Court Opinion

ID: 4712847
Source: CourtListenerOpinion
Date Created: 2021-08-12 00:38:43.29399+00
Date Added: 2024-06-11T08:07:14.241046
License: Public Domain

Madsen, J.
(dissenting) — This case involves a breach of contract claim arising out of an insurer’s denial of coverage. The insurer denied coverage on a claim brought by the president of a corporation who intentionally destroyed the insured corporation’s assets. Under federal case law, the contractual terms of an insurance policy remain enforceable even in bankruptcy and an estate’s interest in property is determined by reference to state law. In this case, the contractual terms of the insurance policy exclude coverage when a person, authorized to act for the insured, causes loss through a criminal act. Furthermore, state case law precludes recovery where a dominating shareholder intentionally destroys assets of the insured corporation. Thus, there can be no recovery against the insurance policy in this case under either federal or state law. However, rather than adhering to overwhelming authority, the majority follows a poorly reasoned decision of the Fourth Circuit of the Court of Appeals and holds that the insurer is bound to indemnify such a loss based solely on the fact that the debtor corporation had filed bankruptcy. I must respectfully dissent.
ANALYSIS
Although federal law determines what assets of the debtor become assets of the estate in bankruptcy, state law determines the extent of the estate’s interest in those assets. Butner v. United States, 440 U.S. 48, 55, 99 S. Ct. 914, 59 L. Ed. 2d 136 (1979). An interest in property should not be “analyzed differently simply because an interested party is involved in a bankruptcy proceeding.” Id. To do so would create uncertainty, encourage forum shopping and might result in a party “receiving ‘a windfall merely by reason of the happenstance of bankruptcy.’ ” Id. (quoting *472Lewis v. Mfrs. Nat’l Bank of Detroit, 364 U.S. 603, 609, 81 S. Ct. 347, 5 L. Ed. 2d 323 (1961)).
A debtor’s interest in an insurance policy existing at the time of the bankruptcy filing becomes property of the estate in bankruptcy. See Am. Bankers Ins. Co. of Fla. v. Maness, 101 F.3d 358, 362 (4th Cir. 1996) (citing A.H. Robins Co. v. Piccinin, 788 E2d 994, 1001 (4th Cir. 1986)); In re Edgeworth, 993 F.2d 51, 55 (5th Cir. 1993); First Fid. Bank v. McAteer, 985 F.2d 114, 116 (3d Cir. 1993); MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89, 92 (2d Cir. 1988); Tringali v. Hathaway Mach. Co., 796 F.2d 553, 560 (1st Cir. 1986). But, “ ‘the estate’s legal and equitable interests in property rise no higher than those of the debtor.’ ” McAteer, 985 F.2d at 117 (quoting In re Gagnon, 26 B.R. 926, 928 (Bankr. M.D. Pa. 1983)). Thus, the extent of an estate’s interest in an insurance policy is determined by reference to state law and does not vary from the debtor’s interest in that policy outside of bankruptcy.
In accordance with established Washington law, “[insurance is a contractual relationship between the insurer and the insured.” Ohio Cas. Ins. Co. v. Nelson, 49 Wn.2d 748, 751, 306 P.2d 201 (1957). Interpretation of an insurance policy is a question of law and “[w]here the language in a contract for insurance is clear and unambiguous, the court should enforce the policy as -written.” Matthews v. Penn-Am. Ins. Co., 106 Wn. App. 745, 747-48, 25 P.3d 451 (2001). Furthermore, bankruptcy courts have said that the terms of an insurance policy apply despite the filing of a bankruptcy petition. See, e.g., In re Jones, 179 B.R. 450, 455 (Bankr. E.D. Pa. 1995); In re Light, 23 B.R. 482, 483 (Bankr. E.D. Mich. 1982) (“[t]he right to recover on an insurance policy is determined by the rights provided by the contract of insurance.”). “[T]he owner of an insurance policy cannot obtain greater rights to the proceeds of that policy than he would have under state law by merely filing a bankruptcy petition.” Jones, 179 B.R. at 455 (citing McAteer, 985 F.2d at 117). See also In re Intercont’l Sec. Corp., 62 B.R. 16 (Bankr. N.D. Ill. 1986) (insurer not bound to indemnify loss in*473curred by corporation in bankruptcy where insurance company had contractual right to question sole shareholder who failed to appear for oral examinations).
