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Maertin v. Armstrong World Industries

December 11, 2002

JOAN MAERTIN, ET AL., PLAINTIFFS,
v.
ARMSTRONG WORLD INDUSTRIES, INC., ET AL., DEFENDANT



The opinion of the court was delivered by: Simandle, District Judge

OPINION

This case involves the payment of a multi-million dollar settlement agreement to plaintiffs who were exposed to the cancer-causing substance known as polychlorinated biphenyl. Plaintiffs have sought payment from defendant Armstrong World Industries, which is now a debtor in Chapter 11 Bankruptcy, and from its insurance carriers, and have alleged that Armstrong and its employee Bethann Jakoboski, and Liberty Mutual Insurance Company and its employee Michael Carroll committed fraud and bad faith in the negotiations that led up to the settlement agreement.

Three separate motions are before the Court at this time: (1) the motion of defendants Central National Insurance Co. and CGU Group to dismiss plaintiffs' complaint; (2) the motion of defendants Liberty Mutual Insurance Company and Michael Carroll to dismiss plaintiff's second amended complaint; and (3) the motion of defendants Armstrong World Industries and Bethann Jakoboski to dismiss or for summary judgment.

This Court will consider each motion in turn and will deny the motion to dismiss of defendants Central National and CGU Group, will deny in part the motion to dismiss of defendants Liberty Mutual and Michael Carroll as to the claims in Count I of plaintiffs' complaint and the fraud claims in Count II of plaintiffs' complaint but will grant it in part as to the bad faith claims in Count II of plaintiffs' complaint, and will deny the motion to dismiss of defendants Armstrong World Industries and Bethann Jakoboski but will grant the motion for summary judgment of defendants Armstrong and Jakoboski as to the bad faith and fraud claims in Count II of plaintiffs' complaint.

I. BACKGROUND

In a 2000 settlement agreement, Armstrong World Industries ("Armstrong") agreed to pay plaintiffs seven million dollars. The agreement settled two actions in the United States District Court for the District of New Jersey, Maertin, et al. v. Armstrong World Industries, Inc., No. 95-2849(JBS), ("Maertin I"), and Schmoll v. Armstrong World Industries, Inc., No. 99-3497(JBS), *fn1 brought by plaintiffs who had either contracted, or feared contracting, cancer as a result of their exposure to ceiling tiles manufactured by Armstrong that had been installed in their workplace at Burlington County College. Armstrong manufactured and distributed the ceiling tiles from about August 1968 to April 1970; they were coated with a plasticizer that included the carcinogen polychlorinated biphenyl ("PCB").

The case was heavily litigated until the parties reported a settlement on September 14, 2000. This Court issued an order of dismissal and the parties entered into a "Settlement Agreement and Mutual General Release." The settlement agreement was signed by all parties on or before November 22, 2000; Armstrong signed the agreement on November 6, 2000. (11/28/2001 O'Connor Cert.) Under the terms of the agreement, Armstrong was to make the $7,000,000 payment to plaintiffs' counsel on or before January 21, 2001. *fn2 (Def. Craven's Br. at 2.)

On September 20, 2000, Armstrong filed Armstrong World Industries, Inc. v. Central National Insurance Co. of Omaha, et al., Civil Number 00-4763, in the Eastern District of Pennsylvania against its insurance carriers seeking a declaration of coverage for the settlement amount.

On December 6, 2000, Armstrong filed bankruptcy under Chapter 11 in the District of Delaware. (Id. at 3.) Armstrong, continuing to operate its business as a debtor in possession, notified plaintiffs of the bankruptcy action and reminded them that any collection action was stayed by the Bankruptcy Code's automatic stay provision. (Id.) The Armstrong case in the Eastern District of Pennsylvania was also stayed. (Gangl Cert. ¶7.)

Plaintiffs filed for relief from the automatic stay on March 29, 2001 to seek payment of the settlement amount. On November 5, 2001, the Honorable Joseph J. Farnan, United States District Judge, presided over a hearing regarding the automatic stay. (Raditz Cert., Ex. C.) Counsel for plaintiffs informed the court:

I think at this point, your Honor, what we would like the Court to do is grant relief from the automatic stay to allow the Maertin plaintiffs to go back to the District Court for the District of New Jersey, deal with whatever rights they have there, assert any action they may have there in New Jersey law against any of the insurance carriers who may have been involved . . . In the event that it can't be resolved there, the Maertin plaintiffs can certainly move to intervene in the Eastern District of Pennsylvania . . . (Id., Tr. 33:24-34:7, 22-25.)

Judge Farnan granted their application, stating from the bench on November 5, 2001, "I'll grant the application and enter an order for that tomorrow." (Id., Tr. 39:23-24.)

