Court Opinion

ID: 2960170
Source: CourtListenerOpinion
Date Created: 2015-09-17 17:43:41.239624+00
Date Added: 2024-06-11T12:46:21.498526
License: Public Domain

05-5988-cv
     Chartschlaa v. Nationwide Mutual

1                         UNITED STATES COURT OF APPEALS

2                               FOR THE SECOND CIRCUIT

3                                       --------

4                                  August Term, 2006

5

6    (Argued:    October 23, 2006                      Decided: August 14, 2008)

7

8                   Docket Nos. 05-5988-cv(L), 05-6603-cv(xap)

9    -----------------------------------------------------------X

10   PETER CHARTSCHLAA and ANGELA SAWICKI KING as personal
11   representatives of ALEX CHARTS, deceased, doing business as Alex
12   Charts Agency Inc. and Charts Insurance Associates, Inc.,1
13
14
15                     Plaintiffs-Appellees-Cross-Appellants,

16               - v. -
17
18   NATIONWIDE MUTUAL INSURANCE COMPANY, NATIONWIDE MUTUAL FIRE
19   INSURANCE COMPANY, NATIONWIDE LIFE INSURANCE CO., NATIONWIDE
20   PROPERTY AND CASUALTY COMPANY, NATIONWIDE VARIABLE LIFE INSURANCE
21   COMPANY and COLONIAL INSURANCE COMPANY OF CALIFORNIA,
22
23
24                     Defendants-Appellants-Cross-Appellees,
25
26
27   HELENA CHARTS and CHRISTOPHER L. GARCIA,
28
29
30                     Plaintiffs.
31
32   -----------------------------------------------------------X
33

            1
            Alex Charts died during the pendency of these proceedings,
      and by order of this Court filed June 26, 2008, Peter Chartschlaa
      and Angela Sawicki King were substituted as parties pursuant to
      Federal Rule of Appellate Procedure 43(a)(1).
1    Before:   WINTER, McLAUGHLIN, and STRAUB, Circuit Judges.

2         Appeal from a judgment entered by the United States District

3    Court for the District of Connecticut (Droney, J.) upon a jury

4    verdict in favor of plaintiffs.   REVERSED.

 5                                 RAYMOND A. GARCIA (Jane I. Milas,
 6                                 Nicole Liguori Micklich, on the
 7                                 brief), Garcia & Milas, P.C., New
 8                                 Haven, Connecticut, for Plaintiffs-
 9                                 Appellees-Cross-Appellants.
10
11                                 CHRISTOPHER LANDAU, Kirkland & Ellis
12                                 LLP, Washington, D.C. (Michael
13                                 Shumsky, Kirkland & Ellis LLP,
14                                 Washington, D.C., Deborah S. Freeman,
15                                 Ann M. Siczewicz, Bingham McCutchen
16                                 LLP, Hartford, Connecticut, on the
17                                 brief), for Defendants-Appellants-
18                                 Cross-Appellees.
19
20   -----------------------------------------------------------X
21
22   Per Curiam:

23        Defendants-Appellants-Cross-Appellees Nationwide Mutual

24   Insurance Company, Nationwide Mutual Fire Insurance Company,

25   Nationwide Life Insurance Company, Nationwide Property and Casualty

26   Company, Nationwide Variable Life Insurance Company, and Colonial

27   Insurance Company of California (collectively, “Nationwide”),

28   appeal from a judgment entered by the United States District Court

29   for the District of Connecticut (Droney, J.) upon a jury verdict in

30   favor of Plaintiffs-Appellees-Cross-Appellants Alex Charts and

31   Charts Insurance Associates, Inc. (“CIAI”).   Charts and CIAI

32   cross-appeal the district court’s denial of their motion for

33   prejudgment interest and grant of Nationwide’s motion for judgment

                                       2
1    as a matter of law on one of their claims.

