In the context of standing to bring a claim under Article Ill, our Court of Appeals has stated
that “the victim of an insured’s tort, even though he is not a third-party beneficiary of his injurer’s
insurance policy, has a legally protectable interest in that policy before he has reduced his tort
claim to judgment (but only after he has been injured).” Bankers Trust Co. v. Old Republic Ins. Co.,
959 F.2d 677, 682 (7th Cir. 1992). The court stated that “[t]his conclusion is not inconsistent with
the refusal of most states to permit the victim of an insured injurer to sue the injurer’s liability
insurer directly,” which is designed “to protect the insurance company from the hostility of juries.”
Id. (citing Zegar, 211 Ill App.3d at 1031, 570 N.E.2d at 1179).

In the court's view, the weight of authority in Illinois favors the proposition that injured
parties do generally have rights in insurance policies, and that such rights vest at the moment of
injury. As discussed earlier, both ITT and South Bend own property that was formerly owned (and
allegedly contaminated by) Allied. Under Illinois law, therefore, they are considered beneficiaries
with vested rights under the Policies, irrespective of the date on which Allied filed its bankruptcy
petition. ITT has obtained a judgment against Allied pursuant to a stipulation and agreement
between them worth at least $434,364, and South Bend has filed a Proof of Claim in the Allied
bankruptcy proceedings asserting environmental claims against Allied covering at least a twenty-
year period.

Significantly, even if Illinois law does not grant ITT and South Bend rights in the Policies,
the court concludes that, to the extent the claims of ITT and South Bend are covered by those
Policies, the Policies themselves grant such rights. As the bankruptcy court found, a clause in one
of the Policies provides, “We will pay the insured for the ‘ultimate net loss’ . . . that the insured
becomes legally obligated to pay as damages . . .” and further provides that “[a] person or
organization may sue us to recover on. . . a final judgment against an insured.” Allied, 288 B.R.
at 537-38. The other relevant Policies provide that the insurance carrier will “pay on behaif of the
Assured . . . all sums which the Assured shall be obligated to pay” for covered liabilities. Id. at 538.

13



on appeal) (1) approving Allied’s proposed sale of the Policies (except for provisions relating to
workers’ compensation) back to the Insurers who issued them, (2) enjoining “any and all past,
present, or future claimants and any other persons from pursuing the Insurers for coverage under
the . . . Policies or otherwise relating to Allied,” and (3) approving the adequacy of notice to
effectuate such injunction. (/d. {[ 10.) Had this condition precedent been met, the proposed
agreement would have required Allied, infer alia, (1) to release the Insurers from “all past, present
and future, known and unknown claims of any type or nature” (except for workers’ compensation
claims), (2) to release the Insurers “from any and all obligations the Insurers may have pursuant
to any written agreements for the defense or partial defense of Allied,” including with respect to the
New York action, and (3) to dismiss its action against the Insurers in Illinois state court. (/d. J 1-
3.) The Insurers, in turn, were to pay Allied $3.5 million. (/d. | 14.) Allied acknowledged that it
intended to make these funds available for the general use of its estate, rather than for prospective
claimants under the Policies. Allied, 288 B.R. at 535.

On July 11, 2002, Allied filed the Motion with the bankruptcy court. /d. The bankruptcy
court directed that notice of the debtor's motion be given to all potential policy claimants.” /d. On
August 22, 2002, ITT and South Bend filed objections to the proposed transaction. (ITT Br., at 4;
South Bend Br., at 4.)

DISCUSSION
I. Jurisdiction and Standard of Review

This court has subject matter jurisdiction over appeals from the bankruptcy court pursuant
to 28 U.S.C. § 158(a)(1), which vests the district court with jurisdiction over appeals from “final
judgments, orders and decrees” of the bankruptcy court. /n re Kmart Corp., 297 B.R. 525, 528

(N.D. Hl. 2003). When reviewing bankruptcy court decisions, the district court acts as an appellate

2 The record does not indicate when the bankruptcy court issued this order.

4


Mh Have ITT and South Bend Sufficiently Established Their Interests?

