In re CJ Holding Co.

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Docket Number

CASE NO: 16-33590

Judges

David R. Jones

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Smart Summary

Factual and Procedural Background

On May 16, 2015, Robert and Delia Nunez were injured in an accident involving a vehicle driven by Reece Horton, an employee of C&J Well Services, Inc. ("C&J Well"). The Nunezes subsequently filed litigation against C&J Well, Mr. Horton, and others in the 143rd Judicial District Court of Reeves County, Texas, seeking compensatory and other damages. On July 20, 2016, C&J Well and affiliates filed a voluntary chapter 11 bankruptcy case, which was jointly administered. The deadline for filing proofs of claim was November 8, 2016. Mrs. Nunez was listed as a creditor with a disputed, contingent, unliquidated claim; Mr. Nunez was not listed. Both Nunezes received notice of the bar date but neither filed a proof of claim. They also received plan solicitation materials but did not vote, object, or otherwise participate in the confirmation process.

The bankruptcy court confirmed the Debtors' plan of reorganization on December 16, 2016, effective January 6, 2017. Under the confirmed plan and 11 U.S.C. §§ 1141(d) and 524, all claims held by the Nunezes were discharged, and further efforts to recover from C&J Well or its property were prohibited. The plan also contained injunctive and exculpatory provisions preventing pursuit of claims against C&J Well or its employees.

On June 29, 2017, the Nunezes filed a motion seeking relief from the statutory discharge injunction and the injunction in the confirmed plan to continue their litigation solely to recover insurance proceeds from C&J Well and Mr. Horton. The Debtors opposed this motion, arguing that the claims were discharged and released under the plan. After a hearing and post-hearing briefing, including submissions regarding the applicable insurance policies and security held by Liberty Mutual Insurance Company, the Court considered the matter.

Legal Issues Presented

Whether Robert and Delia Nunez are entitled to relief from the statutory discharge injunction under 11 U.S.C. § 524 and the injunction contained in the confirmed plan to pursue pre-petition personal injury claims solely to recover insurance proceeds.
Whether the exception recognized in In re Edgeworth allowing a creditor who failed to file a proof of claim to prosecute claims against a reorganized debtor for insurance proceeds applies in this case.
Whether the Debtors would incur substantial costs in the litigation such that the exception to the discharge injunction should be denied.
The effect of the Debtors' assumption of relevant insurance agreements under the confirmed plan on the application of the Edgeworth balancing test.

Arguments of the Parties

Robert and Delia Nunez's Arguments

They did not file a proof of claim but seek to proceed with litigation solely to recover insurance proceeds available under the Debtors' policies.
The Liberty Mutual Insurance policy has a $1 million deductible and a $5 million self-insured retention before excess insurance coverage applies, but it is unclear whether the Debtors will have to pay these amounts.
The Debtors could breach their contractual obligations and refuse to pay the deductible or self-insured retention, so the Edgeworth exception permitting litigation for insurance proceeds should apply.
Because the Debtors assumed the relevant insurance agreements under the confirmed plan, a different legal analysis should apply.

