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Pratt’s Journal of BankruPtcy law

VOLUME 7 NUMBER 5 JULY/AUGUST 2011

HEADNOTE: NO-CALL PROVISIONS, DUAL-FILED REORGANIZATION PROCEEDINGSSteven A. Meyerowitz 385

THE TREATMENT OF NO-CALL PROVISIONS, PREPAYMENT PREMIUMS, AND MAKE-WHOLE DAMAGES UNDER THE BANKRUPTCY CODEDavid S. Elkind and James Chang 387

THE HAZARDS OF DUAL-FILED REORGANIZATION PROCEEDINGS IN CANADA AND THE UNITED STATESRachelle F. Moncur and Rowena White 398

BANKRUPTCY AND INSURANCE: WHEN THEY MEET AT THE CORNERFranklin Ciaccio 415

NOW YOU SEE IT, NOW YOU DON’T: IMPRECISE CLAIM PRESERVATION LEADS TO EVAPORATING VALUEBennett S. Silverberg and Sarah E. Castle 429

NON-JUDICIAL FORECLOSURE OF AIRCRAFT COLLATERAL: UNIQUE CHALLENGES FOR LENDERSMichael A. Nardella 436

UNWRAPPING ENGLISH PRE-PACKAGED ADMINISTRATIONS: A GUIDE TO “PRE-PACKS” Alastair Goldrein 444

TREATMENT OF BOND DEBT AND INTERCOMPANY CLAIMS UNDER MEXICAN BANKRUPTCY LAWLuis Enrique Graham, Salvador Fonseca, and Sergio Rodriguez Labastida 450

IN RE TOUSA, INC.: COMMERCIAL LENDING AND DEBT TRADING MARKETS BREATHE A SIGH OF RELIEFLarren M. Nashelsky, Rafael L. Petrone, Geoffrey R. Peck, and Chrys A. Carey 454

ANOTHER DERIVATIVES DISPUTE RESOLVED IN FAVOR OF LEHMANChristy L. Rivera 461

BANKRUPTCY COURT HOLDS THAT THE SECTION 546(E) SAFE HARBOR DOES NOT APPLY TO “SETTLEMENT PAYMENTS” MADE IN A SMALL, PRIVATE LEVERAGED BUYOUT THAT POSES NO SYSTEMIC RISK TO THE SECURITIES MARKETJason H. Watson, David A. Wender, and Jonathan T. Edwards 466

WHETHER THE GOODS AND INVOICES COMPRISING PENDING §503(B)(9) CLAIMS MAY BE INCLUDED IN A §547(C)(4) SUBSEQUENT NEW VALUE DEFENSE TO A PREFERENCE ACTIONGeorge D. Gaskin III 470

EDITOR-IN-CHIEFSteven A. Meyerowitz

President, Meyerowitz Communications Inc.

ASSISTANT EDITORCatherine Dillon

BOARD OF EDITORS

PRATT’S JOURNAL OF BANKRUPTCY LAW is published eight times a year by A.S. Pratt & Sons, 805 Fif-teenth Street, NW., Third Floor, Washington, DC 20005-2207, Copyright © 2011 THOMPSON MEDIA GROUP LLC. All rights reserved. No part of this journal may be reproduced in any form — by microfilm, xerography, or otherwise — or incorporated into any information retrieval system without the written permission of the copyright owner. Requests to reproduce material contained in this publication should be addressed to A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC 20005-2207, fax: 703-528-1736. For permission to photo-copy or use material electronically from Pratt’s Journal of Bankruptcy Law, please access www.copyright.com or contact the Copyright Clearance Center, Inc. (CCC), 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400. CCC is a not-for-profit organization that provides licenses and registration for a variety of users. For subscription information and customer service, call 1-800-572-2797. Direct any editorial inquires and send any material for publication to Steven A. Meyerowitz, Editor-in-Chief, Meyerowitz Communications Inc., PO Box 7080, Miller Place, NY 11764, [email protected], 631.331.3908 (phone) / 631.331.3664 (fax). Material for publica-tion is welcomed — articles, decisions, or other items of interest to bankers, officers of financial institutions, and their attorneys. This publication is designed to be accurate and authoritative, but neither the publisher nor the authors are rendering legal, accounting, or other professional services in this publication. If legal or other expert advice is desired, retain the services of an appropriate professional. The articles and columns reflect only the pres-ent considerations and views of the authors and do not necessarily reflect those of the firms or organizations with which they are affiliated, any of the former or present clients of the authors or their firms or organizations, or the editors or publisher. POSTMASTER: Send address changes to Pratt’s Journal of Bankruptcy Law, A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC 20005-2207.