The proceeding then continued so the parties could clarify the effect that lifting the stay would have on litigation against Armstrong's insurance providers. Counsel for International Insurance Co. asked the Court "to be clear that you're lifting the stay as to proceeding against the debtor only and not as to any actions or direct actions against any of the insurance carriers." (Id., Tr. 40:7-10.) The Court responded that "[t]he stay only applies to the debtor." (Id., Tr. 40:11.) Counsel for plaintiffs, however, responded by stating, "I want to make sure counsel isn't indicating we may be stayed from proceeding against an insurance carrier as well." (Id., Tr. 40:24-41:1.) Counsel for International Insurance Co. responded by asking "[t]he issue is, can they institute or commence an action against insurance proceeds that are stayed," (Id., Tr. 41:6-7), and the Court answered by stating "some federal judge is going to decide that, if you are sued, and raise it or they're going to refer it back here. But for today, I'm lifting the stay against the debtor and that's all I have the authority to do," (Id., Tr. 41:9-14).

Judge Farnan filed his memorandum order on December 10, 2001 which lifted the stay to allow plaintiffs to pursue the enforcement of the settlement agreement, stating:

NOW THEREFORE, IT IS HEREBY ORDERED that having considered the Motion for Relief from the Automatic Stay filed by the Maertin Plaintiffs in an action pending in the United States District Court for the District of New Jersey, Civil Action No. 95-CV-02849, and the responses thereto, the Motion is hereby GRANTED.

The Automatic Stay set forth in 11 U.S.C. § 362 is modified to permit the Maertin Plaintiffs to proceed with the New Jersey Action and pursue any rights that they may be permitted under applicable state and federal law in connection with that action, in state or federal court. (12/10/01 Order of Hon. Joseph J. Farnan at 3.)

Meanwhile, on November 14, 2001, before the actual written order was entered, plaintiffs filed a complaint with this Court against Armstrong, Liberty Mutual Insurance Co., *fn3 Central National Insurance Co. of Omaha, Certain London Market Insurance Companies, CGU Group, Equitas Reinsurance Limited, First State Insurance Co., International Insurance Co., Puritan Insurance Co., and Peter E. J. Cameron-Webb for a declaratory judgment that the insurers pay the settlement agreement amount and against Armstrong, Liberty Mutual Insurance Company, Michael Carroll, and Bethann Jakoboski for money damages for fraud, bad faith, and concealment during the settlement negotiations. ("Maertin II")(Raditz Cert., Ex. D.)

Plaintiffs also filed a Notice of Motion to Enforce Settlement as to Defendant Armstrong in Maertin I on November 30, 2001. There, the Honorable Joel B. Rosen, in a Report and Recommendation filed pursuant to 28 U.S.C. § 636(b)(1)(B), found that this Court had jurisdiction to enforce the settlement agreement, that the settlement agreement was a valid and binding agreement, and that this Court has authority to enforce the agreement even though the bankruptcy court has exclusive jurisdiction to compel the debtor's payment of the settlement amount. (Report and Recommendation.) After considering Defendant Armstrong's objections to the Report and Recommendation, on September 5, 2002 this Court affirmed Judge Rosen's Report and Recommendation and entered judgment against Defendant Armstrong in the amount of $7,000,000 so that the plaintiffs could compel payment in the United States Bankruptcy Court.

Meanwhile, before this Court in Maertin II, plaintiffs continued their action seeking payment of settlement amounts from the defendant insurers. On March 21, 2002, defendant Cravens, Dargan Co., Pacific Coast, as managing general agent for Central National Insurance Co. of Omaha, (collectively "Central National"), filed a motion to dismiss or, in the alternative, to stay the instant action. [Docket Item 17-1.] In a letter dated March 22, 2002, defendant CGU Group, now OneBeacon Insurance Co., joined and adopted Central National's motion to dismiss. (OneBeacon 3/22/02 Ltr.) On March 25, 2002, Armstrong filed a motion to dismiss or for summary judgment. [Docket Item 24-1.]

On March 28, 2002 this Court dismissed without prejudice defendants Michael Carroll, First State Insurance Co., and Westport Insurance Co., successor to Puritan Insurance Co. [Docket Items 29-1, 30-1.] On April 10, 2002, plaintiffs filed an amended complaint, and on April 17, 2002, plaintiffs filed a second amended complaint. [Docket Items 31-1, 32-1.]

On May 3, 2002, the Honorable Randall J. Newsome, United States Bankruptcy Judge for the District of Delaware, signed a stipulation and order agreed upon by plaintiffs and Armstrong which stated that plaintiffs could proceed against Armstrong's insurance policies because the bankruptcy stay had been lifted to allow such an action and because plaintiffs held the "equivalent" of a judgment returned unsatisfied from Armstrong. (Pls.' Br. Ex. A.)

