## In the



# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it
N o. 07

- 1973 A LEX D. M O GL IA, Trust ee f or Outbo ar d M ar i ne Co r po r at i o n a nd re l ate d debtor s, Plai nt i f f

-Appe l l ant, v. P ACI FI C E M PL O YERS I NSURANCE C OMPAN Y, I ND EM NITY I NSURANCE C OM PA NYOF N OR T H A MERI CA, a nd A CE A MERI CAN I NSURANCE C OMPAN Y, D efend a nts-A pp ellees

.

A pp eal from the United S t ates Di strictC our t fo r the N o rthernDi stricto f Illino is, Eas tern Div isi on. No . 05 C1366

—Mi lt on I . Sh adur , Ju dge .
A RG UE D O CT OB ER 24, 2008

— D ECI DE D N OVE MBE R 6, 2008

Befo re E A S T E RB R OO K, Chi e f Judg e, a nd P OSNERa nd R OV NER, C ircu it Judges . E A S T E RB R OO K, Chi e

f Judg e . Pa ci fi c E mpl o y e r s a n d t wo other in su re rs iss u ed p olic ies to O u tb oa rd M ar ine Cor pora -2 N o. 07

- 1973 tio n c o v e r i n g w or ke rs ’ co m p en sa tio n , au to m ob ile l i ab i l i ty, a nd g en eral l i ab i l i ty
. The se po l i ci es ( whi chthe p arties call“p rogram agreem e n ts”) requ ire O utboard M ar i ne to posti rr evo cabl e l ett ers o fcr edi t a s s ecuri ty f o r i ts ob l i g at i o ns t o pa y pr emi um s an d r ei m bur se the i nsurer s f orspeci fi ed outl ays . A fterOutboar d M ar i ne ent er ed proce edi ngs under Ch apter 7 of the Bankr uptcy Code, i ts Truste e fi l ed an adv er sa r y acti o n a g ai ns t th e i ns ur er s. The Tr us te e co nten d ed that th e l e tters of cred it gi ve th e insu rers m ore se c u rity than they ar e e nti tl ed to , and he a ske d the ba nkr u p tcy cou rt to order th e insu rers to rel ease th ese letters to the e xt en t o fthe e xc es s. The i ns ur er s denied th atthe l et t e r s o f c r e di t g i v e the m t o o muc h s e c ur i t y , a nd they also i nv oked clauses i n eac h policy that requ ire Outbo ar d M ar i ne t o a rbi tr at e di spu te s ar i singo uto fthe pol i ci es. The Trust ee re si ste d, but i n Octobe r 2003 Bankruptcy J ud ge Squi re s g ra nted the i nsurer s’ m oti ons to st aythe a dve r sa r y pr o ce edi nga nd c o m pela rbi tr at i o n. Fi ve y e a r s ha v e g o ne b y , a nd the a rb i t r a t i o n ha s yetto g et un derway . The Tr us te e dec i ded to unde r m i ne the ba nk r upt cyc o ur t’ s o r derby refus i ngt o c o o per at e. The arbi tr at o r s sa w th at th e Tr us te e was b eingdi ffi cul t, a nd they thought i t pr ud ent t o prot ect them selv es by r equi r i ngthe pa r ti es t o s i g n a ho ld- ha r m l es s ag r ee m en t th atno t o nl y forbi ds su i t ag ai ns t th e arbi tr at o r s ( a co ntractu al sup p lem en t to the im m un ity that arbi t rators enj oy at com m on l aw , se e Tam ar iv. C onrad, 55 2 F
. 2d 778, 780 ( 7th Ci r. 19 77) ) but al so re quir es i nd em ni fi cation o f arbi tr ato rs sued i n the tee th ofthat i m m unity, sho uld theyN o. 07

