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Full title: Objection Reorganized Debtors' Objection to Motion of Jennifer Maddock for Relief from the Automatic Stay Under 11 U.S.C. § 362(d) Or In the Alternative, the Plan Injunction (related document(s)935) Filed by AAC Holdings, Inc. (Attachments: # 1 Exhibit A-D) (Meloro, Dennis) (Entered: 05/12/2021)
Document posted on May 11, 2021 in the bankruptcy, 23 pages and 0 tables.
Bankrupt11 Summary (Automatically Generated)
Concorde Treatment Center, LLC (6483); New Jersey Addiction Treatment Center, LLC (7108); ABTTC, LLC (7601); Laguna Treatment Hospital, LLC (0830); AAC Las Vegas Outpatient Center, LLC (5381); Greenhouse Treatment Center, LLC (4402); AAC Dallas Outpatient Center, LLC (6827); Forterus Health Care Services, Inc. (4758); Solutions Treatment Center, LLC (8175); San Diego Addiction Treatment Center, Inc. (1719); River Oaks Treatment Center, LLC (0640); Singer Island Recovery Center LLC (3015); B&B Holdings Intl LLC (8549); The Academy Real Estate, LLC (9789); BHR Oxford Real Estate, LLC (0023); On July 27, 2020, the Debtors caused the Notice of Bar Dates for Filing Proofs of Claim Including Section 503(b)(9)In the Complaint, the Movant alleges claims related to discrimination, retaliation and wrongful termination, among other claims, against the Debtor Defendant, as well as other non-debtor parties.In addition, the Reorganized Debtors’ counsel explained that the Reorganized Debtors do not consent to the late filing of a proof of claim or to any relief that would allow the Movant to pursue the claims in the State Court Action because, pursuant to the Plan, any claims or causes of action that the Movant may have had, including those asserted in the State Court Action, have been discharged, and the Movant is permanently enjoined from commencing or continuing any action on account of such claims.The Plan Injunction permanently enjoins creditors that hold claims against the Debtors or their estates, such as the Movant, from commencing actions against the Reorganized Debtors or any of their property.
List of Tables
Document ContentsIN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: Chapter 11 AAC HOLDINGS, INC., et al.,1 Case No. 20-11648 (CTG) Reorganized Debtors. (Jointly Administered) Re: Docket No. 935 REORGANIZED DEBTORS’ OBJECTION TO MOTION OF JENNIFER MADDOCK FOR RELIEF FROM THE AUTOMATIC STAY UNDER 11 U.S.C. § 362(d) OR, IN THE ALTERNATIVE, THE PLAN INJUNCTION The above-captioned reorganized debtors (collectively, the “Debtors” or the “Reorganized Debtors”) hereby object (the “Objection”) to the Motion of Jennifer Maddock for Relief from the Automatic Stay Under 11 U.S.C. § 362(d) Or In the Alternative, the Plan Injunction [Docket No. 935] (the “Motion”) filed by Jennifer Maddock (the “Movant”) seeking relief from the automatic stay or, in the alternative, the injunction imposed by the Plan (defined below) to (i) pursue a state court action against her former employer, American Addiction 1 The Reorganized Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number, are: Recovery First of Florida, LLC (3005); Fitrx, LLC (5410); Oxford Treatment Center, LLC (7853); Oxford Outpatient Center, LLC (0237); Concorde Treatment Center, LLC (6483); New Jersey Addiction Treatment Center, LLC (7108); ABTTC, LLC (7601); Laguna Treatment Hospital, LLC (0830); AAC Las Vegas Outpatient Center, LLC (5381); Greenhouse Treatment Center, LLC (4402); AAC Dallas Outpatient Center, LLC (6827); Forterus Health Care Services, Inc. (4758); Solutions Treatment Center, LLC (8175); San Diego Addiction Treatment Center, Inc. (1719); River Oaks Treatment Center, LLC (0640); Singer Island Recovery Center LLC (3015); B&B Holdings Intl LLC (8549); The Academy Real Estate, LLC (9789); BHR Oxford Real Estate, LLC (0023); Concorde Real Estate, LLC (7890); BHR Greenhouse Real Estate, LLC (4295); BHR Ringwood Real Estate, LLC (0565); BHR Aliso Viejo Real Estate, LLC (2910); Behavioral Healthcare Realty, LLC (2055); Clinical Revenue Management Services, LLC (8103); Recovery Brands, LLC (8920); Referral Solutions Group, LLC (7817); Taj Media LLC (7047); Sober Media Group, LLC (4655); American Addiction Centers, Inc. (3320); Tower Hill Realty, Inc. (0039); Lincoln Catharine Realty Corporation (5998); AdCare Rhode Island, Inc. (2188); Green Hill Realty Corporation (4951); AdCare Hospital of Worcester, Inc. (3042); Diversified Healthcare Strategies, Inc. (3809); AdCare Criminal Justice Services, Inc. (1653); AdCare, Inc. (7005); Sagenex Diagnostics Laboratory, LLC (7900); RI - Clinical Services, LLC (6291); Addiction Labs of America, LLC (1133); AAC Healthcare Network, Inc. (0677); AAC Holdings, Inc. (6142); San Diego Professional Group, P.C. (9334). Grand Prairie Professional Group, P.A. (2102); Palm Beach Professional Group, Professional Corporation (7608); Pontchartrain Medical Group, A Professional Corporation (1271); Oxford Professional Group, P.C. (8234); and Las Vegas Professional Group - Calarco, P.C. (5901). The location of the Reorganized Debtors’ corporate headquarters is 200 Powell Place, Brentwood, TN 37027.
