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California Self-Insurers' Security Fund v. Siegel

United States District Court, E.D. Virginia, Richmond Division

September 27, 2019

ALFRED SIEGEL, Solely as Trustee of the Circuit City Stores Liquidating Trust and Not in Any Individual or Other Capacity, Appellee.


          M. Hannah Lauck, United States District Judge.

         This matter comes before the Court on Appellant California Self-Insurers' Security Fund[1] (the "Fund") appeal from the August 27, 2018 Order of the Honorable Kevin R. Huennekens, United States Bankruptcy Court Judge, granting summary judgment to Appellee Alfred Siegel (the "Trustee"). (Bankr. Case No. 18-3040, ECF No. 1.) The Trustee filed a Response Brief, (ECF No. 22), and the Fund replied, (ECF No. 23). The Fund also filed a motion requesting that this Court "take judicial notice of certain pleadings and documents" in connection with the Fund's opening brief on appeal (the "Motion for Judicial Notice"). (ECF No. 18.) The Trustee responded to the Motion for Judicial Notice and did not object to this Court taking notice of the orders and documents that the Fund attached to its motion. (Resp. 11, ECF No. 20.) The Fund replied. (ECF No. 21.)

         The Court dispenses with oral argument because the materials before it adequately present the facts and legal contentions, and argument would not aid the decisional process. Accordingly, the matters are ripe for disposition. The Court exercises jurisdiction pursuant to 28 U.S.C. § 158(a)(1).[2] For the reasons that follow, the Court will grant the Motion for Judicial Notice and affirm the judgment of the Bankruptcy Court.

         I. Factual and Procedural Background

         This case concerns the scope of release provisions within a settlement agreement (the "Settlement Agreement") among the Fund, the Trustee, and the Director of the California Department of Industrial Relations. (ECF No. 11.) The Fund and the Trustee dispute whether the Settlement Agreement extinguished the Fund's ability to recover excess insurance proceeds from Old Republic Insurance Company ("ORIC") which the Trustee asserts are property of the bankruptcy estate. (R. 698.)[3] The Fund, the Trustee, and the Bankruptcy Court correctly agreed that California substantive law applies to this contract dispute.[4] (R. 763.)

         A. The Fund Administers Circuit City's Outstanding Workers' Compensation Claims

         Prior to filing for bankruptcy protection, national retailer Circuit City elected to self-insure its California workers' compensation obligations.[5] (R. 409.) In consenting to the election, the California Department of Industrial Relations required Circuit City to post a letter of credit as collateral. (R. 409.) On July 1, 2008, Circuit City posted with the Office of Self-Insurance Plans an Irrevocable Standby Letter of Credit (the "Letter of Credit"), in the amount of $14, 119, 256. (R. 409.) In addition to posting the Letter of Credit, Circuit City obtained excess workers' compensation insurance from ORIC. (R. 175, 409.) In accordance with that policy, Circuit City would be responsible for the first $300, 000 owed on any workers' compensation claim, and ORIC would be responsible for any loss more than that amount.[6] (R. 175, 410.)

         On November 10, 2008, Circuit City filed for bankruptcy pursuant to Chapter 11, Title 11 of the United States Code. (R. 410.) The Bankruptcy Court authorized Circuit City to cease operations on January 16, 2009 and to liquidate its assets. (R. 758.) Circuit City incurred no obligation for workers' compensation after that date and cancelled its ORIC insurance policies on March 31, 2009. (Mot. Judicial Notice Ex. B. 25; ECF No. 18-2.)

         Pursuant to California law, the Director of the California Department of Industrial Relations (the "Director") instructed the Fund to assume Circuit City's outstanding workers' compensation obligations. (R. 410.) The Director also assigned to the Fund the $14, 119, 256 Letter of Credit. (R. 410.) The Fund drew down the full amount of the Letter of Credit and began administering the outstanding workers' compensation claims.[7] (R. 410.) Thereafter, the Bankruptcy Court confirmed Circuit City's liquidating plan.

         B. The Fund, the Trustee, and the Director Enter Into a Settlement Agreement to Resolve Disputes Surrounding Certain Claims and the Letter of Credit Proceeds

         Roughly six years later, on December 23, 2015, the Trustee commenced in the Bankruptcy Court an adversary proceeding against the Director and the Fund to recover proceeds from the Letter of Credit that the Fund did not need to satisfy Circuit City's California workers' compensation obligations. (R. 413.) On April 26, 2016, the Bankruptcy Court ruled that any surplus proceeds from the Letter of Credit belonged to Circuit City's bankruptcy estate. (R. 413.) The Fund and the Trustee then disputed whether a surplus existed and, if so, the amount of surplus. (R.413.)