ISSN 1931-6992

Scott L. BaenaBilzin Sumberg Baena Price &

Axelrod LLP

Leslie A. BerkoffMoritt Hock & Hamroff LLP

Andrew P. BrozmanClifford Chance US LLP

Kevin H. BuraksPortnoff Law Associates, Ltd.

Peter S. Clark II Reed Smith LLP

Thomas W. CoffeyTucker Ellis & West LLP

Mark G. DouglasJones Day

Timothy P. DugganStark & Stark

Gregg M. FicksCoblentz, Patch, Duffy & Bass

LLP

Mark J. FriedmanDLA Piper Rudnick Gray Cary

US LLP

Robin E. KellerLovells

William I. Kohn Schiff Hardin LLP

Matthew W. LevinAlston & Bird LLP

Alec P. OstrowStevens & Lee P.C.

Deryck A. PalmerCadwalader, Wickersham &

Taft LLP

N. Theodore Zink, Jr.Chadbourne & Parke LLP

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Published by A.S. Pratt in the July/August 2011 issue of Pratt’s Journal of Bankruptcy Law.

Copyright © 2011 THOMPSON MEDIA GROUP LLC. 1-800-572-2797.

Bankruptcy and Insurance: When They Meet at the Corner

FRANKLIN CIACCIO

The author analyzes two important decisions and their implica-tions for the insurance industry.

When one mentions J.D. Salinger, most people invariably think of “Catcher in the Rye.” I, on the other hand, think of one of his short stories, “For Esme — with Love and Squalor,” and, al-

though I do not entirely recall its context, I remember Esme’s little brother telling a riddle to a G.I. on his way to war. “What does one wall say to the other wall?,” the little boy asks. “Meet you at the corner,” he immediately responds to his own riddle, thereupon collapsing into gales of laughter. Now I do not know if there is any more subtle meaning to the riddle, nor do I know why I find it so interesting. Maybe it has to do with the point that without a second wall to meet the first wall “at the corner,” the first wall will fall because it cannot stand alone. And maybe it has to do with a point that is so obvious on its face, no one gives it a second thought, and the relationship of two walls standing together is just taken for granted. In a number of respects the riddle bears a unique resemblance to the relationship confronting a filing debtor seeking debtor-in-possession

Franklin Ciaccio is a litigation partner at the Wall Street law firm Carter Ledyard & Milburn LLP. His practice focuses primarily on the financial services industry, representing secured and unsecured institutional lenders, as well as indenture trustees, in connection with restructuring of institutional and indentured debt in cor-porate workouts, reorganizations and bankruptcies. Mr. Ciaccio can be reached at [email protected].

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(“DIP”) financing and the practical requirement for the maintenance of adequate general liability insurance coverage, as well as state mandated maintenance of workers’ compensation. While DIP financing is invariably the subject of a great deal of thought and planning, not to mention intense negotiation, the necessity for the debtor obtaining insurance is generally ignored by the various constituencies represented in a typical bankruptcy case. Rarely, if ever, is it a subject for consideration or negotiation among competing interests, and never does it require judicial intervention other than uncontroverted approval of the insurance contract under which ap-propriate coverage for a debtor-in-possession is obtained. For a debtor-in-possession customarily obtains insurance as a matter-of-course, it is believed, and payment of the attendant premium will “take care of itself” through funding made available by DIP financing, in the same manner as other operational expenses. Insurance coverage, whether commercially necessary or legally man-dated, has become a matter taken for granted over recent years and, just as one wall meets the other wall “at the corner,” the skeleton of the restruc-turing process itself has remained intact, comprised of both financing and insurance. That is, until recently, when a number of court decisions, having wended their way through the by-ways of the judicial process and been de-nied further argument before the U.S. Supreme Court on no less than two occasions, are now the law of the Sixth Circuit.1 As a result, we are advised, in those states governed by the law as interpreted by the Sixth Circuit, the insurance companies involved in such cases have determined to cease writ-ing those traditional types of insurance coverages colloquially referred to as “large risk rating plans” or “deductible loss reimbursement programs,” which are often utilized in the bankruptcy context (the “Programs”). “The sky is falling,” said Chicken Little, and so have argued Zurich American Insurance Company (“Zurich American”) and National Union Fire Insurance Company of Pittsburgh (“National Union”), the latter a for-merly prominent member of the AIG Group and now a part of the Cer-tus family of companies (individually, an “Insurer,” and collectively, the “Insurers”). Before each court in which Zurich American and National Union appeared, that same argument was made, albeit on somewhat less than a sound evidentiary footing. Whether or not such argument is factu-

BANKRUPTCY AND INSURANCE

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ally correct or legally defensible will be proven by the test of time. In the meantime, however, the insurance industry should take careful note of the Zurich American and National Union decisions, as should the bankruptcy bar in general.

