Amicus Curiae Brief — National Union Fire Insurance Co. v. VP Buildings, Inc., (2010) (No. 711)

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i q No. 10-711

IN THE

Supreme Court of the United States

NATIONAL UNION FIRE INSURANCE COMPANY OF

PITTSBURGH, PA,

Petitioner,

Vv.

VP BUILDINGS, INC.,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

MOTION OF ZURICH AMERICAN INSURANCE

COMPANY FOR LEAVE TO FILE BRIEF

AMICUS CURIAE IN SUPPORT OF PETITIONER

AND BRIEF AMICUS CURIAE

KAREN LEE TURNER CRAIG GOLDBLATT

ECKERT, SEAMANS, Counsel of Record

CHERIN & MELLOTT,LLC DANIELLE SPINELLI

2 Liberty Place WILMER CUTLER PICKERING

50 South 16th Street HALE AND DORR LLP

Philadelphia, PA 19102 1875 Pennsylvania Ave., N.W

(215) 851-8400 Washington, D.C. 20006

(202) 663-6000

ces ware

|

IN THE

Supreme Court of the Anited States

No. 10-711

NATIONAL UNION FIRE INSURANCE COMPANY OF

PITTSBURGH, PA,

Petitioner,

Vv.

VP BUILDINGS, INC.,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

MOTION OF ZURICH AMERICAN INSURANCE

COMPANY FOR LEAVE TO FILE BRIEF

AMICUS CURIAE IN SUPPORT OF PETITIONER

Pursuant to Rule 37.2(b) of the rules of this Court,

Zurich American Insurance Company (“Zurich”) re-

spectfully moves this Court for leave to file the at-

tached amicus curiae brief in support of the petition for

a writ of certiorari. Pursuant to Rule 37.2(a), amicus

notified counsel of record for all parties ten days before

this briefs due date of its intention to file the brief and

requested their consent to the filing. Petitioner has

consented, and petitioner's letter of consent has been

submitted to the Clerk of the Court. Respondent has

not yet responded to Zurich’s request.

2

This case presents a question of substantial impor-

tance to the administration of the Bankruptcy Code,

and of great practical import to insurers and debtors

alike: whether all costs incurred by a debtor to obtain

insurs ice during its reorganization, including deducti-

bles that may not become due until after plan confirma-

tion, are administrative expenses entitled to priority

payment in bankruptcy.

The Bankruptcy Code provides that “the actual,

necessary costs and expenses of preserving the es-

tate”—including the expenses necessary to keep the

debtor’s business in operation while it attempts to re-

organize—are known as “administrative expenses” and

granted priority over most pre-bankruptcy claims. 11

U.S.C. § 503(b)(1)(A); id. § 507(a)(2). Such treatment is

necessary in order to encourage insurers and providers

of other essential goods and services to do business

with entities in bankruptcy and for those entities to

have any realistic chance of reorganizing.

This Court has made clear that the cost of insur-

ance necessary for a debtor to operate during bank-

ruptcy is a quintessential administrative expense. See

Reading Co. v. Brown, 391 U.S. 471, 483 (1968). Yet, in

the decision below, the Sixth Circuit held that an in-

surer that provides a debtor with insurance the debtor

needs to operate during bankruptcy is not entitled to

administrative priority for the entire cost of the insur-

ance. Specifically, it addressed the common situation in

which an insurer provides a debtor with workers’ com-

pensation insurance under which the insurer pays

claims as they arise and the debtor thereafter pays the

insurer a deductible for each claim. The workers’ com-

pensation insurance was required by state law for the

debtor to continue its business, and the deductibles

were a very substantial part of the payment the debtor

3

agreed to make for the insurance coverage. The Sixth

Circuit nonetheless held that the insurer could not ob-

tain administrative priority for deductibles that came

due after the debtor confirmed its plan of reorganiza-

tion.

In so holding, the Sixth Circuit followed its prior

decision in Zurich American Insurance Co. v. Lexing-

ton Coal Co. dn re HNRC Dissolution Co.), 536 F.3d

683 (6th Cir. 2008) (per curiam). As in HNRC, the

court reasoned, in essence, that because the deductibles

would not be liquidated until after plan confirmation,

they were not “actual, necessary costs and expenses of

preserving the estate.” 11 U.S.C. § 503(b)(1)(A); see

HNRC, 536 F.3d at 683-684. While the panel held that

it was bound by HNRC, two of the three members of

the panel urged the Sixth Circuit to decide the issue en

banc, recognizing that HNRC’s reasoning is flawed,

conflicts with the decisions of other courts, and poses

substantial practical obstacles to debtors who need in-

surance to reorganize. Pet. App. 13a-18a.