Allied contends that, even if § 388 does grant ITT and South Bend a potential interest in the
Policies, the bankruptcy court “should have demanded more proof from [ITT and South Bend] that
their claims were actually covered by the Policies and consequently entitled to adequate protection
as interests under § 363(e).” (Allied Br., at 11.)° First, Allied notes that ITT acknowledged in its
objection to the proposed transaction that “the policies issued from 1971 to 1986 have some form
of a pollution exclusion.” (Ex. 8 to Allied’s Br., at 2.) This exclusion, Allied urges, “creatfes} a
significant risk that Allied had no coverage for the ITT claim for those years.” (Allied Br., at 13.)
Allied notes that “[t]he only Policies without any pollution exclusions are those issued by Travelers
covering the 1968, 1969, and 1970 policy years.” (Jd. (citing Ex. 11 to Allied Br., at 14).) Allied
adds, “[a]ssuming that ITT were able to overcome Travelers’ coverage defenses concerning those
Policies, the maximum pro rata amount that ITT could obtain would be $434,364,” L.e., the policy
limits for those three policy years. (/d.)

ITT does not dispute this amount of recovery. Instead, ITT urges that, as Allied itself filed
an action against the Insurers in Illinois state court, “Allied believed coverage existed for ITT’s claim
Notwithstanding the Insurers’ possible coverage defenses.” (ITT Br., at 13-14.) ITT notes that,
under Illinois law, “the denial of liability by the garnishee [insurer] does not create a contingency
which will prevent gamishment.” Zimek v. lil. Nat. Cas. Co., 370 Ill. 572, 576, 19 N.E.2d 620, 623
(1939). ITT adds that “Allied’s contention that there is a ‘significant risk’ that there may be no
coverage for ITT’s claim rings hollow.” (/d. at 14.)

Allied also contends that South Bend’s “unliquidated, contested, contingent claim for

environmental cleanup costs” is not covered by the Policies, as [alll of the Policies from January

8 To support this contention, Allied cites § 363(0) which provides: “In any hearing
under this section (1) the trustee has the burden of proof on the issue of adequate protection; and
(2) the entity asserting an interest in property has the burden of proof on the issue of the validity,
priority, or extent of such interest.”


execution against the insured is returned unsatisfied,” thereby “confer[ing} an interest in such . .
. polic[ies] on every member of the public that is negligently injured.” (Allied Reply Br., at 12 (citing
People ex rel. Terry v. Fisher, 12 \il.2d 231, 237, 145 N.E.2d 588, 592 (1957)). Allied argues,
nevertheless, that any such interests in the Policies are preempted under the Bankruptcy Code.
Even if such interests are not preempted, Allied contends, the bankruptcy court should have
required ITT and South Bend to prove those interests. This court considers each argument in turn.
iF Does the Bankruptcy Code Invalidate Claimants’ Purported Interests?

Allied claims that §§ 363(1), 365(e)(1)(A), and 541(c) of the Bankruptcy Code, all of which
invalidate contractual provisions conditioned solely upon the insured’s bankruptcy, preempt § 388
of the filinois Insurance Code to the extent that section grants ITT and South Bend interests in the
Policies. (Allied Br., at 5.) ITT and South Bend note, in the court’s view correctly, that, as Allied
did not cite § 363(|) in its briefs to the bankruptcy court, any argument based on that section is
waived. See Ameritech Info. Sys., inc. v. Bar Code Res., Inc., 331 F.3d 571, 574 (7th Cir. 2003)
(‘Because it is clearly established that a party may not raise an argument for the first time on
appeal, we hold that this issue has been waived”) (internal citations omitted); Green v. Mass. Cas.
Ins. Co., 269 B.R. 782, 792 (N.D. Ill. 2001) ([A]s there is no indication that Green raised these
claims in his answer or in any counter-claim in the court below, these claims were raised for the
first time on appeal. For this reason, the Court cannot now hear these claims").> Allied did cite the
other two provisions of the Code in its earlier briefs, and the court will address them in tum. First,
under § 365(e)(1)(A), “(nJotwithstanding a provision in an executory contract . . . or in applicable
law, an executory contract . . . of the debtor may not be terminated or modified, and any right or
obligation under such contract . . . may not be terminated or modified, at any time after the

commencement of the case solely because of a provision in such contract . . . that is conditioned