1Centers, Inc. (“AAC” or the “Debtor Defendant”); and (ii) compel the production of pertinent insurance policies.2 In support of this Objection, the Reorganized Debtors respectfully state as follows: PRELIMINARY STATEMENT 1. Despite having received notice of these bankruptcy proceedings and filing a proof of claim for an unrelated claim, the Movant commenced the state court action during the pendency of these cases in violation of the automatic stay and the discharge injunction. The Movant filed this Motion after the Reorganized Debtors declined the Movant’s request to stipulate to a late-filed proof of claim and the modification of the stay for the Movant to litigate the state court action to judgment or settlement and then collect from available insurance and the bankruptcy estates. While the Movant now seeks to proceed against insurance, the Reorganized Debtors would first have to satisfy the significant self-insured retention (“SIR”), including defense costs, under the applicable policy before the insurance company is obligated to pay anything to the Movant. Given the SIR, the prosecution of the state court action would not simply be an action against a third-party insurer, but rather an action that creates a personal liability of the Reorganized Debtors. 2. After confirming the Plan and receiving a discharge, the Reorganized Debtors should not be compelled to bear the financial burden of the SIR for the Movant to be able to litigate a prepetition, general unsecured claim, and circumvent the Plan process to obtain an enhanced recovery beyond that of other general unsecured creditors. To the extent that an action against a non-debtor party would trigger SIR obligations for a debtor, courts have found that allowing the action to proceed would be a violation of the discharge injunction of section 524(a), 2 Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to such terms in the Second Amended Joint Chapter 11 Plan of AAC Holdings, Inc. and its Debtor Affiliates [Docket No. 647] (together
2as well as the plan injunction. Courts have also ruled that where the debtor would have to pay a SIR before insurance proceeds would be available to a claimant, permitting the litigation to proceed in another forum would be improper. In fact, in similar cases courts have determined that claimants fail to establish their burden of cause for relief from the automatic stay or the discharge injunction because of the financial burden the litigation would impose on the debtor. 3. Here, the Movant cannot satisfy the heavy burden of establishing cause to justify relief from the Plan Injunction to pursue the state court action because the litigation would place a significant financial burden on the Reorganized Debtors. The Reorganized Debtors will suffer substantial prejudice as a result of the SIR, among other things, should the Movant’s litigation be allowed to continue. Accordingly, the prejudice to the Reorganized Debtors would outweigh any hardship to the Movant as the Movant can resolve her claims under the Plan. 4. Under the Plan, all prepetition unsecured claims are directed to the Litigation Trust and contingent and unliquidated claims – such as the Movant’s claims – will be resolved pursuant to the procedures established as part of the Plan and exclusively managed by the Litigation Trustee. The Movant’s claims should be resolved through the claims administration process like other similarly-situated creditors with prepetition litigation claims. Other litigants—some of whom have also filed motions seeking relief from the discharge injunction based on the purported availability of insurance proceeds—would be more likely to follow suit if the Motion were granted. Modifying the Plan Injunction to give the Movant preferential treatment in liquidating claims outside of the bankruptcy proceedings would encourage other creditors to file similar motions, interfere with the administration of the estates, impair the Reorganized Debtors’ ability to successfully reorganize, and deprive the Reorganized Debtors of the much-needed fresh start provided by the chapter 11 process. Given that the considerable hardship to the with all modifications, amendments and supplements, the “Plan”).
3Reorganized Debtors outweighs any harm to the Movant, the Court should deny the Motion for the Movant to pursue the state court action. JURISDICTION AND VENUE 5. The United States Bankruptcy Court for the District of Delaware (the “Court”) has jurisdiction over the Motion and this Objection pursuant to 28 U.S.C. §§ 157 and 1334 and the Amended Standing Order of Reference from the United States District Court for the District of Delaware, dated February 29, 2012. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2). Under Rule 9013-1(f) of the Local Rules of Bankruptcy Practice and Procedure of the United States Bankruptcy Court for the District of Delaware (the “Local Rules”), the Reorganized Debtors consent to entry of a final order under Article III of the United States Constitution. Venue is proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409. BACKGROUND A. The Chapter 11 Cases 6. On June 20, 2020 (the “Petition Date”), each of the Debtors filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101, et seq. (the “Bankruptcy Code”). 7. On July 2, 2020, the Debtors caused the Notice of Chapter 11 Bankruptcy Case [Docket No. 91] (the “Notice of Commencement”) to be served on the Movant as evidenced by the Affidavit of Service [Docket No. 104] filed July 6, 2020. 8. On July 27, 2020, the Debtors caused the Notice of Bar Dates for Filing Proofs of Claim Including Section 503(b)(9) Claims [Docket No. 252] (the “Bar Date Notice”), providing notice of the August 26, 2020 deadline to file proofs of claim against the Debtors on account of claims arising prior to the Petition Date (the “Bar Date”), to be served on the Movant as evidenced by the Affidavit of Service [Docket No. 369] filed on August 5, 2020.
49. On October 20, 2020, the Court entered the Order Confirming Second Amended Joint Chapter 11 Plan of AAC Holdings, Inc. and its Debtor Affiliates [Docket No. 695] (the “Confirmation Order”), which confirms the Plan. The Movant did not object to the Plan or the claims administration process established therein. 10. On December 11, 2020, the Plan became effective [Docket No. 807] (the “Effective Date”). 11. Under the Plan, the automatic stay of section 362 of the Bankruptcy Code remained in full force and effect until the Effective Date. See Plan, Art. X.C; see also Confirmation Order, ¶ 105. On the Effective Date, the stay was terminated and replaced by the discharge injunction provided by section 524 of the Bankruptcy Code and the chapter 11 plan injunction provision. See 11 U.S.C. § 524(a)(2) (“a discharge . . . operates as an injunction against . . . an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived . . . .”); Plan, Art. X.I; see also Confirmation Order, ¶ 105. Article X.I of the Plan imposes an injunction of the commencement or continuation against the Debtors of any actions related to any claims discharged, released, exculpated or settled under the Plan (the “Plan Injunction”). See Plan, Art. X.I; see also Confirmation Order, ¶ 105. Further, Article X.B of the Plan provides that, upon the Effective Date, claims against the Debtors shall be discharged and holders of such claims shall be enjoined, pursuant to section 1141 of the Bankruptcy Code, from prosecuting or asserting such discharged claims. See Plan, Art. X.B; 11 U.S.C. § 1141(d)(1) (“the confirmation of a plan discharges the debtor from any debt that arose before the date of such confirmation”); see also Confirmation Order, ¶¶ 39, 78.
