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Note: A settlement agreement to a personal injury lawsuit against Interstate Brands Corp. (Tortfeasor) was reached between various insurers, Lumbermens Mutual Casualty Co., Kemper Ins. Co., Platinum Equity LLC, Broadspire Services, Inc., and National Loss Control Services Corp. (Insurers) on the one hand, and Rose Wetzel and Mark Ladendorf (Victims), on the other hand, by which Insurers were to pay Victims US$1,225,000.

Although this amount was below the deductible amount, Victims contend that Insurers assumed liability and undertook to work out amounts due with Tortfeasor. The court stated that:

[Victims'] understanding is that the insurance policy between [Tortfeasor] and [Insurers] contained a deductible in the amount of [US]$ 1.5 million per accident, which would include the entirety of the settlement amount. [Victims] also contend that [Tortfeasor] procured [a LC] from an as-yet unidentified bank in favor of [one insurer] in the amount of [US]$ 1.5 million, the amount of the self-retention clause in the insurance contract.

Prior to disbursement of the funds, Insurers contacted Victims to inform them that the agreement would not be consummated because Tortfeasor had filed for protection under the US Bankruptcy Code. Insurers claimed that the settlement agreement was impacted by the applicable automatic stay under that code.

Rejecting this explanation, Victims filed this action against Insurers in the Indiana state courts for breach of contract, promissory estoppel, and fraud. They did not make any claims against Tortfeasor or its insurance policy. Insurers utilized a provision of US federal law to remove the case from the state courts to the federal courts, claiming that Victims' claims arose in the course of the bankruptcy proceedings or are related to them. Victims moved to remand the case to the Indiana courts, contending that the reasons advanced for removal are groundless. Victims contended that:

[T]he State Court Proceeding does not implicate the administration of [Tortfeasor's] bankruptcy proceeding because success by [Victims] in the State Court Proceeding will cause [Insurers] to draw on [the LC] procured by [Tortfeasor], which does not constitute property of the bankruptcy estate ... [Victims contend] that their claims involve only [Insurers] and, if [Victims] are successful, the settlement agreement will be satisfied by the [LC] drawn up by [Tortfeasor] ...

Concluding that it lacked jurisdiction over the subject matter of the suit, the US District Court for the Southern District of Indiana, Indianapolis Division, Barker, J., granted Victims' motion and remanded the case. While the court noted that the proceeds of an insurance policy are property of the bankruptcy estate, it noted that:

[Victims] distinguish their claims of the grounds that they do not involve any issues relating to the insurance entitlements of [Tortfeasor] because of [Tortfeasor's] side-agreement with [Insurers] whereby [Insurers] agreed to pay the settlement amount; since that amount was within [Tortfeasor's] deductible, [Insurers] would be the ones to seek reimbursement by [Tortfeasor]. [Victims] note that this arrangement was protected by [an LC], which typically is not part of a bankruptcy estate.

In a revealing comment, the court stated:

One would think that it would be a simple task to determine whether [Victims'] claims are directed to the proceeds of [Tortfeasor's] insurance policy or to the [LC] drawn up in their favor, as a third party beneficiary. Our efforts to resolve this dispute, however, have been impeded by [Insurers'] failure, despite possessing all the relevant knowledge and documents, to explain to us the exact nature of the relationship between [Insurers] and [Tortfeasor]. We suspect [Insurers'] obfuscations may be intentional, given the shift of the characterization of this relationship by [Insurers] in their briefings to the Court once [Victims] invoked the substantial case law establishing that [LC] are not property of the bankruptcy estate. Initially, in their Notice of Removal, [Insurers] explained the relationship between [Insurers] and [Tortfeasor] in terms remarkably consistent with [Victims'] subsequent allegations, referencing the deductible level of [Tortfeasor's] insurance policy as well as implying that side arrangements and an [LC] exist. However, in their Response Brief, [Insurers] eschew these specifics, simply repeating instead the mantra that any payout [Insurers] make under the Settlement Agreement would be funded from [Tortfeasor's] insurance policies. In fact, [Insurers] never mention the words "deductible" or "letter of credit" in their Response Brief, even in an effort to contradict the allegations made by [Victims] in their arguments to the Court. We are left with the distinct impression that [Insurers'] sudden inability to provide the details of the contractual relationship between [Insurers] and [Tortfeasor] reflects [Insurers'] counsel's tacit acknowledgement that, though insurance proceeds are considered property of the bankruptcy estate, proceeds from an [LC] are not property of the bankruptcy estate.

In addition to granting [Victims] motion to remand the case, the court exercised its discretion to order [Insurers] to reimburse [Victims] for legal costs incurred in connection with [Insurer's] motion to change venue.

[JEB/dgd]

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