Today I received the February issue of Trial magazine, which includes my article, When the Trucking Company Goes Under.” It’s based on a seminar paper I presented in San Francisco last summer. I’ve copied it below.
Bankruptcy is on the rise for both companies and individuals, so don’t be surprised if your trucking company defendant, or its insurer, becomes insolvent. Here’s how to protect your client if hard times hit your trucking case.
The deepest recession since the 1930s affects the trucking and insurance industries just as it does many others. For attorneys who represent the victims of catastrophic trucking accidents and their survivors, these extraordinary economic times present particular challenges.
Take this scenario: Without warning, you receive a mailed notice that the defendant trucking company in a case you’re handling has filed for bankruptcy in a distant state. The filing imposes an automatic stay of the litigation-litigation in which you have invested vast amounts of resources and on which your client’s future depends. Now what? You’re a trial lawyer, not a bankruptcy specialist. So what’s your first step?
There is a set of procedures you’ll need to follow, but fortunately they’re relatively uncomplicated. Here’s your emergency checklist for the steps you need to take when a trucking defendant goes under.
Resist the temptation to ball up the notice and fling it across your office. Immediately-and carefully-read the notice’s fine print. Note, highlight, and docket in your calendar system all the important deadlines and contact information that will be buried in it.
In some cases, you may not receive any notice from the debtor, trustee, or bankruptcy court. You may only learn about the bankruptcy filing from seeing a “suggestion of bankruptcy” filed in the trial court by the insurance defense counsel. Defense counsel should, simply out of professional courtesy, provide you with a copy of the notice of bankruptcy, but this doesn’t always happen. Find the bankruptcy court, and request a copy of the notice.
Docket a 90-day deadline to file a proof of claim. Corporations can file bankruptcy under Chapter 7 (liquidation) or Chapter 11 (reorganization). A proof of claim in a Chapter 7 bankruptcy must be filed within 90 days after the date first set for the §341meeting of creditors.1 Of course, if you are eager to bring your liability case back to life, there is no reason to wait that long.
If the case is filed under Chapter 11, the court will fix a “bar” date on notice to all creditors. The debtor is required to file a schedule listing all creditors and the amount owed to each. If the creditor and the amount owed to it are listed correctly on the schedule, the creditor is not required to file a proof of claim.2 But if you want to be sure your claim is included in the case, you should file a proof of claim.
Avoid violation of the automatic stay. Filing a bankruptcy petition operates as a stay on any litigation or collection proceedings by a creditor against the debtor. There are circumstances when the automatic stay is not applicable, but they are unlikely to be relevant in personal injury litigation.3
It is dangerous to disregard a notice of bankruptcy, as any judgment obtained during pendency of the stay is subject to being voided. Even if the party with a tort claim against the debtor does not have notice of the bankruptcy stay, a judgment obtained against the debtor may be voided.4 Failure to obtain relief from the automatic stay and notify the debtor’s insurer, even when one is entitled to relief, may void a judgment.5
Also, any individual who is injured by a willful violation of an automatic stay may recover actual damages, costs, attorney fees, and even punitive damages.6 In some jurisdictions, this provision is not limited to individuals but is also available to other entities such as corporations and partnerships.
Check out the rules and forms. If you don’t practice bankruptcy law, you will need quick access to the basic law and procedures and the proper forms. Cornell Law School has a good online summary,7 accompanied by links to the bankruptcy code,8 rules of bankruptcy procedure,9 and uniform bankruptcy forms.10
Each federal judicial district has a bankruptcy court, and each has its own local rules and forms, which vary widely. Some use their Web sites to post general orders, notices to the bar, and additional information from the clerks.11
Use these guidelines to make sure you’re following the correct procedure.
* Search the local rules, forms, and general orders for the information required to assert your claim and motion for relief from the automatic stay. Do not expect uniformity, as the rules, forms, and general orders may vary dramatically even among districts within the same state.
