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the court determined that the debtor, engaged in the sale of VSC's, did not qualify as a "domestic insurance company" and so was eligible to be a debtor in bankruptcy. Next, the court found that the commissioner had failed to prove that the debtor was an alter ego of its affiliated insurance company. Abstention under 28 U.S.C. S 1334(c) was inappropriate, said the court, because that provision only applies to discrete proceedings and not the entire case. The court further concluded that the facts of this case did not warrant abstention under section 305 of the Bankruptcy Code, mostly because unsecured creditors would be subordinated to policyholders under the Hawaiian priority scheme. And while the bankruptcy court's determinations regarding property of the debtor's bankruptcy estate may affect the Hawaiian liquidation proceedings, the bankruptcy court held that the Bankruptcy Code did not "directly conflict" with Hawaii's regulatory scheme such that the debtor's bankruptcy case would "impair" the ongoing liquidation proceedings in Hawaii. Thus, the McCarran-Furgeson Act's reverse preemption doctrine was not implicated in this case. Finally, the court found no cause to dismiss the case on grounds of bad faith, nor did the court find any grounds on which to grant the commissioner relief from the automatic stay -- the State of Hawaii was not exercising its policing powers by attempting to liquidate an underfunded insurance company's non-insurance affiliate.
* In re Plassein Int'l Corp., 377 B.R. 126 (Bankr. D. Del. Oct. 2007) (Gross, J.)
All provisions of an agreement have consequences, even those provision originally thought to be academic. After the sale of the debtors' assets in chapter 11, the case was converted to chapter 7 and a trustee was appointed. The trustee then entered into discussions with the prepetition secured and post-petition DIP lenders (the "lenders") to resolve potential fraudulent conveyance actions. These discussions culminated in a settlement agreement whereby the estate waived its claims against the lenders and consented to the allowance of the lenders' unsecured claim. The lenders, in turn, paid the estate an initial sum for distribution to creditors and waived their rights to receive anydistributions from the first $1.1 million of the estate's other preference recoveries. In the event that the trustee recovered any more than $1.1 million, the estate would repay the lenders' initial loan advancement. This latter provision, however, was thought by all parties to be academic because the parties did not expect the trustee to recover more than $1.1 million. They were wrong.
The trustee, through its vigorous efforts, recovered more than $1.1 million but incurred additional expenses along the way. The lenders claimed that the settlement agreement required the trustee to pay any and all amounts in excess of the $1.1 million to them immediately, requiring the estate (and the other creditors) to eat the additional costs. The trustee, however, contended that the agreement entitled the estate to pay its own costs first, and the lenders could have the net excess of the $1.1 million contemplated by the parties. The bankruptcy court, considering the circumstances and intentions surrounding the agreement, concluded that the trustee's position was correct. Otherwise, the bulk of the lenders' initial payment to the estate under the settlement agreement would be refunded to the lenders, which would not benefit other creditors -- a result the court found to be unintended by either party, especially the trustee. Thus, held the court, the trustee could deduct its additional expenses from the gross preference recoveries in excess of $1.1 million, and the lenders could receive the net recovery. The court further held that the settlement agreement was intended to resolve all disputes between the