- 1973 3 i nc ur l eg ale xpe ns es t o de f end th em se l ve s. Rul es o fthe Am er i ca n Arbi tr ati on A ss o ci at i o n, unde r whi chthe arbi tr ati on was b eing conducted, al l ow arbi tr ato rs to re quir e the par ti es to m ake hol d-har m l ess pro m i ses . The i n su rers si gned; the Truste e r efused. H e a sse rt ed that the ind em ni ty cl ause w ou ld cr eat e a n unw ar ra nted co nt i ng en t cl ai m a g ai ns t th e ba nkr upt cye st at e. The Truste e then ask ed J ud ge Squi re s t o re sci nd the arbi tr ati on ord er, w hich he d id, stating tha t “ifthe t r u s t e e doe sn ’t w ant t o gr ant [ i nd em ni ty] f orthe exer ci se ofh is b usi ness j ud gm ent,
. . . thati s, Ithi nk , a m att erwithi n hi s di scr etion.” Th e b an krup tcy j ud ge d id not c ite an y legal aut hori ty f orthe propos i ti on tha t a T rust ee m ay thw ar t a rbi tr ati on byuni l ate ra l r efusalto co oper ate
. The i nsurer s a pp eal ed to the dist ric t co urt, wh i ch re ver sed. 36 5 B. R. 86 3 ( N
. D. I l l

. 20 07 )
. The di str i ct j ud ge expla i ned that Ou tbo ard M ar i ne had pro m i sed to a rb i t r a t e a nd tha tthe T r us t e e mus tt a k e a nys t e ps requir ed to fulfi l l thatpro m i se. The di str i ct j ud ge di r ec te d the Tr us te e to s i g n the ho l d- ha r m l es s ag r ee m en t and procee d w i th the arbi tr ati on; th e m atterwas re m anded to the bankr uptcy co urt to b e hel d i n abey ance un t i l the a rb i t r a t i o n ha d b e e n c o mpl e t e d. I n thi s co urt th e T ru stee i nsi sts thatthe hol d-har m l ess ag r ee m en t woul d c r ea te a c o nt i ng en t cl ai m a g ai ns t th e est ate
. Why tha ts ho ul d ma t t e r i s o b s c ur e . T he o b l i g a t i on to pa y the a rbit r at o r s cr ea te s a di r ec t cl ai m a g ai ns t th e es ta te ; why sh o ul d a c o nt i ng en t cl ai m a risi ngfr o m the sa m e pre-bankr up tcy contr act be w or se? The si ze ofth is claim surely is sm all : U nless som eon e s ue s t he arbitrators4 N o. 07

- 1973 ther e wil l be no o utl ay. The pro babi l i ty ofsui t i s m i nuscul e, and the l ega l f ees needed to f end offfri vol ous l i ti gati on a l so ar e s m al l

. I t i s har d to see how the ac tuar i al va l ue o fthi s co nt i ng en t cl ai m c ou l d e xc ee d $ 10 0. Ye t th e Truste e has spent m any thousands of dol l ar s i n l ega l fees , and dela yed this c as e by fi ve yea rs , to avo i d a tr i vi al chance o fexposur e t o a m odest cl ai m . That’s a s i gn o f i rr ati onal i ty; no w onder th e arbi tr ato rs tho ught that th eyne ede d e xt r a pr o te ct i o n. The Truste e a l so m ai ntai ns thatthe pol i ci es, as executo ryco ntra c ts, were autom ati cal l y r ej ecte d und er 11 U .S.C . §36 5(d )(1) w h en th ey w er e n o t a ss u m ed w ith in 60 d ay s afterthe bankr uptcy beg an, and that rej ecti on en ables th e estate to avoid allof O u tboa rd M arine’s p rom ises, includ ing th e p rom ise to arbitrate. Th e insu rers ackno w l edge that thi s i s s o i fthe pol i ci es have been rej ecte d, but the y i nter pret the Tr ustee ’ s a rg um ent a s a n at te m pt to a vo i d o nl y Outb o ar d M ar i ne ’ s o bl i g at i o ns u n d er th e p olic ies , w h ile h old in g t h e in su re rs to th eir o wn