On June 3, 2002, defendants Liberty Mutual Insurance Company and Michael Carroll *fn4 filed a motion to dismiss the second amended complaint. [Docket Item 38-1.] On June 4, 2002, Central National contested the submission of the May 3rd bankruptcy order and submitted a copy of its reconsideration motion filed with Judge Newsome. (Central National 6/4/02 Ltr., Ex. 2.)

The remaining defendants in this action are Armstrong, Liberty Mutual Insurance Company, Central National Insurance Co. of Omaha, Certain London Market Insurance Companies, CGU Group (presently called OneBeacon Insurance), Equitas Reinsurance Limited, International Insurance Co., Peter E.J. Cameron-Webb, Bethann Jakoboski, Michael Carroll, and Certain Underwriters at Lloyd's London. Presently before this Court is the motion to dismiss of defendants Central National and CGU Group, [Docket Item 17-1], the motion to dismiss of defendants Liberty Mutual and Michael Carroll, [Docket Item 38-1], and the motion for summary judgment of defendants Armstrong and Bethann Jakoboski, [Docket Item 24-1].

II. DISCUSSION

A. Defendants' Motion to Dismiss for Lack of Subject Matter Jurisdiction

In all three motions before this Court, the defendants argue that this Court should dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(1) because it does not have subject matter jurisdiction over this action since Armstrong is in bankruptcy and the bankruptcy automatic stay was not lifted to allow this action. (Central National Br. at 4-6; Armstrong Br. at 15-16; Liberty Mutual Br. at 4.) As an initial matter, therefore, this Court will determine whether it has subject matter jurisdiction.

In a Memorandum Opinion and Order filed December 10, 2001, the Honorable Joseph Farnan, United States District Judge for the District of Delaware, lifted the bankruptcy automatic stay to "permit the Maertin Plaintiffs to proceed with the New Jersey Action and pursue any rights that they may be permitted under applicable state and federal law in connection with that action, in state or federal court." (12/10/01 Order of Hon. Joseph J. Farnan at 3.) Defendants do not dispute that the stay was lifted to allow plaintiffs to proceed with the Maertin I action against Armstrong for payment. (Central National Br. at 6.) They argue, however, that the stay was not lifted to allow plaintiffs to file this new action against Armstrong and its insurers. (Id.)

When considering a motion to dismiss for lack of subject matter jurisdiction under Fed. R. Civ. P 12(b)(1), the court must accept as true all material allegations of the complaint and construe that complaint in favor of the non-moving party. Warth v. Seldin, 422 U.S. 490, 501 (1975). The court's focus must not be on whether the factual allegations would entitle the plaintiff to relief, but instead should be on whether this Court has jurisdiction to hear the claim and grant relief. New Hope Books, Inc. v. Farmer, 82 F. Supp. 2d 321, 324 (D.N.J. 2000). To determine this, the Court can find facts based on affidavits or materials submitted to the Court. Id.

To determine whether this Court has jurisdiction to hear the present dispute, the Court must determine (a) whether this Court has diversity jurisdiction over the matter; (b) whether the insurance proceeds are part of the bankruptcy estate and subject to the automatic stay; (c) whether the automatic stay was lifted to allow an action against the insurance companies for the proceeds; and (d) whether the present action is allowed when it was filed after the hearing before Judge Farnan but before Judge Farnan issued his written order lifting the stay.

This Court finds that there is subject matter jurisdiction over the action because the automatic stay was lifted to allow the present action against Armstrong's insurance companies. This Court thus agrees with the conclusion reached by the Honorable Randall J. Newsome, United States Bankruptcy Judge for the District of Delaware, in his May 3, 2001 stipulation and order.

(a) Diversity jurisdiction

Federal courts are courts of limited jurisdiction that may only hear a case if the constitution or a federal statute provides the court with jurisdiction. Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 377 (1994). Here, the Court has diversity jurisdiction pursuant to 28 U.S.C. § 1332. *fn5

(b) Insurance as part of bankruptcy estate

Defendants argue that the insurance proceeds that plaintiffs seek are part of Armstrong's bankruptcy estate. If they are, then this Court would only have jurisdiction if the bankruptcy automatic stay was lifted to allow an action against the insurance carriers.

The filing of a bankruptcy petition operates to stay "any act to obtain possession of property of the estate . . . or to exercise control over property of the estate." 11 U.S.C. § 362(a)(3). "Property of the estate" is defined in section 541(a) of the Bankruptcy Code as "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a). The definition of property is intended to be "broad and all-inclusive." Minoco Group v. First State Underwriters, 799 F.2d 517, 518 (9th Cir. 1986) (quoting In re Bialac, 712 F.2d 426, 430 (9th Cir. 1983) and citing S. Rep. No. 95-989, 95th Cong., 1st Ses. 82 (1978)).