Debtors' Arguments

The Nunezes' claims were discharged under the confirmed plan and 11 U.S.C. § 1141(d).
The claims against C&J Well and Mr. Horton were released under the confirmed plan's terms.
The Debtors would incur substantial costs if the litigation proceeded, which weighs against allowing the Nunezes to continue the litigation.
The assumption of insurance agreements under the confirmed plan does not alter the application of the Edgeworth balancing test.
Liberty Mutual Insurance Company holds $5.8 million in cash as security for any costs advanced related to the litigation.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Houston v. Edgeworth (In re Edgeworth), 993 F.2d 51 (5th Cir. 1993)	11 U.S.C. § 524 does not prohibit a creditor who failed to file a proof of claim from prosecuting claims solely to collect insurance proceeds, unless the debtor incurs substantial costs.	The Court applied the Edgeworth balancing test, finding that because C&J Well would incur substantial costs, the exception does not apply to allow litigation against the Debtor or its employee in the scope of employment.
Perez v. Cumberland Farms, Inc., 213 B.R. 622 (D. Mass. 1997)	Economic loss to the debtor violates 11 U.S.C. § 524(a), but litigation may proceed with reimbursement to the debtor.	The Court referenced this case to support the principle that debtor's economic interests must be protected in allowing litigation for insurance proceeds.
Greiner v. Columbia Gas Transmission Corp. (In re Columbia Gas Transmission Corp.), 219 B.R. 716 (S.D. W. Va. 1998)	Balancing the fresh start policy with limitations under 11 U.S.C. § 524(e).	Used to explain the underlying policy considerations guiding the Court’s balancing test.
Jones v. Pilgrim's Pride, Inc., 741 F. Supp. 2d 1272 (N.D. Ala. 2010)	Denied relief to pursue litigation for insurance proceeds where the debtor had a large self-insured retention, effectively no primary insurance.	The Court found this case instructive, noting similar facts regarding self-insured retention and insurance coverage.
DePippo v. Kmart Corp., 335 B.R. 290 (S.D.N.Y. 2005)	Considered in context of insurance coverage and discharge injunction.	Referenced in discussion of balancing debtor’s interests and creditor’s rights to pursue insurance proceeds.
In re Chemtura Corp., No. 09-11233-JLG, 2016 Bankr. LEXIS 4056 (Bankr. S.D.N.Y. Nov. 23, 2016)	Confirmed that assumption of insurance agreements under a plan does not alter the Edgeworth balancing.	The Court relied on this authority to reject the Nunezes’ argument that assumption changes the analysis.
Stern v. Marshall, 131 S.Ct. 2594 (2011)	Constitutional authority of bankruptcy courts to enter final orders in core proceedings.	The Court cited this case to confirm its constitutional authority to enter the final order in this contested matter.

Court's Reasoning and Analysis

The Court framed its analysis primarily around the Fifth Circuit's decision in In re Edgeworth, which permits creditors who failed to file proofs of claim to pursue claims against a reorganized debtor solely to recover insurance proceeds, but only if the debtor does not incur substantial costs. Recognizing the bankruptcy policy of providing debtors a fresh financial start, the Court balanced this against the exception in 11 U.S.C. § 524(e) that preserves creditor rights to pursue insurance proceeds.

The Court found that the Debtors in this case would be required to pay a $1 million deductible and a $5 million self-insured retention before excess insurance coverage applies, representing substantial costs that would frustrate the fresh start policy. The Nunezes' argument that the Debtors may breach their obligations to pay these amounts was undermined by the fact that Liberty Mutual holds $5.8 million in cash as security for these costs.

The Court rejected the Nunezes' contention that the assumption of insurance agreements under the confirmed plan required a different legal analysis, relying on precedent that the Edgeworth balancing test remains controlling.

Accordingly, the Court denied the Nunezes' motion to pursue claims against C&J Well and Mr. Horton in his capacity as an employee (and thus subject to vicarious liability of C&J Well), finding that allowing such litigation would cause substantial costs to the Debtors and undermine the discharge injunction. However, the Court granted relief to the extent the Nunezes sought to pursue claims against Mr. Horton individually, outside his employment capacity, and to recover from his personal insurance or assets.

Holding and Implications

The Court's final ruling was to grant in part and deny in part the Nunezes' motion for relief from the discharge injunction and the injunction in the confirmed plan. Specifically, the motion was denied as to C&J Well and Mr. Horton solely in his capacity as an employee, and granted as to claims against Mr. Horton individually outside that capacity.

The direct effect of this decision is that the Nunezes may not continue litigation against the Debtors or their employee in an official capacity to recover insurance proceeds where the Debtors would incur substantial costs, preserving the bankruptcy discharge and fresh start. However, the Nunezes may pursue claims against Mr. Horton individually. The opinion does not establish new precedent but applies existing Fifth Circuit law and related authority to the facts presented.

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IN RE: CJ HOLDING CO., et al., Debtor(s).

David R. Jones

CHAPTER 11
(Jointly Administered)

MEMORANDUM OPINION

(Docket No. 1733)

Robert and Delia Nunez seek relief from the statutory discharge injunction provided under 11 U.S.C. § 524 as well as the injunction and releases provided in the confirmed plan to pursue pre-petition personal injury claims against C&J Well Services, Inc. ("C&J Well") and an employee solely for purposes of recovering available insurance proceeds. For the reasons set forth below, the Court grants the motion in part and denies the motion in part. A separate order consistent with this opinion will issue.