2         Charts and CIAI, former sellers of Nationwide insurance

3    policies, sued on several claims arising out of Nationwide’s

4    termination of their relationship.    For the reasons that follow, we

5    hold that those claims belong to the bankruptcy estate of Alex

6    Charts and not to either of the plaintiffs.    Accordingly, we

7    reverse the judgment of the district court and direct that judgment

8    be entered in favor of Nationwide.

9                                 BACKGROUND

10        We assume familiarity with the district court’s and our prior

11   decisions in this case.   See Charts v. Nationwide Mut. Ins. Co., 16

12   F. App’x. 44 (2d Cir. 2001) (“Charts I”;) Charts v. Nationwide Mut.

13   Ins. Co., 300 B.R. 552 (D. Conn. 2003) ("Charts II"); Charts v.

14   Nationwide Mut. Ins. Co., 397 F. Supp. 2d 357 (D. Conn. 2005)

15   (“Charts III”).   We recount here only those facts necessary for

16   resolution of this appeal.

17        Since at least 1979, Alex Charts has been in the business of

18   selling Nationwide insurance.   He started as an individual agent

19   with an individual agent’s agreement.     In 1986, Charts entered into

20   a new agency agreement (the “Corporate Agency Agreement”) with

21   Nationwide through a corporation called Alex Charts Agency, Inc.

22   (the “Old Agency”), of which Charts was the sole shareholder.     In

23   October 1992, Charts formed CIAI as a new corporate entity for his

24   insurance business.   That month, the officers and directors of

25   CIAI, including Charts, held an organizational meeting.    Charts

                                       3
1    prepared the incorporation papers for CIAI, but delayed filing

2    them.

3         In December 1992, Charts and his wife filed a Chapter 7

4    bankruptcy petition in the United States Bankruptcy Court for the

5    District of Connecticut.   As required in a Chapter 7 bankruptcy

6    proceeding, Charts filed various schedules of assets and

7    liabilities.   See 11 U.S.C. § 521.    Charts listed the Old Agency as

8    the name of his insurance business.    He did not list his interest

9    in CIAI as an asset of his estate.

10        In January 1993, Charts formally filed the certificate of

11   organization for CIAI with the Connecticut Secretary of State.

12        In May 1993, while still in bankruptcy proceedings, Charts

13   executed a new agency agreement with Nationwide on behalf of CIAI

14   (the “CIAI Agreement”).    The CIAI Agreement, which had an effective

15   date retroactive to January 1, 1980, allowed CIAI to market and

16   service Nationwide insurance contracts as Charts had done in the

17   past individually and through the Old Agency.

18        In 1995, Nationwide launched an internal investigation into

19   potential misconduct by its Connecticut agents.     During that

20   investigation, several agents alleged that Charts engaged in

21   prohibited business practices.

22        In January 1996, Nationwide terminated the CIAI Agreement.

23        In February 1996, Charts obtained an order of discharge in his

24   bankruptcy proceedings, and the bankruptcy court closed the case.

25

                                        4
1         In August 1997, Charts and CIAI sued Nationwide in the United

2    States District Court for the District of Connecticut (Droney, J.).

3    The plaintiffs alleged that Nationwide terminated the CIAI

4    Agreement because of Charts’s age and in retaliation for Charts’s

5    own reporting of misconduct by Nationwide employees to Nationwide

6    management.   The plaintiffs contended that these actions violated

7    the covenant of good faith and fair dealing implied in the CIAI

8    Agreement as well as Connecticut statutory law.    Nationwide moved

9    for summary judgment on the ground that the CIAI Agreement and any

10   cause of action based on that contract were part of the bankruptcy

11   estate.

12        In August 2000, a Magistrate Judge (Garfinkel, M.J.)

13   recommended that the district court grant Nationwide’s motion,

14   finding that Charts’s claims belonged to the bankruptcy estate and

15   that his failure to disclose the existence of CIAI in the

16   bankruptcy case was “clearly not inadvertent.”    In September 2000,

17   the district court adopted this recommendation.    Charts appealed

18   that judgment to this Court, and we vacated the judgment, without

19   reaching the merits, on the ground that the estate should have been

20   joined as a party to the suit.   Charts I, 16 F. App’x at 44.