§ The court notes, nevertheless, that Allied likely would not prevail under § 363(I) for
the same reasons that its argument based on §§ 365(e)(1)(A), and 541(c), discussed below, fails.

6


court. Bielecki v. Nettleton, 183 B.R. 143, 145 (N.D. Ill. 1995) (citing Feo. R. BANKR. P. 8013). In
an appeal from a bankruptcy court's decision, the district court reviews the findings of fact of the
bankruptcy court for clear error, and its legal conclusions de novo. Dye v. United States, 360 F.3d
744, No. 03-2043, 2004 WL 438317, at *2 (7th Cir. Mar. 10, 2004) (internal citations omitted). The
parties in this case raise exclusively questions of law, which this court reviews de novo.

The parties agree that the Policies are property of the estate in bankruptcy, under the broad
definition of § 541(a) of the Bankruptcy Code, 11 U.S.C. § 541(a), and, accordingly, that the
Policies are subject to sale under § 363(b)(1) of the Bankruptcy Code. /d. at 535-36. Allied does
not challenge the bankruptcy court’s determination that, pursuant to 11 U.S.C. § 363(e),° “the buy-
back arrangement can only be approved if the claim holders have no interest in the . . . [PJolicies.”
Allied, 288 B.R. at 536. Instead, Allied urges that the bankruptcy court erred in finding that ITT and
South Bend have protectable interests in the Policies-specifically, their “ultimate right to recover
from the issuing carriers” under § 388 of the Illinois Insurance Code, 215 ILCS 5/388‘—and that the
proposed transaction did not provide adequate protection for such interests. /d. at 534-35, 537.

Allied acknowledges that § 388 “afford[s] injured persons a right of action against the insurer if

3 Section 363(e) provides, in pertinent part, “Notwithstanding any other provision of
this section, at any time, on request of an entity that has an interest in property . . . proposed to be
...$0ld... the court, with or without a hearing, shall prohibit or condition such... sale . . . as is
necessary to provide adequate protection of such interest.”

4 Section 388 provides, in relevant part,

No policy of insurance against liability . . . shall be issued or delivered in this State
. .. unless it contains in substance a provision that the insolvency or bankruptcy of
the insured shall not release the company from the payment of damages for . . .
loss occasioned during the term of such policy, and stating that in case a certified
copy of a judgment against the insured is retumed unsatisfied . . ., then an action
may be maintained by the injured person . . . against such company under the
terms of the policy and subject to all of the conditions thereof for the amount of the
judgment in such action not exceeding the amount of the policy.

215 ILCS 5/388.


v. Westside Bancorporation, Inc., 828 F.2d 387, 393 n.6 (7th Cir. 1987) (citation omitted). Other
courts have found that § 541(c) similarly invalidates such contractual ipso facto clauses. See, e.g.,
Summit Inv. and Dev. Corp. v. Leroux, 69 F.3d 608, 611 (1st Cir. 1995). Section 365(e)(1) was
“intended to deal with contractual ipso facto clauses, according to which the insolvency of a party
automatically terminates the contract or constitutes a material breach.” /n re S. Pac. Funding
Corp., 268 F.3d 712, 715-16 (9th Cir. 2001) (citing H.R. Rep. No. 95-595, at 348-49 (1978),
reprinted in 1978 U.S.C.C.A.N. 5963, 6304-05 (stating that § 365(e) “invalidates ipso facto[] or
bankruptcy clauses,” which “automatically terminate the contract . . ., or permit the other contracting
party to terminate the contract . . ., in the event of bankruptcy’)). Both §§ 365 and 541 “invalidate
contractual ipso facto provisions for the reason that automatic termination of a debtor's contractual
tights ‘frequently hampers rehabilitation efforts’ by depriving the chapter 11 estate of valuable
property interests at the very time the debtor and the estate need them most.” Summit, 69 F.3d
at 610 (citing S. REP. No. 95-989, at 59 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5845).

