2006 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

1-19-2006

Acands Inc v. Travelers Cslty

Precedential or Non-Precedential: Precedential

Docket No. 04-3926

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Recommended Citation

"Acands Inc v. Travelers Cslty" (2006). 2006 Decisions. Paper 1666.

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 PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

 ___________________

Nos. 04-3926 and 04-3929

____________________

ACANDS, INC.,

 Appellant

 v.

TRAVELERS CASUALTY

AND SURETY COMPANY

____________________

ON APPEAL FROM THE UNITED STATES

 DISTRICT COURT FOR THE 

EASTERN DISTRICT OF PENNSYLVANIA

District Court Judge: Honorable Petrese B. Tucker

(D.C. Nos. 00-cv-04633 & 03-mc-00222)

____________________

Argued: July 11, 2005

Before: ALITO and BECKER, Circuit Judges, SHADUR

District Judge*

(Opinion Filed: January 19, 2006)

_______________________

* Honorable Milton I. Shadur, United States District Judge for

the Northern District of Illinois, sitting by designation
2

John E. Heintz (argued)

David B. Killalea

Donna L. Wilson

Marla H. Kanemitsu

Glenn Schlactus

Gilbert Heintz & Randolph LLP

1100 New York Avenue, NW

Washington, DC 20005

Laura Davis Jones

Curtis A. Hehn

David W. Carickhoff, Jr.

Pachulski, Stang, Ziehl, Young,

Jones & Weintraub PC

919 North Market Street

Wilmington, DE 19801

Counsel for Appellant

Barry R. Ostrager (argued)

Mary Beth Forshaw

Bryce L. Friedman

Simpson, Thatcher & Bartlett LLP

425 Lexington Avenue

New York, NY 10017

Samuel J. Arena, Jr.

Stradley, Ronon, Stevens & Young LLP

2600 One Commerce Square

Philadelphia, PA 19103

Counsel for Appellee

___________________

OPINION OF THE COURT

____________________

ALITO, Circuit Judge:

This case involves the applicability of the Bankruptcy
3

Code’s automatic stay provision, 11 U.S.C. § 362(a), to an

arbitration panel’s resolution of an insurance coverage dispute. We

hold that the arbitration proceeding became subject to the

automatic stay after Travelers Casualty (“Travelers”) submitted

arguments supporting an award against the debtor ACandS, and

that the panel’s award granting Travelers affirmative relief violated

the automatic stay by diminishing the bankruptcy estate. We

therefore reverse the order of the District Court.

I.

For decades, ACandS, formerly Armstrong Contracting and

Supply and now a subsidiary of Irex Corporation, was one of the

nation’s largest installers of asbestos insulation. Since the early

1970’s, the company has been embroiled in asbestos litigation. On

September 16, 2002, after selling many of its assets to Irex,

ACandS filed for bankruptcy and began to devote its full attention

and resources to the issues surrounding the asbestos claims and

related insurance matters. See In re ACandS, Inc., 311 B.R. 36

(Bankr. D. Del. 2004). This appeal combines two related disputes

arising out of the same set of insurance policies issued to ACandS

between 1976 and 1979 by Travelers’ predecessor, the Aetna

Casualty & Surety Co. 

Each of the four identical policies provides two types of

coverage: broad coverage for operations claims and more limited

coverage for products claims. The products coverage in each

policy was capped by a $1 million per occurrence limit and a $1

million aggregate limit. ACandS does not dispute that the coverage

provided for products claims has been exhausted. The operations

coverage is limited by a $1 million per occurrence limit but has no

aggregate cap, meaning that Travelers’ exposure to asbestos claims

arising from ACandS’s operations during the years 1976-79 was

potentially unlimited. The present dispute turns on the

classification of products versus operations claims and a

disagreement over whether all of ACandS’s asbestos operations

can be considered a single occurrence.

In 1988, seeking to avoid the cost and difficulty of

classifying large pools of claims, the parties reached an agreement

(the “Letter Agreement”) allocating set percentages of asbestos
4

claims to either products or operations. The Letter Agreement

initially allocated 55% of the claims to products and the remaining

45% to operations. Because of the aggregate limit on products

coverage, Travelers remained liable only for the 45% of claims

allocated to operations after the company paid the first $1 million

of products claims under each policy. The Letter Agreement also

established a three-step process for changing the allocation. First,

after two years had passed and at any time thereafter, either party

could make a demand on the other for a change in the allocation.

