JUNE 2011 BAD FAITH CASES
BANKRUPT INSURED LACKS STANDING TO BRING BAD FAITH AND BREACH OF CONTRACT CLAIMS, AS SUCH CAUSES OF ACTION ARE ASSETS OF HIS BANKRUPTCY ESTATE (Middle District)

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In Reisinger v. Seneca Specialty Insurance Company, Plaintiff-insured owned an apartment/office building in Wilkes-Barre, which was insured by defendant, Seneca. In 2005, the building suffered damage from a fire and the owner filed a notice of loss with the insurer. The insurer advanced the property owner $25,000 on the claim, with the remainder to be paid out after the adjustment was completed. Following the adjustment, the claim was valued at $155,148.46. The insurer sent the property owner a check for $130,148.46 to cover the balance owing on the claim (the adjusted value less the $25,000 advance), indicating that there would be no further payments on the claim. The property owner cashed the settlement check but wrote a letter to the insurer indicating that he did not consider the check to be final payment on his claim.

Plaintiff then filed for bankruptcy and the appointed bankruptcy trustee was ordered by the court to abandon all of the estate’s real estate assets. While the bankruptcy was still pending, the plaintiff brought the present suit against the insurer, alleging that the fire-loss claim was improperly adjusted and seeking both breach of contract and bad faith damages.

Originally filed in Luzerne County, the insurer removed the case to the Middle District on diversity grounds where it moved for summary judgment. Magistrate Judge Mannion in Wilkes Barre recommended that the insurer’s motion be granted, suggesting that, given the status of his bankruptcy proceeding, the plaintiff did not have standing to bring suit.

The insurers argued, and the magistrate judge agreed, that because of the plaintiff’s status as a bankruptcy debtor, any breach of contract or bad faith cause of action that he could have pursued prior to filing for bankruptcy was no longer his property but the property of the bankruptcy estate.

The Middle District here agreed with the Magistrate’s analysis, citing the Supreme Court’s decision in Segal v. Rochelle, 382 U.S. 375 (1966) for the proposition that where the pre-bankruptcy activities of the debtor give rise to a cause of action, that cause of action becomes an asset of the bankruptcy estate. Accordingly, the court held, if any person or entity would have standing to bring suit against the insurer, it would be the bankruptcy trustee on behalf of the estate.

The insured argued that the insurance policy was held in trust for the benefit of the property’s mortgage holder and thus should be without the reach of the bankruptcy estate.

While the court noted that as a general rule trust property is excluded from a debtor’s bankruptcy estate, it noted that there was no indication in this particular case that the breach of contract and bad faith damages sought were to be held in trust for the benefit of anyone but the plaintiff property owner.

Similarly unpersuasive to the Middle District was the plaintiff’s argument that the insurance policy and any attendant causes of action had been abandoned pursuant to the bankruptcy court’s order for the trustee to abandon all of the debtor’s real property. In rebuffing this argument, the court noted a distinction between a debtor’s interest in real property and his interest in insurance proceeds related to that property’s damage—that distinction being that insurance policies (and any causes of action that might stem therefrom) do not attach to the real estate itself but instead are personal contracts existing between the insurer and the insured. Thus, while the bankruptcy court may have ordered the physical property abandoned as an asset of the debtor’s bankruptcy estate (resulting in it’s title re-vesting in the debtor), the building owner’s insurance policy (i.e. a contractual asset) was not included within that order.

As such, the Middle District adopted the Magistrate’s report and recommendation to grant the insurer summary judgment, finding that any causes of action stemming from the insurance policy were property of the plaintiff debtor’s bankruptcy estate, thereby precluding him from having standing to bring suit.

Date of Decision: June 14, 2011

Reisinger v. Seneca Specialty Ins. Co., No. 3:07cv1221, United States District Court for the Middle District of Pennsylvania, 2011 U.S. Dist. LEXIS 62914 (June 14, 2011) (Munley, J.)

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BANKRUPT INSURED LACKS STANDING TO BRING BAD FAITH AND BREACH OF CONTRACT CLAIMS, AS SUCH CAUSES OF ACTION ARE ASSETS OF HIS BANKRUPTCY ESTATE (Middle District)”


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