— in ot h er w or d s, to ge t b ac k t h e s ec u rit y w h ile l e a v i n gth e i n s u r e r s e x p o s e d t o fut ur e c l a i ms f o r in d e mni ty. I f th e po li cies hav e been rej ecte d , the n th ey are can celled. Th ere w il l be n o futu re i nd em nity, any m ore than a tenant coul d “rej ect” a l eas e wh il e co nti nuing to occupy the pre m i ses r ent- f re e. A Tru st ee can’ t hav e th ings both w ays. A ft er rej ection, the ba nk rup tcy cou rt ra therthan an arbi tr ato r shoul d s et tle acco unts be tw een O utboard M arine an d the insu rers

— f or rej ecti on does not av oid th e d eb to r’s ob liga tio n s b u t s im p ly re p lac es sp ec ificN o. 07

- 1973 5 pe r f o r man c e wi t h da mag e s . S e e Do ug l a s G. Ba i r d, Elem ents of Ba nkruptcy1 3 0

–4 0 ( 4 th e d

. 2 0 0 6 ) ; Mi c h a e l T
. An d r ew , Exec utory Cont rac ts i n Bankr upt cy : U nd erstan din g “ R eje ct i on" , 59 U
. Col o. L. Rev. 84 5 ( 1988 )
. Dam age s then m ay be w ritten dow n acco rdi ng to thei r pri or i ty vis -à-vis othe r cl ai m s a gai nst the es tat e. W hetherthes e poli ci es have been rej ecte d, orthe arbi tr at i o n c l a u s e o t h e r w i s e a v o i d e d , i s a q u e s t i o n th a t we m ayde ci de o nl y i fthe a ppea l i s wi th i n o ur j ur i sdi ct i o n. A n d it i s no t. The di str i ct j ud ge re m anded f orfurther p roceed ings. Th at m akes th e de cision i nt erlocuto ry and non-a pp eal abl e. S ee In re Com di s co, Inc . , 53 8 F
. 3d 647 (7th C ir. 2008). Th i s c o nc l us i o n i s f o r t i fi e d b y the n a t ur e o fthe r e man d: f ora sta y o fpro ceedi ngs pendin g ar b i tr ati on. A pro arbi tr ati on d ec i si o n, c o upl ed wi tha s ta y ( r athe r tha n a d ism i ssa l ) o fthe sui t, i s no t a pp eal abl e. S ee Gre e n Tree Fi nan ci al Corp. v. Randolph , 531 U
. S. 79, 87 n .2 (2 0 00). In d ee d , 9 U .S.C . §16 (b ) p os itiv ely f or b i ds a pp e a l

. I tsa ys that “an a pp ealm ay not be t ake n” from a n or der sta yi ng l i ti gat i on i n f avo r of a rbi tr ati on “ [ e] xcept as othe rwis e pr ovi ded in s ecti on 1 292(b) o fti tl e 2 8”, wh i ch al l o ws appe al ofc o n t r o l l i n g q u e s t i o n s b y j o i nt perm i ssi on o fthe dist ri ct a nd a pp el l ate co urts
. Other po s s ib l e s o ur c e s o fa pp e l l a t e j ur i s di c t i o n, i nc l ud i ng28 U
. S. C. §158 ( d) ( fi nal deci si ons i n bankr up tcy) , §129 1 ( fi nal d ecisions in civilsuits), and §1292 (a) (i nj un ctions ), are superse ded f oro rder s t o arbi tr ate
. A ccor ding to the Tr ustee , the dist ri ct j ud ge’ s o rderto si gn the hol d-har m l ess pro m i se i s a n i nj unct i on, wh i ch6 N o. 07

