Enodis Corporation v. Employers Insur ( 2004 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 02-4030
In re: CONSOLIDATED INDUSTRIES CORP.,
Debtor.
ENODIS CORPORATION,
Plaintiff-Appellant,
v.
EMPLOYERS INSURANCE OF WAUSAU,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Indiana, Hammond Division.
No. 4:02CV50—Allen Sharp, Judge.
____________
ARGUED MAY 27, 2003—DECIDED MARCH 9, 2004
____________
Before ROVNER, DIANE P. WOOD, and WILLIAMS, Circuit
Judges.
ROVNER, Circuit Judge. This case presents the odd situ-
ation of one party suing another for contempt of a bank-
ruptcy court order to which neither was a party. Because we
do not believe that appellant Enodis is the proper party to
raise a contempt claim and we further do not believe that
2 No. 02-4030
appellee Wausau acted in contempt of the order, we affirm
the dismissal of Enodis’s adversary complaint.
I.
The debtor in this Chapter 7 case is Consolidated Indus-
tries, Corp., a manufacturer of residential furnaces. Enodis
owned Consolidated until it sold the debtor to William Hall
in 1998. Under the terms of Hall’s stock purchase agree-
ment, Enodis continued to provide insurance for the debtor
for three years after the sale, although Hall promised that
either he or Consolidated would reimburse certain self-
insurance and coverage costs that Enodis was obligated to
pay under its insurance agreements. Consolidated guaran-
teed payment of these costs. Employer’s Insurance of
Wausau was one of Enodis’s insurers.
At the time the debtor entered bankruptcy, it was the
defendant in several product liability suits, including a
California class-action entitled Salah v. Consolidated Indus.
Corp., No. CV 738376 (Cal. Sup. Ct. Santa Clara Cty). On
August 14, 2000, the bankruptcy court issued an order
releasing the Salah plaintiffs from the automatic stay
subject to certain conditions, which in relevant part stated
that:
(a) Any judgment entered in favor of the Salah Class
Action Plaintiffs which is not covered by insurance shall
have no effect on the determination of the amount of
the Salah Class Action Plaintiff’s [sic] allowed claims
filed in this bankruptcy.
In re Consolidated Industries Corp., No. 98-40533, at 2
(Bankr. N.D. Ind. Aug. 14, 2001) (order lifting automatic
stay).
By mid-2001, the Salah plaintiffs had negotiated a set-
tlement with Wausau and another of Consolidated’s insur-
ers in which Wausau agreed to pay more than $1.7 million
No. 02-4030 3
dollars to settle the plaintiffs’ claims against third parties
who had sold furnaces manufactured by Consolidated. The
insurers submitted the settlement to the bankruptcy court
for approval, but the Trustee objected. The insurers over-
came the Trustee’s objection by chipping in an extra
$100,000 to compensate the estate for expenses it had
incurred fighting the insurers’ defenses to coverage. At
a hearing on November 14, 2001, the bankruptcy court
approved the settlement, although the written order ap-
proving the settlement was not entered until November 23,
2001. In the settlement agreement, Wausau expressly
reserved its rights to pursue “any other Persons for subro-
gation, contribution, contractual or other relief with respect
to the sharing or reimbursement of defense fees and costs
incurred under [its] Polic[y].” Enodis did not attend the
hearing at which the bankruptcy court approved the
settlement, nor did it object to the settlement.
Wausau quickly moved to recover the amount it paid un-
der the settlement agreement from Enodis. On November
16, 2001, Wausau drew $500,000 on a letter of credit set up
under the insurance agreement to secure Enodis’s payment
of self-insured retention expenses. Wausau also has at-
tempted to recover from Enodis the rest of what it paid in
the settlement.
Enodis instituted this adversary proceeding to recover the
$500,000. Enodis’s complaint raised four claims to recover
the $500,000 payment. Enodis claimed first that the draw
violated the automatic stay; second, that Wausau’s draw
was in contempt of the August 14, 2000, order releasing the
Salah plaintiffs from the automatic stay; third, that
Wausau acted in contempt of the court at the November 14,
2001, hearing by not disclosing its plan to seek compensa-
tion from Enodis for the amount it paid under the settle-
ment (which under Enodis’s theory would create an admin-
istrative expense when Enodis exercised its contractual
rights against Consolidated); and fourth, that Wausau
4 No. 02-4030
should be equitably estopped from seeking recompense from
Enodis because of alleged misrepresentations Wausau made
to the bankruptcy court in regard to the settlement.
Wausau moved to dismiss the complaint for failure to
state a claim. The bankruptcy court held a hearing on the
motion on March 13, 2002, and in an oral decision, dis-
missed the complaint. The court held that Enodis was not
entitled to enforce the August 14, 2000 order because it was
not a beneficiary of the order. It further held Wausau could
not be held in contempt of the August 14 order because the
order did not bind Wausau. The court found that even
assuming that at the settlement hearing Wausau was
wilfully silent about its intent to pursue Enodis, Wausau
had not acted in contempt because it had expressly reserved
its right to pursue third parties in the settlement agree-
ment itself. The court found no duty for Wausau to speak of
its plans, ruling that any expenses Enodis might try to bill
to the estate would not be entitled to administrative
priority. Finally, the court found that Enodis could not
bring an equitable estoppel claim as a separate cause of
action.
Enodis appealed, raising three arguments in the district
court. First, it claimed that the bankruptcy judge had not
properly evaluated the motion to dismiss. Second, it argued
that Wausau had acted in contempt of the August 14 order
by “duping” the trustee into violating the order, and third,
Enodis argued that because it was a creditor of the debtor,
it was a beneficiary of the August 14 order.
