Opinion ID: 7094
Heading Depth: 2
Heading Rank: 1

Heading: Bankruptcy Aspects

Text: 12 The district court correctly noted that under Sec. 541(a)(1) of the Bankruptcy Code, a bankruptcy estate includes all legal or equitable interests of the debtor in property as of the commencement of [a bankruptcy] case. 5 Interpreting this provision, the Supreme Court has declared that [t]he scope of ... [Sec. 541(a)(1) ] is broad. It includes all kinds of property, including tangible or intangible property, causes of action ... and all other forms of property currently specified in section 70a of the Bankruptcy Act. 6 The language of Sec. 541(a)(1) is unquestionably broad enough to cover a debtor's interest in liability insurance. 7 Indeed, an overwhelming majority of courts have concluded that liability insurance policies fall within Sec. 541(a)(1)'s definition of estate property. 8 This consensus is understandable: [a] products liability policy ... is a valuable property of a debtor, particularly if the debtor is confronted with substantial liability claims. 9 Often, as in this case, liability policies constitute the most important asset of ... [the debtor's] estate. 10 As one court put it, language, authority, and reason all indicate that ... liability insurance polic[ies] are 'property of the estate.'  11 13 In In re Louisiana World Exposition, 12 however, we distinguished titular ownership of a policy from total ownership of the proceeds of that policy, holding that the proceeds of Directors and Officers (D&O) liability insurance policies were not part of a corporation's bankruptcy estate even though the policies were purchased and owned by the corporation. 13 The policies at issue in that case provided liability coverage only for the corporate debtor's directors and officers and for the obligation of the corporation to indemnify those directors and officers. 14 Thus, under the D & O policies, the insurance companies' obligations flowed only to the corporate debtor's directors and officers, who were the only insureds under the policies. 15 The policies did not afford the debtor corporation any direct coverage for liability to third-party claimants. 16 In that narrow factual context, we concluded that the debtor corporation's ownership of the policies was not enough to render the proceeds of those policies property of the corporation's bankruptcy estate. Consequently, despite the debtor's legal ownership of the policies qua policies, this court determined that the directors and officers were the equitable owners of all of the proceeds of those policies, pretermitting inclusion of the proceeds in the estate of the debtor. 14 In the time since Louisiana World Exposition was decided, the distinction drawn in that case between ownership of liability policies and ownership of the proceeds of those policies has not been broadly applied: It arguably remains confined to cases involving D & O liability policies, given their unique nature among liability insurance products. 17 Faced with the typical situation in which a debtor corporation's liability policies provide the debtor and thus the estate with direct coverage against third party claims, virtually every court to have considered the issue has concluded that the policies--and clearly the proceeds of those policies--are part of debtor's bankruptcy estate, irrespective of whether those policies also provide liability coverage for the debtor's directors and officers. 18 Most courts do not even recognize a technical distinction between ownership of insurance policies and ownership of the proceeds of those policies: They simply conclude that such policies--and, by implication, the proceeds of such policies--are valuable properties of debtors' bankruptcy estates. 19 15 Indeed, some courts that have considered Louisiana World Exposition 's policy/proceeds dichotomy have rejected it because it exposes a debtor's insurance policies to suit outside the ambit of the bankruptcy estate. 20 These courts evidently fear that splitting the proceeds of a liability policy between bankrupt and non-bankrupt insureds would create a race to the courthouse whenever potential liability exceeds total proceeds, as creditors scurry to see who can be first to get a judgment against the non-bankrupt insureds (worth a dollar on the dollar) instead of a claim against a bankrupt debtor's estate (often worth but pennies on the dollar, if anything). 21 16 In this circuit, we are therefore in the position of knowing how to resolve cases on either end of the continuum, but we have not yet decided how to resolve cases lying somewhere along the continuum. On one extreme, when a debtor corporation owns a liability policy that exclusively covers its directors and officers, we know from Louisiana World Exposition that the proceeds of that D&O policy are not part of the debtor's bankruptcy estate. 22 On the other extreme, when a debtor corporation owns an insurance policy that covers its own liability vis-a-vis third parties, we--like almost all other courts that have considered the issue--declare or at least imply that both the policy and the proceeds of that policy are property of the debtor's bankruptcy estate. 23 But we have not yet grappled with how to treat the proceeds of a liability policy when (1) the policy-owning debtor is but one of two or more coinsureds or additional named insureds, (2) the rights of the other coinsured(s) or additional named insured(s) are not merely derivative of the rights of one primary named insured, 24 and (3) the aggregate potential liability substantially exceeds the aggregate limits of available insurance coverage. 17 When ultimately we are faced with such a mid-continuum case, we shall have to decide which one of two positions to take: either (1) the proceeds of a liability policy should be wholly included in the bankruptcy estate of the debtor that owns the liability policy--even though there are other coinsureds or additional named insureds who have some interest in the proceeds, 25 or (2) the proceeds should be divided among all coinsureds, either per capita or in proportion to the potential or actual liability faced by each insured party. The instant case, however, is not the one that forces us to decide which of these or possibly other positions to take, for here the district court based its reversal of the bankruptcy court on what it perceived to be a broad, general principle of insurance law; and even if we assume arguendo that such principle is a basic tenet of Texas insurance law, we conclude that the court misapplied it.