512. On the Effective Date, the Litigation Trust was established for the benefit of Holders of Allowed General Unsecured Claims pursuant to the terms of the Plan and the Litigation Trust Agreement.3 See Plan, Art. VII.A. The Litigation Trust is administered by the Litigation Trustee, who holds and distributes the Litigation Trust Assets in accordance with the Plan and the Litigation Trust Agreement. Id. The Litigation Trustee has the sole authority to file and prosecute objections to general unsecured claims and to settle, compromise or otherwise resolve any disputed general unsecured claims or objections to general unsecured claims. See Plan, Art. IX.B. B. The Movant’s Claims and Failure to File A Proof of Claim for Claims Alleged in the State Court Action 13. On August 17, 2020, the Movant filed the proof of claim in the amount of $1,200.00 against “American Addiction Centers – Laguna Treatment Hospital” and designated as Claim No. 447 (the “Proof of Claim”) by the Debtors’ claims and noticing agent in these Chapter 11 Cases. A true and correct copy of the Proof of Claim is attached hereto as Exhibit “A”. The basis of the Proof of Claim is described as “stock loss” and signed by the Movant as a “former employee and stockholder”. Proof of Claim, p. 2. 14. On December 1, 2020, after the Petition Date and the date of entry of the Confirmation Order, the Movant filed the Complaint for Damages (the “Complaint”) commencing the case styled Jennifer Maddock v. American Addiction Centers, Inc., Case No. 30-2020-01172422-CU-WT-CJC, and pending in the Superior Court for the State of California, Orange County (the “State Court Action”). In the Complaint, the Movant alleges claims related to discrimination, retaliation and wrongful termination, among other claims, against the Debtor Defendant, as well as other non-debtor parties. 3 The Litigation Trust Agreement is attached as Exhibit J to the Second Amended Plan Supplement to the Second
615. The Movant did not file a proof of claim against the Debtor Defendant with respect to the claims alleged in the State Court Action. 16. On December 8, 2020, the Reorganized Debtors’ counsel sent a letter to Movant’s counsel providing notice of the automatic stay of section 362 of the Bankruptcy Code (the “December 8th Letter”). A true and copy of the December 8th Letter is attached hereto as Exhibit “B”. The December 8th Letter requested that the Movant cease pursuing any legal proceedings and advised that, under established case law, actions taken in violation of the automatic stay are void ab initio, and parties may be held in contempt for violating the automatic stay. December 8th Letter, p. 2. 17. On January 5, 2021, the Reorganized Debtors’ counsel received a letter from Movant’s counsel in response to the December 8th Letter (the “January 5th Letter”). A true and copy of the January 5th Letter is attached hereto as Exhibit “C”. In the January 5th Letter, Movant’s counsel requested that the “Debtors stipulate to reopen the bankruptcy case so that we may file a proof of claim on Ms. Maddock’s behalf. Additionally, we ask that Debtors stipulate to modify the automatic stay for the limited purpose of allowing Ms. Maddock to litigate her employment related claims in California State Court to judgment or settlement and collect from available insurance and then have an unsecured claim against the bankruptcy estate.” January 5th Letter, p. 2. 18. On January 11, 2021, the Reorganized Debtors’ counsel sent a letter responding to the January 5th Letter (the “January 11th Letter”). A true and copy of the January 11th Letter is attached hereto as Exhibit “D”. In the January 11th Letter, the Reorganized Debtors’ counsel confirmed that the Movant was served with the Notice of Commencement and the Bar Date Notice, as evident by the related affidavits of service. January 11th Letter, p. 2. The Amended Joint Chapter 11 Plan of AAC Holdings, Inc. and its Affiliated Debtors. See Docket No. 667.
