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IN RE ALLIED PRODUCTS CORPORATION

March 31, 2004.

In Re: ALLIED PRODUCTS CORPORATION, Debtor; ALLIED PRODUCTS CORPORATION, Appellant;
v.
ITT INDUSTRIES, INC., et al., Appellees



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

MEMORANDUM OPINION AND ORDER

Appellant Allied Products Corp. ("Allied"), debtor in bankruptcy, moved to sell certain of its liability insurance policies back to the carriers who issued them for the general benefit of its estate and to enjoin parties with actual or potential claims under these policies from taking any action against those carriers. Appellees ITT Industries, Inc. ("ITT") and the City of South Bend, Indiana ("South Bend") objected to the proposed transaction on the grounds that it did not adequately protect their interests. The bankruptcy court sustained the objections and denied Allied's motion. For the reasons stated below, the decision of the bankruptcy court is affirmed.

BACKGROUND

  Prior to filing for bankruptcy, Allied, headquartered in Chicago, engaged in manufacturing operations in a number of states. In re Allied Prods. Corp., 288 B.R. 533, 535 (Bankr. N.D. III. 2003). In connection with these operations, between 1966 and 1986, Allied purchased general liability insurance policies (collectively, the "Policies") from The Travelers Indemnity Company ("Travelers"), the Insurance Company of North America (succeeded by Century Indemnity Company) ("INA"), and various affiliated entities (collectively, the "Insurers"). Id. The Policies Page 2 issued from 1971 to 1986 "have some form of a pollution exclusion," although the record does not indicate what form such exclusion takes. (Ex. 8 to Allied's Br., at 2.) All of the Policies dated January 1, 1986 and later are "claims made" policies, meaning that claims must be made against the insured within the policy period to be covered. (Allied Br., at 13.) All of the Policies permit an injured claimant to sue the Insurers directly upon obtaining a final judgment against Allied. Allied, 288 B.R. at 537-38,

  From April 30, 1968 to October 28, 1976, Allied and one of its former unnamed subsidiaries owned and operated a die casting and manufacturing facility on a parcel of property in Fayetteville, New York (the "New York site"). (ITT Br., at 1-2.) In 1988, through a foreclosure judgment, ITT took possession of the New York site pursuant to its former status as a secured creditor.*fn1 (Id. at 1.) On or about July 11, 1991, ITT filed an action against Allied in the Northern District of New York (the "New York action") asserting various environmental claims relating to the New York site. (Id.) On November 12, 1999, Allied filed an action against the Insurers in Illinois state court seeking a declaration that the Insurers have a duty to indemnify Allied for past and future cleanup costs arising from the New York site. (Id. at 3.)

  On October 2, 2000, Allied filed a voluntary Chapter 11 bankruptcy petition in the bankruptcy court, (Allied Br., at 3-4), at which time an automatic stay on all judicial proceedings against the Allied, including the New York action, went into effect pursuant to 11 U.S.C. § 362. On an unspecified date after October 2, 2000, the bankruptcy court modified the automatic stay to permit ITT to resume the New York action. (ITT Br, at 2.) On March 26, 2001, pursuant to a stipulation and agreement between ITT and Allied (the "Stipulation"), the New York District Court entered judgment in favor of ITT for $3.7 million. (Id.) On May 29, 2001, the bankruptcy court granted Allied's motion to approve the Stipulation, giving ITT an unsecured claim for $3.7 million Page 3 in the estate. (Id. at 2-3.)

  From approximately 1964 to the mid — 1980s, Allied operating a stamping plant in South Bend, and during the period 1985 to 1987, Allied operated a plow works in South Bend (collectively, the "South Bend sites"). (South Bend Br., at 1-2.) After Allied ceased operations at these sites, it leased the properties to unnamed entities. (Id.)

  On May 17, 2001, the City of South Bend filed a Proof of Claim in the Allied bankruptcy proceedings asserting environmental claims relating to the South Bend sites. (South Bend Br., at 2.) On an unspecified date, Allied decided to abandon the South Bend sites "as burdensome to the bankruptcy estate and of inconsequential value." (Ex. C to Ex. 6 to Allied's Br, at 1.) On January 15, 2002, pursuant to a "Compromise and Settlement Agreement," Allied agreed to sell the sites to South Bend for $10, and South Bend released all claims in connection with the sites except for claims that could be satisfied from applicable insurance proceeds. (Id. ¶¶ 4-5.) Allied also agreed,
and the Court would so order in the settlement order, that the automatic stay would lift [12] months after entry of [a] settlement order [from the bankruptcy court] to allow South Bend to pursue its claims related to its filed proofs of claim, with recovery limited to proceeds from Allied's insurance policies. However, the stay would not lift in the event that a motion has been filed and an order entered approving a settlement with applicable insurance companies within [12] months. In the event all insurance companies have not settled, the stay would be lifted as to the non — settling companies.
(Id. ¶ 6.) On March 15, 2002, the bankruptcy court entered an order affirming South Bend's right to object to any proposed settlement between Allied and any of its Insurers. (South Bend Br., at 3; Ex. D to Ex. 6 to Allied's Br.)

