IN RE METROPOLITAN MORTGAGE SECURITIES, CO. (Bankr.E.D.Wash. 2005)

PATRICIA WILLIAMS, Chief JudgePage 2

The Court, in ruling on an emergency motion filed by Charles Turner (the "Turner Motion") herein on October 13, 2005, under Docket No. 8068, raised certain procedural concerns regarding Notice to interested parties when Motions for Relief from Stay seeking payment of attorney fees and costs from the Metropolitan-purchased Insurance policy proceeds. Specifically, the Court and counsel in the hearing discussed the fact that the Interpleader actions are pending, and whether filing a Motion for Relief in the underlying bankruptcy cases and providing electronic notice in the Interpleader actions where the funds have now been interplead, is sufficient Notice to all parties claiming an interest in the policy proceeds, particularly the vast number of pro-se litigants who have appeared in the various interpleader actions. In addition, the Court expressed concern that the pending sua sponte Recommendation for Withdrawal of the Reference, filed in the Interpleader actions, will affect litigants' future Motions for Relief where the movants' ultimate objective is entry of an Order in the respective Interpleader action authorizing the Clerk to disburse funds. The Court has directed counsel to discuss and propose a notice procedure for future reference. The pertinent issues are repeated in this Order for convenient reference. This procedural history is summarized for the purpose of providing assistance and background to this specific Order only and shall not be construed as an attempt to interpret or modify any Order or prior ruling of the Court.

For ease of reference, these insurance policies are: 1) Primary Directors, Officers, and Private Company Liability Insurance Policy No. 263-38-69, issued by National Union Fire Insurance Company of Pittsburgh, PA (the "National Union Primary DO policy"); 2) Excess Insurance Policy No. 594CM0556 issued by St. Paul Mercury Insurance Co.(the "Excess DO policy"); 3) Primary Financial Institutions Professional Liability Insurance Policy No. 281-42-69, issued by American International Specialty Lines Insurance Company (the "AISLIC EO policy"; 4) Excess Professional Liability Insurance Policy No. 70430220, issued by Federal Insurance Company, the Chubb Group of Insurance Companies, collectively " Debtors' Policies."

For ease of reference, the interpleader adversary proceeding cases collectively " Interpleader Actions" are:Federal insurance v. Metropolitan et al. (Adversary Proceeding No. 05-80126-PCW), National Union and AISLIC v. Metropolitan et al. (Adversary Proceeding No. 05-80135-PCW), and St. Paul Mercury v. Metropolitan et al. (Adversary Proceeding No. 05-80138-PCW) The Court has entered an Order Consolidating the Interpleader actions for certain purposes, under Dkt. No. 116.

See Ad Pro. 05-80135 Dkt. No. 104, 05-80126 Dkt. No. 33, 05-80138 Dkt No. 89 for Orders Authorizing Deposit of Funds.

See Dkt. No. 212, National Union.

A. The Procedures Orders.

1. After notice and hearing, the Court entered a ruling that determined a method for submission, review and reimbursement of defense counsels' fees and costs, known as the Stipulation and Order re Procedures for Review and Payment of Attorney Fees from Insurance Proceeds (the "Procedures Order"), filed October 28, 2004, under Metropolitan/Summit Case No. 04-00157, Docket No. 1589. The Procedures Order exclusively governed requests for payment of fees and costs through June 30, 2005.

2. After hearing on a Motion for Relief filed by certain former registered representatives, William Sears, Patricia Jean Sears-Million, (the " Sears Group") the Court entered findings and conclusions and determined that since the filing of the interpleader actions and the deposit of funds into the court's registry, the Procedures Order required amendment. Accordingly, the Court entered the Order Amending Order re Procedures for Review and Payment of Attorney Fees from Insurance Proceeds, (the " Amended Procedures Order"), filed September 7, 2005, under Metropolitan/Summit Case No. 04-00157, Dkt. No. 7157. The Amended Procedures Order applies to requests for reimbursement for fees and costs through June 30, 2005.The Amended Procedures Order makes applicable certain provisions of the Procedures Order and sets out requirements for requests for reimbursement of fees and costs, with certain showings, including the need to look first to other applicable insurance and subject to review by the respective carriers, Federal, National Union/AISLIC or St. Paul, collectively the " Debtors' Insurers."

B. The Insurance Memorandum Decision

The Court has determined that the three Debtors have undivided interests in the insurance proceeds and such that the insurance policies are property of the Debtors' bankruptcy estates. Metropolitan Mortgage Sec. Co, Inc. v. Cauvel, 325 B.R. 851 (Bankr. E.D. Wash. 2005) (the " Insurance Memorandum Decision"). That interest is not only derivative, but arises from the Debtors' direct claims to reimbursement of certain costs and expense from the policy proceeds. C. The Pellegrino Memorandum Decision

See Page 11, Dkt No 223, Ad Pro No. 04-00061.