         To help determine the amount of the surplus, the Fund and the Trustee each obtained an expert. (R. 413.) In August 2016, the experts prepared their respective reports regarding the surplus amount, which the parties exchanged before negotiating the Settlement Agreement in September 2016. (R. 452, 519.) Both reports assumed excess insurance from ORIC remained valid and included figures summarizing the expected costs associated with settling remaining workers' compensation claims, listing net of excess insurance and gross unpaid liability on an undiscounted basis.[8] (R. 460-61, 621-22, 670.)

         Specifically, the Fund's expert valued the amount of the surplus between $2, 291, 504 and $3, 169, 560 after utilizing different unallocated loss adjustment expense rates and recognizing the existence of roughly $2.9 million in excess insurance. (R. 527, 623, 648-49). The Trustee's expert valued the amount of the surplus at $4, 460, 000, recognizing the existence of roughly $2, 425, 000 in excess insurance. (R. 458, 460-61.) The Trustee's expert further noted that the amount of surplus "would substantially increase by including investment income and discounting reserves... and could further increase if there are past [unallocated loss adjustment expense] overcharges." (R. 458.) In the Trustee's expert report, investment income estimates ranged from $1.5 million to $5.3 million after utilizing certain rates of return. (R. 467.) The Trustee's expert affirmed that he had not "assessed the collectability of [Circuit City's] excess insurance." (R. 469.) The Fund's expert similarly stated that "[a]n assessment of potential uncollectible excess insurance is outside the scope of our assignment." (R. 622.)

         Thereafter, in September 2016, the Fund, the Director, and the Trustee entered into the Settlement Agreement to resolve "an adversary proceeding [in the Bankruptcy Court] entitled Alfred H. Siegel, Trustee v. California Self-Insurers' Security Fund, et al, Adversary Proceeding No. 3:15-03477-KRH naming the Fund and the Director as defendants." (Settlement Agreement 2, ECF No. 11.) The parties agreed that they sought to

amicably settle all claims, disputes, and causes of action they have and may have against each other related to, set forth in, or arising out of the Adversary Proceeding, the Proofs of Claim, the [Letter of Credit] Proceeds and all underlying facts, events and occurrences associated therewith, and any other aspect of their relationship and/or claims arising therefrom that exist or may have existed between them, on the terms and conditions as set forth herein.

(Id.) Pursuant to the Settlement Agreement, the Fund paid the Trustee $5.35 million, representing surplus from from the Letter of Credit, and retained the remaining amount to satisfy any continuing California workers' compensation claim obligations. (Id.) The Settlement Agreement does not mention excess insurance, and the terms of the Agreement do not otherwise explain how the parties reached that sum. (Id.)

         The Settlement Agreement contained a mutual release, which states broadly:

In consideration of the obligations of the Parties set forth in this Agreement, and conditioned upon payment in full of the [Letter of Credit] Proceeds as described above, and the other agreements and obligations to be undertaken by each of the Parties as described herein, the Parties, for themselves, their officers, directors, members, shareholders, employees, beneficiaries, attorneys, successors in interest, and assigns, and anyone claiming by or through any of them, do hereby release and forever discharge each of the other Parties and their officers, directors, members, shareholders, employees, beneficiaries, attorneys, successors in interest, and assigns of and from any and all claims, counterclaims, cross-claims, third-party claims, causes of action, rights, debts, contracts, agreements, demands for payment or other relief, and any obligations of any nature, in law, equity or of an administrative nature, whether now known or unknown, and whether or not such claim is liquidated, or contingent, from the beginning of time, relating to or in connection with any matter described herein, including specifically but not limited to the Proofs of Claim, the [Letter of Credit], the Return of the [Letter of Credit] Proceeds, the Adversary Proceeding, or arising out of the Parties' relationship in any way, shape or form whatsoever, and any and all other claims between the Parties, except for breach or enforcement of this Agreement. Said release, as it pertains to the Director only applies to the dispute of In re Circuit City Stores, Inc., Case No. 08-35653 (KRH) pending in the United States Bankruptcy Court for the Eastern District of Virginia, Richmond Division regarding allegations related to Circuit City's self insured status. The release does not apply to any known or unknown claims the Director may have regarding other unrelated claims, including but not limited to claims involving the Director's regulatory authority over wage and hour and health and safety laws. The Trust reserves all rights to resist any and all potential claims of the Director that are excluded from this release, on grounds of timeliness, substance or otherwise.

