Reversionary Interests in Chapter 11
When
disposal to a third party of the Debtor’s reversionary interest in property was
agreed upon in arm’s-length pre-petition documents, but the Confirmed Plan
provides the reversion is property of the reorganized Debtor, who wins? That is
the question the Bankruptcy Court had to answer in Lawski v. Frontier Insurance Group, LLC, et al (In re Frontier Insurance Group, Inc.), No. 05-36877, Adv. Pro. No. 14-9022 (Bankr. Ct., S. D. N. Y., Feb. 1, 2018).
In
1991, Frontier Insurance Company was the wholly owned subsidiary of Frontier
Insurance Group and both companies maintained their headquarters in a corporate
campus in Sullivan County, New York. Frontier Insurance Group owned two of the
three parcels on which the campus was located, while Frontier Insurance Company
owned the third. In connection with a local tax abatement program, both
companies transferred their interests to the Sullivan County Industrial
Development Authority (IDA). The documents governing these transfers provided
that when the tax abatement program was completed, the IDA would convey all
three parcels to Frontier Insurance Company, despite the fact Frontier
Insurance Group originally owned two of them.
In
2001, Frontier Insurance Company went into a state rehabilitation proceeding.
While that was ongoing, Frontier Insurance Group (the parent) went into Chapter
11 and the Plan was confirmed in December 2005. The original Asset Disclosure
Statement listed the parcel conveyed
to the IDA by Frontier Insurance Company
and one of the parcels conveyed by Frontier Insurance Group, both “as ‘Successor in Interest to [the IDA].’” The Disclosure
was later amended to omit the Frontier Insurance Company parcel.
The
state rehabilitation proceeding was unsuccessful and was converted into a
statutory liquidation proceeding in 2012, vesting
the Liquidator with "title to all of Frontier Insurance Company's property" and directing him to liquidate the
business in accordance with the New York Insurance Law. The tax abatement
program concluded in 2014, and the reorganized Debtor asserted ownership of the
reversionary rights (pursuant to the Plan), prompting the Liquidator to
commence an action in state court to enforce the IDA documents.
Following
a trial, the Bankruptcy found the Rehabilitator (predecessor to the Liquidator)
and the Debtor had consistently treated the reversionary rights in both
of the former Frontier Insurance Group parcels as property of the Estate during
the Chapter 11 proceedings, even though one of the parcels wasn’t explicitly
listed in the Asset Disclosure and despite all parties’ awareness of the
contrary provisions in the IDA documents. Thus, under applicable provisions of the Bankruptcy Code and
principles of res judicata, the
Liquidator was precluded from recovery on behalf of Frontier Insurance Company.
Comment:
This is a “juicy” case for both bankruptcy and land title lawyers – an
insurance company in rehabilitation, then in liquidation; its parent in
bankruptcy; an omission from Debtor’s asset schedule; venue, statute-of-frauds
and issue-preclusion concerns; federal/state jurisdiction over property rights
disputes; abstention; judicial estoppel, and more. A must-read.