The insurance policy involved in this case excludes losses for “ ‘[d]ishonest or criminal act[s] by [the insured], any of [the insured’s] partners, employees (including leased employed) [sic], directors, Trustees, authorized representatives or anyone to whom [the insured] entrust [s] the property for any purpose.’ ” Am. States Ins. Co. v. Symes of Silverdale, Inc., 111 Wn. App. 477, 487, 45 P.3d 610 (2002) (quoting Clerk’s Papers). Furthermore, Washington courts have held that an insurer is not bound to indemnify a loss experienced by a corporation that is caused by the intentional act of destruction by a majority shareholder who exercises control over its operations. See, e.g., Great Am. Ins. Co. v. K&W Log, Inc., 22 Wn. App. 468, 591 P.2d 457 (1979) (logging company barred from recovering under insurance policy where circumstantial evidence showed that an individual who was the majority shareholder, president, and manager intentionally destroyed equipment of the company with explosives).
Other jurisdictions, including federal courts, follow this general rule where a stockholder, officer, or employee exercises a great degree of control over the corporation and stands to benefit directly or indirectly if recovery is allowed. See Peter G. Guthrie, Annotation, Fire Insurance on Corporate Property as Affected by its Intentional Destruction by a Corporate Officer, Employee, or Stockholder, 37 A.L.R.3d 1385 §§ 2[a], 3 (1971); Kimball Ice Co. v. Hartford Fire Ins. Co., 18 F.2d 563 (4th Cir. 1927) (insurer not bound to indemnify loss caused by act of arson of general manager who held one quarter of capital stock, was also a creditor of the insolvent corporation, and exercised exclusive management and control of it); Meily Co. v. London & Lancashire Fire Ins. Co., 148 F. 683 (3d Cir. 1906) (arson by sole shareholder would preclude recovery); Miller & Dobrin Furniture Co. v. Camden Fire Ins. Co. Ass’n, 55 N. J. Super. 205, 150 A.2d 276 (1959) (no recovery where arsonist was 50 *474percent owner of corporation and exercised control over its affairs).
The court in Northern Assurance Co. v. Rachlin Clothes Shop explains the rationale for disregarding the corporate fiction and holding that a company is bound by an act of arson of a dominating shareholder, employee, or officer with respect to an insurance policy. N. Assur. Co. v. Rachlin Clothes Shop, Inc., 32 Del. 406, 125 A. 184 (1924). There the court explained that officers of a corporation who manage and control “the ultimate direction of its affairs . . . are to be regarded as the corporation itself’ because a corporation is “a purely metaphysical creature, having no mind with which to think, no will with which to determine and no voice with which to speak.” Id. at 416. “[W]hen an officer of the corporation is allowed to perform the functions of the whole management of the corporation, the directors and stockholders abandoning to him the entire control of its affairs, what he does in the prosecution of the company’s business is to be regarded as being the act and will of the directors and as fully expressive of the corporation’s purposes as though formally authorized by the directors themselves.” Id. at 419. “ ‘[T]he general rule is now firmly established that corporations cannot make defense to actions in tort claiming that the acts by which the wrongs have been committed are not within the corporate powers conferred upon them.’ ” Id. at 420 (quoting 1 William W. Cook, Treatise on the Law of Corporations Having a Capital Stock 156 (8th ed. 1923)).
The language contained in the insurance policy in this case clearly excludes coverage for an act of arson by the insured or an authorized representative. The defendant is the president of the insured corporation and is at least an authorized representative of the corporation, if not the corporation itself as explained in Rachlin. Thus, his act of arson precludes any recovery under the plain language of the policy.
Furthermore, the defendant is a shareholder who not only exercised control of the corporation, but who will also *475benefit if the insurer is forced to indemnify this loss. This is so because the named insured under the policy is a company that was owned and operated by him. The repayment of debts owed by the company made possible by the receipt of insurance proceeds will serve to improve its financial condition and, consequently, the defendant’s financial condition. At least theoretically, the creditors may be fully repaid from the insurance proceeds. Consequently, the debtor corporation may successfully emerge from bankruptcy leaving the defendant with a clean slate or perhaps even a positive equity interest in the corporation. In the event the corporation does not survive despite the receipt of insurance proceeds, the defendant may still benefit because he can show that creditors of the bankrupt corporation had been at least partially repaid, improving his chances for starting a new business and attracting new creditors or investors. Contrary to the majority’s assertion that a would-be arsonist has no motivation for committing the criminal act of arson against property when a business is already protected by the auspices of the bankruptcy court, it is not difficult to imagine other scenarios where the friends or family of the arsonist would benefit from indemnification of such a loss as a shareholder or named insured, which may in turn indirectly benefit the arsonist. And, it might often be the case that burning a business down in order to receive insurance proceeds will result in a faster and larger recovery than would be realized through the bankruptcy process. Thus, this court should follow the general rule applied in Washington and elsewhere, and deny recovery under the policy in this case.
