfast’s rights. Sosebee maintains the references to Zurich are not mere typographical errors. At the time of the boat accident, Harvest had po li c i e s with both Steadfast and Zurich. Sosebee thus maintains that the letter did not sufficiently ap p ri s e Ha rvest of which insurer was waiving its rights with respect to which policy. Second, Sosebee cites a Sixth Circuit case for the proposition that a reservation of rights that only refers to an investigation of an accident will not function as

a r e s ervation of rights with respect to a defense of the matter. Transamerica Ins. Group v. Beem , 652 F.2d 663, 666–67 (6th Cir. 19 8 1 )

. Ac c o r ding to the court in Transameric a , i f the initial letter does not mention a defense, the insurer must issue a second reservation of rights letter if it undertakes to defend the insured. Id

. Under Louisiana law, an insurer can waive any provision of an insurance contract even if it h as the effect of bringing within coverage risks originally

exc l u d e d under the policy. Steptore , 643 So. 2d at 1216. If an insurer with knowle d ge of facts indicating noncoverage assumes an insured’s defense without first reserving its rights to assert a noncoverage defense, the insurer waives its right to assert the defense. Id. If an insurer assumes an insured’s defense with knowledge of facts indicating noncoverage without first obtaining a non-waiver agreement, the insured may assume the insurer is acting in the insured’s best interest with respect t o c o verage defenses the insurer has seemingly relinquished. Arceneaux v. Amstar Corp. , 66 So. 3d 438, 451 (La. 2011). Thus, “the insurer’s notice of its intent to avail itself of the defense of noncoverage

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must be timely.” Scottsdale , 1999 WL 130633, at *3. Courts must apply waiver princi p l es stringently to prevent conflicts of interest between insurer and insured that could potentially affect legal representation. Steptore , 643 So. 2d at 1216. Courts should not, however, require overly technical or t a l i s m a n ic language for insurers to effectively reserve their rights. See F.D.I.C. v. Duffy , 47 F.3d 146, 151 (5th Cir. 1995) (rejecting ass e rt ion that insurer must state in reservation of rights that insurer “reserved its rights to void the policy”). Steadfast reserved its watercraft exclusion defense thro u gh i t s letter to Harvest on February 23, 2009. The letter unambiguously refers to the policy that Steadfast issued to Harvest, cites the watercraft exclusion in the policy, and

reserves rights under the exclusion. Even thoughSteadfast’s February 23, 200 9 let t e r to Harvest was on Zurich’s letterhead, Zurich signed it, and the letter mentioned Zurich’s name multiple times, the letter nevertheless put Harvest on notice that Steadfast was reserving its rights under the policy listed in the letter. The letter referred to the policy issued by “Steadfast Insurance Company” and listed the policy number and dates of coverage. The letter reproduced verbatim the watercraft exclusion from Steadfast’s policy. The letter did not include any reference to policies issued by Zurich and the letter referenced the lawsuit against Harvest by name. The letter stated Zurich would pr o ceed with the “investigation of the case and allegations subject to a fu l l [r]eservation of [r]ights.” Because Louisiana follows a functional approach to the reservation of rights and we have rejected requirements for technical language, see Duffy , 47 F.3d at 151, the fact that Steadfast did not explicitly sta t e i t was reserving its rights with respect to the defense of Harvest did not render the re s e rvation of rights void once Steadfast u n dertook to defend Harvest. Therefore, Sosebee’s

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contention that Steadfast failed to reserve its rights with respect to the watercraft exclusion is without merit. IV Because we hold Steadfast validly reserv e d i t s right to assert the

w a t e rcraft exclusion, we must now address whether Steadfast waived its

r e s ervation of rights. Though Steadfast concedes Sosebee has standing u n d e r the Louisiana Direct Action Statute t o r ai s e the issue of waiver, our waiver analysis is complicated by the fact Harvest, not a party to this case, is currently in bankru p t c y. Moreover, Harvest was in Chapter 11 bankruptcy at all times relevant to Sosebee’s claim that (1) Steadfast engaged in conduct inconsistent with a sserting a noncoverage defense and (2) Steadfast’s inconsistent conduct prejudiced Harvest. The Louisiana Direct Action Statute explicitly states that when an insured is in bankruptcy, an injured person or his survivors may bring

an action directly against the insurer without j o i n i ng the insured. LA

. R E V
. S TAT
. § 22:1269(B)(1) (Supp. 2012). We have held a direct action claimant may assert waiver even where the insured is not a party to the litigation and has received a discharge in bankruptcy. Duffy , 47 F.3d at 149–50; F.D.I.C. v. Duffy , 8 3 5 F. Supp. 307, 308, n.1 (E.D. La. 1993), aff’d , 47 F.3d 146 (5th Ci r . 1 9 9 5 ) (“Duffy received a discharge in bankruptcy, which relieved him of any potential liability .