THE INSURANCE CONTRACT

The genesis of both the Zurich American and National Union cases is to be found in the manner in which workers’ compensation insurance coverage is financed under the Programs and how such coverages are im-pacted by Section 503(b)(1)(A) of the Bankruptcy Code. The Programs are comprised of two discrete but interrelated agree-ments. The type, scope and amount of the coverages provided by the In-surer, subject to a large deductible (the “Deductible”), are set forth in the attendant insurance policies (the “Policy” or “Policies”) listed on Sched-ules annexed to a Payment Agreement (the “Payment Agreement”), a fair-ly standard agreement also entered into by the Insurer and the debtor. The Payment Agreement describes the payment obligations assumed by the debtor, as well as certain payment obligations assumed by the Insurer. Pursuant to the Payment Agreement, the insurer assumes responsibil-ity for, among other things, the administration, adjustment and payment of workers’ compensation claims for injuries sustained during the coverage period, whether such claims are made during or after the conclusion of such period (the latter are typically referred to as “incurred but not report-ed losses” or “IBNR”). As part of the services furnished by the Insurer in connection with its administration, adjustment and payment of insurance claims, the Insurer advances on behalf of the debtor payment for losses for which the debtor is liable under the Deductible provisions of the Policies (the so-called “Loss Deductibles”). The payment obligations of the debtor under the Payment Agreement are secured in a variety of ways. The Payment Agreement is replete with fi-nancial preconditions imposed on the debtor to ensure that sufficient funds remain accessible or otherwise available to the Insurer in satisfaction of the debtor’s obligations thereunder. The debtor is liable for payment of a deposit, including a claims payment deposit, installments, together with


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additional payments, in amounts and subject to deadlines clearly imposed in various Schedules appended to the Payment Agreement. Most important for purposes of the present discussion, the Payment Agreement requires reimbursement by the debtor of those Loss Deductibles advanced by the Insurer on the debtor’s behalf (the “Loss Deductible Reimbursements”). In addition, the debtor is required to deliver collateral, acceptable in form and amount to the Insurer. Pursuant to the terms of the Payment Agree-ment, the debtor grants to the Insurer a continuing first priority security in-terest and right of offset with respect to all premiums, surcharges, dividends, cash, accounts, or funds that are payable to the debtor and that currently, or in the future, come into the possession of the debtor in connection with its obligations under the Payment Agreement. Any letters of credit that are pro-vided as collateral must be clean, unconditional, irrevocable and evergreen. The collateral supplied by the debtor to ensure its obligations under the Payment Agreement is typically subject to annual review by the In-surer and such further review and revision as the insurer “deems reason-ably necessary.” In addition, the review and revision of the collateral re-quirements under the Payment Agreement may be “triggered” at any time upon the occurrence of any one or more numerous events. These events may include the non-renewal or cancellation of any Policy to which the Payment Agreement applies; the failure or violation of any financial cov-enants or tests, or minimum financial rating specified in the Schedules; the occurrence of any direct or indirect transaction, with respect to the merger or consolidation of the debtor, or the conveyance, sale, transfer, dividend, spin-off, lease, or sale and lease-back, of all or a material portion of the debtor’s property, assets, business or equity to any other entity; or any ma-terial adverse change in the financial condition of the debtor, its subsidiar-ies or affiliates taken separately or in combination, or any other entity on which the Insurer might rely for security or guarantee in connection with the Payment Agreement.

