Insurance Company’s Pre-petition Payment of Insurance Proceeds to Debtor’s Tort Claimant Creditor Held Voidable Under Section 547 of the Bankruptcy
Insurance Company’s Pre-petition Payment of Insurance Proceeds to Debtor’s Tort Claimant Creditor Held Voidable Under Section 547 of the Bankruptcy
Code To advance the Bankruptcy Code’s goal of equitable distribution of estate assets to creditors, a trustee may avoid certain transfers of “an
interest of the debtor in property.” 11 U.S.C. §§ 547 & 550. Whether proceeds of insurance policies are property of the estate is a question that has generally divided courts. This determination usually turns on the language of the policy at issue, among other factors.
In a recent case before the Fifth Circuit, the debtor’s insurance company made a payment to the family of a victim of a car crash caused by the debtor. The payment was for $1,000,000, the full policy limit.
Other victims of the car crash sued the debtor’s insurance company. After the insurance company paid the full policy limit to the first claimants, it informed the remaining claimants that the policy limit was exhausted.
The remaining claimants, having received nothing from the policy proceeds, commenced an involuntary bankruptcy against the debtor. The trustee then sought to avoid and recover the transfer of the policy proceeds.
The recipients of the policy proceeds moved for dismissal, arguing that the payment was not voidable because the debtor had neither legal title in nor a contractual right to receive the policy proceeds, and otherwise lacked control over their disbursement.
The bankruptcy court denied dismissal, based on Fifth Circuit precedent holding that in “limited circumstances”, where a siege of tort claimants threatens the debtor’s estate over and above the policy limits, insurance proceeds are property of the estate. See Martinez v. OGA Charters, L.L.C. (In re OGA Charters), 901 F.3d 599, 604 (5th Cir. 2018).
According to the Fifth Circuit, “this interest does not bestow upon the debtor a right to pocket the proceeds,” but “instead . . . serves to reduce some claims and permit more extensive distribution of available assets in the liquidation of the estate.” Id.
On appeal, the recipients of the proceeds argued that OGA Charters was wrongly decided under Texas law. The Fifth Circuit, however, noted that:
- a panel of the court was not free to overturn circuit precedent, and
- Texas law did not dictate the outcome of this case.
It is worth noting that the insurance company in this case made the payment at issue under G.A. Stowers Furniture Co. v. American Indem.
Co., 15 S.W.2d 544 (Tex. Comm’n. App. 1929, holding approved), which interpreted Texas law to impose a “basic tort duty,” under which insurers, “when faced with a settlement offer within policy limits, must accept the offer . . . when an ordinarily prudent insurer would do so in light of the reasonably apparent likelihood and degree of that insured's potential exposure to a valid judgment in the suit in excess of policy limits.”