Appeal from the Ninth Circuit Bankruptcy Appellate Panel Klein, Montali, and Dunn, Bankruptcy Judges, Presiding. BAP No. CC-06-1350-MoDK.
Argued and Submitted May 6, 2009 - Pasadena, California.
Before: Cynthia Holcomb Hall, Andrew J. Kleinfeld and Barry G. Silverman, Circuit Judges.
The Bankruptcy Appellate Panel is AFFIRMED for the reasons stated in its opinion in this case sub nom. We adopt the BAP opinion, In re SNTL Corp., 380 B.R. 204 (B.A.P. 9th Cir. 2007), as our own and attach it as an appendix to this opinion. See Appendix, infra.
UNITED STATES BANKRUPTCY APPELLATE PANEL FOR THE NINTH CIRCUIT
In re: SNTL CORP.; SN INSURANCESERVICES, INC.; SNTL HOLDINGS CORP.; SN INSURANCE ADMINISTRATORS, INC.; INFONET MANAGEMENT SYSTEMS, INC.; PACIFIC INSURANCE BROKERAGE, INC., CENTRE INSURANCE COMPANY, SV Debtors. SNTL CORP.; Appellant, v. SN INSURANCE SERVICES, INC.; SNTL HOLDINGS CORP.; SN INSURANCE ADMINISTRATORS, INC.; INFONET MANAGEMENT SYSTEMS, INC.; PACIFIC INSURANCE BROKERAGE, INC., Appellees.
Bk. Nos. SV 00-14099-GM SV 00-14100-GM 00-14101-GM SV 00-14102-GM SV 02-14236-GM SV 02-14239-GM (Jointly Administered)
Argued and Submitted on September 21, 2007 at Pasadena, California.
Filed - December 19, 2007
Appeal from the United States Bankruptcy Court for the Central District of California Honorable Geraldine Mund, Bankruptcy Judge, Presiding
Before: MONTALI, DUNN and KLEIN, Bankruptcy Judges.
MONTALI, Bankruptcy Judge
In this complicated and high-stakes case, we apply a somewhat obscure doctrine that involves the intersection of insolvency law principles and guaranty law, illustrating the temporal nature of a release of a guarantor when a voidable preference is recovered from the obligee. We also will be one of the first courts to address a question left unanswered by the Supreme Court earlier this year: May an unsecured creditor include attorneys' fees incurred post-petition but arising from a prepetition contract as part of its unsecured claim?
Here a creditor contended that the debtor's previously released liability as a guarantor of an affiliate's obligation was revived when the creditor compromised a preference action against it. The bankruptcy court disagreed and entered summary judgment disallowing the creditor's multimillion dollar claim and denying the creditor's request for post-petition attorneys' fees and costs. The creditor appeals, and we REVERSE and REMAND.
On April 26, 2000 (the "petition date"), SNTL Corporation (formerly known as Superior National Insurance Group)*fn1 and its non-insurer affiliates SN Insurance Services, Inc., SNTL Holdings Corporation (formerly known as Business Insurance Group, Inc.), and SN Insurance Administrators, Inc. (collectively, "Debtors") each filed chapter 11 petitions*fn2 for relief.
Pursuant to a confirmed joint plan of reorganization ("Plan"), an SNTL Litigation Trust ("Trust") was formed and an SNTL Litigation Trustee ("Trustee") was appointed. The Trustee was authorized to prosecute certain claims, rights and causes of actions and to oversee and initiate actions pertaining to the allowance and payment of claims, including objections to proofs of claims.
Appellant Centre Insurance Company ("Centre") filed a proof of claim in November 2000 asserting a claim in excess of $294,488,911 (including approximately $3 million in attorneys' fees but not including contingent and unliquidated amounts) and an amended proof of claim in March 2005 in the amount of $232,748,280.40. The Trustee filed an objection to Centre's claim arguing, inter alia, that Centre had released claims against SNIG prepetition, that the released claims could not be revived by post-petition events and that Centre, as an unsecured creditor, could not include in its claim attorneys' fees incurred post-petition.