As an insurer that issues workers’ compensation

and other insurance policies to companies that may find

themselves in bankruptcy, Zurich has a strong interest

in having this Court resolve the important and recur-

ring issue presented by the petition. As a result of the

Sixth Circuit’s decision in HNRC, now reaffirmed by

the decision below, Zurich has been required to revise

its business practices with regard to issuing insurance

to companies that are in bankruptcy or likely to enter

bankruptcy. If this Court were to grant the petition

and reverse the decision below, adopting a rule under

which unliquidated deductibles are properly treated as

administrative expenses—as Zurich believes the Bank-

ruptcy Code requires—insurers will again be able to

make such necessary insurance available to debtors on

4

affordable terms, thus benefiting insurers and debtors

alike, and furthering the Bankruptcy Code’s purpose of

encouraging reorganization.

Accordingly, Zurich respectfully requests that it be

granted leave to file the attached amicus curiae brief.

Respectfully submitted.

KAREN LEE TURNER CRAIG GOLDBLATT

ECKERT, SEAMANS, Counsel of Record

CHERIN & MELLOTT, LLC DANIELLE SPINELLI

2 Liberty Place WILMER CUTLER PICKERING

50 South 16th Street HALE AND DORR LLP

Philadelphia, PA 19102 1875 Pennsylvania Ave.,

(215) 851-8400 N.W.

Washington, D.C. 20006

(202) 663-6000

JANUARY 2011

CORPORATE DISCLOSURE STATEMENT

Zurich American Insurance Company is a wholly

owned subsidiary of Zurich Holding Company of Amer-

ica, Inc., a Delaware corporation. Zurich Holding Com-

pany of America, Inc. is 99.8711% owned directly by

Zurich Insurance Company Ltd, a Swiss corporation,

with the remaining shares indirectly owned by Zurich

Insurance Company Ltd. Zurich Insurance Company

Ltd is directly owned by Zurich Financial Services Ltd,

a Swiss corporation. Zurich Financial Services Ltd is

the only publicly traded parent company, with a listing

on the Swiss stock exchange, and a further trading of

American Depositary Receipts.

(i)

TABLE OF CONTENTS

Page

CORPORATE DISCLOSURE STATEMENT.............. j

TPs OO A tk 0 ee eitenenecvccvcencovvenscisovsnscosansusen iv

INTEREST OF AMICUS CU RIAB....cccccoccscccscocsecceccssces Z

REASONS FOR GRANTING THE WRIT.................... 4

I. THE SIXTH CIRCUIT’S OVERLY NARROW

INTERPRETATION OF ADMINISTRATIVE

EXPENSES CONFLICTS WITH DECISIONS OF

THIS COURT AND OTHER CIRCUITS AND

WRONGLY DECIDES AN ISSUE OF SUB-

STANTIAL IMPORTANCE TO DEBTORS AND

TINIE as cance vsiecoduakcauiradcacthccvenietaeie eater eae 4

Il. THE SIxTH CIRCUITS DECISION SPLITS

WITH OTHER CIRCUITS ON THE IMPOR-

TANT AND RECURRING QUESTION OF THE

MEANING OF “CLAIM” IN BANKRUPTCY. ..........2..222- 10

COIN CCEA ORO occwvdececarecaccrescessoas PR PAD Reta RE Ube! 15

(iii)

1V

TABLE OF AUTHORITIES

CASES

Page(s)

Avellino & Bienes v. M. Frenville Co. (In re M.

Frenville Co.), 744 F.2d 332 (8d Cir.

_ ) STAM ARE RAE rea Les et 11, 12, 13, 14

Butler v. NationsBank, N.A., 58 F.3d 1022 (4th

ee I eatici tse ancasaee ci evans casemmnaieeacsnpaeckerareea eens 13

Carter-Wallace, Inc. v. Davis-Edwards Phar-

macal Corp., 443 F.2d 867 (2d Cir. 1971).................. 8

California Department of Health Services v.