- 1973 may b e a pp e a l e d u nd e r §1 2 9 2 ( a ) ; the T r us t e e c o nt e nd s that w e m ay re vi ew the arbi tr ati on o rderunder th e doctr i ne o f“pen d ent a pp el l ate j uri sdic ti on. ” Thi s l i ne o f ar gum ent i s fullo fhol es. The o r dert o sign the ho l d- ha r m l es s pr o m i se i s no m ore an “injun ction” than i s the order to arbitrate itself

. J ud ges r outi nely d ire ct par ti es to do thi ngs

— pr o v i de disc ove ry , m ake witnes ses ava i l abl e f orm edi calexam s, p a y a rb i t r a t o r s , d r a w u p p l a n s f o r c o mp l i a n c e w i th s o me l e g a l o b l i g a t i on

— wi th o utthe r eb y e nt er i ngi nj unc ti o ns t ha tma y b e i mm e di a t e l y a pp e a l e d. A n i nj uncti on i s a n or der o fspecifi c per f or m ance o n the m er its , a r em edy f ora l ega l wrong. A n or der “ to do” in th e c ou rs e o f litiga tio n is n o t a n i nj u n c tio n u n les s it e f f e c t i v e l y r e s o l v e s the me r i t s i n a wa y tha two ul d e s c a pe re vie w lat e r . S ee , e.g., Gul f s t r e am Ae r os pac eCorp. v. M a ya ca m a s C o rp . , 485 U
. S. 271, 279 (1988 ); In reSpri ngfie ld, 818 F
. 2d 56 5 ( 7th Ci r . 1 98 7)
. Tr ea tingc as e- m an ag ement or ders as inj uncti ons w oul d perm i t no t o ne appealper sui t, but dozens, and m ake a m ock er y ofthe fi nal

- deci si on r equi r ement
. I t woul d a l l o w l i tigatio n t o b e dr ag g ed o ut i nt e r mi nab l y , a s thi s h a s b een

— for althou gh Ou tboa rd M ar i ne e nt er ed ba nk r upt cyi n 2 00 0, r es o l ut i o n o fthe parti es’ subst anti ve dispute has y et to begin! A rbitrati on i s s up posed to be a qui ck and cheap substi tute f or l i ti gat ion (g ai ni ng the bene fi ts ofexper ti se i n the proce ss, si nce m any a rbi tr ato rs ar e s peci al i sts ) , ye t the Trust ee has s u c c ee d ed i n m ult i ply i ng the ti m e a nd expense re qu i r e d. I fthe or der t o si gnw ere an inj u n c tio n, st ill §1 6(b ) w ou ld f orbi d app eal

. The o nl y e xcep tio n to §1 6( b) i s a n appealN o. 07

- 1973 7 by perm i ssi on under § 1292 ( b) , a nd thatse cti on does not h e l p t h e T ru st ee . (Th e d ist ric t jud ge d id n ot ce rt ify h is or d er for a p p e a l u n d er §1 29 2(b ).) A s fo r th e c olla te ra lor der doct ri ne, se e Cohe n v . Be nefic i al Indu s t r i al Lo an C o rp . , 3 3 7 U. S
. 5 4 1 ( 1 9 4 9 ) : thi s e l a b o r a t e s o n the phrase “fi nal deci sio n ” in 28 U
. S. C. §129 1, and §16 ( b) pre vents li tigant s from using §1291 to get review of ord ers st ay i ngl i ti g at i o n i n f av o r o fa rbi tr at i o n. Eve n i fa l l o fthi s wer e wro ng, the do ct r i ne o f“ pen den t appel l at e j ur i sdi ct i o n” woul d no t per m i t us t o r ev i ew the or der t o arbi tr ate
. S ecti on 1 6( b) bl ock s r eso rtto that doctr i ne, i n com m on with al l so urces o fappel l ate j u risd ict ion ot h er t h an §1 29 2(b ). So w e h eld inID S Lif e Ins urance Co. v. Su nAm e r i ca, Inc . , 103 F .3 d 5 2 4 , 528 (7th C ir. 1996). W hat’ s m or e, pendent appell ate j uri sdic ti on i s a discreti onar y doctrin e, and j ud ges o ught notuse disc re ti on t o get’ ro und st atute s s uch as §1 6(b )
. A l though the Trust ee i s ri ght to say that Swi ntv. Cham b e rs County Com m i s s i on , 514 U
. S. 35 , 43 –51 ( 1995 ) , l eft open the possibi l i ty that appe l l a t e c o ur t s mi g hta s s e r tp e nd e nta pp e l l a t e j ur i sdict i on, “the Courtm ade cl earthato nl y th e m ostextr aor dinary ci rcum sta nces coul d j usti fy the use ofwh ate ver pow erthe cour ts ofappeal s pos ses s