* Find out whether local counsel or pro hac vice admission is required. Local rules of some bankruptcy courts require a creditor to associate local counsel to do anything. Some, such as the bankruptcy court in Delaware, allow creditors’ counsel to file a proof of claim and motion for relief from automatic stay without either retaining local counsel or admission pro hac vice, and to participate in hearings by telephone conference.
* Register for e-filing. Each district requires separate registration into the CM/ECF (Case Management/Electronic Case Files) electronic filing system. Search the court’s Web site for information on registering for CM/ECF in that jurisdiction and any costs involved. If you need help, phone the clerk. In some districts, you may be required to prepare a “dummy” motion to file as a test before the court will issue you a user identification and password.
* Ask if a court appearance is required. Often, with the cooperation of the trustee and the debtor’s counsel, it is possible to obtain a consent order for relief from the stay, in which case no hearing is required. When it is, some courts permit a hearing on the motion by telephone conference.
Local courts vary, and some seem to go out of their way to make it easy for “outsiders” to use their systems. But others do not. Some require attorneys from other jurisdictions to associate with local counsel and move for admission pro hac vice just to file a routine motion for relief from the automatic stay. This will force you to do a serious cost-benefit analysis in some situations-for instance, if the truck driver files for personal bankruptcy as well. Your analysis may lead you to the conclusion that the case should be dismissed.
Prepare and file a proof of claim. Before filing the proof of claim, inspect the notice of bankruptcy to determine where to file it, or confirm with the clerk that you have the correct address. Especially in large Chapter 11 bankruptcies, claim procedures may be outsourced to a bankruptcy administration company or a law firm. Always check local rules for fees, payment methods, access to CM/ECF, and other procedures for filing motions.
The proof of claim must be filed using Form B10. This form states that the creditor is required to attach supporting documentation, but in most personal injury cases, there is no judgment at the time the bankruptcy petition is filed and the complaint may not include a specific damages amount to support a proof of claim. The bankruptcy court may permit a proof of claim with a number at the high end of valuation without supporting documentation, but it is prudent to check with the clerk regarding local practice on that point.
What if this isn’t, in fact, OK? One suggestion is to insert a number that is the demand you would make based on your knowledge at the time and reserve the right to amend based on circumstances as matters develop.
Prepare and file the motion for relief from automatic stay. Until the stay is lifted, your case is stayed, so don’t overlook this step. There is no standard bankruptcy form for this motion, but some courts have a local form.
The motion for relief from the automatic stay should limit relief to the amount of liability insurance.12 In ruling on a creditor’s motion for relief from stay in order to proceed with a lawsuit nominally against the debtor, solely for the purpose of establishing the debtor’s liability and recovering from liability insurers, the bankruptcy court must first determine whether the proceeds of liability insurance policies are “property of the estate.” If they are not, then automatic stay does not extend to the proceeds, and the creditor can proceed with a lawsuit.13
There is some ambiguity in the case law about whether the relief from stay encompasses a surety contract, such as an appeal or supersedeas bond, but my law firm has successfully obtained orders for relief from the stay as to such bonds.
There is no clear, uniform deadline for filing this motion, but in most cases, it’s wisest to file it as soon as possible, preferably at the same time you file the proof of claim.
File a notice of hearing. Procedures for doing this vary widely among districts, so check the local rules and, if necessary, call the clerk. You may be surprised at how easy some courts make this.
For example, in the Northern -District of Georgia, you can log on to the judge’s Web page, see what dates are available for a hearing on a motion for relief, sign up, and electronically give notice of the hearing to everyone involved. You can also save a lot of time and effort by communicating with the trustee and the debtor’s bankruptcy attorney and seeking consent to an order granting relief from the automatic stay.
Digging deeper
After completing these initial procedures, you can start digging deeper into the specifics of the bankruptcy case.
