Judge denies trustee’s motion

A U.S. Bankruptcy Court judge in Massachusetts has ruled that a Chapter 7 trustee could not sell the debtor’s automobile policy back to his insurance carrier to settle a dispute over the validity of a pre-petition waiver of coverage of an accident giving rise to personal injury claims by a third party.

The debtor, David DeVeau, hit a pedestrian with his car in 2011 in Florida. The pedestrian, Ashly Rierson, sued the debtor for negligence.

The debtor’s insurer, Progressive Select Insurance Co., disputed coverage of the accident. Shortly before filing for bankruptcy in 2015, the debtor settled his coverage dispute with Progressive, executing a release of claims under the policy.

The Chapter 7 trustee sought to set aside the release executed by the debtor, bringing an adversary action against Progressive. The trustee and Progressive subsequently settled the adversary proceeding, with the trustee agreeing to sell to Progressive the debtor’s insurance policy “free and clear” of any interests and rights. In exchange, Progressive agreed to pay the estate $825,000, contingent upon the debtor obtaining a discharge of the personal injury claim and certain related claims.

Over Rierson’s objection, the trustee filed a motion to approve the compromise of rights held by the bankruptcy estate as a result of the proposed agreement.

But Judge Frank J. Bailey found a number of problems with the agreement between the trustee and Progressive, foremost among them being that the debtor’s auto policy was not property of the bankruptcy estate for the trustee to sell.

“It is undisputed that before he filed his bankruptcy petition, DeVeau released and forever discharged Progressive of all liability arising, from among other things, its offer of insurance to DeVeau and the issuance of Policy No. 74082543 to DeVeau,” Bailey wrote in denying the trustee’s motion. “It follows that DeVeau had no rights under that policy at the time of the filing, and none came into the estate via [Bankruptcy Code] §541(A)(1).”

The 10-page decision is In Re: DeVeau, David.

‘Tough case’

Florida attorney Henry Seiden represents Rierson, the plaintiff in the personal injury action and a creditor in the bankruptcy case. Seiden credited Judge Bailey for focusing on the fact that the debtor had signed away his rights under the Progressive policy before filing for bankruptcy, precluding the trustee from making any disposition regarding that asset.

Seiden criticized the trustee for failing to protect the rights of his client as a creditor of the bankruptcy estate.

“The bottom line is that this young lady suffered substantial injuries,” Seiden said. “As our adversary pleadings state, we believe there was pre-petition fraud that will bar discharge of the debtor. No matter how hard they try to get around it, that’s going to end up being the fact of life in this case.”

Joseph H. Baldiga of Westborough, Massachusetts, a bankruptcy attorney who serves as a trustee in Chapter 7 and 11 cases, called DeVeau a “tough case” for all the parties involved.

“The trustee did an excellent job of actually getting money on the table, getting Progressive to pay a large amount after the debtor executed a release [of policy rights],” Baldiga said. “The difficulty is that [Rierson] wasn’t involved in the decision. She’s the dominant creditor, so everything the trustee is doing is supposed to be in her interest.”

According to Baldiga, the clear message of the case is that creditors need to be involved in such settlement negotiations.

“The bar for approving a settlement agreement in Bankruptcy Court is pretty low, but if the debtor didn’t have an ownership interest in the insurance policy, you can’t settle what you don’t own.”

— D. Ethan Jeffery, Boston

Boston bankruptcy attorney D. Ethan Jeffery said he agreed with Bailey’s ruling.

“When you read the decision, there is a deal [between the trustee and Progressive] that could be approved, but there were too many contingencies in this one,” Jeffery said. “The bar for approving a settlement agreement in Bankruptcy Court is pretty low, but if the debtor didn’t have an ownership interest in the insurance policy, you can’t settle what you don’t own.”

According to Jeffery, an agreement between the trustee and Progressive would have to wait for the conclusion of the discharge action.