21        On remand, the district court reopened the bankruptcy case for

22   the purpose of appointing a trustee to represent the estate’s

23   interests in this litigation.    Nationwide thereafter renewed its

24   motion for summary judgment, iterating its position that the claims

25   belonged to the bankruptcy estate.    The trustee then entered an

                                       5
1    appearance and expressed his intent to abandon the claims against

2    Nationwide under 11 U.S.C. § 554(a) by filing a notice of proposed

3    abandonment.   Nationwide objected to the proposed abandonment.

4         At a December 2002 hearing, the trustee informed the district

5    court that he had entered negotiations to sell the claims to

6    Nationwide, and soon planned to file a proposed notice of sale of

7    the claims.    On that basis, the trustee requested that the court

8    take no action with respect to the proposed abandonment.

9         In September 2003, the district court denied Nationwide’s

10   renewed motion for summary judgment, reversing its earlier

11   position.    This time, the district court held that Charts owned the

12   disputed claims after all, because the claims arose after the

13   bankruptcy filing and such “post-petition” claims generally do not

14   belong to the estate.   Charts II, 300 B.R. at 556-58.    In its

15   ruling, the district court noted its understanding that the trustee

16   had sold, rather than abandoned, whatever interest it held in the

17   claims.   Id. at 556 n.5.   Thus, the court observed, “if the Court

18   were to hold that these claims were property of the estate, . . .

19   Charts would not have standing to assert them because any claim

20   owned by the estate is now held by Nationwide.”    Id.   In fact,

21   however, the proposed sale of the claims to Nationwide was never

22   finalized.

23        The case proceeded to a jury trial.   At trial, Charts

24   testified that CIAI was simply the new name and corporate identity

25   of the very same insurance business he had previously operated

                                        6
1    through the Old Agency:

 2              Q:     So that business from Alex Charts Agency,
 3                     Inc., the Nationwide policies for which that
 4                     company was receiving commissions, that was
 5                     all rolled over to the new company?
 6
 7              A:     Everything stayed the same. . . .
 8
 9              . . .
10
11              Q:     When you say everything stayed the same, am I
12                     characterizing this fairly by essentially
13                     saying—and tell me if I’m wrong—that all of
14                     the business that you had been doing as Alex
15                     Charts Agency, Inc. for which you were
16                     receiving ongoing commissions, that . . . was
17                     simply moved over to the new company, Charts
18                     Insurance Associates, Inc.?
19
20              A:     Yes.
21
22              Q.     Did you have employees of Alex Charts Agency,
23                     Inc.?
24
25              A.     Yes.
26
27              Q.     Did all of those individuals who were
28                     employees of Alex Charts Agency, Inc. at the
29                     time you wound down that business, that
30                     corporation, become employees of Charts
31                     Insurance Associates, Inc.?
32
33              A.     Yes.
34
35         The jury returned a verdict for Charts on all counts,

36    awarding $2.3 million in damages.

37         Nationwide filed a post-verdict motion for judgment as a

38    matter of law.    The plaintiffs moved for prejudgment interest and

39    for attorneys’ fees.    The district court denied Nationwide’s

40    motion except as to the plaintiffs’ claim for breach of the

41    implied covenant of good faith and fair dealing; denied the

                                        7
1    plaintiffs’ motion for prejudgment interest; and awarded the

2    plaintiffs $750,000 in attorneys’ fees.       Charts III, 397 F. Supp.

3    2d at 370, 372, 374, 385-86.

4         On appeal, Nationwide continues to press its argument that

5    the claims belong to Charts’s bankruptcy estate, and not to the

6    plaintiffs.     We agree.   Because ownership of the claims is a

7    threshold issue, we need not reach the numerous other arguments

8    raised in the appeal and cross-appeal.

