Enodis Corporation v. Freeland, Daniel ( 2005 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 04-2332
IN RE:
CONSOLIDATED INDUSTRIES CORPORATION,
Debtor.
APPEAL OF:
ENODIS CORPORATION
____________
Appeal from the United States District Court
for the Northern District of Indiana, Hammond Division.
No. 04 C 25—Allen Sharp, Judge.
____________
ARGUED NOVEMBER 10, 2004—DECIDED FEBRUARY 8, 2005
____________
Before POSNER, WOOD, and EVANS, Circuit Judges.
EVANS, Circuit Judge. By now it is fair to say we are
painfully aware that Consolidated Industries Corporation is
in bankruptcy in the Northern District of Indiana. (In re
Consolidated Indus. Corp., Bankr. Case No. 98-40533.) To
put it mildly, we have seen this case before. This time it is
before us on Enodis Corporation’s1 appeal from a decision in
yet another of the adversary proceedings growing out of the
bankruptcy.
The Consolidated bankruptcy case was originally filed
under Chapter 11, but when reorganization was not suc-
1
Formerly Welbilt Corporation.
2 No. 04-2332
cessful it was converted to Chapter 7, and Daniel L.
Freeland was appointed trustee. At the time of its orig-
inal filing, Consolidated, which produces residential fur-
naces and is a wholly owned subsidiary of Enodis, was
a defendant in products liability lawsuits in which plaintiffs
contended that its furnaces were defectively designed. One
such case was a class action pending in California, Salah v.
Consolidated Indus., Inc., No. CV 738376 (Cal. Sup. Ct.
Santa Clara Cty). Once the bankruptcy case was filed, the
automatic stay pursuant to 11 U.S.C. § 362 took effect. The
Salah plaintiffs moved for partial relief from the stay. That
relief was granted to the extent of permitting the Salah
plaintiffs to pursue their rights against third parties, such
as insurance companies, and subject to the express provi-
sion that whatever happened in the California state court
would have no impact on Consolidated’s bankruptcy estate.
The order was issued pursuant to In re Shondel, 950 F.2d
1301 (7th Cir. 1991), and In re Fernstrom Storage and Van
Co., 938 F.2d 731 (7th Cir. 1991).
Another products liability case, the one directly involved
in this appeal, was filed by Sherrill and Bobby Vansant
against Consolidated in the circuit court for Shelby County,
Alabama. The Vansants sought $8 million in damages.
Because Alabama law does not permit direct actions against
insurance companies, the Vansants’ suit named Consoli-
dated as the defendant. They, too, sought
a “Shondel/Fernstrom” order for partial relief from the
automatic stay so their suit against Consolidated could
proceed. The order was granted. It stated that any judg-
ment in the Vansants favor would have no effect on Con-
solidated’s bankruptcy estate. The defense of the lawsuit
was provided by an insurance company from whom Enodis
had purchased insurance for its subsidiaries, including
Consolidated.
The products liability insurance structure consisted
No. 04-2332 3
of various layers of primary and excess insurance. Each
primary policy was subject to a self-insured retention (SIR)
deductible of $250,000 per occurrence. The SIR applied
to defense costs as well as indemnity payments. In practice,
a primary carrier would advance defense costs and then bill
them back to Enodis until the costs exceeded $250,000. In
addition, each insurance policy had a finite policy aggregate
limit, which Enodis says means that each dollar spent to
resolve one claim results in one dollar less being available
for other claims.
The Alabama court ordered mediation of the Vansant
lawsuit. The mediation was successful and the Vansants
agreed to settle their claim for $20,000, to be paid by
insurance companies. Because Consolidated remained
the named defendant, and because Consolidated was in
bankruptcy, the settlement had to be approved by the
bankruptcy court. The trustee and the three insurance
companies that were funding the settlement filed a joint
motion seeking approval of the settlement, which included
dismissal of all claims against Consolidated. But soon
after the joint motion was filed, the trustee filed a notice of
withdrawal of the motion to approve the settlement. That’s
when the present case began.