7Reorganized Debtors’ counsel also provided a copy of the Proof of Claim filed by the Movant as further corroboration that the Movant had due and adequate notice of the Chapter 11 Cases and the Bar Date. Id. In addition, the Reorganized Debtors’ counsel explained that the Reorganized Debtors do not consent to the late filing of a proof of claim or to any relief that would allow the Movant to pursue the claims in the State Court Action because, pursuant to the Plan, any claims or causes of action that the Movant may have had, including those asserted in the State Court Action, have been discharged, and the Movant is permanently enjoined from commencing or continuing any action on account of such claims. Id. Finally, the Reorganized Debtors’ counsel reiterated the request that the Movant cease the pursuit of any claims or legal proceedings related to the State Court Action in violation of the Plan Injunction. Id. 19. On April 2, 2021, the Movant filed the Motion seeking relief from the automatic stay, or, in the alternative, the Plan Injunction to: (i) pursue the State Court Action against the Debtor Defendant; and (ii) compel the production of insurance policies. See Motion, at 1-2. 20. The applicable insurance policy that could potentially provide coverage (if any) for the Movant’s claims is the Employment Practices Liability Insurance Policy, Policy Number MKLM2MML000420 (the “Insurance Policy”) issued by Markel American Insurance Company (“Markel”) on or about June 10, 2020. The Insurance Policy includes the SIR in the amount of $350,000 and provides that “[t]he Insurer’s liability with respect to Loss for each specific type of Claim shall apply only to that part of Loss which is excess of the applicable Retention stated in the Coverage Schedule in Item 5. of the Declarations, and such Retention shall be borne by the Insured uninsured and at the Insured’s own risk.” Insurance Policy, General Terms and Conditions, Section III.B.1 (Retention) (emphasis added). The Insurance Policy defines “Loss” as the “the total amount the Insureds become legally obligated to pay on account of covered
8Claims made against them, including, but not limited to . . . Claim Expenses. . . .” Insurance Policy, Employment Practices and Third Party Discrimination Liability Coverage Part, Section III.E (Loss) (emphasis added). The term “Claim Expenses” includes reasonable and necessary fees, costs and expenses incurred in defense of any claim by Markel under the Insurance Policy.4 Insurance Policy, General Terms and Conditions, Section II.C (Claim Expenses). Therefore, the Insurance Policy requires the Reorganized Debtors to exhaust the SIR, including the payment of defense costs, for Markel to be liable for any loss. 21. The Reorganized Debtors expressly assumed the Insurance Policy as of the Effective Date of the Plan. Plan, Article V.D.5 Accordingly, the SIR under the Insurance Policy is a current obligation of the Reorganized Debtors. 4 The relevant provision provides: Claim Expenses means reasonable and necessary fees, costs and expenses incurred by: 1. The Insurer, if duty to defend coverage has been purchased for the applicable Coverage Part; 2. The Insureds, if duty to defend coverage has not been purchased for the applicable Coverage Part; In the defense or appeal of that portion of any Claim for which coverage is afforded under this policy, including without limitation court costs, costs of bonds to release attachments and similar bonds, but without any obligation of the Insurer to apply for or furnish any such bonds; provided, however, that Claim Expenses shall not include salary, wages, overhead, benefit expenses or charges of any kind associated with Insured Persons or the Insurer. Insurance Policy, General Terms and Conditions, Section II.C (Claim Expenses). The Reorganized Debtors purchased duty to defend coverage, and, therefore, Markel has the duty to defend covered claims. See Insurance Policy, For Profit Management Liability Policy Declarations. Claim Expenses reduce the applicable Retention under the Insurance Policy. Id. 5 Article V.D. of the Plan provides in pertinent part: All of the Debtors’ insurance policies and any agreements, documents, or instruments relating thereto, are treated as and deemed to be Executory Contracts under the Plan. On the Effective Date, the Reorganized Debtors shall be deemed to have assumed all insurance policies and any agreements, documents, and instruments related thereto. Plan, Art. V.D.
9OBJECTION I. The Movant Has Not Established Cause for Relief to Modify the Plan Injunction. A. The Plan Injunction Applies to the Movant’s Claims Asserted in the State Court Action. 22. The Movant’s request for relief from the automatic stay is moot. The automatic stay was in effect pursuant to section 362 of the Bankruptcy Code when it was violated by the Movant filing the Complaint. However, on the Effective Date, the stay was terminated and replaced by the Plan Injunction pursuant to section 524 of the Bankruptcy Code and Article X.I of the Plan. See 11 U.S.C. § 524(a)(2); Plan, Art. X.I. See also 11 U.S.C. § 362(c)(2)(C) (the stay in the chapter 11 case continues until “the time a discharge is granted or denied”). The Plan Injunction permanently enjoins creditors that hold claims against the Debtors or their estates, such as the Movant, from commencing actions against the Reorganized Debtors or any of their property. See Plan, Art. X.B, X.I. See also 11 U.S.C. §§ 524(a)(2), 1141(d)(1). Accordingly, the Movant’s prosecution of the State Court Action against the Defendant Debtor after the Effective Date is barred by the Plan Injunction. 23. Further, the Plan and the Confirmation Order discharged all claims arising on or before the Effective Date, including the Movant’s claims. The Confirmation Order specifically approves the Plan’s releases, provides a discharge and issues the injunctions enforcing the discharge and releases granted pursuant to the Plan. As recognized by the Third Circuit, “[t]he discharge injunction and the confirmation order are ‘critical elements’ of a debtor’s fresh start.” In re Cont’l Airlines, Inc., 236 B.R. 318, 330 (Bankr. D. Del. 1999), aff’d, 279 F.3d 226 (3d Cir. 2002) (citing Miller v. Mayer (In re Miller), 81 B.R. 669, 672 (Bankr. M.D. Fla. 1998)). “It is essential that creditors respect these court orders and permit debtors to benefit from the rights and protections to which they are entitled.” Id. See also Wci Cmtys., Inc. v. Espinal (In re Wci
10Cmtys., Inc.), Nos. 08-11643 (KJC), 09-52250 (KJC), 2012 Bankr. LEXIS 2511, at *28-29 (Bankr. D. Del. June 1, 2012) (“It is essential that an order regarding the complex give-and-take of bankruptcy negotiations be enforced, and that the debtors and third-parties enjoy the rights and protections ordered by the Court.”). 24. The Plan’s discharge provisions and injunctions conform to section 1141 of the Bankruptcy Code, which provides that the confirmation of a plan of reorganization discharges a debtor from any debt that arose prior to the date of confirmation. 11 U.S.C. § 1141(d)(1)(A); see also United States v. Cont’l Airlines (In re Cont’l Airlines), 134 F.3d 536 (3d Cir. 1998). Such claims are discharged whether or not a proof of claim was filed, the claim was allowed under section 502 or the holder of the claim accepted the plan under section 1126. 11 U.S.C. § 1141(d)(1)(A)(i-iii). Furthermore, section 524(a) of the Bankruptcy Code provides that “a discharge in a case under this title . . . voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section . . . 1141 . . . of this title.” 11 U.S.C. § 524(a). Subsections 524(a)(2) and (a)(3) provide that the discharge operates as an injunction preventing the commencement or continuation of actions or other efforts to seek to collect upon discharged claims. See United States v. Conston, Inc. (In re Conston, Inc.), 181 B.R. 769, 772 (D. Del. 1995) (“The section 524(a) discharge injunction operates into perpetuity to ensure the post-confirmation debtor receives the fresh start envisioned by section 1141(d)(1).”). Here, the Movant’s claims for relief in the Complaint unquestionably constitute dischargeable claims and the pursuit of the State Court Action is a violation of the Plan Injunction, as well as the Confirmation Order. As a result, the Movant seeks relief from the Plan Injunction to proceed with the litigation.