. . . Hence the sole defendant remain i n g in this proceeding is Duffy’s alleged insurer”). Whether an insurer may waive its coverage defenses through its conduct in a direct action suit in which the insured is not a party while the insured is in bankruptcy is, however, a question of first impression. A In order to determine if Steadfast waived its noncoverage defenses vis-à10 Case: 11-31134 Document: 00512065053 Page: 10 Date Filed: 11/27/2012No. 11–31134

vis Harvest through its conduct in this case we must we must examine (1) the prot e c t i o n s Louisiana Direct Action statute provides to Sosebee and (2) the protections the Bankruptcy Code provides to Harvest while it is in Chapter 11 bankruptcy. The purpose of Louisiana’s Direct Action statute is to safeguard the rights of injured persons. Duf f y , 47 F.3d at 150. The Louisiana dir ect action statute creates a “contractual relationship which inures to the benefit of any and every person who might be negligently injured by the insured as completely as if such injured person had been specifically named in the policy.” Id

. (quoting Shockley

v. Sallows , 615 F.2d 233, 238 (5th Cir. 1980)). Section 655 of Title 22, Louisiana Revised Statutes, provides in part: A. No policy or contrac t o f l iability insurance shall be issued or delivered in this state, unless it contains provisions to the effect that the insolvency or bankruptcy of the insured shall not release the insurer from the payment of damages for injuries sustained or loss occasioned during the existence of the policy . . . B. (1) The injured person or his survivors or heirs

. . . shall have a right o f dir ect action against the insurer within the terms and l i m its of the policy

. . . however, such action may be b r o u gh t again s t the insurer alone only when at least one of the following applies: (a) The insur e d h a s been adjudged bankrupt by a court of competent jurisdiction or when p r o ceedings to adjudge an insured bankrupt have been commenced before a court of competent jurisdiction . . . .
LA

. R E V
. S TAT
. § 22:1269 (Supp. 2012). The plain language of the statute evinces Louisi a n a ’ s i n tent for the insolvency of the insured not to “release the insurer from the payment of damages” to injured parties. Id. Section 22:1269 is crafted to protect Louisiana’s vital interest in liability insurance that covers injuries to
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people in the state

. Watson v. Emp’rs Liab. Assur. Corp. , 348 U.S. 66, 73 (1954). The Supreme Court held even where an insurance contract expressly prohibited di rect actions before a determination of the insured’s liability, Louisiana’s interest in protecting injured parties under Sec ti o n 2 2:1269 overrode Massachusetts’s interest in enforcing its contract r u l e s . Watson, 348 U.S. at 72–73 (holding Louisiana direct action did not deny due process t o foreign liability insu r e r e v en where contract of insurance prohibited direct action and was drafted and executed in Massachusetts). The Louisiana Supreme Court has held that “the direct action statute does not create an independent cause of action a g a inst the insurer, it merely grants

a p r o cedural right of action against the insurer where the plaintiff h a s a
substantive cause of action against the insured.” Descant v. Adm’rs of Tulane Educ. Fund , 639 So. 2d 246, 249 (La. 1994). Under Section 22:1269, insurers may raise any defenses that arise from the nature of the obligation, that are personal to the insurer, or “that are common to all the solidary obligors. ” I d

. 2 4 9

– 5 0. Insurers may not, howev e r , r a i se defenses to liability that are personal to the insured, such as the fact the insured is in bankr u ptcy. Id. at 250 n.9. Thus, if there is coverage for Sosebee’s claim, the fact Harvest is in bankruptcy should not affect Steadfast’s obligation to pay on the claim. This does not me a n Steadfast
may not raise the fact Harvest is in bankruptcy as a d e f e n s e t o waiver

. The question of waiver is, of course, antecedent to coverage. Because Harvest has been in Chapter 11 bankruptcy at all times relevant to Sosebee’s claim of waiver, we must consider how the protections of bankruptcy might affect our waiver analysis. Chapter 11 provides robust protections to debtors while bankruptcy is o n go ing, but strikes “a balance between a debtor’s

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interest in reorganizing and restructuring its debts and the creditors’ interest in maximizing the value of the bankruptcy estate.” Florida De p t

. of Re venue v. Piccadilly Cafeterias, Inc. , 554 U.S. 33, 51 (2008) (internal c i tations omitted). Unlike Chapter 7 bankruptcy, the goal of which is liquidation of the debtor’s assets, Pioneer Inv. Servs. Co. v. B r u n s w i c k Assocs. Ltd. , 507 U.S. 380, 389 (1993), the goal of Chapter 11 bankruptcy is to marshall th e d eb t or’s resources “to provide the best possible opportunity for a successful rehabilitation which will ultimately redound to the benefit of all creditors.” In re Colortex Indus., Inc. , 19 F.3d 1371, 13 7 7 ( 1 1 th C i r . 1994); accord Pioneer Inv. Servs. , 507 U.S. at 389. When a debtor files for bankruptcy, an estate i s c r e at e d under 11 U.S.C. §§ 541, 541(a) (2006). Except as otherwise provided in the statute, the estate includ e s “ a ll legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 5 4 1 ( a) ( 1 )

. We have held that while insurance policies are generally property o f th e estate, the proceeds of liability insurance policies, unlike first party policies, generally are not.