Enodis filed this adversary proceeding seeking a man-
datory injunction to compel the trustee to obtain bank-
ruptcy court approval of the settlement. The bankruptcy
court found, in part, that the trustee had discretion whether
and when to settle Fernstrom/Shondel litigation. The
district court affirmed, finding Enodis lacked standing in
the matter, and now Enodis has presented the issue to us.
To hear Enodis tell it, it is shockingly unjust to allow
a trustee to reject this favorable settlement. Enodis, which
claims direct financial interest in the consummation of
the Vansant settlement and in seeing an $8 million dollar
claim settled for $20,000, argues that the entry of a
4 No. 04-2332
Fernstrom/Shondel order imposes on the trustee an
affirmative duty to cooperate with third parties (like
Enodis) which bear the financial risk of tort litigation.
The argument is basically that it is ultimately Enodis’s
money and it is wrong to let the trustee block such an
advantageous settlement when the payment does not
come from the bankruptcy estate. Thus presented, the
argument is compelling.
But, in fact, it tells only part of the story. To understand
why the trustee might reject this settlement, it is necessary
to understand another of the adversary proceedings arising
out of the Consolidated bankruptcy. In that one, after
Enodis filed a proof of claim in the bankruptcy proceeding,
the trustee sued Enodis and other defendants to recover
over $38 million in fraudulent transfers. The district court
withdrew the reference of two of the counts and entered an
$8.6 million summary judgment against Enodis and another
defendant. Freeland v. Enodis Corp., C.A. 01 C 0072 (N.D.
Ind. Jan. 7, 2003). Then the bankruptcy court held a 6-week
trial on the remaining 14 counts; this proceeding resulted
in a $43.3 million judgment against Enodis. The bankruptcy
court found that Enodis had unlawfully diverted $30 million
in assets from Consolidated. Freeland v. Enodis Corp., Adv.
No. 99-4022 (July 28, 2004). This judgment is on appeal to
the district court.
The trustee’s rejection of the settlement is directly related
to the latter case. The trustee says he is protecting his
standing under 11 U.S.C. § 544(b)(1) to avoid the over $30
million of fraudulent transfers that Enodis
caused Consolidated to make to Enodis. The trustee ex-
plained that, under 11 U.S.C. § 544(b), he has standing
to pursue any causes of action a creditor could have pur-
sued, provided that “a creditor existing at the time the
transfers were made . . . still had a viable claim against
[the] debtor at the time the bankruptcy petition was filed.”
In re Acequia, Inc., 34 F.3d 800, 807 (9th Cir. 1994). The
No. 04-2332 5
Vansants’ claim dates back prior to the filing and pro-
vided the trustee with standing to avoid the transfers to
Enodis. However, Enodis has raised the argument that
settling the Vansant claim deprives the trustee of stand-
ing under § 544(b). While the trustee believes that Enodis
is wrong and that the settlement would not alter his ability
to rely on the Vansant claim to provide him with standing,
he is concerned that Enodis will persist in its argument.
Trying to avoid the issue even if he thinks he would ulti-
mately prevail, in an abundance of caution the trustee
rejected the settlement.
The trustee’s explanation sheds a whole new light on
the situation. As the bankruptcy judge explained:
Where Vansant is concerned, not only have I heard no
evidence that leads me to believe that the Trustee has
not appropriately exercised his judgment, but what I
have heard leads me to believe that Trustee had a good
reason to pull that deal off the table, given what he saw
Enodis’ position being in 4022 with regard to the
consequences to that litigation if the Vansant claim was
settled and potentially putting this Prometheus creditor
claim out from under the— out from under the Trustee
as a basis to assert rights against Enodis.