THE BANKRUPTCY CODE (SECTION 503(B)(1)(A))

Under the Bankruptcy Code, administrative expenses generally refer to expenses incurred by a party after the filing of a petition in bankrupt-


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cy and prior to confirmation of a debtor’s plan of reorganization or plan of liquidation (the “Plan”). Such expenses, if allowed by the bankruptcy court, are eligible for priority in payment before distributions are made to general unsecured creditors of the debtor’s estate under a plan of reorga-nization or plan of liquidation. The Bankruptcy Code, Section 503(b)(1)(A), provides, in pertinent part, that “After notice and hearing, there shall be allowed, administrative expenses, including the actual, necessary costs and expenses of preserving the estate.” Both the Zurich American and National Union cases involve the eligi-bility of actuarially determined post-confirmation losses and expenses for administrative expense priority over prepetition unsecured claims under Section 503(b)(1)(A) of the Bankruptcy Code. The decisions rendered in Zurich American and National Union, in one way or another, revolved around the determination of what constituted “actual, necessary costs and expenses” and whether such costs and expenses were incurred for the pur-pose of “preserving the [debtor’s] estate.” The fact that payments made under Policies for workers’ compensation losses extending well beyond the confirmation of a debtor’s estate brought these issues clearly into play, together with the allied issue of whether Loss Deductible Reimbursements required of the debtor under the Payment Agreement could be deemed to be “Reimbursable” before such losses might actually have been reported or advanced and, in any event, after the debtor had ceased to exist.

ZURICH AMERICAN INSURANCE COMPANY v. LEXINGTON COAL CO., LLC (IN RE HNRC DISSOLUTION CO.)2

Any analysis of the issues which led to the present state of the law in the Sixth Circuit concerning the eligibility of post-confirmation costs and expenses for administrative expense priority under Section 503(b)(1)(A) of the Bankruptcy Code must start where the genesis of the issues took place in the relatively unfamiliar venue of the U.S. Bankruptcy Court for the Ashland Division of the Eastern District of Kentucky, in Zurich Ameri-can v. Lexington Coal.3


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The Kentucky Bankruptcy Court Decision

On May 30, 2006, the bankruptcy court for the Ashland Division for the Eastern District of Kentucky rendered a decision in connection with a matter that was thereafter referred to by higher courts as a matter of first impression. Considering that workers’ compensation, commercial automobile, and general liability risks must comprise the overwhelming preponderance of the insurance coverages required to be maintained by debtors-in-possession, this, in itself, might be viewed to be a matter of considerable importance. On the other hand, that the matter was one of first impression would seem to bear witness to the view that, in the “real world,” this issue arose due to the rare instance of collateral proving in-sufficient to cover the Insurer’s losses. If such is the case, in the future, Insurers would do well to take greater care in the negotiation of the col-lateralization of Loss Deductible insurance risks. Certainly, that is the inference one may draw from the succinct, straight forward manner in which the Bankruptcy Court for the Eastern District of Kentucky addressed the issues presented and summarily dismissed them with neither the fanfare nor the tortured analysis with which the same is-sues were to be addressed on a subsequent occasion by a number of the Sixth Circuit Judges in the National Union case. The Kentucky bankruptcy court held, in cursory fashion, that, to qual-ify as an administrative expense, a debt must have arisen from a postpeti-tion transaction with the debtor that could be demonstrated to have inured to and directly and substantially benefited the debtor’s bankruptcy estate. Speculative or potential benefits to the estate were held to be insufficient and expenses were required to have been paid prior to confirmation, pre-cluding expenses incurred post-confirmation. The court stated:

At this point, Zurich has provided nothing more than ‘its own statisti-cal analysis of the likelihood such claims will occur’ for the purpose of estimating its claim, and the court finds such analysis no more sup-portive of its claims than the Eli Witt court did. The court does not see how Zurich can ever provide anything more than a statistical analysis until the events can precipitate a claim for deductibles to occur. These events, by necessity, will occur post-confirmation.


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The court went on to question whether “estimation” was ever proper under Section 503(b)(1)(A) of the Bankruptcy Code where claims estima-tion was customarily the province of Section 502 involving the disposition of prepetition claims during the postpetition, pre-confirmation administra-tion of a debtor’s estate. For all its brevity, however, the Kentucky bankruptcy court addressed two issues that were to resonate throughout the cases to follow. The first dealt with the “corporeal existence” of a debtor’s estate. Said the court:

After confirmation of a plan under Chapter 11, administration of the estate ends and the estate ceases to exist…Thus, it is impossible to classify [costs] that accrue post-confirmation as administration ex-penses for the simple reason that after confirmation there is no longer an estate to administer.

