Defamation Plaintiff Has Default Judgment But Not Standing To Sue Insolvent Policyholder’s Insurance Company

Bankruptcy and insurance have been engaged in a tangled web for decades.  Claimants against bankrupt insureds are often frustrated in seeking a recovery that they might otherwise obtain if the insured had not gone bankrupt.  In a recent case, the Third Circuit addressed the standing of a default judgment creditor claimant to sue the bankrupt insured’s insurance company to recover the default judgment.

In Riley v. Mutual Insurance Co. Ltd, No. 19-1321 (3rd Cir. Feb. 19, 2020) (Not Precedential), a defamation claimant sued a media company that was insured for defamation claims.  While the suit was pending, the media company filed for bankruptcy.  The automatic stay precluded continuing with the defamation suit.  A liquidating trust was established by the bankruptcy court and a liquidation plan for the media company was filed.

Meanwhile, the defamation claimant sought to lift the automatic stay.  The claimant and the liquidating trustee entered into a stipulation to allow the claimant to proceed against non-debtor third parties and recover available insurance proceeds.  The insurance company did not learn of the stipulation when the claimant moved to lift the stay.  A dispute arose over who should defend the debtor media company in the defamation case and the claimant ended up getting a default judgment.  When the insurance company refused to pay the default judgment this litigation was brought.

The insurance company moved for summary judgment and the district court granted the motion holding that the claimant did not have standing to bring the suit against the insurance company.  The Third Circuit affirmed on appeal.

In affirming, the circuit court noted that judgment creditors have standing to sue their tortfeasor’s insurance company where they have obtained an assignment of rights under the tortfeasor’s insurance policy.  The court affirmed that no assignment had taken place and rejected all the claimant’s arguments that the stipulation was an assignment. Based on the stipulation’s plain language and the testimony of the liquidating trustee, the court concluded that there was no genuine issue of material fact as to whether the stipulation was an assignment of rights under the insurance policy.

The court also rejected as waived the claimant’s argument under Pennsylvania’s direct action statute that the claimant had statutory standing to bring the suit.  This statute allows an injured person to bring suit directly against an insurance company to recover proceeds under a third-party’s insurance policy if the third-party has declared bankruptcy.  The district court found that the claimant had waived this argument because the claimant never referenced the statute in the complaint or pleaded facts supporting the elements of the statute.  The circuit court agreed and pointed to the failure of the claimant to raise the issue in the appellate brief.  The claimant’s failure to address the district court’s waiver holding led the court to conclude that the claimant had abandoned the argument.  Thus, the claimant had no standing and the district court’s judgment was affirmed.

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