In this court’s view, nothing in the language of § 388, or in the clauses of the Policies which
§ 388 mandates, triggers a forfeiture, modification, or termination of the rights of a debtor upon its
involvency or bankruptcy. To the contrary, §388 maintains the interests of a bankrupt insured in
an insurance contract by preventing an insurance carrier from terminating or modifying such rights
(and, by extension, the rights of parties whom the insured has injured). Cf. Home ins. Co. of lit.
v. Hooper, 294 Ill.App.3d 626, 632, 691 N.E.2d 65, 69-70 (1st Dist. 1998) (“The plain language of
section 388 makes clear the legislative intent to prevent insurers from using the insured's bankrupt
condition and resulting inability to make actual payment to satisfy a judgment or any portion thereof
as grounds to avoid payment on a policy”.) The court finds, therefore, that §§ 365(e)(1)(A) and
541(c) do not invalidate or preempt ITT’s and South Bend's interests in the Policies arising under

§ 388.



Minute Order Form (06/97)

ol

United States District Court, Northern District of Illinois

Name of Assigned Judge Sitting Judge if Other
or Magistrate Judge Re pita R. Pallmeyer than Assigned Judge
CASE NUMBER 03 C 1361 DATE 3/31/2004
CASE Allied Products Corp. vs. ITT Industries, Inc., et al.
TITLE
[in the following box (a) indicate the party filing the motion, ¢.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature

MOTION: of the motion being presented.]

DOCKET ENTRY:

qd) a Filed motion of [ use listing in “Motion” box above.]

(2) Qa Brief in support of ‘motion due

(3) oO Answer brief to motion due . Reply to answer brief due. :

(4) oO Ruling/Hearing on set for at

(5) Oo Status hearing[held/continued to] [set for/re-set for] on set for at

(6) Oo Pretrial conference{held/continued to] (set for/re-set for] on set for at :

(7) oOo Trial[set for/re-set for] on at

(8) im [Bench/Jury trial] [Hearing] held/continued to at

(9) im) This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

OFRCP4(m) OLocal Rule 41.1 COFRCP41(a)(1) OO FRCP41(aX(2).

(do) (Other docket entry} Enter Memorandum Opinion and Order. ITT and South Bend have a legally
cognizable interest in Allied’s insurance policies that is not adequately protected under the proposed buy-
back transaction. Therefore, for the reasons stated above, the decision of the bankruptcy court is affirmed.

(li) [For further detail see order attached to the original minute order.]

No notices required, advised in open court.
No notices required.
wv | Notices mailed by judge’s staff.
Notified counsel by telephone.
Docketing to mail notices.
oY | Mail AO 450 form. 1uno2 1aIwisia ‘s0
Copy to judge/magistrate judge. Wy379
courtroom 82:f Kd rel
wv suri 1e BH i002 ~
initials Dey —
in
ee a ch naling ety nits

ee ar



Allied's Br. {| 10(iii).) The order also stated that “Allied’s official committee of unsecured creditors
. .. does not oppose this court’s approval of the . . . Agreement, provided its approval does not
interfere with or impede ongoing settlement negotiations with certain of Allied’s insurers.” (/d. J] J.)
According to Allied, these provisions demonstrate that, “[nJotwithstanding South Bend's allegation
to the contrary . . ., Allied never agreed to allow South Bend an interest in the Policies.” (Allied
Reply Br., at 8.)