The second issues were purely pragmatic in nature:

As Lexington Coal points out, Zurich chose not to participate in the plan process until after the Plans had been confirmed. The creditors and other parties in interest in this case were thus necessarily deprived of the opportunity to factor in a huge administrative expense claim that would have had a major effect on the consideration of the feasibil-ity of the Debtors’ proposed Plans.

The Kentucky District Court Decision

The district court decision in the Zurich American case addressed, in comprehensive fashion, all the issues raised below. As to the issue involv-ing “preservation of a debtor’s estate,” the district court referred to an earlier Supreme Court decision wherein the words “preserving the estate” were determined to “include the larger objective, common to arrange-ments, of operating the debtor’s business with a view to rehabilitating it.” The district court deferred to the “acknowledgment” of the Supreme Court that, “in the liquidation context, the parallel purpose is to preserve the estate as a going concern.” Accordingly, the district court held that Zurich


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American’s administrative expense claim failed to satisfy the statutory re-quirements of Section 503(b) because the “claimed expenses were neither actual at the time of filing nor would they be necessary to preserve the bankruptcy estate when the expenses [were] ultimately realized.” As to the issue involving the “actuality” of the expenses Zurich Amer-ican anticipated it would incur, the district court informed that accelerated reimbursement via administrative priority would not act to provide a direct and substantial benefit to the estate where the claimed expenses would not become legal obligations until unknown points in the future, if ever. In this regard, the district court recognized that the issue raised a “temporal dilemma:”

The timing problem arises because the question one must ask is whether the benefit should be measured at the moment the expenses become “actual” or whether it is appropriate to actuarially accelerate the reimbursement of the expenses because they stem from a contrac-tual obligation entered into by the debtor-in-possession.

To Zurich American, the answer was clear. Expenses incurred post-confirmation should relate back to the underlying contractual arrangement originally entered into during the bankruptcy “where such arrangement did not cognize the acceleration of the speculative expenses.” This argu-ment that prospective Loss Deductible obligations of the debtors flowed directly from the underlying terms of the Program providing a vital service to the debtors by enabling their continued operation during bankruptcy would later be articulated by two of the Sixth Circuit panel judges who recommended a review of Zurich American by the Sixth Circuit Court of Appeals sitting en banc.

In the end, the district court rejected Zurich American’s position:

…beyond the reality that the deductibles will not become due until after the estate is dissolved,…it is the special case here that the deduct-ible obligations do not even exist until claims arise whereby Zurich must advance payment.


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After addressing the countervailing assessments by Zurich American and the debtors, the district court turned its attention to the policy argu-ments raised by the respective parties concerning the affect the determina-tion of the court would have on bankruptcies in general. Finding that the case at bar was one of first impression and resulted, in large part, from a failure of the collateral taken by Zurich American to secure payment of its anticipated losses, the district court then rejected the view asserted by Zu-rich American that the disallowance of its claim by the court for adminis-trative expense priority would: “effectively turn the bankruptcy and insur-ance worlds ‘upside down.’” Instead, advised the court, “the precedential repercussions” felt in denying Zurich American’s claim under the narrow circumstances presented would not produce the dire picture that Zurich American had painted. The district court concluded its views in this regard in words later quoted repeatedly in the briefs of respective counsel in the National Union case:

The answer is reached by the simple realization that the question be-fore the court is not whether Zurich should be reimbursed for the de-ductibles where incurred in the future (as a creditor of the now-defunct estate), but instead whether Zurich’s claim for prospective expenses should receive administrative priority treatment. Proverbially speak-ing, Zurich made its bed and the other parties in interest — including [the debtors] and the public by way of reclamation — should not be forced to sleep in it.

The Sixth Circuit Court of Appeals: The Zurich American Decision

The Sixth Circuit issued a per curiam opinion in Zurich American, recognizing that the case involved so-called “deductible policies,” and taking note of the obligation of Zurich American to pay the entirety of any claims made and the necessity for Zurich American to seek reimbursement from the debtors for the deductible portion. The administrative expense claim, the court characterized as “an actuarial estimate of the deductible portion of the claims that Zurich believes it will pay in the future for inju-