1125. Courts have held that where the debtor will bear the costs of litigation, the case should not be allowed to proceed against a debtor’s insurer. Houston v. Edgeworth (In the Matter of Edgworth), 993 F.2d 51, 54 (5th Cir. 1993) (allowing suit only “as long as the costs of the defense are borne by the insurer”); In re Jet Fla. Sys., Inc., 883 F.2d 970, 976 (11th Cir. 1989) (“to allow suits of this nature to go forward could possibly have the effect of draining funds that would more properly be used in the revitalization of the reorganized corporation”); In re Columbia Gas Transmission Corp., 219 B.R. at 716 (prohibiting plaintiff from proceeding with suit against debtor to recover from insurer where debtor was primarily liable for defense costs). “[A]s long as the costs of defense are borne by the insurer and there is no execution on judgment against the debtor personally, section 524(a) will not bar a suit against the discharged debtor as the nominal defendant.” In re Edgeworth, 993 F.2d at 54 (“[The Debtor] has not asserted that he will be required to pay the costs of his defense against appellants’ suit . . . . Such threats to [the Debtor’s] pocketbook might require a different result under § 524.”). 26. This Court has acknowledged that section 524(a) will bar a suit against the discharged debtor where the debtor is responsible for insurance deductibles and SIRs triggered by the litigation. In re E. W. Resort Dev. V, LP, No. 10-10452 (BLS), 2014 Bankr. LEXIS 3930, at *29-30 (Bankr. D. Del. Sep. 12, 2014) (Shannon, J.). In In re East West Resort Development V, LP, the Court observed that the discharge of a debt in bankruptcy does not extinguish the debt itself but merely releases the debtor from personal liability. Id. at *29 (citing 11 U.S.C. § 524(e)). However, to the extent that an action against a non-debtor party would trigger deductible or SIR obligations for the debtor, the Court found it would be a violation of the plan injunction. Id. Granting the debtor’s motion to enforce the plan injunction, the Court held that “[the claimant] may pursue its lawsuit against [the non-debtor party] so long as either [the
12claimant] pays the deductible or self-insured retention and administrative costs attributed to the Debtors . . . or [the insurer] agrees to waive any such deductible or self-insured retention.” Id. at *29-30. Similarly, allowing the State Court Action to proceed for the Movant to recover against Markel would create a “personal liability of the debtor” because the Reorganized Debtor would have to pay the SIR triggered by the litigation. Such a suit would infringe upon the discharge injunction of section 524(a), as well as the Plan Injunction. B. A Party Seeking Relief from the Plan Injunction Must Demonstrate “Cause”. 27. In determining whether there is “cause” to modify a plan injunction, courts have applied the “cause” standard used in assessing the merits of a motion for stay relief under section 362 of the Bankruptcy Code. In re SquareTwo Fin. Servs. Corp., No. 17-10659 (JLG), 2017 Bankr. LEXIS 2570, at *10-11 (Bankr. S.D.N.Y. Sep. 11, 2017); In re WorldCom, Inc., No. 02-13533-ALG, 2007 WL 841948, at *5 (Bankr. S.D.N.Y. Mar. 12, 2007). See also In re Fucilo, No. 00-36261-CGM, 2002 Bankr. LEXIS 475, at *9 (Bankr. S.D.N.Y. Jan. 24, 2002) (holding that “[d]etermining whether relief from the permanent injunction is warranted under appropriate circumstances should be analyzed pursuant to a cause standard”). Here, cause does not exist to modify the Plan Injunction and allow the Movant to litigate the State Court Action. 28. As the Bankruptcy Code does not define “cause”, the term is determined on a case-by-case basis. See In re DBSI, Inc., 407 B.R. 159, 166 (Bankr. D. Del. 2009). The movant bears the burden of demonstrating that cause exists to warrant relief. Id. In the Third Circuit, courts apply a three-part balancing test to evaluate whether cause exists in a specific case: (1) whether any great prejudice to either the bankrupt estate or the debtor will result from continuation of the civil suit; (2) whether the hardship to the non-bankrupt party by maintenance of the stay considerably outweighs the hardship to the debtor; and (3) the probability of the creditor prevailing on the merits.