ITT and South Bend also claim that, under Illinois law, they have “legally protect[a]ble
interest[s]” in the Policies stemming from the moment the damage to the properties occurred. (ITT
Br., at 14; South Bend Br., at 14.) Allied contends that “[nJeither the Policies nor Illinois law create
an enforceable property interest in the Policies for the benefit of anyone other than Allied and its
bankruptcy estate.” (Allied Br., at 4.) In Illinois, Allied notes, “public policy prohibits direct actions
against insurance companies’ and “bars questions of insurance coverage from even being raised
in a trial of the underlying accident liability.” Rockford Mut. Ins. Co. v. Amerisure Ins. Co., 925 F.2d
193, 196 (7th Cir. 1991); see also Zegar v. Sears Roebuck & Co., 211 Ill.App.3d 1025, 1027, 570
N.E.2d 1176, 1177 (1st Dist. 1991) (“In Illinois, direct actions against insurance companies are
against public policy. . . . to prevent the jury in the personal injury action from becoming aware that
the defendant tort-feasor is insured and thereby possibly awarding a larger verdict under the ‘deep
pockets’ theory”); Scroggins v. Allstate ins. Co., 74 Ill App.3d 1027, 1031, 393 N.E.2d 718, 721 (1st
Dist. 1979) (“[BJecause the duty [to exercise good faith or due care] is intended to benefit the
insured and not third parties, actions by injured claimants founded on third party beneficiary
principles have not been permitted”). Allied also notes that one Illinois court stated that “the
coverage provisions of an insurance policy are primarily for the benefit of the contracting parties

and only incidentally for injured claimants.” Zegar, 211 ill.App.3d at 1031, 570 N.E.2d at 1179.°

10 Allied also cites in re Minoco Group of Cos., Ltd., 799 F.2d 517 (9th Cir. 1986), in
(continued...)

11



1, 1986 forward are ‘claims made’ policies, meaning that claims must be made against the insured
within the policy period to be covered.” (Allied Br., at 13.) To support this contention, Allied cites
a 1995-1996 renewal policy issued by an affiliate of INA that states, “This insurance applies to . .
. ‘property damage’ only if a claim for damage because of the . . . ‘property damage’ is first made
against any insured during the policy period.” (Ex. A to Ex. 12 to Allied’s Br.) As South Bend filed
a Proof of Claim in the Allied bankruptcy proceedings in May 2001, after the expiration of the last
Policy subject to the proposed buy-back transaction, Allied claims, South Bend cannot recover
against any of the Policies.

South Bend notes that Allied operated the stamping plant from approximately 1964 to the
mid-1980s, and that Allied’s “direct operations’ at the plow works began in 1985. (South Bend Br.,
at 15.) South Bend claims that it will demonstrate “in the proof of liability claim that such damage
occurred as to the stamping plant. . . between 1964 and 1986, and at the . . . [p]low [w]orks in
1985-86.” (/d.)® South Bend also notes that, when Allied and South Bend entered into their
Compromise and Settlement Agreement, South Bend reserved claims that could be satisfied from
applicable insurance proceeds and that, pursuant to 6 of the Compromise and Settlement
Agreement, “South Bend agreed to a twelve month stay with respect to action against the insurers
in order to give Allied a reasonable period to try to broker an insurance deal acceptable to all.”
(South Bend Br., at 14 (citing Ex. C to Ex. 6 to Allied’s Br. If] 4-5.).) South Bend claims that,
through this provision, Allied “agreed to allow South Bend” an interest in the Policies. (/d.)

Allied points out that the court's order approving the Compromise and Settlement
Agreement did not “constitute a finding, conclusion or other determination regarding . . . South

Bend's entitlement, if any, to the proceeds of any Allied insurance policy... .” (Ex. D to Ex. 6 to

8 South Bend also argues that, even though it did not assert its claims until May 2001,
coverage “turns on whether the 1986 and later insurers first learned of environmental problems at
Allied’s South Bend properties requiring an cleanup, which almost certainly occurred earlier (Allied
does not disclose when).” (/d. at 151.11.) Allied cites no support for this contention, however.