[The] definition [of the bankruptcy estate] is int e n d e d to be broadly construed, and courts are generally in agreement that an insurance policy will be considered property of the estate. Insurance policies are property of th e e s t a t e . . . . Any rights the debtor has against the insu r e r , whether contractual or otherwise, become property of the estate. Acknowledging that the debtor owns the policy, however, does not e n d the inquiry. The question is not who owns the policies, but who owns the liability proceeds . . . . 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 . . . . Examples of insurance policies whose proceeds are property of the estate include casualty, collision, life, and fire insurance policies

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in whi c h the debtor is a beneficiary. Proceeds of such insurance policies, if made payable to the debtor rather than a third party such as a credi t o r, are property of the estate and may inure to all bankruptcy creditors. But un der the typical liability policy, the debtor will not have a cognizable interest in the proceeds of the policy. Those proceeds will normally be payable only for the benefit of those harmed by the debtor under the terms of the insurance contract.
In re Edgeworth , 993 F.2d 51, 55–56 (5th Cir. 1993) (foo t n o t es and internal quotation marks omitted); accord In re Sfuzzi, Inc. , 191 B.R. 664, 666 (Ba nkr. N.D. Tex. 1996) (holding liability insurance proceeds not property of bankruptcy

e state). Only in the limited instance of a mass tort action where hundr e d s o r thousands of claims against the debtor’s insurer might exhaust insu r a n ce proceeds and thus threaten the debtor’s estate over and above limits of liability insurance policies have courts held the proceeds of liability insurance policies are property of the bankruptcy estate. E.g. , MacArthur Co. v. Johns-Manville Corp. , 837 F.2d 89, 92 (2d Cir. 1988), (“Manville’s insurance policies and their proceeds

were substantial property of the Manville estate which will be diminished if and to the extent that third party direct actions against the insurance carriers result in plaintiffs’ judgments.”) (internal citation and quotation marks omitted); Edgeworth , 993 F.2d at 56 n.21 (“In the mass tort context, th e d e c i sions by several courts to include the proceeds as proper ty o f th e estate appear to be motivated by a concern that the court would not otherwise be able to prevent a free-for-all against the insurer outside the bankruptcy proceeding.”). At the time Harvest filed for bankruptcy, all of the twenty largest unsecured claims against Harvest were for “Vendor/Trade Debt”, not tort liabi l ity. Sosebee’s personal injury claim agai n s t Harvest is the result of an isolated accident to which the

mass tort precedents are inapplicable. There is no evidence that numerous tort

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claims threaten the limits of Harvest’s liability insurance or that Steadfast needs to be protected from a siege of tort claims under Harvest’s policy. Therefore, the proceeds of the policies at issue in this cas e a r e n o t th e property of Harvest’s bankruptcy estate. Because liability insurance proc e eds are generally not property of the bankruptcy estate, if a direct action claimant succeeds in obtaining a judgment against an insurer, the claimant recovers from the insurer directly rather than from the bankruptcy estate. See Landry v. Exxon Pipeline Co. 260 B.R. 769, 779 (Bankr. M.D. La. 2001). [R]ecovery against the Insurers causes a dollar for dollar reduction of any obligation on the part of [the deb t o r] to repair any damage suffered by the Pla i n t i f f s . In turn, the value of the remaining claims against the assets of [the debtor] increases by the amount of the diminished liability of [th e debtor]. Recovery against the Insurers lessens the sum total o f claims for which the estate is or may be liable, while at the same time potentially increases the pro rata recovery of creditors that are situated, as a matter of priority, the same as the Plaintiffs’ claims (or that are situated in a position of lesser priority), but ar e not afforded by applicable non-bankruptcy law the right to liability insurance coverage.
Id. Thus, in this direct action case Sosebee is seeking recovery from the proceeds of the insurance policy, not from Harvest’s bankruptcy estate. Pursuing a direct action claim against a liability insurer is not the onl y recovery option available to a personal injury claimant when the in s u r ed is in bankruptcy: a personal injury claimant may make a claim against the debtor in the bankruptcy case. See Sikes v. Global Marine, Inc. , 881 F.2d 1 7 6 ( 5 th Cir. 1989). Sosebee has also f i l e d a claim against Harvest in the bankruptcy case. I f, as in this case, the debtor objects to the claim, the court must qua n t i f y th e claim by lifting the bankruptcy stay so that a personal injury action may 15 Case: 11-31134 Document: 00512065053 Page: 15 Date Filed: 11/27/2012No. 11–31134

proceed. See, e.g. , id

. (lifting bankruptcy stay to permit personal injury action to proceed). To discourage forum shopping and prevent a party “from receiving

a windfall merely by reason of the happenstance of bankruptcy, ” s tate law applies i n the adversary proceeding unless an overriding bankruptcy policy requires otherwise. Butner v. United States , 440 U.S. 48, 55 (1979) (citing Lewis

v. Mfrs. Nat’l Bank , 364 U.S. 603, 609 ( 1961)). If the personal injury claimant

succ e e ds in proving the debtor is liable on the claim and there is liability insurance coverage, the insurer will pay the claimant directly, rather than the bankruptcy estate. See Landry , 260 B.R. at 800. The money p a i d under the liability policy is the money of the insurance company. Id