  On an unspecified date after October 2, 2000, Allied decided to liquidate all of its assets. Id. At some point between October 2, 2000 and July 11, 2002, Allied and the Insurers negotiated a proposed "buy — back" agreement. (Proposed Agreement, Ex. B to Ex. 2 to Allied Br.) This proposed agreement was conditioned on the bankruptcy court's entering a final order (not reversed Page 4 on appeal) (1) approving Allied's proposed sale of the Policies (except for provisions relating to workers' compensation) back to the Insurers who issued them, (2) enjoining "any and all past, present, or future claimants and any other persons from pursuing the Insurers for coverage under the . . . Policies or otherwise relating to Allied," and (3) approving the adequacy of notice to effectuate such injunction. (Id. ¶ 10.) Had this condition precedent been met, the proposed agreement would have required Allied, inter alia, (1) to release the Insurers from `all past, present and future, known and unknown claims of any type or nature" (except for workers' compensation claims), (2) to release the Insurers "from any and all obligations the Insurers may have pursuant to any written agreements for the defense or partial defense of Allied," including with respect to the New York action, and (3) to dismiss its action against the Insurers in Illinois state court. (Id. ¶¶ 1-3.) The Insurers, in turn, were to pay Allied $3.5 million. (Id. ¶ 14.) Allied acknowledged that it intended to make these funds available for the general use of its estate, rather than for prospective claimants under the Policies. Allied, 288 B.R. at 535.

  On July 11, 2002, Allied filed the Motion with the bankruptcy court. Id. The bankruptcy court directed that notice of the debtor's motion be given to all potential policy claimants.*fn2 Id. On August 22, 2002, ITT and South Bend filed objections to the proposed transaction. (ITT Br., at 4; South Bend Br., at 4.)

  DISCUSSION

  I. Jurisdiction and Standard of Review

  This court has subject matter jurisdiction over appeals from the bankruptcy court pursuant to 28 U.S.C. § 158(a)(1), which vests the district court with jurisdiction over appeals from "final judgments, orders and decrees" of the bankruptcy court. In re Kmart Corp., 297 B.R. 525, 528 (N.D. III. 2003). When reviewing bankruptcy court decisions, the district court acts as an appellate Page 5 court, Bielecki v. Nettleton, 183 B.R. 143, 145 (N.D. III. 1995) (citing FED. R. BANKR. P. 8013). In an appeal from a bankruptcy court's decision, the district court reviews the findings of fact of the bankruptcy court for clear error, and its legal conclusions de novo. Dye v. United States, 360 F.3d 744, No. 03-2043, 2004 WL 438317, at *2 (7th Cir. Mar. 10, 2004) (internal citations omitted). The parties in this case raise exclusively questions of law, which this court reviews de novo.

  The parties agree that the Policies are property of the estate in bankruptcy, under the broad definition of § 541(a) of the Bankruptcy Code, 11 U.S.C. § 541 (a), and, accordingly, that the Policies are subject to sale under § 363(b)(1) of the Bankruptcy Code. Id. at 535-36. Allied does not challenge the bankruptcy court's determination that, pursuant to 11 U.S.C. § 363(e),*fn3 "the buy — back arrangement can only be approved if the claim holders have no interest in the., [P]olicies.' Allied, 288 B.R. at 536. Instead, Allied urges that the bankruptcy court erred in finding that ITT and South Bend have protectable interests in the Policies — specifically, their "ultimate right to recover from the issuing carriers" under § 388 of the Illinois Insurance Code, 215ILCS 5/388*fn4 — and that the proposed transaction did not provide adequate protection for such interests. Id. at 534-35, 537. Allied acknowledges that § 388 "afford[s] injured persons a right of action against the insurer if Page 6 execution against the insured is returned unsatisfied," thereby "conferr[ing] an interest in such . . . policie[s] on every member of the public that is negligently injured." (Allied Reply Br., at 12 (citing People ex ml. Terry v. Fisher, 12 lll.2d 231, 237, 145 ...


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