In re OGA Charters, LLC, 2018 Westlaw 4057525 (5th Cir.)
In re OGA Charters, LLC, 2018 Westlaw 4057525 (5th Cir.): The Fifth Circuit Court of Appeals recently held that when a bankruptcy estate is subject to mass tort claims, the estate has an equitable interest in the insurance proceeds, thus precluding extrajudicial settlements by the tort victims.
FACTS: A thinly-capitalized bus charter company owned an insurance policy providing $5 million in liability coverage. One of the company’s two buses suffered an accident, killing nine passengers and injuring 40 others. The passengers filed claims against the bus company. Some of the passengers quickly entered into settlements with the insurance carrier, which would have exhausted the liability coverage.
The victims without settlements filed an involuntary bankruptcy petition against the bus company and initiated an adversary proceeding against the insurance company, seeking to enjoin the payments to the settling passengers. The bus company’s bankruptcy trustee claimed that the proceeds of the insurance policy were property of the bankruptcy estate under 11 U.S.C.A. §541(a).
The bankruptcy court entered summary judgment in favor of the trustee, and the settling claimants appealed directly to the Fifth Circuit.
REASONING: The appellate court affirmed. Acknowledging some inconsistencies in the circuit’s own prior decisions, the court articulated its holding:
We now make official what our cases have long contemplated: In the “limited circumstances,” as here, where a siege of tort claimants threaten the debtor’s estate over and above the policy limits, we classify the proceeds as property of the estate. Here, over $400 million in related claims threaten the debtor’s estate over and above the $5 million policy limit, giving rise to an equitable interest of the debtor in having the proceeds applied to satisfy as much of those claims as possible.