9                                   DISCUSSION

10        This Court reviews de novo a district court’s resolution of

11   a motion for judgment as a matter of law under Federal Rule of

12   Civil Procedure 50(b), applying the same standard that the

13   district court was required to apply.       Diesel v. Town of

14   Lewisboro, 232 F.3d 92, 103 (2d Cir. 2000).       Thus, we “consider

15   the evidence in the light most favorable to the non-moving party

16   and give that party the benefit of all reasonable inferences from

17   the evidence that the jury might have drawn in that party’s

18   favor.”   Id.     Whether a cause of action belongs to a bankruptcy

19   estate is a question of law, which we review de novo.       See In re

20   Swift, 129 F.3d 792, 795 (5th Cir. 1997).

21        Our analysis begins with 11 U.S.C. § 541(a)(1), which

22   defines the bankruptcy estate as including “all legal or

23   equitable interests of the debtor in property as of the

24   commencement of the case.”      “It would be hard to imagine language

25   that would be more encompassing” than this broad definition.       4

                                         8
1    Collier on Bankruptcy ¶ 541.01 (15th ed. 2001).       “[E]very

2    conceivable interest of the debtor, future, nonpossessory,

3    contingent, speculative, and derivative, is within the reach of §

4    541.”   In re Yonikus, 996 F.2d 866, 869 (7th Cir. 1993).

5    Contractual rights clearly fall within the reach of this section,

6    see, e.g., Cohen v. Drexel Burnham Lambert Group, Inc. (In re

7    Drexel Burnham Lambert Group, Inc.), 138 B.R. 687, 701 (Bankr.

8    S.D.N.Y. 1992), as do causes of action owned by the debtor or

9    arising from property of the estate, see Seward v. Devine, 888

10   F.2d 957, 963 (2d Cir. 1989)

11        Given the wide scope of § 541, the debtor’s obligation to

12   disclose all his interests at the commencement of a case is

13   equally broad.   See 11 U.S.C. § 521(a)(1)(B)(i), (iii) (requiring

14   debtor to “file . . . a schedule of assets and liabilities ...

15   and a statement of the debtor’s financial affairs”).       Because

16   full disclosure by debtors is essential to the proper functioning

17   of the bankruptcy system, the Bankruptcy Code severely penalizes

18   debtors who fail to disclose assets:       While properly scheduled

19   estate property that has not been administered by the trustee

20   normally returns to the debtor when the bankruptcy court closes

21   the case, undisclosed assets automatically remain property of the

22   estate after the case is closed.       See 11 U.S.C. § 554(c), (d);

23   Collier, supra, ¶ 554.03.   “A debtor may not conceal assets and

24   then, upon termination of the bankruptcy case, utilize the assets

25   for [his] own benefit.”   Kunica v. St. Jean Fin., Inc., 233 B.R.

                                        9
1    46, 53 (S.D.N.Y. 1999).

2         Because assets within the estate are those that exist “as of

3    the commencement of the case,” 11 U.S.C. § 541(a), property

4    acquired by the debtor after the filing of a bankruptcy petition

5    generally does not become part of the estate.     Benjamin Weintraub

6    & Alan N. Resnick, Bankruptcy Law Manual § 5:6 (5th ed. 2008).

7    However, “[a]fter-acquired” property will vest in the estate if

8    it is derived from property that was part of the estate as of the

9    commencement of the bankruptcy.    See 11 U.S.C. § 541(a)(6)

10   (making “[p]roceeds, product[s], offspring, rents or profits of

11   or from property of estate” part of bankruptcy estate).     Post-

12   petition property will become property of the estate only if it

13   is “sufficiently rooted in the pre-bankruptcy past.”     Segal v.

14   Rochelle, 382 U.S. 375, 380 (1966)) (interpreting Bankruptcy Act

15   of 1898).

16        The plaintiffs argue that Charts had no duty to disclose the

17   existence of CIAI because it was not formally incorporated until

18   after the date of the bankruptcy petition, and therefore is not

19   part of the bankruptcy estate.    We disagree.   Charts readily

20   admitted in deposition testimony that CIAI was formed in October

21   1992, prior to filing his bankruptcy petition.     Charts also

22   conceded that CIAI was incorporated simply to change the name of

23   his preexisting insurance business, and that this change occurred

24   in October 1992, when CIAI was organized.    The Bankruptcy Code is

25   premised on full and complete disclosure of the debtor’s

                                       10
1    finances.   A debtor who “elects to avail himself of the benefits

2    of the federal bankruptcy laws by the filing of a petition . . .