— and th at even w hen ci rcum sta nces ar e e xcep ti onalthe avai l abi l i ty of p en d en t a pp el l ate j uri sdic ti on i s doubtful. ” M cCar t e rv. Ret i r e m e ntPla n f

orA m eric an Famil y Ins uranc eGr oup , 54 0 F.3d 649 , 653 (7th C ir. 2008). Si nce Sw intthe J us ti ce s ha ve a ppr o ve d the us e o fpe nden t appe l l at e j ur i sdi ct i o n o nl y o nc e. The y de emed the P r e s i d e n t ’ s s t a t u s a s a d e f e n d a n ta c o mp e l l i n gc i r c u m-8 N o. 07

- 1973 sta nce. S ee C linto n v . Jones , 52 0 U. S
. 68 1, 70 7 n. 41 ( 19 97 )
. But th e T r u s t e e o f O u tb o a r d Ma r i n e C o r p o r a t i o n i s n o t th e P re sid en t, an d t h e r e is n ot h in g e x tr ao rd in ar y a b ou t t h is com m er ci all i ti gat i on. Pendent appel l ate j uri sdic ti on w oul d n o tb e a v a i l a b l e e v e n i f§ 1 6 ( b ) we r e n o ta n i nd epe nd e ntb a r t o i t s u s e . Al though Nat i onal Rai l r oad Pass e nge rCorp. v. E xp ress t r ak, LL C, 330 F.3d 523 ( D
. C
. Cir. 20 03 ) , a nd Qua c ke n b u s h v. Al l s t at eInsu r an c eCo
. , 12 1 F
. 3d 13 72 ( 9th Ci r. 19 97) , i nvoke “pendent appel l ate j uri sdic

tio n ” t o re vie w m u n d an e a rb itr at ion ord er s, t h os e d ec isi ons go i n the tee th o fbo thSwi ntan d §1 6(b ). W e s h all adhere to ID S Lif

e Ins urance . I t i s l ong past t i m e t o car rythr ough with the arbi tr ati on that w as or de re d i n 200 3. W hethero r not the c ontr act h as be en rejec te d , th e T ru st ee m u st s t o p d ra gg in g h is he el s. I fthe a rbi tr ati o n e nds i n the i ns ur er s’ f av o r, the T ru s t ee w il l be en titl ed to renew i n th e ban krup tcy cou rt hi s ar g um en t tha t th e po l i ci es ha ve b ee n r ej ec te d. The T rus tee’s intran sigenc e has greatly i nc reased the insu rer s’ co sts o fl i ti gat i on. The pol i ci es c on tain f eesh iftin g c lau se s. T h e b an kr u p tc y jud ge m ay th in k it p r u d e n tt o c o n s i d e r, o n c e th e a rb i t r a t i o n h a s b e e n c o mple ted, wh ether any at torneys’ fees awarded und erthes e pol i ci es shoul d b e bor ne by the Truste e perso nal l y rather than by the cre dit or s o fOutboar d M ar i ne. S ee M axw el l v. KPM G LLP , 520 F.3d 713 , 718–1 9 (7th C ir. 2008). The a ppea l i s di smi ss ed f o r wanto fj ur i sdi ct i o n.

11- 6- 08