Tuesday, December 31, 2019

US Bankruptcy Court denies approval of settlement transferring claimant's rights against debtor's insurer to debtor; also, Florida insurance law is insane

On February 2011, David DeVeau was in a car accident in Florida in which Ashly Rierson suffered devastating injuries.  DeVeau was insured by Progressive Select Insurance Company, apparently under a Florida policy that did not include bodily injury coverage.  Rierson sued DeVeau in Florida.  Progressive defended the lawsuit under a reservation of rights.  A jury found in DeVeau's favor in 2018, but that verdict was vacated on appeal.  The case is scheduled for retrial in 2020.

Meanwhile, in 2011 Progressive had filed a declaratory judgment action in Florida seeking a declaration that it had no duty to defend or indemnify DeVeau. DeVeau asserted in that action that he had bodily injury coverage under the policy.  Progressive filed a motion under a Florida statute that permits an insurer that prevails in a coverage action to recover attorneys' fees and costs in equal amounts from the losing party and the losing party's attorney.

Let that sink in.  

In 2015, DeVeau and Progressive executed a stipulation and mutual release under which DeVeau released and discharged Progressive of all liability arising under the policy it issued to DeVeau, the declaratory judgment action, and the duty to defend DeVeau in the personal injury claim.  DeVeau withdrew his defense in the coverage action and assented to entry of declaratory judgment in favor or Progressive.

A few months later, DeVeau filed a Chapter 7 bankruptcy petition in Massachusetts.  Rierson filed an adversary proceeding asserting that her claim against DeVeau was not dischargeable in bankruptcy.
The bankruptcy trustee commenced an adversary proceeding to avoid or set aside the release against Progressive as a fraudulent conveyance.

The bankruptcy trustee then negotiated a settlement with Progressive, for which it sought approval from the Bankruptcy Court.  Under the agreement, within 30 days of DeVeau receiving a discharge in bankruptcy, Progressive would pay the bankruptcy estate $825,000 and the bankruptcy trustee would transfer to Progressive all right, title and interest in all Progressive insurance policies issued to DeVeau.  All claims against Progressive relating to DeVeau's Progressive policy, including Rierson's claims, would be permanently enjoined.

Unsurprisingly, Rierson objected to the motion to approve the settlement.

In In re DeVeau, 2019 WL 7000066 (Bankruptcy Court, D. Mass), the United States Bankruptcy Court for the District of Massachusetts denied the motion to approve the settlement.  It first examined whether it should approve the sale of the policy free of clear of any interest of Rierson. Rierson argued that the bankruptcy estate did not own DeVeau's interest in the policy because he had released all rights under the policy before he filed for bankruptcy.  The court agreed with that argument.

The court next analyzed the request for an injunction that would permanently enjoin Rierson from prosecuting any claim against Progressive  related to DeVeau's policy.  The court denied the request as it was predicated on a sale free and clear of liens.  As there could be no sale of property that did not belong to the bankruptcy estate, there could be no injunction.

Finally, the court held that the agreement was not reasonable because under it the injunction on claims against Progressive would immediately go into effect but DeVeau would receive payment from Progressive only if he received a discharge in bankruptcy.

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