Opinion ID: 2549238
Heading Depth: 2
Heading Rank: 1

Heading: The Right of a Bankruptcy Trustee to Recover Insurance Proceeds for Damage to Property Allegedly Caused by Debtor

Text: As an initial matter the parties dispute whether state law or federal bankruptcy law applies. The Court of Appeals held state law, not bankruptcy law, determines contractual terms between the parties, even if one is in bankruptcy.... 111 Wash.App. at 480, 45 P.3d 610. Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). However, a state has no power to make or enforce any law that conflicts with federal bankruptcy laws. Int'l Shoe Co. v. Pinkus, 278 U.S. 261, 263-64, 49 S.Ct. 108, 73 L.Ed. 318 (1929). State court decisions that define property rights are not binding on federal bankruptcy courts when they are contrary to bankruptcy law. In re Lahman Mfg. Co., 33 B.R. 681, 687 (Bankr.D.S.D.1983). Thus, if there is a conflict between state law and federal law, federal law prevails. A trustee, as representative of the bankruptcy estate, acquires all the rights of the debtor in an insurance policy issued to the debtor, subject to all defenses and obligations that may have existed at the time the bankruptcy estate was created. In re Feiereisen, 56 B.R. 167, 169 (Bankr.D.Ore.1985). But the Trustee and the Debtor are neither the same entity nor alter egos of each other. In re Buckeye Countrymark, Inc., 251 B.R. 835, 840 (Bankr.S.D.Ohio 2000). If the debtor has no authority to act on behalf of the bankruptcy estate, a debtor's intentional wrongdoing is not attributable to the trustee. Feiereisen, 56 B.R. at 169-70. Accordingly, a bankruptcy trustee is not barred from recovering under debtor's insurance policy if the debtor's principal intentionally sets fire to the debtor's premises after the debtor filed a chapter 11 petition for bankruptcy. In re J.T.R. Corp., 958 F.2d 602, 605 (4th Cir.1992). [1] The Court of Appeals relied on In re Light, 23 B.R. 482 (Bankr.E.D.Mich.1982) for the proposition that a bankruptcy trustee's interest in a debtor's insurance policy is equal to that of the debtor's. But that case is clearly distinguishable. There the debtor allegedly intentionally set fire to his property and filed a claim against his insurer several months before he was forced into involuntary bankruptcy and before a trustee had been appointed to oversee the estate. Id. at 483. The sole issue before the court was whether the defense of arson asserted by the insurer was also valid against the trustee. Id. The court held because the debtor was barred from recovery at the time the petition was filed, the trustee was likewise barred. Id. at 484. Here Symes's president allegedly set fire to the restaurant after Symes filed a bankruptcy petition but before a trustee was appointed. This case is on all fours with J.T.R. Corp. where a principal of the debtor restaurant corporation intentionally set fire to the restaurant several months after filing a chapter 11 bankruptcy petition. 958 F.2d at 603. The court appointed a bankruptcy trustee a few days after the fire. Id. The Fourth Circuit held the bankruptcy estate was not barred from recovering under an insurance policy even if the principal would have been barred from recovery under the policy. Id. at 605. It reasoned the arson was not attributable to the estate because the principal had no authority from the estate to destroy the restaurant. Id. But the Court of Appeals declined to apply J.T.R., reasoning: A holding consistent with [ J.T.R. ] could encourage acts of arson and encourage fraud against the insurer. Certainly the unsecured creditors would benefit when the insolvent owner burns his business with the intent to destroy records that would implicate him criminally or just relieve him of a debtor situation by having sufficient insurance to cover all of the debt when the business is destroyed. The unscrupulous debtor would then have fewer persons examining his position criminally if the unsecured creditors were satisfied by insurance payments. (It is likely that secured creditors would have insurance on their security or be provided for as loss payees.) And the insurer would have little incentive to pursue the debtor if it were required to sustain the loss and pursue the insolvent debtor. 111 Wash.App. at 488-89, 45 P.3d 610. Yet state courts have no authority to depart from federal bankruptcy law based on a disagreement as to appropriate public policy. Pinkns, 278 U.S. at 263-64, 49 S.Ct. 108. Moreover, the Court of Appeals public policy argument is unpersuasive. It is unlikely a debtor would commit arson to satisfy his or her creditors when the debtor already enjoys the protection of the bankruptcy court. And even if the debtor were motivated to commit arson that is strictly a criminal matter and has no bearing on the insurer's contractual obligation to indemnify the estate for losses caused by arson. Based on J.T.R. we hold the bankruptcy trustee is not barred from recovering under the policy.