Upon the making of the demand, both parties were to conduct a

“claims study” in order to determine the proper allocation of

claims. If the parties failed to reach agreement on a new allocation,

the parties were to submit to non-binding dispute resolution

overseen by a neutral mediator. Finally, if the mediation failed, the

parties agreed to submit to binding arbitration. In the arbitration,

the party seeking the adjustment of the allocation bore the burden

of establishing that the existing allocation should be changed.

Both parties quickly explored ways of modifying the

bargain. In 2000, Travelers sought to limit its exposure to

operations claims by informing ACandS that it would treat all of

the operations claims as arising out of the same occurrence

(ACandS’s use of asbestos), thereby subjecting the claims to the $1

million per occurrence limit. ACandS filed a motion for

declaratory judgment in the District Court for the Eastern District

of Pennsylvania seeking to have each claim recognized as a

separate occurrence (“Number of Occurrences Action”). See JA6-

1438 (Complaint, filed September 12, 2000). On November 8,

2000, the District Court granted a joint motion for a stay pending

mediation and arbitration. JA6-1455 (Order, filed November 8,

2000). It is this action that the District Court dismissed as moot in

the order now on appeal.

Following a different track, ACandS sought to increase its

potential recovery under the policies by submitting a demand

seeking an increase in the allocation of claims to operations. On

January, 31, 2001, the company filed a formal demand pursuant to

the 1988 Letter Agreement. Although the demand did not specify

the desired reallocation, it stated that the allocation to operations

should approach 100%, and acknowledged Travelers’ position

“that all of the asbestos bodily injury claims pending against
1 In a collateral proceeding not directly relevant to this

appeal Travelers sought to forestall ACandS’s resort to the Letter

Agreement’s dispute resolution process. See JA2-423 (Complaint,

filed February 15, 2001). Travelers’ argument was that it could not

be required to arbitrate the allocation dispute because ACandS

failed to satisfy the prerequisites to arbitration as set forth in the

Letter Agreement, primarily the requirement that there be a joint

claims study. The Connecticut District Court denied a preliminary

injunction and later stayed the action pending the outcome of the

arbitration. See JA4-1018 (Order, filed October 16, 2001).

2 Any challenge to this finding was waived when

ACandS failed to raise it before the District Court. See JA2-374

(ACandS’s motion to vacate, filed October 30, 2003).

5

ACandS are [products] claims.” Although the Letter Agreement

contemplates a collaborative approach to reallocation, ACandS did

not invite Travelers to participate in the claims study it conducted

in 2000.1

 No agreement was reached regarding reallocation, and

a mediation was held in August 2001 under the direction of

Professor James J. White. After mediation failed to resolve the

dispute, the parties proceeded to arbitration. The panel instructed

both parties to submit statements of their position. See JA2-467

(Statement of Position of ACandS, Inc., submitted July 31, 2002);

JA2-505 (Travelers Casualty and Surety Company’s Statement of

the Case, submitted August 6, 2002). ACandS’s statement largely

tracks its demand letter. Travelers’ statement says that it would

“demonstrate during this proceeding [that] the correct allocation .

. . would allocate no claim payments to non-products coverage.”

JA2-506.

In arguments submitted to the panel, the parties presented

conflicting definitions of “operations claims.” The arbitration

panel agreed with Travelers’ interpretation that operations claims

encompassed only those claims arising from asbestos exposure

during the policy period. JA2-531 (Arbitration Award, filed July

31, 2003). The panel found, as a matter of fact, that ACandS had

ceased manufacturing and installing asbestos in 1974.2

 The Panel

concluded that any claim arising during the policy period was

necessarily a products claim and therefore allocated 100% of the
6

claims to the products coverage.

After the arbitration panel was constituted, but before the

award was issued, ACandS settled a raft of asbestos claims,

totaling more than $2.6 billion. Shortly thereafter, the company

filed for Chapter 11 bankruptcy in the District of Delaware. JA4-

1050 (Bankruptcy filing, September 16, 2002). The Bankruptcy

Court refused to confirm the reorganization plan because it treated

similarly situated claimants differently based on the order in which

they filed their claims. In re ACandS, 311 B.R. at 43. As a result,

the company remains in receivership, and the bulk of the settled

claims persist in a state of limbo.

ACandS filed a motion in the District Court for the Eastern

District of Pennsylvania, seeking to have the arbitration award

vacated. The District Court denied the motion and affirmed the

arbitration award. The District Court also dismissed the Number

of Occurrences Action on the ground that the award’s finding that

no claims arose from operations rendered the question presented

moot. The two matters were joined for the purposes of this appeal.