10


on the insolvency or financial condition of the debtor at any time before the closing of the case."*
Similarly, § 541(c) provides,

[A]n interest of the debtor in property becomes property of the estate...
notwithstanding any provision in an agreement, transfer instrument, or applicable
nonbankruptcy law (A) that restricts or conditions transfer of such interest by the
debtor; or (B) that is conditioned on the insolvency or financial condition of the
debtor . . . and that effects . . . a forfeiture, modification, or termination of the
debtor's interest in property.

Allied urges that, “to the extent that § 388 . . . and related provisions of the Policies purport
to terminate Allied’s exclusive property interests in the Policies by creating derivative interests in
favor of creditors with claims against Allied that are allegedly covered by the Policies, they are
preempted by” §§ 365(e)(1)(A) and 541(c). (/d. at 4-5.) Allied cites no cases holding that either
of these provisions preempts § 388 of the Illinois Insurance Code, and this court found no such
authority.’ Nevertheless, ITT and South Bend cite no authority to the contrary.

Our Court of Appeals has stated that § 365(e) “invalidates jpso facto or bankruptcy

termination clauses which permit one contracting party to terminate or even modify an executory

contract .. . in the event of the bankruptcy of the other contracting party.” Lyons Sav. & Loan Ass'n

8 Allied implicitly argues that the Policies are executory contracts within the meaning
of § 365(e)(1)(A), and neither ITT nor South Bend argues otherwise. Thus, the court assumes that
the Policies are executory contracts under § 365(e)(1)(A).

7 Allied notes that the bankruptcy court in in re Forty-Eight Insulations, inc., 54 B.R.
905 (Bankr. N.D. Ill. 1985), stated, “[t]he defendants . . . contend that Section 378 of the Illinois
Insurance Code which allows for direct action against insurers should somehow supercede the
Bankruptcy Code. Having found that the insurance policies are property of the debtor's estate, the
Court summarily rejects this contention.” /d. at 909. Assuming arguendo that the court intended
to cite § 388, the fact that § 388 does not supercede the Bankruptcy Code does not imply that the
reverse is true, i.e., that the Bankruptcy Code (specifically, §§ 365(e)(1)(A) and 541(c)) supersedes
§ 388. |

Allied also cites cases in which bankruptcy courts found that other provisions in non-
insurance contracts were superseded by §§ 365(e) and 541(c), inter alia. See Matter of Daugherty
Constr., inc., 188 B.R. 607, 612-15 (Bankr. D. Neb. 1995) (post-bankruptcy sale of membership
interests in limited liability company); in re Grablowsky, 180 B.R. 134, 137-38 (Bankr. E.D. Va.
1995) (partnership interest); Matter of Railway Reorganization Estate, Inc., 133 B.R. 578, 582-83
(Bankr. D. Del. 1991) (“springing liens”). As these cases did not involve interests in insurance
contracts, however, the court finds these decisions inapposite to this case.

7


in the estate. (/d. at 2-3.)

From approximately 1964 to the mid-1980s, Allied operating a stamping plant in South
Bend, and during the period 1985 to 1987, Allied operated a plow works in South Bend (collectively,
the “South Bend sites”). (South Bend Br., at 1-2.) After Allied ceased operations at these sites,
it leased the properties to unnamed entities. (/d.)