. If, however, the court finds the debtor is liable but there is no insurance coverage, the claimant must seek a payout from the bankruptcy estate. See Fogel v. Zell , 221 F.3d 955, 960 (7th Cir. 2000) (citing 11 U.S.C. § 101(10)) (tort victim is creditor of bankruptcy estate if victim had claim against bankruptcy estate that arose no later than the filing of petition). Because tort victims are only unsecured creditors, they are disadvantaged vis-à-vis the debtor’s s e cure d creditors who have a higher priority in the payout. See 11 U.S.C. §§ 725–26, 507 (2006); see, e.g. , In re Chance Indus., I n c . , 3 67 B.R. 689, 696 (Bankr. D. Kan. 2006) (“No funds were recovered an d available for distribution to unsecured creditors.”). Thus, if there is no coverage for Sosebee’s claim, Sosebee must seek a payout from the bankruptcy estate. In Harvest’s bankruptcy, the claims against the estate amount to tens of millions of dollars more than the asset s o f th e estate, and the amount Harvest owes to secured creditors dwarfs the amount Harvest owes to unsecured credi t o rs. If there is no coverage, Sosebee may receive only a fraction of the amount Harvest

owes it from the bankruptcy payout. Conversely, if there is insurance coverage, Sosebee would be able to recover the judgment amount directly from Steadfast, 16 Case: 11-31134 Document: 00512065053 Page: 16 Date Filed: 11/27/2012No. 11–31134

see Landry , 260 B.R. at 800, leaving more money in the bankruptcy estate for Harvest’s other creditors. When a debtor files for bankruptcy under Chapter 11, an automatic stay goes into effect under 11 U.S.C. § 362 and suspends nonbankruptcy courts’ authority to continue judicial proceedings then pendin g against the debtor including (1) the commencement or continuation.

. . [of a] proceeding against the debtor that was or could have been commenced before the commencement of the case . . . (3) any act to obtain possessio n o f p r o p erty of the estate or of property from the estate or to exercise control over property of the estate (6) a ny act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title 11 U.S.C. § 362. This stay go es into effect without any action required by the bankruptcy court. 3 Collier on Bankruptcy, ¶ 362.02 (Alan N. Resnick & Henry J. Sommer e d s ., 16th ed. 2011). Parties need not receive formal service of
process in order to be subject to the stay. Id

. Unless a court grants relief from the stay, the stay continues until the property at issue is no longer property of the bankruptcy estate or until th e b a nk r u p t cy case is closed or dismissed. 11 U.S.C. § 362(c). The automa t i c s tay does not generally apply to third parties such as debtors’ codefendants or guarantors, Travelers Indem. Co. v . Bailey , 557 U.S. 137, 166 (2009) (Steve n s, J., dissenting), but some courts have held the stay applies to the debtor’s insurers. 3 Collier on Bankruptcy, ¶ 3 6 2

. 0 3 (Alan N. Resnick & Henry J. Sommer eds., 16th e d

. 2 0 1 1 )

. In MacArthur Co. v. Johns-Manville Corp. , the Second Circuit held the liability insurance proceeds constituted property of the estate and therefore actions by third parties against
17 Case: 11-31134 Document: 00512065053 Page: 17 Date Filed: 11/27/2012No. 11–31134

debtor-insurers were automatically stayed when the debtor filed its bankruptcy petition. 837 F

. 2 d at 92 (citing In re Johns-Manville Corp. , 40 B.R. 219 (S.D.N.Y. 1984)

. Wh e r e a court finds insurance proceeds to be property of the bankruptcy estate the automatic stay will apply to direct actions against insurers, see 11 U.S.C. § 362(3), but where the proceeds of the insurance policies