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ries that occurred during the coverage period but were not the subject of insurance claims until after the confirmation of the debtors’ plans.” The Sixth Circuit took further note of a proposition that had previ-ously run through Zurich’s arguments in the lower courts and would run through the arguments of National Union which it was to later prosecute in the Ohio bankruptcy and district courts. The proposition asserted was that Zurich’s “estimated” administrative expense claim should have been permitted under Section 502(c) of the Bankruptcy Code. The Sixth Circuit stated, without discussion, that such argument had no merit and affirmed the lower court decisions, holding that Zurich American’s administrative expense claim did not constitute an “actual, necessary expense of preserv-ing the estate [of the debtors] as required by [S]ection 503(b)(1)(A) of the Bankruptcy Code.” The Sixth Circuit added meaningfully at the foot of its opinion that “Because it would be difficult for us to add anything of substance to the district court’s comprehensive opinion, we AFFIRM for the reasons stated by Judge David L. Bunning [of the district court below].” The U.S. Supreme Court denied the petition of Zurich American for a writ of certiorari.

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTS-BURGH v. VP BUILDINGS, INC. (VP BUILDINGS DISTRIBUTION TRUST)

The National Union case involved circumstances on all fours with those presented in Zurich American. As Circuit Judge Kennedy stated in the ultimate decision rendered by her in the Sixth Circuit Court of Appeals, no meaningful distinction was discernible between the two contracts gov-erning the obligations of the respective insurers.

The Ohio Bankruptcy Court and District Court Decisions

The National Union case against VP Buildings was commenced by a Motion for Summary Judgment in March 2007, requesting an order (1) confirming an arbitration award, and (2) allowing certain prepetition


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claims, as well as postpetition claims. The latter were comprised of both postpetition, pre-confirmation claims and post-confirmation claims. The decision in the U.S. Bankruptcy Court for the Northern District of Ohio, Eastern Division, was rendered shortly after the Kentucky district court rendered its decision in the Zurich American case. At the time, an appeal from that decision was pending before the Sixth Circuit Court of Appeals. The Ohio bankruptcy court, while not bound by the decision of the Kentucky district court, nor relying upon it, gave due consideration to its analysis of the issues presented and held independently that post-con-firmation costs and expenses could not be deemed administrative expenses under Section 503(b) of the Bankruptcy Code which were reserved for “actual, necessary costs and expenses of preserving a debtor’s estate.” The Ohio bankruptcy court based its decision on the fact that (1) the debtor’s estate had previously ceased to exist, and (2) National Union had not yet paid the claims for which it sought reimbursement from VP Buildings. The Ohio district court affirmed the opinion of the bankruptcy court below, and responded to an argument of National Union that the ruling of the bankruptcy court would result in a windfall to VP Buildings which might have a “chilling effect” on the willingness of insurance companies to pro-vide coverage after the filing of a bankruptcy petition. The district court re-sponded that National Union had provided insurance coverage to VP Build-ings during the period it conducted operations as a debtor-in-possession and, in turn, VP Buildings had paid premiums to National Union which were administrative expenses of the VP Buildings estate. Accordingly, both Na-tional Union and VP Buildings had received the benefit of their insurance bargain and neither a windfall nor a chilling effect on the willingness of Insurers to provide coverage to debtors postpetition would result.

The Sixth Circuit Court of Appeals National Union Decision

As the Sixth Circuit panel saw it, the mandate to the court as expressed in the Zurich American decision was clear. National Union had appealed the district court affirmance of the bankruptcy court’s decision disallowing Na-tional Union’s petition for post-confirmation administrative expenses. Na-tional Union had provided the estate with workers’ compensation insurance


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and requested that the estate fulfill its contractual obligation to reimburse it for anticipated post-confirmation costs and expenses to which National Union deemed itself entitled under Section 503(b)(1)(A) of the Bankruptcy Code. Both the bankruptcy court and the district court, having rejected that argument on the ground that the claim was not “actual” and did not benefit the debtor’s estate, the court of appeals panel was now bound by its control-ling decision in Zurich American to affirm the decisions below. And so it did. The Sixth Circuit Rule that the panel was bound by a prior panel’s decision, to which there were only two exceptions, could not be undone. The exceptions, an intervening U.S. Supreme Court decision to the contrary, or the prior decision having been overruled en banc were inap-plicable. Neither exception applied in the instant case. The panel concluded:

We are bound by HNRC [Zurich American] to conclude that National Union’s request for reimbursement is not an “actual” expense within the meaning of the bankruptcy code. In light of this conclusion, we do not address whether the reimbursement benefitted the estate or other-wise qualified for administrative expense priority.