Instead, the majority relies upon a poorly reasoned decision by a three-judge panel of the Fourth Circuit of the United States Court of Appeals in order to override the policy’s express criminal acts exclusion. In In re J.T.R. Corp., as in this case, the debtor had filed bankruptcy under chapter 11 and remained in control when the business was destroyed by fire. In re J.T.R. Corp., 958 F.2d 602, 603 (4th Cir. 1992). The parties did not dispute that the debtor-in-*476possession intentionally set the fire. Id. A trustee was appointed a few days after the fire, and later filed an insurance claim on behalf of the estate seeking to recover for the loss caused by the fire. Id. Relying on a bankruptcy court decision, In re Feiereisen, 56 B.R. 167 (Bankr. D. Or. 1985), the Fourth Circuit held that the bankruptcy trustee could recover under the policy. J.T.R. Corp., 958 F.2d at 604.
Unfortunately, the J.T.R. court’s reliance on Feiereisen was completely misplaced. In that case the debtor committed arson after the bankruptcy filing and the appointment of a trustee. Feiereisen, 56 B.R. at 169. The bankruptcy court held that neither the trustee nor the estate was barred from recovering under the insurance policy because the debtor was not authorized to act on behalf of the estate. Id. Thus, the debtor’s acts could not be attributed to the estate and thereby preclude any recovery under the policy. Feiereisen, 56 B.R. at 170. In the case now before this court, as in J.T.R. Corp., a trustee had not been appointed at the time of the arson and the officers of the debtor corporation remained in control.
The Fourth Circuit misread Feiereisen to hold that as soon as a bankruptcy petition is filed, the trustee may not be barred from recovering under an insurance policy for a criminal act of arson committed by a debtor-in-possession prior to the appointment of a trustee. J.T.R. Corp., 958 F.2d at 605. This is simply incorrect. The bankruptcy court’s opinion in Feiereisen was based on the fact that a trustee had been appointed and the debtor had no authority to act on behalf of the estate at the time of the arson. That court indicated “[t]he trustee, as representative of the estate, acquired the rights of the debtor in the insurance policy issued . . . subject to all defenses and obligations that may have existed at the time the estate was created.” Feiereisen, 56 B.R. at 169. This statement emphasizes that the trustee, as opposed to the debtor, was the representative of the estate at the time the arson occurred and the debtor had no authority to act on its behalf. As Feiereisen stated, “[n]o facts have been presented to the court, in this case, indi-*477eating that the debtor had any authority to act on behalf of the estate . . . when the fire occurred.” Id. The court further indicated the arson “did not occur until well after the reconversion of this case and the appointment of defendant as trustee” and that “the estate acts by and through its representative, the [trustee].” Id. at 169-70 (emphasis added). Only after emphasizing the fact that the debtor had no authority to act on behalf of the estate did the bankruptcy court conclude that the arson “is not attributable to the trustee or the estate.” Id. at 170. Thus, Feiereisen does not stand for the proposition that the defense of arson is unavailable where a debtor who remains in control of a business intentionally destroys the insured assets.
The J.T.R. court unconvincingly asserts that the “meaningful issue” is “the filing of the petition” because, it says, upon the filing of a bankruptcy petition “the debtor. . . ceases to act in his own interests and begins to act for the creditors.” J.T.R. Corp., 958 F.2d at 605. As noted, however, the holding in Feiereisen was based on the fact that the debtor had no authority to act on behalf of the estate. Thus, the relevant question is whether the debtor acted with authority and not, as J.T.R. suggests, in whose interest the debtor acts. This is so because the contractual terms of an insurance policy persist even when the debtor “ceases to act in his own interests and begins to act for the creditors.” Id. Here, the defendant remained in control of the debtor corporation until a trustee was appointed following the arson. Thus, under the terms of the policy and in accordance with state law, defendant was at least “the authorized representative” of the bankruptcy estate.
Finally, it is worth noting that the parties here have not disputed that the contract for insurance is valid and binding upon the parties, or that the defendant was acting with authority when the policy was obtained and renewed and when the fire occurred. This case involves a breach of contract claim relating to the insurer’s denial of coverage. This court should hold that there was no breach because even in bankruptcy the insurer is not bound to indemnify a *478loss excluded by the contractual terms of the insurance policy. The court should not rewrite the terms of an insurance policy bargained for by the parties which expressly excludes coverage for the criminal acts of the insured or authorized representatives.
CONCLUSION
The rule adopted by the majority runs counter to the great weight of federal and state authority. This court should not abandon the well-worn path to follow the Fourth Circuit’s lead where it fails to provide any rational basis for the adoption of the rule it promulgates. Rather, this court should hold that where a debtor-in-possession commits an act of arson against property of the debtor corporation after the filing of a bankruptcy petition but before the appointment of a trustee, a trustee thereafter appointed has no greater rights under an insurance policy than the debtor-in-possession and thus may not recover under a policy which expressly excludes coverage for such an act.
Alexander, C.J., and Johnson and Owens, JJ., concur with Madsen, J.
Reconsideration denied February 26, 2004.