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Note: To secure its obligations to pay premiums and reimburse certain outlays related to insurance policies for workers' compensation, automobile liability, and general liability, Outboard Marine Corporation (Insured/Applicant) obtained LCs in favor of insurer, Pacific Employers Insurance Company (Insurer/Beneficiary).

When Insured filed for insolvency protection under Chapter 7 of the U.S. Bankruptcy Code (Liquidation), its trustee, Alex Moglia (Trustee), filed an adversary action against Insurers, claiming that the LCs provided Insurers with more security than that to which they were entitled and asked the bankruptcy court to order Insurers to release the LCs. Insurers moved to stay the adversary action in order to compel arbitration as provided under the insurance policies. The bankruptcy court so ordered.

Trustee, however, "decided to undermine the bankruptcy court's order by refusing to cooperate." Concerned about Trustee's behavior, the arbitrators required the parties to sign a hold-harmless agreement that required indemnifications as permitted by the applicable arbitration rules. Trustee refused to sign, claiming that such an agreement would "create an unwarranted contingent claim against the bankruptcy estate" and asked the bankruptcy court to rescind the arbitration order. The bankruptcy court rescinded the arbitration order and Insurers appealed. On appeal, the United States District Court for the Northern District of Illinois reversed the rescission, ruling that Insured had made a promise to arbitrate which Trustee must fulfill.

On appeal by Trustee, the United States Court of Appeals for the Seventh Circuit, Easterbrook, Posner, and Rovner, JJ., in an opinion by Easterbrook, J., dismissed the appeal for lack of jurisdiction. The appellate opinion classified the district court's decision as an interlocutory decision and thus "nonappealable."

The appellate opinion characterized the resistance of Trustee to the indemnity as "a sign of irrationality; no wonder the arbitrators thought that they needed extra protection." Noting the delay, the opinion stated that "Trustee must stop dragging his heels...The Trustee's intransigence has greatly increased the insurers' costs of litigation. The policies contain feeshifting clauses. The bankruptcy judge may think it prudent to consider, once the arbitration has been completed, whether any attorneys' fees awarded under these policies should be borne by the Trustee personally rather than by the Creditors of [Insured]."

[JEB/plc]

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