The Court has determined that any dispute regarding the applicability of § 362(a)(1) to a particular proceeding against the Debtors, its former officers and directors, and registered representatives, as insureds and potential claimants under the Insurance Policies, would have to be resolved on a case-by-case basis. The Court, in ruling on a motion filed by Ronald Pellegrino (the " Pellegrino Motion") herein on August 24, 2005, under Docket No. 6649, filed a Memorandum Decision Re: Ronald Pellegrino's Motion for Limited Relief From Automatic Stay, (the " Pellegrino Memorandum Decision"). The Pellegrino Memorandum Decision found that an NASD Disciplinary Action commenced against Mr. Pellegrino was not subject to the protection of the Automatic Stay because the action did not seek to exercise control over the policy proceeds, such as seeking a distribution of the proceeds. Finally, the Court found that lifting the automatic stay to allow Mr. Pellegrino or other similarly situated defendants the right to seek reimbursement for defense costs would be inconsistent with the orderly administration of the interpleader actions. D. The Interpleader Interim Case Management Order

See Page 3, Dkt. No. 6649, Metropolitan Ch 11, No. 04-00757.

Id. at Page 4.

Id. at Page 6.

The Court has set forth a procedure to resolve the Debtors' entitlement and amount of portions of the insurance proceeds by entry of an Interim Case Management Order in the Interpleader actions, which establishes November 14, 2005, for Debtors' Motions for Claims to Proceeds, December 5^th for Objections and December 12^th for Reply to Objections to Debtors' Claims. It is conceivable, but unknown, whether the District Court will rule on the Recommendation for Withdrawal of the Reference before those deadlines. In addition, the Interim Case Management Order sets deadline for Motion for the Appointment of Lead Counsel for various representative groups, which are subject to the same conjecture. In the interest of proceeding, the Court desires to simplify the process for those defendant/litigants who believe they are entitled to access to the insurance policy proceeds.

See National Union, No. 05-800135; Dkt No. 211 Order Consolidating Cases, Dkt No. 209.

E. The Motion for Relief Notice Rules

Under 11 U.S.C. § 362(d), a party filing a Motion for Relief from Stay must provide Notice under Fed.R.Bkrptcy.P. Rules 4001(a) and 9014(a) and served in accordance with Rule 7004. Essentially, this requires service on the Mailing Matrix, in this case a Standing Order Limiting Notice has provided for a Limited Notice Mailing Matrix, consisting of hundreds of parties. Alternatively, a party may file a Motion, request a hearing date from the Court's Deputy Clerk, and secure a setting in both the main bankruptcy case and the related Interpleader Actions. Until the District Court rules on the Recommendation for Withdrawal of the Reference, matters may be jointly set before Judge Williams in this manner.

Metropolitan Mortgage, Dkt. No. 63; Summit Securities, Dkt. No. 22 (Order for Joint Administration), Metropolitan Investment Securities, Dkt. No. 17.

If an Adversary Proceeding is pending which is related to the underlying bankruptcy in which a Motion for Relief is filed, it is normally not necessary to take action in the Adversary Proceeding. Because every dollar of the Insurance Policy proceeds spent on defense costs will reduce the potential proceeds available for claimants, the vast majority of whom are creditors in the Debtors' bankruptcy cases, it is imperative that charges by professionals moving to draw down on the Policies are kept to a minimum. Here, given that the counsel's ultimate objective is to secure payment from the funds held in the Interpleader, it is desirable to develop efficiency, clarity and a single filing Notice requirement to prevent cost-prohibitive or repetitive filings in the underlying bankruptcy cases and the Interpleader Actions.

NOW, THEREFORE, IT IS HEREBY ORDERED:

1. This Order governs the notice procedures for all motions seeking disbursement of proceeds from the Insurance Policies in the Interpleader Actions from the date of entry of this Order. This Order does not apply to the notice procedures for any motions filed before the entry of this Order.

2. The Court grants standing relief from automatic stay, and all parties to the Interpleader Actions have relief from the automatic stay (to the extent it is applicable) to seek disbursement of insurance proceeds through the Interpleader Actions. It is no longer necessary for parties to the Interpleader Actions to file notices, motions or other papers in the above-captioned underlying Metropolitan, Summit or MIS bankruptcy cases in connection with requests for disbursement of interplead insurance proceeds.

3. Notice of any requests for disbursement of insurance proceeds filed in any of the Interpleader Actions must be noticed as the moving party deems appropriate.

To the extent parties have filed actions in the Interpleader Actions to recover defense fees and costs incurred in connection with one or more of the Related Litigation Matters after June 30, 2005, this Order shall not prejudice disposition of those actions.