3    can no longer expect to have any financial secrets.”    In re

4    Trout, 108 B.R. 235, 238 (Bankr. D.N.D. 1989).   The existence of

5    CIAI—the formal incorporation of which Charts delayed until soon

6    after filing for bankruptcy and which was intended as simply a

7    renamed successor to Charts’s Old Agency—should have been

8    disclosed to the bankruptcy trustee.2   And because CIAI’s

9    existence was not disclosed, it remains part of the bankruptcy

10   estate.   See Kunica, 233 B.R. at 53.

11        Further, the CIAI Agreement is also an asset of the

12   bankruptcy estate, even though it was not signed until May 1993.

13   During his deposition, Charts conceded that Nationwide issued a

14   new contract to CIAI at his request because of the change of his

15   business’s name.   Even more telling, the CIAI Agreement had a

16   retroactive effective date of January 1, 1980—the approximate

17   date that Charts began doing business with Nationwide.    The

18   parties thus perceived the CIAI Agreement as merely a

          2
           When he filed for bankruptcy, Charts listed the Old Agency
     as an exemption under 11 U.S.C. § 522(d)(5), valuing the business
     at a mere $1. That provision allows debtors to exempt from the
     bankruptcy estate up to $11,200 in estate property. 11 U.S.C. §
     522(d)(5). The plaintiffs have not argued that CIAI was subject
     to this exemption or that the CIAI Agreement is not a product of
     the bankruptcy estate by virtue of the exemption. In a dispute
     that has entered its second decade, we will not take up this
     argument for them. See Norton v. Sam’s Club, 145 F.3d 114, 117
     (2d Cir. 1998) (issues not sufficiently argued considered
     waived).

                                     11
1    continuation of their longstanding business relationship.    See

2    Weintraub & Resnick, supra, § 5:6 n.1 (“It is important to

3    distinguish between property that is acquired after the case is

4    commenced and property that merely changes in form.”).

5    Accordingly, the CIAI Agreement is deeply rooted in the pre-

6    bankruptcy past, and should be considered part of the bankruptcy

7    estate.

8         Because the claims asserted by the plaintiffs arose from

9    CIAI and the CIAI Agreement, they are also property of the

10   bankruptcy estate, and those claims may not be brought by the

11   plaintiffs.

12        Finally, we reject the plaintiffs’ argument that the rights

13   in Charts’s insurance business were abandoned to Charts after the

14   trustee filed and served on creditors a notice of proposed

15   abandonment of the claims.    Abandonment is not a process to be

16   taken lightly.   Once an asset is abandoned, it is removed from

17   the bankruptcy estate, and this removal is irrevocable except in

18   very limited circumstances.    See Catalano v. Comm’r, 279 F.3d

19   682, 686 (9th Cir. 2002).    In light of the impact of abandonment

20   on the rights of creditors, a trustee’s intent to abandon an

21   asset must be clear and unequivocal.    See In re Sire Plan, Inc.,

22   100 B.R. 690, 693 (Bankr. S.D.N.Y. 1989).

23        Here, the trustee informed the district court that it

24   intended to sell the claims to Nationwide.    This representation

                                      12
1    was inconsistent with the trustee’s previously evinced intent to

2    abandon the property to Charts.    Indeed, the trustee specifically

3    requested that the court take no action on the abandonment issue

4    while the negotiations were pending.     Although the sale was never

5    consummated, there is no indication that the trustee ever renewed

6    its request to abandon the claims.     Under these circumstances,

7    the trustee’s intent to abandon the claims was ambiguous.     Absent

8    an unambiguous intent to abandon estate property, the proposed

9    abandonment is not effective.

10                               CONCLUSION

11        For the foregoing reasons, the judgment of the district

12   court is REVERSED.   We direct the district court to enter

13   judgment for Nationwide.

14

                                       13