Determine what’s dischargeable. Not all debts can be discharged in a bankruptcy. There are two types of debt that are not dischargeable and that may be relevant to your case: a debt related to personal injury that was caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated by alcohol, drugs, or another substance;14 and a debt that arose from willful and malicious injury.15
Where pending civil litigation involves facts that may render a judgment nondischargeable, you may move for relief from the automatic stay to allow the underlying case to proceed to judgment so a trial court can determine liability and liquidate the debt. The bankruptcy court still retains the ultimate authority to determine whether a debt is dischargeable, although it may consider the evidence in the case and the findings of the trial court. Alternatively, that portion of the case may be referred to a federal court.
Circumstances that a court may consider sufficient to constitute cause for relief from the automatic stay include the following:
* when allowing the state court action to proceed to trial and judgment would liquidate the amount of the movant’s personal injury claim and allow a jury to make findings of fact that the bankruptcy court can consider when-applying the doctrine of collateral estoppel-it determines whether a debt is dischargeable * when the state court action had progressed to the eve of trial before a bankruptcy petition was filed, and the parties are ready for trial * when the debtor’s insurer has assumed full responsibility for defending the state court action * when relief would result in a partial or complete resolution of the issues * when the state court action involves matters of state law16
A creditor can file a complaint against the debtor in bankruptcy court asking the court to determine if the debt is dischargeable. In the case of a driver who was under the influence of drugs or alcohol at the time of the wreck, damages for serious bodily injury are not dischargeable.17 If the bankruptcy court finds that the debt is not dischargeable, then it will make this finding and lift the stay so that you can pursue the case in state court.
Look for the MCS-90. If a trucking company is bankrupt or otherwise out of business, it may well fail to cooperate with its insurer. In that case, the MCS-90 endorsement becomes all the more important.
All interstate motor carrier liability insurance policies must include the MCS-90 endorsement.18 This is a federally mandated endorsement to insurance policies, whose primary purpose is “to assure that injured members of the public would be able to obtain judgments collectible against negligent authorized carriers.”19 The MCS-90 is “in effect, suretyship by the insurance carrier to protect the public-a safety net . . . . [I]t simply covers the public when other coverage is lacking.”20
Courts that consider the applicability of an MCS-90 endorsement hold that “the operation and effect of ICC-mandated endorsements are a matter of federal law.”21 But since state law governs interpretation of the underlying insurance policy, both state and federal law may apply, to the extent that they do not conflict.22
The MCS-90 provides that
no condition, provision, stipulation, or limitation contained in the policy, this endorsement, or any other endorsement thereon, or violation thereof, shall relieve the company from liability or from the payment of any final judgment, within the limits of liability herein described, irrespective of the financial condition, insolvency, or bankruptcy of the insured. However, all terms, conditions, and limitations in the policy to which the endorsement is attached shall remain in full force and effect as binding between the insured and the company. The insured agrees to reimburse the company for any payment made by the company on account of any accident, claim, or suit involving a breach of the terms of the policy, and for any payment that the company would not have been obligated to make under the provisions of the policy except for the agreement contained in this endorsement.23
Find out if the company is self-insured. While most trucking cases involve insurance coverage, at least 100 of the larger truck fleets are self-insured.24 A self-insurance program for a motor carrier has to meet the requirements for Federal Motor Carrier Safety Administration (FMCSA) approval, and any self-insurance authority granted by the FMCSA automatically expires 30 days after a carrier receives a less than satisfactory rating from the U.S. Department of Transportation.25
Still, there have been instances of self-insurance turning out to be illusory. For instance, Builders Transport, Inc., was an interstate motor carrier that insured itself for the first million dollars of liability, secured by a single $1 million bond held by a bank, against which there were probably hundreds of claims. Above the first $1 million, there were four layers of excess coverage that added up to $36.8 million, with an annual deductible “loss corridor” of between $1 million and $2 million.