II.

ACandS’s challenge to the validity of the arbitration award

raises three issues related to the panel’s decision to grant Travelers

affirmative relief by revising the allocation of operations claims to

zero: (1) whether the panel exceeded its authority by granting

Travelers affirmative relief despite Travelers’ failure to file a

formal demand, (2) whether the relief granted Travelers violated

the Bankruptcy Act’s automatic stay provision in 11 U.S.C. § 362,

and (3) whether ACandS was prejudiced by inadequate notice

regarding Travelers’ intent to seek affirmative relief in the

arbitration proceeding. Because we hold that the proceeding and

award violated the automatic stay, it is unnecessary to address the

remaining issues. Because the award must be vacated, the

allocation of claims under the Letter Agreement remains at 45%

operations and 55% products. Accordingly, ACandS’s action

seeking a declaratory judgment regarding the number of

occurrences is not moot.

A.
7

The District Court’s determination that the award did not

violate the Bankruptcy Code’s automatic stay provision is a purely

legal question subject to plenary review. In reviewing a District

Court decision concerning the validity of an arbitration award, our

assessment of the arbitration panel's actions is governed by the

same standard that governed the District Court's review.

Metromedia Energy, Inc. v. Enserch Energy Servs., Inc., 409 F.3d

574, 578 (3d Cir. 2005). An arbitration award will be enforced if

its form can be rationally derived from either the agreement

between the parties or the parties’ submissions to the arbitrators

and the terms of the arbitral award are not completely irrational.

Mut.Fire, Marine & Inland Ins. Co. v. Norad Reins. Co., 868 F.2d

52, 56 (3d Cir. 1989); see also Swift Indus., Inc. v. Botany Indus.,

Inc., 466 F.2d 1125, 1131 (3d Cir. 1972); Ludwig Honold Mfg. Co.

v. Fletcher, 405 F.2d 1123, 1128 (3d Cir. 1969). 

A long-standing exception to this general rule provides that

courts may refuse to enforce arbitration awards that violate welldefined public policy as embodied by federal law. See Exxon

Shipping Co. v. Exxon Seamen’s Union, 11 F.3d 1189 (3d Cir.

1994) (vacating labor arbitration award that required the

reinstatement of an able bodied seaman who was found to be

highly intoxicated while on duty). We hold that the automatic stay

provision of the Bankruptcy Act promotes a public policy sufficient

to preclude enforcement of an award that violates its terms or

interferes with its purposes. See In re Cavanaugh, 271 B.R. 414,

424 (Bankr. D.Mass. 2001) (“[T]he automatic stay is the single

most important protection afforded to debtors by the Bankruptcy

Code.”); see also Exxon Shipping, 11 F.3d at 1193 n.7 (“[A]n

award may properly be vacated either because it ‘violates a specific

command of some law’ or ‘because of inconsistency with public

policy.’”’) (quoting Honold, 405 F.2d at 1128 n.7) (emphasis

supplied).

The District Court’s order dismissing the Number of

Occurrences action as moot is subject to plenary review. See

Ruocchio v. United Transp. Union, Local 60, 181 F.3d 376, 382

n.8 (3d Cir. 1999) (“The plenary standard of review seems

appropriate since mootness doctrine relates to courts’ constitutional

authority to hear a case. . . .”).
8

B.

ACandS argues that, because the arbitration panel

considered and accepted the argument that operations should be

zero, the arbitration proceeding and award violated the automatic

stay provision of 11 U.S.C. § 362. Section 362 of the Bankruptcy

Act provides in part:

Automatic Stay.

(a) Except as provided in subsection (b) of this

section, a petition filed under section 301, 302, or

303 of this title . . . operates as a stay, applicable to

all entities, of--

(1) the commencement or continuation, including the

issuance or employment of process, of a judicial,

administrative, or other action or proceeding against

the debtor that was or could have been commenced

before the commencement of the case under this title

. . . .

(3) any act to obtain possession of property of the

estate or of property from the estate or to exercise

control over property of the estate

11 U.S.C. § 362(a). 

The stay mandated by this provision is automatic in that the

debtor does not have to make any formal request that it be issued

or that it apply to a particular proceeding. Rather, the onus is on

the party seeking to proceed to petition the Bankruptcy Court for

relief from the stay. See 11 U.S.C. § 362(d). The scope of the

automatic stay is broad and covers all proceedings against a debtor,

including arbitration. Ass’n. of St. Croix Condominium Owners v.