On May 17, 2001, the City of South Bend filed a Proof of Claim in the Allied bankruptcy
proceedings asserting environmental claims relating to the South Bend sites. (South Bend Br., at
2.) On an unspecified date, Allied decided to abandon the South Bend sites “as burdensome to
the bankruptcy estate and of inconsequential value.” (Ex. C to Ex. 6 to Allied’s Br., at 1.) On
January 15, 2002, pursuant to a “Compromise and Settlement Agreement,” Allied agreed to sell
the sites to South Bend for $10, and South Bend released all claims in connection with the sites
except for claims that could be satisfied from applicable insurance proceeds. (/d. ff] 4-5.) Allied
also agreed,

and the Court would so order in the settlement order, that the automatic stay would

lift [12] months after entry of [a] settlement order [from the bankruptcy court] to

allow South Bend to pursue its claims related to its filed proofs of claim, with

recovery limited to proceeds from Allied’s insurance policies. However, the stay

would not lift in the event that a motion has been filed and an order entered

approving a settlement with applicable insurance companies within [12] months. In

the event all insurance companies have not settled, the stay would be lifted as to

the non-settling companies.

(id. 16.) On March 15, 2002, the bankruptcy court entered an order affirming South Bend’s right
to object to any proposed settlement between Allied and any of its Insurers. (South Bend Br., at
3; Ex. D to Ex. 6 to Allied’s Br.)

On an unspecified date after October 2, 2000, Allied decided to liquidate all of its assets.
Id. At some point between October 2, 2000 and July 11, 2002, Allied and the Insurers negotiated
a proposed “buy-back” agreement. (Proposed Agreement, Ex. B to Ex. 2 to Allied Br.) This

proposed agreement was conditioned on the bankruptcy court's entering a final order (not reversed



Allied does not dispute that these clauses purport to give injured or potentially injured claimants an
interest in the Policies. The bankruptcy court did not err in finding that ITT and South Bend had
“an ultimate right to recover” under in the Policies, and that such interests were not adequately
protected by the proposed buy-back transaction. Allied, 288 B.R. at 535.
CONCLUSION

ITT and South Bend have a legally cognizable interest in Allied’s insurance policies that
is not adequately protected under the proposed buy-back transaction. Therefore, for the
reasons stated above, the decision of the bankruptcy court is affirmed.

ENTER:

Dated: March 31, 2004

REBECCA R. P,
United States Distri

14


issued from 1971 to 1986 “have some form of a pollution exclusion,” although the record does not
indicate what form such exclusion takes. (Ex. 8 to Allied’s Br., at 2.) All of the Policies dated
January 1, 1986 and later are “claims made” policies, meaning that claims must be made against
the insured within the policy period to be covered. (Allied Br., at 13.) All of the Policies permit an
injured claimant to sue the Insurers directly upon obtaining a final judgment against Allied. Allied,
288 BR. at 537-38,

From April 30, 1968 to October 28, 1976, Allied and one of its former unnamed subsidiaries
owned and operated a die casting and manufacturing facility on a parcel of property in Fayetteville,
New York (the “New York site"). (ITT Br., at 1-2.) In 1988, through a foreclosure judgment, ITT
took possession of the New York site pursuant to its former status as a secured creditor.’ (/d. at
1,) On or about July 11, 1991, ITT filed an action against Allied in the Northern District of New York
(the “New York action”) asserting various environmental claims relating to the New York site. (/d.)
On November 12, 1999, Allied filed an action against the Insurers in Illinois state court seeking a
declaration that the Insurers have a duty to indemnify Allied for past and future cleanup costs
arising from the New York site. (/d. at 3.)

On October 2, 2000, Allied filed a voluntary Chapter 11 bankruptcy petition in the
bankruptcy court, (Allied Br., at 3-4), at which time an automatic stay on all judicial proceedings
against the Allied, including the New York action, went into effect pursuant to 11 U.S.C. § 362. On
an unspecified date after October 2, 2000, the bankruptcy court modified the automatic stay to
permit ITT to resume the New York action. (ITT Br., at 2.) On March 26, 2001, pursuant to a
stipulation and agreement between ITT and Allied (the “Stipulation”), the New York District Court
entered judgment in favor of ITT for $3.7 million. (/d.) On May 29, 2001, the bankruptcy court

granted Allied’s motion to approve the Stipulation, giving ITT an unsecured claim for $3.7 million

1 The record does not explain how ITT came to hold a security interest in the New
York site, nor does it provide any details regarding this foreclosure judgment.