“The general proposition in bankruptcy is that you try not to approve deals that have contingencies in them,” Jeffery said. “What happens if the debtor goes to trial in the discharge action and loses? The settlement that was approved becomes a nullity.”

Boston attorney Alex F. Mattera, who represented the trustee, Donald R. Lassman, did not respond to a request for comment prior to deadline. Boston attorney Philip A. O’Connell Jr., who represented Progressive, and the debtor’s attorney, David G. Prentiss of New Bedford, Massachusetts, also did not respond to requests for comment.

Insurance dispute

According to court records, Rierson suffered catastrophic injuries in February 2011 when she crossed the road and was struck by a car driven by the debtor. Bodily injury liability coverage is not mandatory in Florida, and the Progressive policy covering the debtor did not include such coverage.

Rierson filed a personal injury action against the debtor in Florida state court. Progressive undertook defense of the case under a reservation of rights, maintaining that it had no duty to defend the debtor given the absence of bodily injury liability coverage.

A Florida jury returned a defense verdict in the personal injury case in 2018, but that verdict was overturned on appeal and a retrial scheduled for February 2020.

Meanwhile, Progressive brought a declaratory action against the debtor and Rierson in Florida state court to establish that Rierson’s injuries were not covered by the policy. The debtor filed a counterclaim in the coverage action. Progressive responded by filing a motion for sanctions seeking recovery of attorneys’ fees and costs under a Florida law compensating prevailing parties in coverage actions.

Facing the possibility of sanctions, on Aug. 20, 2015, the debtor executed a release discharging Progressive of all liability under its policy, later consenting to entry of a declaratory judgment to the effect that the Progressive policy did not provide coverage for bodily injury arising from the 2011 accident.

On Aug. 24, 2015, the debtor filed for bankruptcy. The trustee commenced an adversary proceeding in the bankruptcy case to set aside as a fraudulent conveyance the release executed by the debtor. In addition, Rierson filed adversary complaints in the bankruptcy case to deny the debtor a discharge of her claims against the debtor.

The trustee also sued Progressive in Florida state court, asserting the insurance company had acted in bad faith in declining coverage of the 2011 accident.

In October, the trustee filed a motion to approve a compromise under which the trustee agreed to sell and transfer to Progressive all rights under the debtor’s policy. Under the settlement, Progressive agreed to pay the debtor’s bankruptcy estate $825,000. The settlement was contingent on the debtor prevailing in the discharge actions brought by Rierson.

Rierson objected to the trustee’s motion for approval of the compromise, asserting that she had an unsecured claim against the debtor in the amount of $26 million.

‘Asymmetrical’ compromise

In addition to finding that the Progressive policy was not part of the bankruptcy estate, Judge Bailey found two other reasons to deny the trustee’s motion to approve the compromise with Progressive.

The agreement between the trustee and Progressive required the trustee to obtain a permanent injunction on the insurance company’s behalf against any persons asserting claims under the policy or for bad-faith denial.

The judge concluded that an injunction could not be granted given the court’s determination that the debtor’s insurance policy was not part of the bankruptcy estate subject to sale by the trustee.

“The Trustee’s motion for an injunction is predicated on the Court’s authorization of a sale free and clear of liens under [Bankruptcy Code] §363(f) — the theory is that §363(f) channels the rights of interest holders exclusively to the proceeds of sale, insulating the purchaser from liability on the sold and settled claims,” Bailey wrote. “The court having determined there is no sale here, much less one under §363(f), it follows that there can be no injunction.”

Finally, Bailey cited the contingent nature of the $825,000 payment as a basis for concluding that the agreement did not constitute a reasonable exercise of the trustee’s business judgment and discretion.

“Here, the [trustee’s] judgment on the advisability of the agreement is based wholly on the cash and releases it would bring the estate; at the same time, however, he offers no defense to the unusually asymmetrical nature of this compromise,” Bailey wrote. “I cannot find that an agreement in which the trustee effectively gives up all rights in exchange for quite possibly no benefit at all falls above the lowest point in the range of reasonableness.”