The district court rejected Enodis’s arguments and af-
firmed. The court found that the bankruptcy court had pro-
perly evaluated the motion to dismiss, accepting Enodis’s
factual allegations as true. Further, the court found that
the bankruptcy court was justified in judicially noticing
prior documents in the main bankruptcy case. The district
court then agreed with the bankruptcy court that the
No. 02-4030 5
August 14 order did not prohibit Wausau’s actions. Enodis
now appeals to this court
II.
A Rule 12(b)(6) dismissal of an adversary complaint in
bankruptcy presents an issue of law that we review de novo.
Boim v. Quranic Literary Inst., 291 F.3d 1000, 1008 (7th
Cir. 2002). However, the bankruptcy court’s decision in this
case in large part depended on its interpretation of its own
earlier orders. We will not reverse a court’s interpretation
of its own order unless it is a “clear abuse of discretion,”
because a court that issued an order is in the best position
to interpret it. In re VMS Securities Litigation, 103 F.3d
1317, 1323 (7th Cir. 1996); In re Mars-Winn Co., Inc., 103
F.3d 584, 595 (7th Cir. 1996).
As an initial matter, an adversary proceeding is not the
proper vehicle to present a contempt claim, as civil con-
tempt is a method of enforcing a court order, not an inde-
pendent cause of action. D. Patrick, Inc. v. Ford Motor Co.,
8 F.3d 455, 459 (7th Cir. 1993). The proper vehicle to
enforce a court order is a motion in the original case. Id.But even aside from this procedural problem, Enodis is not
the proper party to assert any alleged contempt of the
August 14 order. Generally, contempt claims may only be
brought by the party aggrieved by the contemptuous ac-
tions. Cf. Flight Engineers Intern. Ass’n v. Eastern Air
Lines, Inc., 301 F.2d 756, 758-59 (5th Cir. 1962). Enodis
argues that as a creditor, it has a pecuniary interest
protected by the August 14 order. But the estate itself is the
true party harmed by any violation of the August 14 order,
and the code charges the trustee to pursue the interests of
the bankruptcy estate. See 11 U.S.C. § 323(a). Status as a
creditor is not sufficient to allow a party the right to allege
contempt of an order seeking to protect the estate, particu-
larly in a complex bankruptcy such as this. Bankruptcy law
6 No. 02-4030
does allow a creditor to bring a derivative claim on behalf
of the estate, but only in limited circumstances. See Fogel
v. Zell, 221 F.3d 955, 965-66 (7th Cir. 2000); Matter of
Perkins, 902 F.2d 1254, 1258 (7th Cir. 1990). To do so, a
creditor must show that the trustee has unjustifiably
refused the creditor’s demand to pursue a colorable claim
and obtain leave from the bankruptcy court to proceed. See
Fogel, 221 F.3d at 965. The record in this case shows that
Enodis did not attempt to make the required showing, and
thus it cannot enforce the August 14 order.
III.
We do not believe, however, that a remand to the bank-
ruptcy court for a determination of whether Enodis ought to
be allowed to pursue its claims is justified, because the
bankruptcy court and district court have both considered
the contempt claim on the merits and found no basis for
contempt of the August 14 order. The core of Enodis’s
contempt claim is the scope of the August 14 order. The
bankruptcy court interpreted its order according to its
terms and found that the only party bound by the order was
the Salah plaintiffs. Enodis urges a far more expansive
view of the order, arguing essentially that the order bars
any party from creating any expense against the estate in
connection with the Salah litigation. But the bankruptcy
court is the best judge of the meaning of its own order, and
we will not disturb its reasonable interpretation. In re VMS
Securities Litigation, 103 F.3d at 1323. Wausau is not
named in the order, and the bankruptcy court wisely
decided not to engage in the gymnastics that would be
required to make that order appear to apply to Wausau.
Enodis’s claim that Wausau defrauded the court about its
intent to proceed against Enodis is foreclosed by Wausau’s
explicit reservation of rights in the written settlement
presented to the court. Wausau had vigorously litigated its
No. 02-4030 7
liability for the tort claims against the debtor during the
bankruptcy proceedings, and its explicit reservation of
rights, when viewed in light of its conduct during the
bankruptcy, was sufficient notice to the bankruptcy court
about its attempt to pursue Enodis for the costs it incurred
under the settlement. Thus, Wausau’s resort to the letter of
credit did not constitute a contempt of the court.
IV.
Enodis’s final attack on the dismissal faults the bank-
ruptcy court for making factual findings in a Rule 12(b)(6)
proceeding. Enodis complains that the bankruptcy court
improperly decided that had it known about Wausau’s
intent to draw on the letter of credit, it would nonetheless
have approved the settlement. But Enodis overstates its
case. Of course, a judge reviewing a motion to dismiss under
Rule 12(b)(6) cannot engage in fact-finding. See Interna-
tional Marketing, Ltd. v. Archer Daniels Midland Co., 192
F.3d 724, 730 (7th Cir. 1999). But the bankruptcy court
both recognized the proper standard of review and did not
engage in fact-finding. Rather, the bankruptcy court’s
hypothetical is just an expression of the court’s opinion that
the facts Enodis presented in its complaint were insufficient
to establish contempt as a matter of law. Enodis’s claim
therefore fails.
In light of our disposition of the issues above, we need not
decide whether Enodis’s claims arising out of the letter of
credit transaction are administrative expenses. We AFFIRM
the district court’s judgment.
8 No. 02-4030
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—3-9-04