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In re DGI Services, LLC

United States District Court, D. New Jersey, Camden Vicinage

August 14, 2019

IN RE DGI SERVICES, LLC, Debtor.
v.
LINDA L. MCMACKIN, TRUSTEE, Appellee. GREAT NORTHERN INSURANCE COMPANY, Appellant,

          REBAR BERNSTIEL By: George McClellan, Esq. Counsel for Appellant

          McMANIMON, SCOTLAND & BAUMANN, LLC By: Andrea Dobin, Esq. Henry M. Karwowski, Esq. Counsel for Appellee

          OPINION

          RENÉE MARIE BUMB UNITED STATES DISTRICT JUDGE

         The issue presented by this appeal from the Bankruptcy Court is the applicability of the Barton[1" name= "FN1" id="FN1">1] doctrine to: (A) Appellant Great Northern Insurance Company's Motion for Leave to File a counterclaim under the New Jersey Insurance Fraud Prevention Act, N.J.S.A. 17:33A-4(a)(1)-(3) (“NJ IFPA”), against the Appellee Chapter 7 Trustee in a state court suit brought by the Trustee[2]; and (B) the Trustee's Cross-Motion to bar Great Northern from asserting its fifth affirmative defense-- that the Trustee violated the “concealment or misrepresentation” provision of the insurance policy-- in the same state court suit. The Bankruptcy Court denied Great Northern's Motion [see Bankr. Docket # 903, Order of June 27, 2017], and granted the Trustee's Cross-Motion only insofar as Great Northern's fifth affirmative defense was coextensive with its proposed N.J. IFPA claim [see Bankr. Docket # 1028, Order of October 4, 2018].[3" name="FN3" id= "FN3">3]

         For the reasons stated herein, the Court will affirm in part and reserve decision in part.

         I. BACKGROUND

         On December 21, 2011, several creditors of the Debtor, DGI Services, LLC, initiated this involuntary Chapter 7 case. [Bankr. Docket # 1] Relevant to the issues raised on appeal, on November 13, 2011 (i.e., pre-petition), vandals broke into the Debtor's premises, physically damaged the Debtor's equipment, and breached the secure data room. In re DGI Services, LLC, 2017 WL 3314225 at *1 (Bankr. D.N.J. June 26, 2017). The Debtor timely submitted a notice of claim to its insurance company, Great Northern, which “had issued an insurance policy in favor of the Debtor, covering: (1) loss or damage caused by or resulting from a peril not otherwise excluded; and (2) business income loss.” Id. Post-petition, Great Northern denied coverage, which led the Trustee to file suit in New Jersey state court seeking “declaratory judgment that (i) the loss . . . is covered by the Policy; (ii) the Debtor's Estate is entitled to payment of the amount owed for the damaged physical assets; and (iii) the Debtor's Estate is entitled to payment of the business income loss claim pursuant to an appraisal process set forth in the insurance policy.” Id.

         During the course of the state court coverage litigation, Great Northern learned of information which it asserts supports a claim of insurance fraud, pursuant to the N.J. IFPA, against the Trustee. See In re DGI Services, 2017 WL 3314225 at *2. Great Northern-- knowing that the Barton doctrine required it to get permission from the Bankruptcy Court before filing a claim against the Trustee in her official capacity as Trustee-- filed a Motion with the Bankruptcy Court for leave to file an N.J. IFPA counterclaim against the Trustee in the pending state court coverage litigation. [See Bankr. Docket # 863] In response, the Trustee opposed the motion, and cross-moved to bar Great Northern from asserting its fifth affirmative defense that the Trustee violated the “concealment or misrepresentation” provision of the insurance policy at issue, therefore voiding coverage under the policy. [Trustee's Brief, Bankr. Docket # 885-1, p. 35, citing Great Northern's Proposed Answer, Bankr. Docket # 863-3, 15');">p. 15][4]

         With respect to Great Northern's Motion, the Bankruptcy Court held that the proposed N.J. IFPA claims failed to state a claim. Then with respect to the Trustee's Cross-Motion, the Bankruptcy Court reasoned, “[t]o succeed under an affirmative defense of fraud, Great Northern must prove the same elements of fraud outlined in the IFPA, as discussed above. Since the Court ruled that Great Northern cannot prevail under the theory of fraud, Great Northern's affirmative defense of fraud would also not be successful.” In re DGI Servs., 2017 WL 3314225 at *5.

         Great Northern timely appealed. On appeal, it became apparent to this Court that the parties did not agree on what the Bankruptcy Court had ruled with respect to the Trustee's Cross-Motion[5], and so this Court remanded to the Bankruptcy Court for clarification on that issue. On October 8, 2018, the Bankruptcy Court issued a clarifying order which states,

1. Paragraph 2 of the June 26 Order is hereby clarified to state:
The Trustee's Cross-Motion is GRANTED only insofar as Great Northern is barred from raising the affirmative defense of fraud based on N.J.S.A. 17:33A-4(a)(1-3) and the facts alleged in the Motion before this Court. Nothing in this Order should be construed to limit or prevent Great Northern from raising any defenses and affirmative defenses available to it, including an affirmative defense not based on N.J.S.A. 17:33A-4(a)(1-3) and the allegations raised in the Motion.
2. Except as set forth herein, the terms of the June 26 Order remain in full force and effect.

         [Bankr. Docket # 1028] Great Northern ...


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