B. Pertinent Transactions and Events
The relationship of the parties, and the nature of the transactions summarized below, are complex and perhaps unique to the insurance and reinsurance industry. Reduced to their central elements, however, they can be summarized as follows: Debtor SNIG guaranteed the performance of its affiliates' obligations to Centre. Following default on these obligations, the parties reached an agreement whereby the affiliates paid Centre $163.4 million to satisfy an obligation of $180 million and Centre simultaneously released the guarantor (SNIG). Thereafter, in settlement of a preference action brought by the liquidator of the affiliate insurance companies, Centre returned a portion of the $163.4 million payment. Centre now seeks to recover the returned amount ($110 million) from the guarantor SNIG; Trustee asserts that SNIG's released liability cannot be revived.
More specifically, on December 18, 1998, SNIG sold its affiliate Business Insurance Company ("BICO") to Centre Solutions Holdings (Delaware Limited) ("Centre Solutions"); BICO became known as Centre. On the same day, Centre entered into certain reinsurance agreements (the "LPT and Quota Share Agreements") with insurance companies affiliated with SNIG: California Compensation Insurance Company ("CalComp") and Superior National Insurance Company ("SNIC"). SNIG guaranteed performance of one of these rein-surance agreements known as the "QSR Contract."
In addition, the parties also entered into fronting (service) agreements known as the Underwriting Management Agreement ("UMA") and the Claims Administration Services Agreement ("CSA"). SNIG also guaranteed performance of these agreements. The UMA, CSA, LPT and Quota Share Agreements are collectively referred to as the "Fronting Agreements."*fn3 The Fronting Agreements provide for the recovery of all reasonable expenses, including attorney's fees, incurred in the enforcement of SNIG's guaranty.
The Fronting Agreements were breached in late 1999. On December 31, 1999, Centre entered into a Partial Commutation and Settlement Agreement ("PCSA") with CalComp, SNIC and SNIG. The PCSA modified the Fronting Agreements and provided for a partial release of the reinsurance obligations of SNIG, CalComp, SNIC and all of their parents and affiliates (among others) up to $180 million (the "Re-lease").*fn4
In exchange for the Release, SNIG, CalComp and SNIC agreed to meet six conditions, including payment of a $163.4 million Partial Commutation Payment ("Payment") by CalComp and SNIC. Centre received the Payment; no evidence was introduced that any of the six conditions for the Release were unsatisfied. In its opening brief, Centre acknowledges that "the primary obligors and SN Holdings [SNIG] (the guarantor) were released from liability for up to $180 million" in exchange for the Payment. Appellant's Opening Brief at 13. Consequently, the Release in the PCSA became effective pre-petition.
Article X of the PCSA provided that the Release could be revoked by Centre if the PCA or other payments made pursuant to the PCSA were found to be voidable or preferential transfers, stating in pertinent part:
In the event that any court of competent jurisdiction or governmental or regulatory authority asserting jurisdiction over the subject matter hereof or the parties hereto enters a final order, judgment, or other finding that: (i) the payment of all or any part of the $22,300,000, described above, or (ii) the payment by Reinsurers of all or any part of the [Payment] of $163,400,000, or (iii) any of the consideration described in the Recitals to this Agreement . . . constitutes a voidable or preferential transfer, such payment constitutes an improper or disproportionate payment, or the payment is otherwise in violation of law or subject to a claim or [sic] preference, then [Centre] may in its sole discretion, in addition to any other remedy provided by law, equity, statute, or contract: (a) enforce this Agreement according to its express terms and conditions; or (b) declare this Agreement to be null and void in its entirety, and thereupon enforce the terms and conditions of the LPT and Quota Share Agreements as though this Agreement (including without limitation the releases and discharges set forth in Articles III and IV) had not been executed . . . .
In March 2000, the Insurance Commissioner for the State of California (the "Commissioner") placed certain insurance companies affiliated with Debtors into conservation, followed by liquidation. In January 2002 (approximately fourteen months after the petition date), the Commissioner filed a complaint in state court against Centre and others, seeking in part the ...