When Builders Transport went into bankruptcy, a coverage nightmare ensued. The first-layer excess carrier eventually became insolvent. An injury victim with a judgment against Builders Transport tried to enforce the MCS-90 endorsement on the second-layer excess policy. The Fifth and Sixth circuits ruled that the MCS-90 endorsement is required only when insurance is used to satisfy the minimum financial responsibility requirements of the Federal Motor Carrier Safety Regulations and did not require the excess carrier to drop below its liability floor in order to provide “first dollar” coverage.26
A high deductible under a policy, as distinguished from a self-insured reserve, may produce a different outcome in the event the motor carrier becomes bankrupt. A Louisiana state appellate court held that where a motor carrier purchased a policy with $1 million coverage with an MCS-90 endorsement and a $1 million deductible, the insurer was required to “drop down” and provide “first dollar” coverage when the motor carrier became insolvent.27
“First dollar” insurance coverage provides liability coverage for the entire loss, subject to any deductible that the policyholder may have, to reimburse the insurance company. A policy that is “excess” or “umbrella” coverage, over an underlying layer of primary liability insurance coverage or a self-insured retention (SIR), may not provide any coverage for any amount that should be covered by the primary insurance coverage or the SIR.
The Gulf Insurance cases cited here arose out of the Builders Transport bankruptcy, where the SIR collapsed due to the trucking company’s bankruptcy and the inadequacy of the bond securing the SIR, and the first-layer insurance company became insolvent. The next layer of coverage was held not to drop down to cover the SIR or first layer of coverage that had disappeared due to insolvency.
Less common in recent years is the use of a fronting agreement. This is an arrangement in which a trucking company rents an insurance company’s licensing and filing capabilities in a particular state (or states).28 The commercial insurance company (the fronting company) issues its policy to the insured. The entire risk is then transferred from the fronting company to a captive insurance company through a reinsurance agreement, known as a fronting agreement.
In this setup, the insured obtains a policy issued on the paper of the commercial insurance company. But the financial risk of that coverage resides with the captive insurance company. Occasionally, the reinsurance company transfers the risk back to the insured, creating a full circle in which self-insurance-is made to look like commercial insurance, with the whole arrangement administered by a managing general agent. If the fronting agreement maintains the form of insurance rather than self-insurance, albeit subject to a high deductible, then the MCS-90 should provide protection to an injury victim if the motor carrier goes under.
Another possibility: If the truck driver, rather than the trucking company, files individual bankruptcy under Chapter 7 or Chapter 13, the rules and procedures are similar. But your cost-benefit analysis may be different. Do the facts of the individual case justify the trouble and expense of associating local counsel, obtaining admission pro hac vice, and paying filing fees in a distant state, when the trucking company is the target defendant?
That’s an intensely fact-specific, case-by-case determination. Generally, unless there is evidence of drug or alcohol use contributing to the cause of the crash, which raises the possibility of punitive damages and a judgment that is nondischargeable, the cost of keeping the driver in the case may not be justified.
Insolvency and insurance
Until recently, the idea of an insurance company going under seemed remote. In this economy, no one knows where the ripples from the turmoil in the financial markets will stop-and the trucking industry is not immune.
Insurer insolvency is governed by state rather than federal laws. Most states follow one of two model statutes from the National Association of Insurance Commissioners (NAIC), the now withdrawn Uniform Insurers Liquidation Act, or the more recent Insurers Rehabilitation and Liquidation Model Act.29 An insolvent insurer is subject to legal action, typically by the state insurance commissioner, to place the insurer into liquidation, rehabilitation, or conservatorship.
When an insurer enters insolvency proceedings, its reinsurer remains contractually obligated under the insolvency clause typical in reinsurance treaties. Most states require that the reinsurance contract include an insolvency clause providing that, if the reinsured insurer becomes insolvent, reinsurance proceeds must be paid to the insolvent insurer. Those funds are not earmarked for individual claimants but become general assets of the insolvent reinsured insurer. In such a case, policyholders and claimants then must take their place in line with other unsecured creditors who have claims against the estate.