(Id. 2-3) (emphases added). The Settlement Agreement also included a waiver of California Civil Code § 1542, [9] providing that the release was complete notwithstanding any discovery or the existence of additional facts that might have materially affected the decision to settle. (Id. 3.)

         In early 2018, after entering the Settlement Agreement, the Fund made two demands upon ORIC for payment pursuant to the excess insurance policies. (R. 38.) The Fund received from ORIC $19, 778.23 after making its first demand for payment, and $4, 257.94 after making its second demand for payment. (R. 38.) The ORIC payments derived from open California workers' compensation claims, the same claims that were known to the Fund during settlement negotiations. (R. 11, 717-18.) The Fund's demands for payment from ORIC triggered the adversary proceeding underlying the current appeal. (R. 11-12.)

         C. The Trustee Initiates an Adversary Proceeding Against the Fund and the Director Seeking a Determination that the Settlement Agreement Released the Fund's Claims Against ORIC

         After learning about the Fund's demands for payment against ORIC, the Trustee initiated the underlying adversary proceeding against the Fund and the Director seeking a determination that the Settlement Agreement released the Fund's claims against ORIC. (R. 11-12.) The Trustee moved for summary judgment, asserting that the unambiguous release provisions in the Settlement Agreement released ORIC. (R. 32-53.) The Trustee specifically requested a declaration that "by entering into the Settlement Agreement, the Fund released its right to seek reimbursement from ORIC on any of [Circuit City's] California workers' compensation claims, and the Fund is precluded from seeking further reimbursements from ORIC on account of [Circuit City's] California workers' compensation claims." (R. 52.) The Trustee sought damages equaling the reimbursements that ORIC had paid to the Fund after the Settlement Agreement went into effect because the Bankruptcy Court's previous ruling concluded that excess proceeds belonged to the bankruptcy estate. (R. 44, 52.) At issue was just over $14, 000. (R.4.)

         The Fund opposed the Trustee's motion for summary judgment and asserted that, "standing in [Circuit City's] shoes, [the Fund] is empowered with the rights of [Circuity City] and is entitled to seek reimbursement for the amounts it expends on behalf of [Circuit City] to offset [the Fund's] costs." (R. 406.) The Fund further argued that it had not intended for the release in the Settlement Agreement to apply to ORIC. (R. 408, 414.) The Fund asserted that such intent becomes evident from reviewing the "plain meaning of the agreement, which never mentions ORIC; from the extrinsic evidence, admissible under California law; and from the parties' course of dealing." (R. 415.) The Fund also noted that "the Trust[ee] now claims that ORIC was released, [but the Trustee] admits in its motion that ORIC was never even informed of the settlement until a year after the fact." (R. 415.)

         D. The Bankruptcy Court Awards Summary Judgment to the Trustee

         The Bankruptcy Court held a hearing on the motion for summary judgment. (R. 696-743.) During the hearing, Counsel for the Trustee explained how the parties reached the $5.35 million settlement figure, saying: first, the Trustee's expert valued the amount of the surplus, absent any excess insurance, at roughly two million dollars. (R. 710, see R. 461.) Next, Counsel for the Trustee noted that a discount rate should be applied, which amounted to roughly $500, 000.[10] (R. 710.) Counsel for the Trustee also explained that "because the Fund had held this money for so many years, " the Trustee sought interest or investment income dating back to 2009. (R. 710.) The investment income estimation, set forth in the Trustee's expert report, ranged from $1.5 million to $5 million dollars. (R. 710.) Counsel for the Trustee also contemplated attorneys' fees in light of the ongoing disputes concerning the surplus proceeds. (R. 710.) Adding those amounts together produced "a range between four and a half and almost nine million dollars. And the [Trustee] settled for 5.35 million dollars." (R. 710-11.)

         In response, the Fund argued that "excess insurance was not the subject of the prior adversary proceeding" and that the expert reports showed that both parties intended to "net out excess recoveries" those recoveries exceeding $300, 000, because that money would be "recovered from another source, " namely ORIC. (R. 715.) As a result, the Fund contended that "there was agreement among their experts that, when you calculate the net case reserves, which is part of that surplus calculation, you take out of consideration excess-insurance reimbursements." (R. 716.) The Bankruptcy Court then questioned Counsel for the Fund about whether the Settlement Agreement fully extinguished the Fund's remaining liability to the Trustee derived from the workers' compensation claims. (R. 719.) Counsel agreed that the Fund could get reimbursed only to the extent that Circuit City has liability, but asserted that the Fund "didn't waive [its] right to seek reimbursement from ORIC." ...

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