A tragic bus accident in Texas killed nine passengers and injured more than 40 others.  OGA Charters, L.L.C. (“OGA”), the owner and operator of the bus, had limited resources.  A number of claims for personal-injury, wrongful-death, and survival claims arose against OGA.  OGA owned an insurance policy with New York Marine & General Insurance Company (“NYM”) that provided $5 million in liability coverage for “covered autos” as well as collision and comprehensive coverage.  A small group of victims and their representatives quickly entered into settlements with NYM.  If those settlements had been finalized, the coverage would have been exhausted.

But less than two months after the accident, the victims without settlements filed an involuntary bankruptcy petition against OGA, and commenced an adversary proceeding against OGA and NYM.  The settling claimants intervened, and the bankruptcy court preliminarily enjoined NYM from paying out any policy proceeds.

After the appointment of a Chapter 7 trustee, the parties filed cross-motions for summary judgment to determine whether the proceeds of the insurance policy were property of the bankruptcy estate under 11 U.S.C. § 541(a).[1]  The bankruptcy court ruled in favor of the Chapter 7 trustee and the victims without settlements, holding that the policy proceeds were estate property.  The settling victims sought direct appeal to the Fifth Circuit Court of Appeals.

The Fifth Circuit had previously held that the proceeds of insurance policies, as opposed to the policies themselves, were not property of the estate.  In Louisiana World Exposition, Inc., 832 F.2d 1301 (5th Cir. 1987), where the directors and officers of debtor were the only named insureds, and the policy did not cover the liability exposure of the corporation, the insurance proceeds were not property of the estate.  And in Houston v. Edgeworth, 993 F.2d 51 (5th Cir. 1993), the proceeds of the debtor’s malpractice policy were not property of the estate, because the debtor could never have a right to receive and keep policy proceeds.  So, the malpractice policy was property of the estate but the proceeds of the policy were not.  Edgeworth included a caveat indicating that the result might be different if there were “secondary impacts” such as if the policy limit was insufficient to cover appellants’ claims or competing claims to proceeds.

In Martinez v. OGA Charters, L.L.C. (In re Charters, L.L.C.), 901 F.3d 599 (5th Cir. 2018), the Fifth Circuit found that there were “secondary impacts” as contemplated by Edgeworth, and as discussed in MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89, 92 (2d Cir. 1988).  Accident claims in the OGA bankruptcy exceeded $400 million, dwarfing the $5 million in NYM policy limits, “giving rise to an equitable interest of the debtor in having the proceeds applied to satisfy as much of those claims as possible[.]” and in the limited circumstances, the proceeds were properly classified as property of the estate under 11 U.S.C. § 541.  In re Charters, L.L.C., at 604.

Where tort claims exceed policy limits, the policy proceeds may be property of the estate, and quick action by the tort claimants, including the possible filing of an involuntary bankruptcy petition against the tortfeasor, may be appropriate.

[1] Subject to certain exceptions, the commencement of a bankruptcy estate creates an estate including “all legal or equitable interests of the debtor in property as of the commencement of the case.”