Brief Factual Background

On May 16, 2015, Mr. and Mrs. Nunez were injured in an accident involving a vehicle driven by Reece Horton, an employee of C&J Well. Mr. and Mrs. Nunez subsequently filed litigation against C&J Well, Mr. Horton and others in the 143^rd Judicial District Court of Reeves County, Texas seeking millions of dollars in compensatory and other damages for their injuries (the "Litigation").

C&J Well filed a voluntary chapter 11 bankruptcy case on July 20, 2016 along with a number of affiliates. All cases were jointly administered under the instant case [Docket No. 32]. The deadline for filing proofs of claims in these cases was November 8, 2016 (the "Bar Date") [Docket No. 496].

In their schedules, the Debtors listed Mrs. Nunez as a creditor with a disputed, contingent claim in an unliquidated amount [Docket No. 327]. Mr. Nunez is not listed as a creditor.

C&J Well alleges that Mr. Nunez sued both C&J Well and Mrs. Nunez solely in an attempt to manufacture venue in Reeves County, Texas. This issue is not before the Court and no opinion is expressed nor should any inference be drawn. --------

On September 28, 2016, a notice of the Bar Date was sent both to Mr. and Mrs. Nunez in care of their counsel, Bill Weinacht, The Weinacht Law Firm, P.O. Box 170, Pecos, TX 79772 [Docket No. 661]. Neither Mr. nor Mrs. Nunez filed a proof of claim.

On November 11, 2016, a copy of the plan solicitation materials, including notice of the hearing to consider confirmation of the Debtors' proposed plan or reorganization and a voting ballot was sent both to Mr. and Mrs. Nunez [Docket No. 793]. Neither Mr. nor Mrs. Nunez cast a vote, objected to the proposed plan or otherwise participated in the confirmation process.

The Court confirmed the Debtors' plan of reorganization by order entered December 16, 2016 [Docket No. 1057]. The confirmed plan became effective on January 6, 2017 [Docket No. 1157]. All claims held by Mr. and Mrs. Nunez are now discharged under 11 U.S.C. § 1141(d) and the express provisions of the confirmed plan. All further efforts by Mr. and Mrs. Nunez to recover from C&J Well or its property are expressly prohibited under 11 U.S.C. §§ 524(a)(2) and (3). Moreover, the confirmed plan contains both injunctive and exculpatory provisions that prevent the continued pursuit of any claims held by Mr. and Mrs. Nunez against C&J Well or its employees [Docket No. 1057].

On June 29, 2017, Mr. and Mrs. Nunez filed their motion for relief from the statutory discharge injunction under 11 U.S.C. § 524 as well as the injunction contained in the confirmed plan [Docket No. 1733]. Specifically, Mr. and Mrs. Nunez request authority to continue the Litigation against the C&J Well and Mr. Horton solely for the purpose of recovering proceeds from the Debtors' insurance policies [Docket No. 1733].

The Debtors filed their response to the Nunez motion on August 4, 2017 [Docket No. 1802]. In their response, the Debtors assert that Mr. and Mrs. Nunez are not entitled to the requested relief and that (i) any claims held by Mr. and Mrs. Nunez were discharged; and (ii) any claims against C&J Well or Mr. Horton held by Mr. and Mrs. Nunez were released under the specific terms of the confirmed plan.

The Court conducted a hearing on the Nunez motion on August 24, 2017 [Docket No. 1837]. During the hearing, the Debtors elicited testimony that the Debtors would incur substantial costs if the Litigation proceeded. At the conclusion of the hearing, the Court established a schedule for post-hearing briefing [Docket No. 1837].

On September 18, 2017, Mr. and Mrs. Nunez filed their post-hearing brief [Docket No. 1880]. In the brief, Mr. and Mrs. Nunez cited to various provisions of the applicable Liberty Mutual Insurance policy (the "Liberty Policy") [Docket No. 1880]. These cited provisions reflect that the Liberty Policy has a $1 million cap with a $1 million deductible [Docket No. 1880]. The brief further reflects that the Debtors have a $5 million self-insured retention above the Liberty Policy before a $10 million excess policy issued by Price Forbes becomes available [Docket No. 1880].

On September 27, 2017, the Debtors' filed their response to the Nunez post-hearing brief [Docket No. 1901]. Liberty Mutual Insurance Company ("Liberty") also filed its response to the Nunez post-hearing brief on September 27, 2017 [Docket No. 1900]. In its response, Liberty noted that it was holding the Debtors' cash in the amount of $5.8 million as security for any costs that it advanced with respect to the Litigation [Docket No. 1900].