are not property of the bankruptcy estate, direct actions again st insurers will not be affected by the stay. See 11 U.S.C. § 362. Therefor e, because the proceeds from Steadfast’s policy are not property of H a rv e s t’s bankruptcy estate, the automatic stay does not apply to the direct action in this case. Because the automatic stay did, however, apply to Sosebee’s claim against Harvest in the 2008 case, that case has remained stayed since Harvest filed for bankruptcy and the court cann o t lift the stay until the bankruptcy court closes or dismisses Harvest’s bankruptcy case. B Al s o relevant to Sosebee’s claim of waiver is the possible res judica t a o r collateral estoppel effect a judgment in this case would have on Sosebee’s claim in the bankruptcy case. Federal courts look to the law of state in which the federal diversity court sat to determine the preclus iv e effect of a federal diversity judgment. Hartsel Springs Ranch of Colo., I nc. v. Bluegreen Corp ., 296 F.3d 982, 986 (10th Cir. 2002). If claim preclusion applies in a bankruptcy case the jud g ement in the prior action would be dispositive as to the existence and amount of the debtor’s obligation to the particular creditor, see, e.g. , In re Comer , 723 F.2d 737, 739–40 (9th Cir. 1984), but not as to the dischargeability of the debt. Brown v. Felson , 4 4 2 U.S. 127, 129 (1979). “The four prerequisites for the application o f r e s judicata are: (1) the parties must be identical in both suits, or in privity; (2) the 18 Case: 11-31134 Document: 00512065053 Page: 18 Date Filed: 11/27/2012No. 11–31134

prior judgment must have been rendered by a court of competent jurisdiction; (3) t h e r e must be a final judgment on the merits; and (4) the same claim or cau s e of action must b e involved in both cases.” Schneidau v. Vanderwall , 17 So. 3d 61, 64 (La. Ct. App. 2009); LA

. R E V
. S TAT
. AN N
. § 13:4231. In this case Harvest is not a party , s o for claim preclusion to apply there must be privity between Steadfast and Harvest. Louisiana courts have interpreted privity to m e a n “ a person whose liability is purely derivative from the act of another person, or a person who is the primary actor in creating this kind of liability, such as in cases
of employer-employee and lessor-lessee relationships

. ” Bake r v . W he less Dr i l l i n

g Co. , 303 So. 2d 511, 515 (La. Ct. App. 1974). Insurers may be in privity with the insured w h en the injured party sues the under the Louisiana Direct Action Statute, but only where the policy limits are not exceeded and the interests of the insurer and the insured are aligned. See Cornis h v . F re e m a n , 451 So. 2d 148, 150 (La. Ct. App. 1984); Roland v. Owens , 786 So. 2d 167, 170 (La. Ct. App. 2001) (“The insured and the insurer not only share the same quality as parties, but in essence their identities are virtually merged into one, to the extent of the policy limits .”) (emphasis added) (internal citation and quotation m a rk s omitted). Because Steadfast has asserted policy defenses in this case, there is

no credible argument that the interests of Harvest and Steadfast are sufficiently aligned to establish privity for purposes of res judicata. Thus, claim preclusion will not apply to Sosebee’s claim against Harvest in the bankruptcy case. Issue preclusion will likewise not bar Harvest from relitigating the issues decided in this case in the bankruptcy case. Louisiana r equires four el e m e n t s to be met “before an earlier valid and f i n al judgment will preclude relitigation of an issue: (1) the parties must be identical; (2) the issue to be precluded must be identical to that involv e d i n the prior action; (3) the issue must have been
19 Case: 11-31134 Document: 00512065053 Page: 19 Date Filed: 11/27/2012No. 11–31134

actually litigated; and (4) the determination of the issue in the prior action must have been necessary to the resulting judgment.” Sevin v . P a r i sh of Jefferson , 632 F. Supp. 2d 586, 594–95 (E.D. La. 2 0 0 8) (i n t ernal citations and quotation marks omitted). Because Steadfast a n d S o s ebee are not identical parties, collateral estoppel will not prevent relitigation of the waiver issue i n th e adv e r s a ry action. Unlike the federal issue preclusion rules, Louisiana still requires mutuality for issue preclusion. Williams v. City of Marksville , 839 So. 2d 1129, 1132 (La. Ct. App. 2003). Therefore, neither claim preclusion nor issue preclusion will prevent Harvest from relitigating the issues decided in this case.

C Waiver requires (1) misleading conduct on the part of the insurer and (2) prejudice to the insured. Emery, 49 So. 3d at 21; Scottsdale , 1999 WL 130633, at *5. The burden of proving waiver is on the party claiming waiver. Duffy , 47 F.3d at 150. i Steadfast contends the district court erred in holding Steadfast’s conduct

was so inconsistent with asserting th e exclusion as a defense as to reasonably lead Harvest to believe Steadfast relinquished its right to assert the exclusion. Steadfast claims it never informed Harvest it was withdrawing its reservation of rights or c o v e ri n g S osebee’s claims. Steadfast admits three of its insurance adjusters misinterpreted Steadfast’s policy as covering Harvest’s claims, but maintains Steadfast never communic a t e d the mistaken interpretation to Harvest. Steadfast maintains Louisiana case law has restricted waiver to cases where the insurer fails to issue a reservation of rights before providing a defense to the insured.
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Steadfast extensively relies on F.D.I.C. v. Duffy, 47 F.3d 146 (5th Cir. 1995) for the proposition that an insurer cannot waive its reservation of rights through delay in asserting policy defenses against the injured party. In Duffy , we examined the issue of whether an insurer waived its defense that the policy