The general rule is that a claimant or policyholder cannot make a direct claim against the reinsurer because there is no privity. There are three exceptions.
First, a reinsurance contract may include a “cut-through,” permitting funds to pass directly to the insured, rather than to the estate of the insolvent reinsured insurer. In addition, the insurance insolvency laws of a state may authorize cut-through arrangements. Find out whether cut-through agreements and guarantees conflict with receivership laws so that a reinsurer could owe payment to both a policyholder (including the obligation to pay a judgment) and a receiver for the same claim.
Second, there is persuasive authority for the notion of treating a policyholder as a third-party beneficiary of the reinsurance contract even in the absence of a cut-through agreement, where the reinsured insurer basically had nothing more than a fronting agreement with no intention to bear any of the risk.30
Finally, if both the insurer and the reinsurer fail, there are in each state insurer insolvency pool arrangements. Such arrangements tend to focus on limited coverage, primarily for smaller claims.
The recession has spared no industry and no region of the country. If you’re representing clients who deserve compensation for their injuries, you need to be prepared for the possibility that any defendant can go under at any time.
Basic knowledge of bankruptcy law, a quick response to the notice of bankruptcy, and familiarity with local court rules will help you meet this challenge calmly.
Kenneth L. Shigley is of counsel at Chambers, Aholt & Rickard in -Atlanta. He can be reached by e-mail at ken@carllp.com.
Notes:
1. Fed R. Bankr. P. 3002(c); 11 U.S.C. §341 (2006).
2. See 11 U.S.C. §1111 (2006).
3. See e.g. 11 U.S.C. §362(b)(2)(A)(2006).
4. See e.g. In re Allied Holdings, Inc., 355 B.R. 372, 377-78 (Bankr. N.D. Ga. 2006).
5. See e.g. In re Atl. Ambul. Assocs., Inc., 166 B.R. 613 (Bankr. E.D. Va. 1994).
6. See e.g. Fleet Mortg. Group, Inc. v. Kaneb, 196 F.3d 265 (1st Cir. 1999); see also 11 U.S.C. §362(k)(1) (2006).
7. Cornell U. L. Sch., Leg. Info. Inst., Wex: Bankruptcy, http://topics.law.cornell.edu/wex/bankruptcy.
8. Cornell U. L. Sch., Leg. Info. Inst., U.S. Code Collection: Title 11-Bankruptcy, http://uscode.law.cornell.edu/uscode/html/uscode11.
9. Cornell U. L. Sch., Leg. Info. Inst., Federal Rules of Bankruptcy Procedure, www.law.cornell.edu/rules/frbp.
10. Admin. Office U.S. Cts., Bankruptcy Forms, www.uscourts.gov/bkforms.
11. A compilation of links to bankruptcy court Web sites may be found in Admin. Office U.S. Cts., Local Rules of Court: United States -Bankruptcy Courts, www.uscourts.gov/rules/bk-localrules.html.
12. See e.g. In re Carraway Methodist Health Sys., 355 B.R. 853 (Bankr. N.D. Ala. 2006).
13. See e.g. In re Scott Wetzel Serv., Inc., 243 B.R. 802, 804-05 (Bankr. M.D. Fla. 1999).
14. 11 U.S.C. §523(a)(9) (2006).
15. 11 U.S.C. §523(a)(6) (2006).
16. See 11 U.S.C. §362(d) (2006); see e.g. In re Sonnax Indus., Inc., 907 F.2d 1280, 1286 (2d Cir. 1990) (list of 12 factors); In re Holtkamp, 669 F.2d 505 (7th Cir. 1982) (insurer was providing defense); In re Quay Corp., Inc., 2006 WL 208704 at *1 (N.D. Ill. 2006) (noting that judicial efficiency may constitute grounds for lifting an automatic stay); In re NW Airlines Corp., 2006 WL 382142 (Bankr. S.D.N.Y. 2006); In re Enron Corp., 306 B.R. 465 (Bankr. S.D.N.Y. 2004); Jonathan P. Friedland, Commercial Bankruptcy Litigation §6:28 (2d ed., Thomson West 2009).