On November 7, 2017, Mr. and Mrs. Nunez filed their reply to the Debtors' response to their post-hearing brief [Docket No. 1955].

Jurisdiction and Authority

The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334(a). Further, the Court has jurisdiction to interpret and enforce its own orders. This contested matter is a core proceeding arising under title 11 pursuant to 28 U.S.C. §§ 157(b)(2)(A), (L), and (O). The Court has constitutional authority to enter a final order in this contested matter under the Supreme Court's holding in Stern v. Marshall, 131 S.Ct. 2594 (2011).

Analysis

The Court finds the resolution of the parties' dispute squarely encompassed within the Fifth Circuit's decision in Houston v. Edgeworth (In re Edgeworth), 993 F.2d 51 (5th Cir. 1993). In Edgeworth, the Fifth Circuit held that 11 U.S.C. § 524 does not prohibit a creditor that failed to file a proof of claim from proceeding to prosecute litigation claims against a reorganized debtor solely for the purpose of collecting insurance proceeds. Id. at 54-55. The Fifth Circuit noted, however, that this exception to § 524 is not available if the debtor is required to incur substantial costs in the litigation. Id. at 54 (noting that "threats to [a debtor's] pocketbook might require a different result"). See also Perez v. Cumberland Farms, Inc., 213 B.R. 622, 624 (D. Mass. 1997) (stating that any economic loss to the debtor would violate 11 U.S.C. § 524(a) but allowing litigation to proceed with a reimbursement obligation to the debtor).

The underlying tenet of the Fifth Circuit's holding is a balancing of the financial fresh start policy underlying the bankruptcy process with the limitation set forth in 11 U.S.C. § 524(e). See Greiner v. Columbia Gas Transmission Corp. (In re Columbia Gas Transmission Corp.), 219 B.R. 716, 720 (S.D. West Va. 1998). The Court's analysis in Jones v. Pilgrim's Pride, Inc. is instructive on this issue. 741 F. Supp. 2d 1272 (N.D. Ala. 2010). In denying the plaintiff's request to pursue litigation claims solely for the purpose of collecting insurance proceeds, the Pilgram's Pride Court noted that there was effectively no primary insurance as the Debtor had a large self-insured retention. Id. at 1277-1278. See also Columbia Gas Transmission Corp., 219 B.R. at 720; DePippo v. Kmart Corp., 335 B.R. 290, 298 (S.D.N.Y. 2005)

The relevant facts are largely undisputed. Mr. and Mrs. Nunez admit that they did not file a proof of claim. No assertion is made that they are not bound by the terms of the confirmed plan in this case. Rather, Mr. and Mrs. Nunez argue that although the Liberty Policy has a $1 million deductible and that a $5 million self-insured retention exists before any proceeds of the excess policy are available to satisfy their claims, it is not clear that the Debtors will have to actually pay those amounts. In essence, Mr. and Mrs. Nunez argue that the Edgeworth exception should apply because the Debtors could choose to breach their contractual obligations and refuse to pay the $1 million deductible or the $5 million self-insured retention. The argument fails to address the fact that Liberty is holding the Debtor's cash as security for its performance.

The Court is convinced that this is the type of situation recognized by the Edgeworth Court. In this case, C&J Well is required to pay the first million, and five of the following six million in related expenses/recoveries. No legitimate argument exists that such circumstances would not frustrate C&J Well's discharge and the fresh start policy engrafted into the Bankruptcy Code.

Mr. and Mrs. Nunez also argue that the fact that the Debtors' relevant insurance agreements were assumed under the confirmed plan requires a different analysis. The Court disagrees. The Edgeworth balancing remains unchanged. See In re Chemtura Corp., No. 09-11233-JLG, 2016 Bankr. LEXIS 4056, at *61-62 (Bankr. S.D.N.Y. Nov. 23, 2016).

Applying Edgeworth, the Court will deny the Nunez motion as to C&J Well and to Mr. Horton solely in his capacity as an employee for which C&J Well would have vicarious liability. With respect to any claims against Mr. Horton individually, outside of his capacity as an employee, and any personal insurance or other assets that he may have, the motion is granted.

An order consistent with this opinion will separately issue.

SIGNED: August 15, 2018.

/s/ _________

DAVID R. JONES

UNITED STATES BANKRUPTCY JUDGE