However, it was not as easy as that. Two members of the three judge panel, while constrained to “concur in the majority opinion” wrote a sepa-rate opinion to question the Zurich American decision and to urge en banc review of the application of that rule to the National Union case. The basis for a rather tortured opinion delivered by the two panel judges who sought an en banc review of the Zurich American decision was that (1) the deci-sion focused on the Insurer’s claim for reimbursement as a “cost” which, by definition, could provide no benefit to a debtor’s estate, and (2) the ob-ligation of a debtor to reimburse the insurer arose when the Insurer entered into the underlying payment agreement, not postconfirmation when the Insurer actually paid a claim and sought reimbursement from the debtor. National Union, anticipating a possible reversal of the decision in Zur-ich American, immediately petitioned for a rehearing of the decision of the panel by the Sixth Circuit Court of Appeals sitting en banc. The suceeding Order of the Sixth Circuit read as follows:


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The court having received a petition for rehearing en banc, and the petition having been circulated not only to the original panel members but also to all other active judges of this court, and less than a majority of the judges having favored the suggestion, the petition for rehearing has been referred to the original panel.

The panel has further reviewed the petition for rehearing and con-cluded that the issues in the petition were fully considered upon the original submission and decision of the case. Accordingly, the petition is denied.

A petition for a writ of certiorari by National Union was recently de-nied by the U.S. Supreme Court.

CONCLUSION

It is clear that in the Sixth Circuit post-confirmation costs and expens-es are ineligible for administrative expense priority under Section 503(b)(1)(A) of the Bankruptcy Code. The U.S. Supreme Court will only grant a petition for a writ of certiorari on one of three grounds, (1) a decision of one circuit conflicts with that of another circuit; (2) a decision of a circuit court conflicts with a prior precedent of the Supreme Court; and (3) a deci-sion of a circuit court involves a question of exceptional importance. Since Zurich American and National Union were cases of first impres-sion and petitions for writs of certiorari were denied in both instances, the second and third grounds which might serve as a basis for the Supreme Court to grant a petition for a writ of certiorari, with respect to the issues presented in such decisions, has been rendered moot. The sole remaining ground for the possible grant of a petition for a writ of certiorari by the Su-preme Court, with respect to the issues presented in Zurich American and National Union, is a decision of another circuit court that conflicts with that of the Sixth Circuit in the Zurich American and National Union cases. It is interesting to speculate how far in the future that might be. As previously noted, both Insurers, Zurich American and National Union, are believed to have ceased offering the Programs in those juris-dictions governed by the rule of the Sixth Circuit. Whether they or other


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Insurers are willing to test such a rule in another jurisdiction, or were an-other debtor to do so in the future, remains to be seen.

NOTES1 In re HNRC Dissolution Co., 343 B.R. 839 (Bankr. E.D.Ky. 2006), aff’d, 371 B.R. 210 (E.D. Ky. 2007), aff’d, 536 F.3d 683 (6th Cir. 2008), cert. den., Zurich American Ins. Co. v. Lexington Coal Co., LLC, 129 S.Ct. 2866 (U.S. 2009); National Union Fire Ins. Co. v. VP Bldgs., Inc., unreported decision (Bankr.N.D. Ohio 2007), aff’d, 2008 WL 4445075 (N.D. Ohio 2008), aff’d, (606 F.3d 835 (6th Cir. 2010), rehearing and rehearing en banc denied (2010),) cert. den. (U.S. 2011). 2 The author represented U.S. Bank National Association (“US Bank”), in its capacity as Distribution Trustee to the VP Buildings Distribution Trust (“VP Trust”), the successor-in-interest to VP Buildings, Inc. (“VP Buildings”), in the National Union litigation from its inception against VP Buildings. The author previously served as counsel to US Bank prior to the commencement of the National Union litigation, including representation of US Bank, in its capacity as indenture trustee with respect to certain notes issued by The LTV Corporation (“LTV”), of which VP Buildings and its affiliated debtor companies were either direct or indirect subsidiaries. The author also represented US Bank in its capacity as a member of the LTV Creditors’ Committee and, thereafter, as a member of the LTV Noteholders’ Committee. The author had no involvement in the Zurich American case. Counsel to National Union had previously submitted amicus curiae briefs in support of Zurich American in its appeal to the Sixth Circuit.3 Zurich American Insurance Company v. Lexington Coal Co., LLC (In re HNRC Dissolution Co.), 371 B.R. 210 (E.D. Ky. 2007), is alternatively referred to in the various National Union reported cases as the “HNRC” case.

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