13Id. (quoting In re SCO Grp., Inc., 395 B.R. 852, 857 (Bankr. D. Del. 2007)). Courts also consider whether lifting the stay will impede the orderly administration of the debtor’s estate. Id. “Even slight interference with the administration [of the estate] may be enough to preclude relief in the absence of a commensurate benefit.” In re W.R. Grace & Co., Case No. 01-01139 (JKF), 2007 Bankr. LEXIS 1214, at *9 n.7 (Bankr. D. Del. Apr. 13, 2007). Applying the three prongs of the hardship balancing test demonstrates that the prejudice to the Reorganized Debtors considerably outweighs any hardship to the Movant. As the Movant has failed to demonstrate “cause” to modify the Plan Injunction, the Court must deny the Motion to modify the Plan Injunction to pursue the State Court Action. C. The Movant Fails to Satisfy the Three-Part Test. (i) Modifying the Discharge Injunction will Prejudice the Reorganized Debtors. 29. Modifying the Plan Injunction to allow the Movant to file the State Court Action will substantially prejudice the Reorganized Debtors given the significant expense of the SIR. Although the Movant seeks to recover proceeds from the Debtors’ insurance policies, the insurer has no obligation to even bear the cost of defending the case until the SIR is met; most likely the Reorganized Debtors would have to pay the cost of defending the action unless and until defense costs exceed the SIR. Cases dealing with SIRs in the bankruptcy context generally have acknowledged that the insurer above the SIR is an excess insurer and recognize the financial burden an SIR places on a debtor even when a claim is for insurance proceeds. See Schneider Nat. Transp. v. Ford Motor Co., 280 F.3d 532, 534 (5th Cir. 2002) (recognizing differences between the insured’s SIR, primary insurance, and excess insurance); In re iHeartMedia, Inc., 2019 Bankr. Lexis 1617, *14 Case No. 18-31274 (Bankr. S.D. Tex. May 28, 2019) (“Any claim necessarily invokes the Insurer’s right to reimbursement from [the debtor insured], whether that payment is required prior to claim payment under an SIR, or as reimbursement under a
14deductible is irrelevant.”); In re Amatex Corp., 107 B.R. 856, 872 (E.D. Pa. 1989) (“[I]t is clear . . . that [an insurer] is liable only for those amounts in excess of the self-insured retention. The self-insured retention is therefore not an amount owed by the Debtor to [the insurer] but, rather, represents the threshold of [the insurer’s] liability to the Debtor.”). 30. Applied here, Markel would have no obligation to fund any amounts to defend the Movant’s lawsuit until the SIR is exhausted. Markel will not be obligated to pay for either the costs of defense or liability costs within the range of the SIR. See, e.g., In re iHeartMedia, Inc. at *14 (“Any claim necessarily invokes the Insurer’s right to reimbursement from [the debtor insured], whether that payment is required prior to claim payment under an SIR, or as reimbursement under a deductible is irrelevant.”); Pak-Mor Mfg. Co. v. Royal Surplus Lines Ins. Co., No. SA-05-CA-135-RF, 2005 U.S. Dist. LEXIS 34683, at *9-27 (W.D. Tex. Nov. 3, 2005) (court held that an insurer had no obligation to defend or indemnify unless and until the debtor-insured first satisfied the applicable self-insured retention by actual payment); T.Y. Lin Int’l v. Hyundai Marine & Fire Ins. Co., No. C-97-1693 MHP, 1997 U.S. Dist. LEXIS 24208, at *7 (N.D. Cal. Oct. 27, 1997) (determining that the self-insured retention has to be exhausted before the duty to defend or liability is triggered); In the Matter of Federal Press Co., Inc., 104 B.R. 56, 60 (Bankr. N.D. Ind. 1989) (insurer has no duty to pay damages falling within the self-insured retention). 31. By allowing the Movant to litigate the State Court Action, the SIR would require up to $350,000 to be spent defending general unsecured claims, which is uncertain to result in the recovery of any insurance proceeds. In analogous circumstances, several courts have held that permitting litigation to proceed in another forum is improper. See, e.g., In re iHeartMedia, Inc., No. 18-31274, 2019 Bankr. Lexis 1617, *14 (Bankr. S.D. Tex. May 28, 2019) (denying
15motion to lift automatic stay where debtor would have to pay a deductible before insurance proceeds would be available because stay relief would implicate debtor’s finances); Pak-Mor Mfg. Co. v. Royal Surplus Lines Ins. Co., No. SA-05-CA-135-RF, 2005 U.S. Dist. LEXIS 34683, at *5-6 (W.D. Tex. Nov. 3, 2005) (granting summary judgment dismissing declaratory judgment action where insured had not met the self-insured retention because “under the policy [the insurer] need not pay anything under its policy unless [the insured] first satisfies the self-insured retention”); In re Columbia Gas Transmission Corp., 219 B.R. 716, 721 (S.D.W.V. 1998) (relief from discharge injunction should not be granted where debtor is responsible for costs of defending lawsuit); DePippo v. KMart Corp., 335 B.R. 290, 298 (S.D.N.Y. 2005) (court declined to allow claim to proceed against debtor due to self-insured retention). 32. In a case factually similar to the instant case, the Bankruptcy Court for the Southern District of Texas held that because the deductible implicated the debtor’s finances, the claimant failed to establish its burden of cause for relief from the automatic stay. In re iHeartMedia, Inc., No. 18-31274, 2019 Bankr. LEXIS 1617 (Bankr. S.D. Tex. May 28, 2019). The Court proceeded to analyze whether adequate cause existed to lift the stay, noting that the claimant’s attempt to collect on the debtor’s insurance policy was barred under the automatic stay and discharge injunction. Id. at 13. To determine whether stay relief is warranted, the Court opined that “the controlling question is whether the litigation would place the financial burden solely on the insurer or implicate the debtor.” Id. at 15-16 (internal citations omitted). Since the debtor’s insurance policy imposed a $3,000,000 deductible, the court found that the claimant’s third-party suit against the insurer would “directly involve debtor property under the deductible,” which would impose financial burdens on the debtor, as opposed to just nominally implicating the debtor. Id. at 13-14. In this case, permitting the Movant to prosecute the State Court Action
16would impose financial burdens on the Reorganized Debtors by forcing them to spend real dollars satisfying the SIR, including the costs for defending against the Movant’s claims. Despite having only potential unsecured claims, the Movant seeks to have the Reorganized Debtors incur significant costs that would not result in a monetary recovery from Markel unless the Movant succeeds in her suit and is awarded substantial damages. 33. Since before the Petition Date, the Debtors and their advisors have worked tirelessly to reorganize, including formulating the Plan to address all claims in an orderly manner. Despite filing the Proof of Claim and receiving notices in these Chapter 11 Cases, the Movant did not object to the Plan and yet now argues that her claims should not be subject to the Plan and the claims reconciliation process similar to other prepetition litigation claims. Employing the procedures articulated in the Plan, presented to and approved by the Court and on notice to creditors, to liquidate claims such as those of the Movant will be fairer to the creditor body as a whole and more cost-effective for the estates and the Litigation Trust than resolving claims piecemeal. In light of the Litigation Trustee’s imminent implementation of the tailored procedures under the Plan for dealing with the Movant’s claims, the Movant should be subject to the claims administration process and her recovery should be limited to the Litigation Trust. Otherwise, allowing the State Court Action to proceed at this time would result in a needless waste of resources. 34. Granting relief from the Plan Injunction would also force the Reorganized Debtors into prolonged litigation of prepetition claims and encourage other claimants to file similar motions, which will impose undue financial hardship on the Reorganized Debtors given the SIRs, distract the Reorganized Debtors from their reorganization efforts and hamper the Litigation Trustee’s administration of the Litigation Trust. See, e.g., In re DBSI, 407 B.R. at 167
