Outboard Marine Corp v. Pacific Employers In ( 2008 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 07-1973
A LEX D. M OGLIA, Trustee for
Outboard Marine Corporation and
related debtors,
Plaintiff-Appellant,
v.
P ACIFIC E MPLOYERS INSURANCE C OMPANY,
INDEMNITY INSURANCE C OMPANY OF
N ORTH A MERICA, and A CE A MERICAN
INSURANCE C OMPANY,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 05 C 1366—Milton I. Shadur, Judge.
A RGUED O CTOBER 24, 2008—D ECIDED N OVEMBER 6, 2008
Before E ASTERBROOK, Chief Judge, and P OSNER and
R OVNER, Circuit Judges.
E ASTERBROOK, Chief Judge. Pacific Employers and two
other insurers issued policies to Outboard Marine Corpora-
2 No. 07-1973
tion covering workers’ compensation, automobile
liability, and general liability. These policies (which the
parties call “program agreements”) require Outboard
Marine to post irrevocable letters of credit as security
for its obligations to pay premiums and reimburse the
insurers for specified outlays.
After Outboard Marine entered proceedings under
Chapter 7 of the Bankruptcy Code, its Trustee filed an
adversary action against the insurers. The Trustee con-
tended that the letters of credit give the insurers more
security than they are entitled to, and he asked the bank-
ruptcy court to order the insurers to release these letters
to the extent of the excess. The insurers denied that the
letters of credit give them too much security, and they
also invoked clauses in each policy that require
Outboard Marine to arbitrate disputes arising out of the
policies. The Trustee resisted, but in October 2003 Bank-
ruptcy Judge Squires granted the insurers’ motions to
stay the adversary proceeding and compel arbitration.
Five years have gone by, and the arbitration has yet to
get under way. The Trustee decided to undermine the
bankruptcy court’s order by refusing to cooperate. The
arbitrators saw that the Trustee was being difficult, and
they thought it prudent to protect themselves by
requiring the parties to sign a hold-harmless agreement
that not only forbids suit against the arbitrators (a con-
tractual supplement to the immunity that arbitrators
enjoy at common law, see Tamari v. Conrad, 552 F.2d 778,
780 (7th Cir. 1977)) but also requires indemnification of
arbitrators sued in the teeth of that immunity, should they
No. 07-1973 3
incur legal expenses to defend themselves. Rules of the
American Arbitration Association, under which the
arbitration was being conducted, allow arbitrators to
require the parties to make hold-harmless promises.
The insurers signed; the Trustee refused. He asserted
that the indemnity clause would create an unwarranted
contingent claim against the bankruptcy estate. The
Trustee then asked Judge Squires to rescind the arbitration
order, which he did, stating that “if the trustee doesn’t
want to grant [indemnity] for the exercise of his business
judgment, . . . that is, I think, a matter within his discre-
tion.” The bankruptcy judge did not cite any legal author-
ity for the proposition that a Trustee may thwart arbitra-
tion by unilateral refusal to cooperate.
The insurers appealed to the district court, which
reversed. 365 B.R. 863 (N.D. Ill. 2007). The district judge
explained that Outboard Marine had promised to
arbitrate and that the Trustee must take any steps
required to fulfill that promise. The district judge
directed the Trustee to sign the hold-harmless agreement
and proceed with the arbitration; the matter was
remanded to the bankruptcy court to be held in abeyance
until the arbitration had been completed.
In this court the Trustee insists that the hold-harmless
agreement would create a contingent claim against the
estate. Why that should matter is obscure. The obligation
to pay the arbitrators creates a direct claim against the
estate; why should a contingent claim arising from the
same pre-bankruptcy contract be worse? The size of this
claim surely is small: Unless someone sues the arbitrators
4 No. 07-1973
there will be no outlay. The probability of suit is minus-
cule, and the legal fees needed to fend off frivolous litiga-
tion also are small. It is hard to see how the actuarial
value of this contingent claim could exceed $100. Yet the
Trustee has spent many thousands of dollars in legal fees,
and delayed this case by five years, to avoid a trivial
chance of exposure to a modest claim. That’s a sign of
irrationality; no wonder the arbitrators thought that
they needed extra protection.
The Trustee also maintains that the policies, as
executory contracts, were automatically rejected under
11 U.S.C. §365(d)(1) when they were not assumed within
60 days after the bankruptcy began, and that rejection
enables the estate to avoid all of Outboard Marine’s
promises, including the promise to arbitrate. The insurers
acknowledge that this is so if the policies have been
rejected, but they interpret the Trustee’s argument as an
attempt to avoid only Outboard Marine’s obligations
under the policies, while holding the insurers to their
own—in other words, to get back the security while
leaving the insurers exposed to future claims for indem-
nity.
If the policies have been rejected, then they are
cancelled. There will be no future indemnity, any more
than a tenant could “reject” a lease while continuing to
occupy the premises rent-free. A Trustee can’t have
things both ways. After rejection, the bankruptcy court
rather than an arbitrator should settle accounts between
Outboard Marine and the insurers—for rejection does not
avoid the debtor’s obligations but simply replaces specific
No. 07-1973 5
performance with damages. See Douglas G. Baird, Elements
of Bankruptcy 130–40 (4th ed. 2006); Michael T. Andrew,
Executory Contracts in Bankruptcy: Understanding “Rejection",
59 U. Colo. L. Rev. 845 (1988). Damages then may be
written down according to their priority vis-à-vis
other claims against the estate.
Whether these policies have been rejected, or the arbitra-
tion clause otherwise avoided, is a question that we
may decide only if the appeal is within our jurisdiction.