was void ab in it i o . Id. at 150. Steadfast cites language from Duffy for the
propos i tion that waiting four years after the grounds for a defense arises to assert a noncoverage defense does not place an insurer in danger of waiving its reservation of rights. Duffy does not support this propos i t ion. The insurer in Duffy waited four y e a r s to raise its affirmative defense because the court dismissed the suit sua sponte before the insurer had the o p p o rt unity to file responsive pleadings. F.D.I.C. v. Duffy , 835 F. Supp. 307, 325 (E.D. La. 1993), aff’d , 47 F.3d 146 (5th Cir. 1995). The insurer only had the opportunity to assert its noncoverage defense four years later on remand, at whic h t ime the insurer immediately filed respo n s ive pleadings denying coverage. Id

. Therefore Duffy does not support Steadfast’s contention that voluntarily waiting years to assert

a nonc ov e r a g e d efense in a direct action suit could never waive an otherwise valid reservation of rights. In Steptore , the Louisiana Supreme Court held that for an insurer to waive

a provision of an insurance contract through its inconsistent conduct the insurer must either have “an actual int e n t i o n to relinquish the right” or the conduct must be “so i n c o n s i s t e nt with the intent to enforce the right so as to induce a reasonable belief that the right has been relinquished.” Steptore , 643 So. 2d at 1216; Emery , 49 So. 3d at 21 (rejecting contention that insured could not waive coverage defense through subsequent conduct after issuing reservation of rights lett e r)

. An insurer may waive a reservation of rights unintentionally, even

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without explicitly withdrawing its reservation of rights. Steptore , 643 So. 2d at 1216. Sosebee’s claim of waiver revolves entirely around Steadfast’s conduct in this suit, to which Harves t i s n o t a party. Both parties are in agreement that Steadfast’s delay in asserting the watercraft exclusion as a defense in this case
was the result of multiple Steadfas t p o l icy adjusters misreading the policy. Steadfast did not act with a knowing intention to relinquish its right to assert the watercraft exclusion. Because Steadfast had no i n t e n ti o n to relinquish its right to assert the exclusion, we must examine whether Steadfast’s c o n d uct was sufficiently inc o n si s t e nt with asserting the exclusion to induce a reasonable belief in H arve s t that Steadfast had relinquished its right to assert the exclusion. Louisiana law implies a subjective and an objective component to this inquiry. See Arceneaux , 66 So. 3d at 450–51 (holding waiver requires “conduct so inconsistent with the intent to enforce the right so as to induce a reasonable belief that the right has been relinquished.”) (emphasis added). T h e requirement that the insured’s belief be reasonable forms the objective component of the inquiry. The subjective component of the inqu i ry requires the insurer’s conduct to actually induce or cause the insured’s belief that the insurer relinquished its right. Regarding the objective component, Sosebee alleges Steadfast’s conduct in this case was inconsistent with an intention to assert the watercraft exclusion

as a defense vis-à- vi s Harvest. In Steadfast’s initial answer to Sosebee, Steadfast pled no affirmative policy defenses. Only after its right to amend its

answer as a matter of course passed, s ee F E D
. R. C IV
. P. 15(a)(1), did Steadfast

move to amend its answer to add policy defenses. When Sosebee asked Steadfast to produce any insurance policies that would p r ovide coverage for Sosebee’s
22 Case: 11-31134 Document: 00512065053 Page: 22 Date Filed: 11/27/2012No. 11–31134

injuries, Steadfast produced the applicable policies covering Harvest. Although

a judgment in this case would have no preclusive effect in the bankruptcy case, Harvest might have viewed failure to timely assert the watercraft exclusion in this case as inconsistent with an intention to assert the exclusion as a defense in f u t u r e l itigation. Whether Steadfast’s actions in this case are sufficiently 3 inconsistent with asserting the watercraft exclusion as a defense to satisfy the objective test is a close question. We need not resolve this question because the subjective component of our inquiry clearly does not support a claim of waiver. Re gar din g the subjective component, the deposition te s ti m o ny of H arve s t’ s representative, Brian Daigle, never references Steadfast’s conduct in this c ase
as a reason for Harvest’s belief that Steadfast was not asserting policy defenses. Mr. Daigle suggests Harvest b e l i eved Steadfast was covering Sosebee’s claim b e c a u s e ( 1 ) it read the February 23, 2009 reservation of rights letter as onl y pertaining t o H a rvest’s policies with Zurich and (2) Steadfast never informed Harvest that Steadfast would not be providing coverage for Sosebee’s claim. Mr. Daigle did not claim Steadfast emp loye e s inf or m e d H arve s t th at S t eadfast would b e covering Sosebee’s claim, only that Steadfast employees never infor m e d Harvest that Steadfast would not be covering Sosebee’s claim. As discussed in

our analysis of the February 23, 2009 reservation of rights letter, that letter

Taking suc h an inco nsi st ent pos itio n coul d give ris e to a clai m of judic ial es top pel