The Third Circuit has held that insurance policies fit within section 541's definition of "property of the estate." First Fid. Bank v. McAteer, 985 F.2d 114, 116 (3d Cir. 1993) (citing Estate of Lellock v. Prudential Ins. Co., 811 F.2d 186, 189 (3d Cir. 1987)); Hanover Ins. Co. v. Tyco Indus., Inc., 500 F.2d 654, 656 (3d Cir. 1974). The Third Circuit has thus followed the general rule that insurance policies which provide coverage for a debtor's liability belong to the debtor's estate. See, e.g. In re Dow Corning Corp., 86 F.3d 482, 495 (6th Cir. 1996); In re Titan Energy, Inc., 837 F.2d 325, 329 (8th Cir. 1988); In re Minoco Group of Cos., 799 F.2d 517, 519 (9th Cir. 1986); A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1001 (4th Cir. 1986); In re Davis, 730 F.2d 176, 184 (5th Cir. 1984). The general rule is the same for proceeds of the insurance policies, but includes one exception, not relevant to the present situation. *fn6

Here, therefore, it is clear that the insurance policies are part of Armstrong's bankruptcy estate and this Court finds that the insurance proceeds are property of Armstrong's estate as well. Nothing indicates that Armstrong assigned its interest in the insurance proceeds to plaintiffs. Counsel for the insurance companies testified at the stay proceeding that "[t]here is no money set aside. There is no equitable trust. There is nothing. There was a settlement claim." (Raditz Cert., Ex. C at Tr. 37:18-20.) Plaintiffs argue that the act of entering the settlement agreement should have implicitly assigned them rights to Armstrong's insurance proceeds. (Pls.' Br. at 11.) Before filing for bankruptcy, Armstrong did agree to pay plaintiffs, and may have even intended to use the insurance proceeds to do so, but because it did not affirmatively and explicitly assign its rights in the policies to plaintiffs, this Court must follow the general rule and find that the debtor's liability insurance policies and their proceeds are property of Armstrong's estate.

(c) Effect of lifting of automatic stay

Because the insurance policies and proceeds are property of Armstrong's bankruptcy estate, this Court must determine whether Judge Farnan lifted the automatic stay to allow claims against the insurance carriers. Plaintiffs argue that Judge Farnan used language that was broad enough to allow such an action. Defendants, however, argue that Judge Farnan intended to lift the stay so that the plaintiffs could seek enforcement of the settlement agreement in the Maertin I action against Armstrong. They argue that Judge Farnan did not lift the stay to allow this new action against new defendants.

If Judge Farnan's order is not clear, the meaning of an unclear court order "must be determined by what preceded it and what it was intended to execute." Hendrie v. Lowmaster, 152 F.2d 83, 85 (6th Cir. 1945) (quoting Union Pac. R.R. Co. v. Mason City & R.R. Co., 222 U.S. 237, 247 (1911)). The court may thus consider the entire record and the circumstances which surrounded the order. Houghton v. Am. Guar. Life Ins. Co., 692 F.2d 289, 296 (3d Cir. 1982); see also Sec. Mut. Cas. Co. v. Century Cas. Co., 621 F.2d 1062, 1066 (10th Cir. 1980) (citing Union Pac., 222 U.S. at 247). If the order is susceptible to two interpretations, it is the duty of the court to adopt the one "which renders it more reasonable, effective and conclusive in the light of the facts and the law of the case." Hendrie, 152 F.2d at 85 (quoting Pen-Ken Gas & Oil Corp. v. Warfield Natural Gas Co., 137 F.2d 871, 885 (6th Cir. 1943)).

Here, Judge Farnan's December 10, 2001 written order stated:

NOW THEREFORE, IT IS HEREBY ORDERED that having considered the Motion for Relief from the Automatic Stay filed by the Maertin Plaintiffs in an action pending in the United States District Court for the District of New Jersey, Civil Action No. 95-CV-02849, and the responses thereto, the Motion is hereby GRANTED.

The Automatic Stay set forth in 11 U.S.C. § 362 is modified to permit the Maertin Plaintiffs to proceed with the New Jersey Action and pursue any rights that they may be permitted under applicable state and federal law in connection with that action, in state or federal court. (Raditz Cert., Ex. E. at 3.)

This Court finds that the order lifted the stay to allow plaintiffs to continue civil action 95-CV-02849 and to file any action necessary to pursue the rights that they asserted or may have in connection with the 95-CV-02849 action. The Court, thus ...


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