2


UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

In Re:
ALLIED PRODUCTS CORPORATION,

DOCKETED

Debtor. MAR 34 2004

ALLIED PRODUCTS CORPORATION,
No, 03 C 1361
Appellant,
Judge Rebecca R. Pallmeyer
v.

ITT INDUSTRIES, INC., et al.,

wwe we SS eee ee

Appellees.
MEMORANDUM OPINION AND ORDER

Appellant Allied Products Corp. (“Allied”), debtor in bankruptcy, moved to seil certain of its
liability insurance policies back to the carriers who issued them for the general benefit of its estate
and to enjoin parties with actual or potential claims under these policies from taking any action
against those carriers. Appellees ITT Industries, Inc. (‘ITT’) and the City of South Bend, Indiana
(‘South Bend”) objected to the proposed transaction on the grounds that it did not adequately
protect their interests. The bankruptcy court sustained the objections and denied Allied’s motion.

For the reasons stated below, the decision of the bankruptcy court is affirmed.

BACKGROUND

Prior to filing for bankruptcy, Allied, headquartered in Chicago, engaged in manufacturing
operations in a number of states. in re Allied Prods. Corp., 288 B.R. 533, 535 (Bankr. N.D. iM.
2003). In connection with these operations, between 1966 and 1986, Allied purchased general
liability insurance policies (collectively, the *Policies”) from The Travelers indemnity Company
(‘Travelers’), the Insurance Company of North America (succeeded by Century Indemnity

Company) (“INA”), and various affiliated entities (collectively, the “Insurers”). /d. The Policies

Qe


On the other hand, ITT points out that, under Illinois law, “[g]enerally speaking, an insurer
and its insured cannot agree to policy interpretations with the intent to keep an injured party from
recovering under that policy.” Skidmore v. Throgmorton, 323 IIl_App.3d 417, 420, 751 N.E.2d 637,
640 (5th Dist. 2001) (citation omitted). “The injured party's relationship with the liability insurer has
been . . . characterized as that of a beneficiary|;] the public policy consideration at work in such
situations is that liability insurance policies should operate to afford injured parties coverage.” /d.
at 421, 751 N.E.2d at 641 (internal citations omitted). Further, “even though an injured party is not
a party to the insurance contract, he or she will always be allowed to file a declaratory judgment
action in order to determine the liable party's coverage pursuant to that insurance contract.” /d. at
422, 751 N.E.2d at 641 (citation omitted). “The injured party's rights come into existence at the
moment of the accident.” /d. (citation omitted). What's more, “injured members of the general
public are beneficiaries of liability insurance policies . . . that their rights under the policies vest at
the time of the occurrence giving rise to their injuries. . . . [and] that an injured party is considered
a real party in interest to an insurance contract... .” Bamey v. Unity Paving, 266 Il_App.3d 13, 23,
639 N.E.2d 592, 598-99 (1st Dist. 1994) (internal quotation marks and citations omitted). An
injured party “must be given at least one opportunity to litigate the question of a tortfeasor’s
coverage under a liability insurance policy before the injured party's interest in the insurance can
be terminated.” Pratt v. Protective ins. Co., 250 Ill App.3d 612, 618, 620, 621 N.E.2d 187, 191, 193

(1st Dist. 1993) (citations omitted).

19(._ continued)

which the court stated that “Liability policies . . . are not held in constructive trust by the insured for
the benefit of potential claimants; they are held by the insured as protection against claims that may
be asserted against the insured.” /d. at 519. In addition, Allied cites In re Dow Coming Corp., 198
B.R. 214 (Bankr. E.D. Mich. 1996), in which the court found that, under Michigan law, “prior to
obtaining and enforcing a judgment, an injured person merely has an expectation of recovery that
is contingent upon the occurrence of future events, and such expectation does not rise to the level
of a vested property right.” As these cases did not construe Illinois law, however, the court finds
them inapposite to this case.

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