17. 11 U.S.C. §362 (2006).
18. 49 C.F.R. §387.15 (2009); see e.g. Lynch v. Yob, 768 N.E.2d 1158, 1159 (Ohio 2002) (citing 49 U.S.C. §13902(a)(1) (2008) and 49 U.S.C. §31139 (2008)); see also Michael Jay Leizerman, Finding Insurance in Truck Crash Cases, 28 TRIAL (Feb. 2008), www.justice.org/cps/rde/xchg/justice/hs.x51/698.htm.
19. Hamm v. Canal Ins. Co., 10 F. Supp. 2d 539, 545 (M.D.N.C. 1998) (quoting Canal Ins. Co. v. First Gen. Ins. Co., 889 F.2d 604, 611 (5th Cir. 1989), modified, 901 F.2d 45 (5th Cir. 1990)), aff’d, 178 F.3d 1283 (4th Cir. 1999).
20. T.H.E. Ins. Co. v. Larsen Intermodal Servs., Inc., 242 F.3d 667, 672 (5th Cir. 2001) (quoting Canal Ins. Co. v. Carolina Cas. Ins. Co., 59 F.3d 281, 283 (1st Cir. 1995)).
21. See e.g. Canal Ins. Co. v. First Gen. Ins. Co., 889 F.2d 604, 610 (5th Cir. 1989), modified on other grounds, 901 F.2d 45 (5th Cir. 1990); see also Ford Motor Co. v. Transp. Indemn. Co., 795 F.2d 538, 545 (6th Cir. 1986); see also John Deere Ins. Co. v. Nueva, 229 F.3d 853, 856 (9th Cir. 2000).
22. See e.g. Ins. Corp. of N.Y. v. Monroe Bus Corp., 491 F. Supp. 2d 430, 439 (S.D.N.Y. 2007).
23. Fed. Motor Carrier Safety Admin., Form MCS-90: Endorsement for Motor Carriers Policies of Insurance for Public Liability under Sections 29 and 30 of the Motor Carriers Act of 1980 (emphasis added), www.fmcsa.dot.gov/documents/eta/sec387-form3.pdf.
24. Jeff Casale, Self-Insurance Helps Trucking Firms Lower Costs, Bus. Ins . (Sept. 15, 2008), www.businessinsurance.com/cgi-bin/article.pl?article_id=25868.
25. 49 C.F.R. §387.309(a)(3) (2009).
26. See Wells v. Gulf Ins. Co., 484 F.3d 313, 318 (5th Cir. 2007); Kline v. Gulf Ins. Co., 466 F.3d 450 (6th Cir. 2006).
27. Rideau v. Edwards, 985 So. 2d 311, 315 (La. App. 2008).
28. See e.g. White v. Ins. Co. of Pa , 282 F. Supp. 2d 618 (N.D. Ohio 2003), vacated, 405 F.3d 455 (6th Cir. 2005).
29. Larry P. Schiffer, Insurer Insolvency and Reinsurance ( July 2004), www.irmi.com/expert/articles/2004/schiffer07.aspx; see also Natl. Assn. of Ins. Commrs., NAIC Model Laws, Regulations and Guidelines ( July 2009), www.naic.org/documents/committees_models_table_of_contents.pdf.
30. Koken v. Legion Ins. Co., 831 A.2d 1196, 1236 (Pa. Commw. 2003) (citing Mellon v. Sec. Mut. Cas. Co., 1981 WL 207373 (Pa., Philadelphia Co. Comm. Pl. Apr. 15, 1981)), aff’d, 878 A.2d 51 (Pa. 2005).