. See, 3 Ris setto v. Plum bers & Steamfi tters Loca l 343 , 94 F.3d 597, 600 (9t h Cir. 1996) (“Jud i c i a l es top pel

. . . pr eclu des a par ty fr om gainin g a n a dvant age by tak ing one pos itio n, and then se ek ing a se cond advant age by tak ing an inco mp atib le pos itio n.” ). We have no occ asi on here to gues s wh at advant age Ste adf ast mi ght have gained by int e ntio nally fai ling to ass ert the wa ter cra ft exclus ion in this cas e, los ing, and then rais ing the exclus ion in the bankrup tcy cas e. We mak e this poi nt only to ack now led ge that Ste adf ast failing to tim ely ass ert the wa ter cra ft exclus ion in this cas e coul d indu ce a belie f that it did not inte n d to rais e the exclus ion as a def ens e i n f utur e l itigat ion. 23 Case: 11-31134 Document: 00512065053 Page: 23 Date Filed: 11/27/2012No. 11–31134

references Harvest’s policy with Steadfast by number and reproduces verbatim the text of the watercraft exclusion. In this letter Steadfast properly r e served its rights to assert the watercraft exclusion as a defense. Once Steadfast reserved its rights under th e watercraft exclusion, it did not need to again inform Harvest that it might not be covering Sosebee’s claim. Mr. Daigle’s deposition strongly suggests that it was a careless reading of the reservation of rights letter, rather than Steadfast’s conduct in this case that misled Harvest as to coverage. To establish waiver Louisiana requires that the insured be misled about coverage because of the insurer’s inconsistent conduct. See Arceneaux , 969 So. 2d a t 7 6 7 (citing Steptore , 643 So. 2d at 1216). Mr. Daigle’s deposition testimony was sufficiently clear on this point as to leave no issue of material fact in dispute: Harvest’s understanding that Steadfast would cover Sosebee’s claim

was not related to Steadfast’s conduct in this case. Thus, the district court erred in granting summary j u dgment to Sosebee and in denying to summary judgment to Steadfast. ii Even if Sosebee had produced sufficient evidence of inconsistent conduct to survive summary judgment, Sosebee produced no eviden c e that Steadfast’s conduct in this case prejudiced Harvest. Steadfast contends the district court erred in holding Steadfast’s conduct prejudiced Harvest. In support of this contention Steadfast states that Harvest

was never a defendant in this case and Sosebee’s case against Harvest is stayed pending the resolution of Harvest’s bankruptcy case. Steadf a s t m aintains its conduct could not have prejudiced Harvest when Sosebee has no active lawsuits pending against Harvest. Steadfast stresses Harvest provided the information with respect to the v essel involved in the accident prior to the time Steadfast
24 Case: 11-31134 Document: 00512065053 Page: 24 Date Filed: 11/27/2012No. 11–31134

assumed Harvest’s defense. Thus, Steadfast asserts the documents and fact witnesses Harvest provided to Steadfast after Steadfast assumed its defense did not give Steadfast any information Steadfast could use against Harvest. The party asserting waiver must prove the insurer’s inconsistent conduct prejudiced the insured. Scottsdale , 1999 WL 130633, at *5. If the injured party raises the issue of waiver pursuant to a claim under the Louisiana Direct Action statute, the relevant question remains whether the insurer’s conduct prejudiced the insured

. See Todd v. Steamship Mut. Underwriting Ass’n , No. 08-1195, 2011 WL 1226464, at *6 (E.D. La. Mar. 28, 2011) (citing LA

. R E V
. S TAT
. § 22:1269(B)(1) (2009) ) (hol din g direct action plaintiff has no independent cause of action against insurer but merely stands in shoes of insured). The question of whether an insurer’s conduct prejudiced the injured party is irrelevant to the question of whether the insurer waived its reservation of rights vis-à-vis the insured. This appeal raises the qu e s tio n of wh eth er the party asserting waiver may, under Louisiana law, prove prejudice to the insured without showing a c t u a l harm. Louisiana case law addressing the prejudice pron g o f waiver does not clarify whether the insu r e d must have detrimentally relied on the insurer’s misleading conduct t o p r o v e prejudice. Cf. Tudor Ins. Co. v. First Advantage Litig. Consulting , LL C, N o . 11 CIV. 3567 KBF, 2012 WL 3834721, at *11 (S.D.N.Y. Aug. 21, 2012) (citing Federated Dep’t. Stores, Inc. v . T w in City Fire Ins. Co. , 28 A.D. 3d 32, 37 ( N.Y. App. Div. 2006))(“Moreover, ‘a key element of common-law estoppel’ is a sh o w i n g by the insured of prejudice, or detrimental reliance, from the belated disclaimer.”); Pennsylvania Nat. Mut. Cas. Ins. Co. v. Kitty Hawk Airways, Inc. , 964 F.2d 478, 480 (5th Cir. 1992) (requiring insured show actual harm to prove prejudice under Texas law). In Arceneaux , the court

