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Paul Zimmerman

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U.S. Magistrate Judge Recommends Finding for Insurer Due to No Final Judgment Against its Bankrupt Insured

On February 29, 2016, a Texas Magistrate Judge recommended that the District Court for the Southern District of Texas grant summary judgment in favor of an insurer faced with a $63 million bid for coverage (Kipp Flores Architects, LLC v. Mid-Continent Casualty Co).  U.S. Magistrate Judge Mary Milloy noted that plaintiff Kipp Flores Architects (“KFA”) failed to obtain the requisite final judgment necessary to pursue recovery against insurer Mid-Continent Casualty Co. (“Mid-Continent”). KFA had predicated its claim against Mid-Continent on a Chapter 7 bankruptcy proceeding involving Mid-Continent’s bankrupt insured, Hallmark Collection of Homes LLC (“Hallmark”).

According to the Magistrate, while KFA submitted a $63 million proof of claim in Hallmark’s Chapter 7 bankruptcy proceeding, the Bankruptcy Court never entered an Order allowing that proof of claim, and closed the no-asset bankruptcy proceedings without ever liquidating or distributing any assets. The Magistrate thus concluded that there was no genuine issue of material fact on whether KFA’s proof of claim was allowed, and as a result, whether KFA ever obtained a final judgment against Hallmark to which it could turn to the Mid-Continent policy for satisfaction. 

Judge Milloy concluded that without a final judgment against Hallmark, KFA had no right to recover the benefits of Hallmark's insurance policy from Mid-Continent. Relying on rationale set forth in a Ninth Circuit decision, Siegel v. Federal Home Loan Mortgage Corp., KFA claims that Judge Milloy’s recommendation is flawed.  KFA argues that under Section 502 (a) of the Bankruptcy Code, since no objection was filed to its $63 million proof of claim in the Bankruptcy Court, it is deemed allowed and becomes a “final judgment.” This case then, poses two interesting questions: (1) whether the Bankruptcy Court in Hallmark's Chapter 7 case did not have jurisdiction to allow KFA’s claim because the proceeding was a no-asset case; and (2) even if KFA’s proof of claim was deemed allowed (since there was no objection to it), does it constitute a final judgment in the absence of a specific order or judgment of the Bankruptcy Court.

It remains to be seen whether the district court will accept Judge Milloy’s recommendation or take an alternative course of action. In any event, this is a case that insurance companies and their counsel will keep a watchful eye on, as it could dramatically shift the definition of a “final judgment” in the context of a bankruptcy proceeding.

This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.