Now, I’m not for a moment saying that Enodis was
right in making that assertion. I’m not even saying that
Enodis made that assertion. That was Mr. Freeland’s
perception of what Enodis said and we can really only
go—he can really only make his mind up based upon
what he thinks is going on, even though it may—it may
or may not vary from what is actually going on.
But it seems that the Trustee made his decision to
hold off seeking approval of the Vansant settlement
in an effort to, A, preserve assets of the Bankruptcy
Estate; i.e. maximize the claim against Enodis; but,
more significantly, since I—in an effort to avoid a whole
6 No. 04-2332
range or avoid becoming embroiled in an entirely
separate dispute. If he held off on the Vansant litiga-
tion, we don’t have to fight this fight about whether the
compromise of the Vansant claim destroys the Trustee’s
rights to stand upon it for the purpose of prosecuting a
claim against Enodis yea or nay.
I think that was an appropriate decision to make.
Furthermore, there is no suggestion here that the
deal can’t be resurrected at any time. I mean, if they
were willing to settle on particular terms and conditions
a year ago, why wouldn’t they be willing to do it now?
Because this appeal will be dismissed on other grounds,
we will not discuss in detail why we agree with this expla-
nation. We will say, though, that a fear that Enodis might
raise an issue—even one which seems unlikely to suc-
ceed—is entirely justified. Enodis’s actions in this
case support the fear. Our quick count of the appeals
in which Enodis is involved in the Consolidated bankruptcy
shows that at least 13 have been filed. Most of them have
been dismissed for lack of jurisdiction—usually because the
matter at issue remained pending in the district court. In a
published decision, In re Consolidated, 360 F.3d 712 (7th
Cir. 2004), we affirmed the dismissal of Enodis’s adversary
complaint against Employers Insurance of Wausau. Less
than a month before oral argument in the present case, we
issued an order inviting trustee Freeland to file a motion for
sanctions against Enodis in our case number 04-3074. It
was clear our patience was wearing thin. We stated:
Enodis Corporation has filed yet another appeal while
this bankruptcy proceeding remains pending in the
district court. We have dismissed quite a number of
Enodis’s appeals, and we remarked last month that
Enodis should thank its lucky stars that it had not been
sanctioned.
In re Consolidated Indus. Corp., Case No. 04-3249, order of
No. 04-2332 7
October 14, 2004. Then, a few days after oral argument in
the present case, Enodis’s lucky stars did fail. On November
19, 2004, we ordered sanctions against Enodis in the
amount of $36,698 in attorney fees plus $116.40 in costs.
Still pending is the trustee’s motion for clarifica-
tion, basically asking whether we didn’t mean to award
more money. It would be foolish, indeed, for the trustee
to assume he could put his faith in Enodis not to pursue
an argument just because it is unlikely to succeed. He
knows better and so do we.
But to get back to the case at hand, we note that this
appeal, too, is doomed. There are significant issues as
to whether Enodis has standing. And the trustee con-
tends that the appeal is moot because the Vansant set-
tlement had been taken off the table. We cannot order
approval of a settlement which does not exist.
And at oral argument, we learned that it gets worse.
While we were hearing argument about why the trustee
should be compelled to approve a possibly now-defunct
settlement, we were told that there is a new settlement. Not
surprisingly, we granted the trustee’s subsequent motion
that we take judicial notice of certain documents, including
an order of the bankruptcy court approving the second
settlement and the order of the Alabama court dismissing
the Vansants’ case. The new settlement is different in two
respects from the former. It is for $25,000, rather than
$20,000, a difference which seems insignificant when we
remember, as Enodis emphasized throughout this case, that
the original claim was for $8 million. And it retains to
Consolidated a $2,000 unsecured claim, which protects the
trustee’s standing under § 544(b) to avoid the fraudulent
transfers.
This case was moot before and it is moot now. It is
not possible to require a trustee to seek approval of a
defunct settlement, and it would be absurd to order him
to seek approval of an already approved settlement. This
appeal is DISMISSED.
8 No. 04-2332
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—2-8-05