And it is not. The district judge remanded for further
proceedings. That makes the decision interlocutory
and non-appealable. See In re Comdisco, Inc., 538 F.3d 647
(7th Cir. 2008).
This conclusion is fortified by the nature of the remand:
for a stay of proceedings pending arbitration. A pro-
arbitration decision, coupled with a stay (rather than a
dismissal) of the suit, is not appealable. See Green Tree
Financial Corp. v. Randolph, 531 U.S. 79, 87 n.2 (2000).
Indeed, 9 U.S.C. §16(b) positively forbids appeal. It says
that “an appeal may not be taken” from an order
staying litigation in favor of arbitration “[e]xcept as
otherwise provided in section 1292(b) of title 28”, which
allows appeal of controlling questions by joint
permission of the district and appellate courts. Other
possible sources of appellate jurisdiction, including 28
U.S.C. §158(d) (final decisions in bankruptcy), §1291 (final
decisions in civil suits), and §1292(a) (injunctions), are
superseded for orders to arbitrate.
According to the Trustee, the district judge’s order to
sign the hold-harmless promise is an injunction, which
6 No. 07-1973
may be appealed under §1292(a); the Trustee contends
that we may review the arbitration order under the doc-
trine of “pendent appellate jurisdiction.” This line of
argument is full of holes.
The order to sign the hold-harmless promise is no
more an “injunction” than is the order to arbitrate itself.
Judges routinely direct parties to do things—provide
discovery, make witnesses available for medical exams,
pay arbitrators, draw up plans for compliance with some
legal obligation—without thereby entering injunctions
that may be immediately appealed.
An injunction is an order of specific performance on
the merits, a remedy for a legal wrong. An order “to do”
in the course of litigation is not an injunction unless it
effectively resolves the merits in a way that would escape
review later. See, e.g., Gulfstream Aerospace Corp. v.
Mayacamas Corp., 485 U.S. 271, 279 (1988); In re Springfield,
818 F.2d 565 (7th Cir. 1987). Treating case-management
orders as injunctions would permit not one appeal per
suit, but dozens, and make a mockery of the final-decision
requirement. It would allow litigation to be dragged out
interminably, as this has been—for although Outboard
Marine entered bankruptcy in 2000, resolution of the
parties’ substantive dispute has yet to begin! Arbitration
is supposed to be a quick and cheap substitute for
litigation (gaining the benefits of expertise in the process,
since many arbitrators are specialists), yet the Trustee
has succeeded in multiplying the time and expense re-
quired.
If the order to sign were an injunction, still §16(b) would
forbid appeal. The only exception to §16(b) is an appeal
No. 07-1973 7
by permission under §1292(b), and that section does not
help the Trustee. (The district judge did not certify his
order for appeal under §1292(b).) As for the collateral-
order doctrine, see Cohen v. Beneficial Industrial Loan
Corp., 337 U.S. 541 (1949): this elaborates on the phrase
“final decision” in 28 U.S.C. §1291, and §16(b) prevents
litigants from using §1291 to get review of orders
staying litigation in favor of arbitration.
Even if all of this were wrong, the doctrine of “pendent
appellate jurisdiction” would not permit us to review the
order to arbitrate. Section 16(b) blocks resort to that
doctrine, in common with all sources of appellate juris-
diction other than §1292(b). So we held in IDS Life Insurance
Co. v. SunAmerica, Inc., 103 F.3d 524, 528 (7th Cir. 1996).
What’s more, pendent appellate jurisdiction is a discre-
tionary doctrine, and judges ought not use discretion to
get ’round statutes such as §16(b). Although the Trustee
is right to say that Swint v. Chambers County Commission,
514 U.S. 35, 43–51 (1995), left open the possibility that
appellate courts might assert pendent appellate juris-
diction, “the Court made clear that only the most extra-
ordinary circumstances could justify the use of whatever
power the courts of appeals possess—and that even
when circumstances are exceptional the availability of
pendent appellate jurisdiction is doubtful.” McCarter v.
Retirement Plan for American Family Insurance Group, 540
F.3d 649, 653 (7th Cir. 2008).
Since Swint the Justices have approved the use of pen-
dent appellate jurisdiction only once. They deemed the
President’s status as a defendant a compelling circum-
8 No. 07-1973
stance. See Clinton v. Jones, 520 U.S. 681, 707 n.41 (1997). But
the Trustee of Outboard Marine Corporation is not the
President, and there is nothing extraordinary about this
commercial litigation. Pendent appellate jurisdiction
would not be available even if §16(b) were not an inde-
pendent bar to its use. Although National Railroad
Passenger Corp. v. Expresstrak, LLC, 330 F.3d 523 (D.C. Cir.
2003), and Quackenbush v. Allstate Insurance Co., 121 F.3d
1372 (9th Cir. 1997), invoke “pendent appellate jurisdic-
tion” to review mundane arbitration orders, those deci-
sions go in the teeth of both Swint and §16(b). We shall
adhere to IDS Life Insurance.
It is long past time to carry through with the arbitration
that was ordered in 2003. Whether or not the contract
has been rejected, the Trustee must stop dragging his
heels. If the arbitration ends in the insurers’ favor, the
Trustee will be entitled to renew in the bankruptcy court
his argument that the policies have been rejected. The
Trustee’s intransigence has greatly increased the insur-
ers’ costs of litigation. The policies contain fee-
shifting clauses. The bankruptcy judge may think it
prudent to consider, once the arbitration has been com-
pleted, whether any attorneys’ fees awarded under these
policies should be borne by the Trustee personally rather
than by the creditors of Outboard Marine. See Maxwell
v. KPMG LLP, 520 F.3d 713, 718–19 (7th Cir. 2008).
The appeal is dismissed for want of jurisdiction.
11-6-08