17(recognizing that lifting the stay to permit litigation to continue “may encourage a race to the courthouse by parties seeking similar orders, which will cause undue hardship and expense to the estate”). See also In re Bally Total Fitness of Greater N.Y., Inc., 402 B.R. 616, 623 (Bankr. S.D.N.Y. 2009) (denying stay relief where “granting relief could open the floodgates to a multitude of similar motions causing further interference with the bankruptcy case”); In re Northwest Airlines Corp., No. 05-17930 (ALG), 2006 Bankr. LEXIS 477, at *6 (Bankr. S.D.N.Y. Mar. 13, 2006) (noting that relief from the automatic stay may result in similar motions for relief where the debtor was party to numerous lawsuits). The Reorganized Debtors would certainly bear a significant financial burden if they were required to liquidate each claim filed in these Chapter 11 Cases in a piecemeal fashion in various forums across the country. Based on the foregoing, the Reorganized Debtors submit that granting the requested relief would result in substantial, and thoroughly unnecessary, prejudice to the Reorganized Debtors, as well as the estates and the Litigation Trust. Accordingly, this factor weighs against modifying the Discharge Injunction. (ii) The Movant Cannot Show the Balance of Harms Tips Significantly in her Favor. 35. While modifying the Plan Injunction to allow the Movant’s litigation to proceed will substantially prejudice the Reorganized Debtors, the Movant has not articulated the requisite harm necessary to grant the Motion. Absent sufficient harm, the Movant cannot overcome the “heavy and possibly insurmountable burden of proving that the balance of hardships tips significantly in favor of granting relief.” In re W.R. Grace & Co., No. 01-01139 (JFK), 2007 Bankr. LEXIS 1214, at *11 (Bankr. D. Del. April 13, 2007) (internal quotation omitted) (emphasis added); see also In re Irish Bank Resolution Corp. Ltd., No. BR 13-12159-CSS, 2019 U.S. Dist. LEXIS 166153, at *21 (D. Del. Sept. 27, 2019) (“[T]o establish cause, the party
18seeking relief from the stay must show that [the] balance of hardships from not obtaining relief tips significantly in [its] favor.” (citation omitted)); In re RNI Wind Down Corp., 348 B.R. 286, 299 (Bankr. D. Del 2006) (“‘A party seeking relief from the stay must show that the balance of hardships from not obtaining relief tips significantly in [its] favor.’” (citations omitted)). 36. The Movant has not provided evidence demonstrating any harm or identifying any pressing need that should lead this Court to treat her differently from other litigants enjoined from pursuing their claims by the Plan Injunction.6 The Movant claims that the prejudice in forcing her to pursue her claim in Delaware is “manifest.” Motion, at ¶ 30. Though it may be inconvenient, the Movant’s claims against the Debtors, like those of other similarly-situated creditors, are subject to the claims reconciliation process managed by the Litigation Trustee. See In re Residential Capital, No. 12-12020 (MG), 2012 Bankr. LEXIS 3624, at *14 (Bankr. S.D.N.Y. Aug. 7, 2012) (noting that the creditor would merely have a general unsecured claim against the estate to be paid in accordance with a plan if the state court rendered a judgment against the debtor, which weighed against lifting the stay). There is ultimately no significant prejudice or hardship in the liquidation of the Movant’s claims in these Chapter 11 Cases as a result of the Plan Injunction. Rather, it is a necessary and critical component of the Bankruptcy Code and the reorganization process. Moreover, it would be more prejudicial for the 6 As a number of courts in the Third Circuit have explained, unsecured creditors are entitled to relief from the automatic stay only in “extraordinary circumstances.” In re Brown, 311 B.R. 409, 413 (E.D. Pa. 2004); see also O’Neal Steel, Inc. v. Chatkin (In re Chatkin), 465 B.R. 54, 59 (Bankr. W.D. Pa. 2012) (“[M]otions [for relief from stay] usually involve a secured creditor that is seeking to foreclose on, or repossess, collateral.”). Lifting the stay in favor of one unsecured creditor would give that creditor an advantage over other unsecured creditors who dutifully resolve their claims through the claims administration process. See In re Ashland Partners III, 99 B 21777, Chapter 11, 2000 Bankr. LEXIS 262, at * 8 (Bankr. N.D. Ill. Jan. 20, 2000) (“An unsecured creditor has to show why it is more entitled to relief from the stay than other unsecured creditors.”). The stay, or the discharge injunction, should not be modified to simply because an unsecured creditor requests it. See Shepard v. Patel (In re Patel), 291 B.R. 169, 174 (Bankr. D. Ariz. 2003) (“[N]o creditor should be given the opportunity to liquidate his claim on his schedule in his chosen forum, while other creditors are denied that strategic advantage.”). In fact, to do so would harm all the other unsecured creditors. Id. at 174-75 (“Indeed, it would be particularly inappropriate to grant such preferential leverage to one creditor simply because he got closer to judgment before bankruptcy intervened,
19Reorganized Debtors to be forced to liquidate claims in piecemeal fashion in various jurisdictions outside the channeling function provided by the bankruptcy process. The Reorganized Debtors are seeking this Court’s recognition that the claims are better dealt with by the Litigation Trustee properly evaluating the claims and applying the collective, fair and streamlined claims reconciliation procedures. 37. In sum, the Movant cannot demonstrate that she will be substantially harmed by the continued imposition of the Plan Injunction. Moreover, subjecting the Movant to the claims reconciliation process will undoubtedly impose far less harm on the Movant than the harm the Reorganized Debtors and other creditors will experience if the Movant is given preferential treatment in the form of modifying the Plan Injunction to permit the Movant to pursue the State Court Action. Therefore, this second factor militates against the requested relief. (iii) The Movant Has Not Demonstrated a Probability of Prevailing on the Merits. 38. The Movant has failed to establish the last factor that she is likely to succeed on the merits in the State Court Action, and there is no indication that the Movant’s claims have any likelihood of succeeding. The Movant has the burden of establishing the likelihood of success on the merits, but has made no such showing in the Motion. She simply makes a self-serving, conclusory statement that “there is substantial evidence that the [Debtor Defendant] engaged in” conduct giving rise to the alleged claims. Motion, at ¶ 32. This statement is not supported by sufficient proof or objective evidence and fails to establish the likelihood of success on the merits. Thus, this third factor weighs against modifying the Plan Injunction. 39. Upon considering the three-part balancing test to determine whether cause exists to modify the Plan Injunction to allow the Movant to pursue the State Court Action, it is clear because such a policy would encourage a rush to the courthouse that has always been recognized as contrary to sound bankruptcy policy.”).