St. Croix Hotel Corp., 682 F.2d 446, 448 (3d Cir. 1982) (citing

H.R.Rep.No.95-595, at 340 (1977), reprinted in 1978

U.S.C.C.A.N. 5787, 5963, 6296-97). “Because the automatic stay

serves the interests of both debtors and creditors, it may not be

waived and its scope may not be limited by a debtor.” Maritime

Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1204 (3d Cir.

1992). Sub-sections 362(a)(1) and 362(a)(3) differ in that the stay

of actions and proceedings provided for by § 362(a)(1) applies only

to actions brought against the debtor--“the statute does not address
9

actions brought by the debtor which would inure to the benefit of

the bankruptcy estate.” St. Croix, 682 F.2d at 448. Section

362(a)(3), on the other hand, applies to actions against third parties

as well as actions against the debtor. See In re Krystal Cadillac

Oldsmobile GMC Truck, Inc., 142 F.3d 631, 637 n.11 (3d Cir.

1998).

ACandS argues that the arbitration panel’s award violates

both § 362(a)(1) and § 362(a)(3). We agree that the automatic stay

applied to the arbitration and that the panel should have halted the

arbitration once it became apparent that proceeding further could

negatively impact the bankruptcy estate. We also hold that the

arbitration award is invalid because it diminishes the property of

the estate.

1.

With respect to the application of § 362(a)(1), the District

Court held that the automatic stay did not apply because the

arbitration was an action initiated by the debtor. JA1-18. While in

the context of a trial it is simple to distinguish between claims and

counter-claims that may support judicial relief, in the context of

arbitration, especially in the absence of a joint statement of issues

submitted, it is impossible to definitively classify the arguments

presented. Travelers contends that its arguments in favor of a zero

allocation of claims to the products coverage should be classified

as a permissible defense. Defenses, as opposed to counter-claims,

do not violate the automatic stay because the stay does not seek to

prevent defendants sued by a debtor from defending their legal

rights and “the defendant in the bankrupt’s suit is not, by opposing

that suit, seeking to take possession of it. . . .” Martin-Trigona v.

Champion Fed. Sav. & Loan Ass’n., 892 F.2d 575, 577 (7th Cir.

1989). In the trial context, a defendant’s failure to formally plead

a counter-claim prevents the court from granting affirmative relief

on the basis of the defendant’s arguments. See Fed. R. Civ. Pro. 8.

By contrast, an arbitration award will be affirmed so long as its

form can be rationally derived from either the agreement between

the parties or the parties’ submissions to the arbitrators and the

terms of the arbitral award are not completely irrational. Mut. Fire,

Marine & Inland Ins. Co., 868 F.2d at 56. This procedural

flexibility, which is essential to the utility of arbitration, allows
10

Travelers to make a colorable argument that it respected the stay by

merely defending its interests when there is no question that in the

trial context it would have been required to file a counterclaim in

order to obtain the result it seeks to uphold. See Maritime Elec.

Co., 959 F.2d at 1204 (“[W]ithin one case, actions against a debtor

will be suspended even though closely related claims asserted by

the debtor may continue.”) (emphasis omitted). Despite the

importance of procedural informality, however, the panel’s

authority must yield when a dispute threatens the rights of third

parties in violation of the laws of the United States. To avoid

interfering with the broad purposes served by the automatic stay,

it was necessary for the arbitration proceeding to halt as soon as the

scope of the parties’ submissions supported an award that could

diminish ACandS’s estate. By continuing beyond this point, the

proceeding violated § 362(a)(1), and the panel’s deliberations and

the resulting award are therefore void.

2.

The District Court rejected ACandS’s argument that the

arbitration award itself, as distinct from the proceeding, violated §

362(a)(3) by stripping ACandS of a valuable property right.

ACandS argues that the award’s reallocation of claims under the

Letter Agreement to 0% operations and 100% products deprived

the bankruptcy estate of property covered by the automatic stay by

reducing the amount of insurance coverage available to the debtor.

We agree with this argument because the contractual right secured

by the Letter Agreement allocating 45% of the asbestos claims to

operations was property of the bankruptcy estate. By effectively

terminating ACandS’s insurance coverage, the arbitration award

had a clear adverse effect on that property interest.

The interests classified as “property of the estate” protected

by § 362(a)(3) are defined by 11 U.S.C. § 541. In re Atlantic Bus.

& Community Corp., 901 F.2d 325, 328 (3d Cir. 1990). It has long

been the rule in this Circuit that insurance policies are considered

part of the property of a bankruptcy estate. Estate of Lellock v.