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discusses but does n o t decide whether actual harm is required to prove the insured was prejudiced. 969 So. 2d at 7 6 7 (citing 14 Couch on Ins.3d §§ 202:67-69) (some jurisdictions hold “the loss of the right of the insured to control and manage the defense is, i n itself, prejudice without any further proof.”) (internal quotation marks omitted). Keeping in mind this ambiguity, the central point of our prej u di c e i n quiry is whether insurer’s conduct interfered with the insured’s rights. L e e R

. R u s s , et. al, 14 Couch on Ins. § 202:70 (3d ed. 2008). (“Whether specific detriments, or combinations thereof, constitute prejudice is extremely fact specific, rendering it difficult or impossible to provide any black letter rules of law. Practitioners must review each factual pattern to determine whether the insurer’s actions or inactions interfered with the insured’s rights.”). Louisiana case law sugg e s t s th ere are two ways to prove an insurer’s misleading conduct prejudiced the insured. First, an insurer may prejudice an insured by depriving the insured of the opportunity to assume and manage its

own defense. Arceneaux , 66 So. 3d at 452. Louisiana case law does not clearly define the contexts in which this form of prejudice may occur. 4 [A]n insurers actions in continuing to defend an insured after it a c qu ired information relevant to a potential defense against coverage, may be thought to imply an acknowle d g m e n t of coverage despite that defense. The jurisprudence ha s found an insurers belated disclaimer prejudicial because the insured lost its opportunity to assume and/or man a g e its own defense as a direct resul t o f its reliance on the insurers assumption of the defense. However, there are no universally accepted rules.
Arceneaux v. Amstar Corp. , 969 So. 2d at 768 (internal citations omitted).

The tw o ins tanc es in wh ich Louis iana cas e law me ntio ns this for m of pr ejudi ce are in 4 cont exts wh ere the ins urer never iss ued a res ervation of right s. Arcen ea ux , 66 So. 3d at 452; Arcen ea ux , 969 So. 2dat768

. 26 Case: 11-31134 Document: 00512065053 Page: 26 Date Filed: 11/27/2012No. 11–31134

Second, an insurer prejudices an insured if the insured was actually harmed by the insurer’s inconsistent conduct

. See Scottsdale , 1999 WL 130633, at *5. In Scottsdale the i n s u r e d ’ s claim of waiver was not based on delay in asserting a policy defense, but based on a claimed conflict of interest. Id. at *4

. The court held the insurer indeed created a conflict of interest by retaining the same attorney to represent itself and the insured even though the insurer raised policy defenses. Id. at *5. Nevertheless the court held the insured was not prejudiced by this conflic t o f i n t erest because the insurer also defended the claim on the merits and there was no evidence that the settlement was unfair to the insured. Id. Sosebee failed to show evidence either of Arceneaux or “real harm” prejudice. Steadfast did not deprive Harvest of the opportunity to assume and manage its own defense. Stephens & Grace did not begin representing Harvest until after the district court stayed Sosebee’s claim against Harvest pursuant to 11 U.S.C. § 362. This case remained stayed the entire time Stephens & Grace

was representing Harvest. While it is true that Sosebee has filed a claim against Harvest in the bankruptcy case that may evolve into an adversary proceeding, Harvest’s own counsel repres e n t s Harvest in the bankruptcy case. Further, neither claim preclusion nor issue preclusion will apply to prevent relitigation in the impending adversary proceeding of the coverage iss u e o r the merits of Sosebee’s claim against Harvest. Therefore, Harvest will have an opportunity to defend itself both from Sosebee’s personal injury claim and Steadfast’s claim of waiver. The only evidence Sosebee provided of prejudice to Harvest was that Harvest cooperated with Steadfast to aid Steadfast in defending Sosebee’s claim against Steadfast by making its personnel available to Steadfast for questions,

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allowing Stephens & Grace to represent a H a rvest employee in a deposition taken by the owner a n d operator of the fishing boat, and providing discovery material to Steadfast as an aligned party rather than as an adversarial party. Sosebee provided no evidence that any of these actions actually harmed Harvest

or will somehow detrimentally effect Harvest in its attempt to reorganize or in its future negotiations with Soseb e e a s u nsecured creditor in the bankruptcy

case. In short, Sosebee did not provide e vi d e nce that any of the aid Harvest provided to Steadfast in this case actually harmed Harvest’s interests. We do not have occasion to hold that if an insured is in Chapter 11 bankruptcy it may
never be prejudiced by an insurer’s conduct in a di r e ct action suit. We do, however, hold Sosebee did not provide evidence th a t Harvest was actually prejudiced by Steadfast’s i n c o n s i s tent conduct in this case. Thus, the district court erred in denying summary judgment to Steadfast and granting summary judgment to Sosebee. V For these reasons, we REVERSE a n d r e n der summary judgment for Steadfast.

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