20that the Movant fails to meet the heavy burden to establish cause under any of these factors, and the Court should refuse to grant the requested relief. II. The Movant Cannot Proceed with the State Court Action Because She Failed to File a Proof of Claim for the Alleged Claims. 40. In addition to failing the three-factor hardship balancing test, the Movant is barred from pursing her claims because she failed to file a proof of claim for the claims asserted in the State Court Action. Paragraph 78 of the Confirmation Order reflects the discharge provided to a reorganizing debtor under section 1141(d) of the Bankruptcy Code. Section 1141(d) of the Bankruptcy Code provides that the confirmation of a plan “discharges the debtor from any debt that arose before the date of such confirmation” whether or not a proof of claim based on that debt is filed, and regardless of whether the holder of such claim has accepted the plan. 11 U.S.C. § 1141. Further, section 524(a)(2) of the Bankruptcy Code provides that a discharge “operates as an injunction against the commencement or continuation of an action . . . to collect, recover or offset any such debt as a personal liability of the debtor . . . .” 11 U.S.C. § 524(a)(2). 41. The Movant did not file a proof of claim for the claims asserted in the State Court Action despite having due and adequate notice of the Chapter 11 Cases and the Bar Date as evidenced by the relevant affidavits of service. See, e.g., In re Brooklyn Hosp. Ctr. & Caledonian Health Ctr., Inc., 513 B.R. 810, 820 (Bankr. E.D.N.Y. 2014) (“[N]otice to a known creditor is sufficient if provided to the address shown in the debtor’s books and records.” (citing Chemetron Corp. v. Jones, 72 F.3d 341, 247 (3d Cir. 1995)). Further, it is clear that the Movant received notice of the Chapter 11 Cases and the Bar Date because she filed the Proof of Claim. See Exhibit “A”. 42. The Movant failed to timely file a proof of claim for the claims asserted in the State Court Action and, as a result, is not entitled to share in distributions from the estates to the
21extent she seeks such relief. Fed. R. Bankr. P. 3003(c)(2); In re Acevedo, 441 B.R. 428, 435 (Bankr. S.D.N.Y. 2010). She was required to file a proof of claim in order to preserve her claims. In re Altegrity, Inc., 562 B.R. 253, 258 (Bankr. D. Del. 2016). As she failed to do so, there is no reason to liquidate any monetary damages against the Reorganized Debtors. Therefore, the Movant should be denied relief from the Plan Injunction to pursue the State Court Action because she has not filed a proof of claim for the claims alleged in the State Court Action. III. The Reorganized Debtors have Provided the Insurance Policy Despite the Movant’s Procedurally Deficient Request. 43. The Reorganized Debtors provided the Insurance Policy to the Movant prior to the filing of this Objection. In the Motion, the Movant requests that the Reorganized Debtors produce any insurance policies applicable to the Movant’s claims under Rule 2004 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”). The request is procedurally deficient as the Movant failed to comply with Local Rule 2004-1. See Del. Bank. L.R. 2004-1. The Movant did not confer with Reorganized Debtors’ counsel prior to filing the Motion requesting the production of documents under Bankruptcy Rule 2004. Del. Bank. L.R. 2004-1(a). If Movant’s counsel had discussed this matter with Reorganized Debtors’ counsel prior to filing the Motion, the Insurance Policy would have been provided. Notwithstanding the foregoing, and as this request would alternatively fall within contested matter discovery, the Reorganized Debtors have provided the Insurance Policy rendering the Movant’s request moot. [Remainder of Page Intentionally Left Blank]
22RESERVATION OF RIGHTS 44. The Reorganized Debtors expressly reserve the right to amend, modify, or supplement this Objection, and to raise further and other objections prior to or at the hearing. CONCLUSION WHEREFORE the Reorganized Debtors respectfully request that this Court enter an order denying the Motion. Dated: May 12, 2021 Respectfully submitted, Wilmington, Delaware GREENBERG TRAURIG, LLP /s/ Dennis A. Meloro Dennis A. Meloro (DE Bar No. 4435) The Nemours Building 1007 North Orange Street, Suite 1200 Wilmington, Delaware 19801 Telephone: (302) 661-7000 Facsimile: (302) 661-7360 Email: firstname.lastname@example.org - and - David B. Kurzweil (admitted pro hac vice) Alison Elko Franklin (admitted pro hac vice) Terminus 200 3333 Piedmont Road, NE, Suite 2500 Atlanta, Georgia 30305 Telephone: (678) 553-2100 Facsimile: (678) 553-2212 Email: email@example.com firstname.lastname@example.org Counsel for the Reorganized Debtors