The Prudential Ins. Co. of Am., 811 F.2d 186, 189 (3d Cir. 1987)

(holding that an insurance policy is property of the estate within 11

U.S.C. § 541 even though the policy has not matured, has no cash

surrender value and is otherwise contingent); see also Tringali v.
11

Hathaway Mach. Co., 796 F.2d 553, 560 (1st Cir. 1986); see

generally 3-362 Collier on Bankruptcy P 362.03 (15th ed. revised)

(“[T]he prevailing view is that an insurance policy is property of

the estate, protected by the automatic stay of § 362(a)(3).”). The

fact that the Letter Agreement is not itself an insurance policy, and

so the rights secured by that contract merely pertain to ACandS’s

right to coverage, does not exclude these contractual rights from

the broad definition of property found in § 541. See Westmoreland

Human Opportunities, Inc. v. Walsh, 246 F.3d 233, 242 (3d Cir.

2001) (definition of property “encompasses rights and interests

arising from ordinary contractual relationships”). Furthermore, the

contractual rights secured by the Letter Agreement and insurance

policies are property of the estate regardless of the fact that all of

the proceeds from any recovery will be exhausted in satisfaction of

outstanding settlements. See Maertin v. Armstrong World Indus.,

Inc., 241 F.Supp.2d 434 (D.N.J. 2002); In re Johns Manville Corp.,

40 B.R. 219, 230-31 (S.D.N.Y. 1984).

For a claim to fall within the scope of § 362(a)(3), it must

also be shown that the grant of affirmative relief to Travelers

constitutes an act to obtain possession of ACandS’s contractual

right to a 45% allocation of claims to the operations coverage.

Although it cannot accurately be said that Travelers obtained

ACandS’ rights under the policy, we nevertheless hold that the

grant of affirmative relief was an act barred by the automatic stay.

The possession or control language of Section 362(a)(3) has

consistently been interpreted to prevent acts that diminish future

recoveries from a debtor’s insurance policies. See, e.g., A.H.

Robins Co. v. Piccinin, 788 F.2d 994, 1001 (4th Cir. 1986) (noting

that a debtor’s insurance policy may well be the most important

asset of the estate, and that “any action in which the judgment may

diminish this ‘important asset’ is unquestionably subject to a stay

under [11 U.S.C. 362(a)(3)]”) (quoting In re Johns Manville Corp.,

40 B.R. at 229). In Matter of J&L Transport, Inc., 47 B.R. 51

(Bankr. W.D. Wis.), the court held that an insurer was barred by §

362(a)(3) from cancelling the debtor’s policy so long as the debtor

was not in monetary default. Similarly, because the grant of

affirmative relief to Travelers had the effect of terminating

ACandS’s coverage, we hold that it violated the automatic stay.

3.
12

Travelers argues that even if the panel’s award violates the

automatic stay, equity precludes its application in this case. This

argument fails because no equitable power to grant relief from an

automatic stay rests with the District Court. To the extent that an

equitable exception to the automatic stay exists, it rests solely in

the Bankruptcy Courts. “Only the bankruptcy court with

jurisdiction over a debtor’s case has the authority to grant relief

from the stay of judicial proceedings against the debtor.” Maritime

Elec. Co., 959 F.2d at 1204.

C.

The District Court dismissed the Number of Occurrences

Action on the grounds that the enforceable arbitration award

rendered it moot. The action was brought by ACandS in response

to Travelers’ stated intention to treat all operations claims as

arising out of the same occurrence, and therefore subject to the $1

million per occurrence cap. The District Court addressed this issue

in footnote 9: 

The complaint in this case deals with the “number of

occurrences” under the insurance policies ACANDS

has with Travelers. Since the Arbitration Panel has

rendered this issue moot by ruling that there is zero

remaining coverage under the products policies in

this case, there is no reason for this court to decide

the “number of occurrences” posed by ACANDS in

this case.

JA1-20 (District Court Opinion). As explained above, the panel’s

award violates the automatic stay and is therefore void ab initio.

See Maritime Elec. Co., 959 F.2d at 1206. As a result, ACandS is

still entitled to a 45% allocation of claims to the policies’

operations coverage, and the dispute concerning whether the

asbestos claims present multiple or single occurrences under those

policies is justiciable. Accordingly, the Number of Occurrences

Action should not have been held to be moot.

III.

For the reasons stated above, the order of the District Court
13

is vacated. The case is remanded with instructions to vacate the

arbitration award for resolution of the pending action.