Jensen (In re Jensen), 995 F.2d 925 (9th

RA i. Ne iniciersincascotabidnded nakedtadbeiacadsnusinibiasentusesieheads 13

Devan v. Simon DeBartolo Group, L.P. (In re

Merry-Go-Round Enterprises, Inc.), 180

Be ey ee ED paeccsncestvscsnwvscniacestucsnsecsuccntexses 8

Eastern Air Lines v. Insurance Co. of State of

Pennsylvania (In re Ionosphere Clubs,

PCJ, BO FG Fie Cl Cal. LGB) vscnsicescccnsssecesccsccenessenee )

Epstein v. Official Committee of Unsecured

Creditors of Estate of Piper Aircraft Corp.

(In re Piper Aircraft Corp.), 58 F.3d 1573

ee I cic asters cceansceacshasiscatsdevonisateninucacenidnensantens 13

Grady v. A.H. Robins Co., 839 F.2d 198 (4th

Bese ies balrcsscacinncaneneanasogtmiridadatcasineiaunenntns 12

In re A.H. Robins Co., 63 B.R. 986 (Bankr. E.D.

Se NE aiid tks cin esate chanbelaeuer ditieauabenasninbinnivcieds 12

Jeld-Wen, Inc. v. Van Brunt (In re Grossman’s

EG), Ge © Bek VAG GE Ce, BOO) ccavhsivcsiscesicicnsacccnendces 14

Vv

TABLE OF AUTHORITIES—Continued

Page(s)

Juniper Development Group v. Kahn (In re

Hemingway Transport Inc.), 993 F.2d 915

EE a lla TaIIITTIIT cuitchagclescidatssnctaiddenpebtniatiecabdenseaeninanincanbedaseniiel 8

Nostas Associates v. Costich (In re Klein Sleep

Products, Inc.), 78 F.3d 18 (2d Cir. 1996)............. 5,8

Reading Co. v. Brown, 391 U.S. 471 (1968)...2, 4, 7, 10, 11

United States v. LTV Corp. (In re Chateaugay

Corp.), 944 F.2d 997 (2d Cir. 1991)..........c..c.ccceseseeee 12

Watson v. Parker (In re Parker), 313 F.3d 1267

PUI MTs SII Uh cis nsnsneiniiccicane coeiadnascsdetasiuodamaaaeonall 13

Zurich American Insurance Co. v. Lexington

Coal Co. (In re HNRC Dissolution Co.),

DO Fe Re Cc POD ccsrscnsinertennsiacrinncsentiaannpoonia 3

Zurich American Co. v. Lexington Coal Co.

(In re HNRC Iissolution Co.), 371 B.R.

Be MN SINE Rise cnchaaicacins rence nideakenandctintanonads 5, 6, 10

STATUTES AND LEGISLATIVE MATERIALS

11 U.S.C.

aT a a 11

SS SRDRRPREAPES iA ENS oP Re ORS BO DIE OEE NY Hire 12

ee passim

ESRI Enema ere MEU rrie Dann nny RinrD Meee MIRC re 10

I siti diciies sccsesdauersncnduiuascariamiecalaaionmadmemndiaannadl 4

I idea 2

H.R. Rep. No. 95-595 (1977), reprinted in 1978

FA ee SP a weiaec eribva tina vaes coaneaivannionnicinniciaces 1]

vl

TABLE OF AUTHORITIES—Continued

Page(s)

OTHER AUTHORITIES

Collier on Bankruptcy (16th ed. 2010)...........0... eee 2,5

IN THE

Supreme Court of the United States

No. 10-711

NATIONAL UNION FIRE INSURANCE COMPANY OF

PITTSBURGH, PA,

Petitioner,

Vv.

VP BUILDINGS, INC.,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

BRIEF OF ZURICH AMERICAN INSURANCE

COMPANY AS AMICUS CURIAE

IN SUPPORT OF PETITIONER

Amicus curiae Zurich American Insurance Company

(“Zurich”) respectfully submits this brief in support of

the petition for a writ of certiorari.'

' Pursuant to Rule 37 2(a), Zurich notified counsel of record for

all parties ten days before this briefs due date of its intention to file

the brief. Petitioner has consented to the filing of the brief and a

letter of consent has been submitted to the Clerk of the Court. Re-

spondent has not yet responded to Zurich’s request. Pursuant to

Rule 37.2(b), therefore, Zurich has prepared and submits with this

brief a motion for leave to file the brief. No counsel for a party au-

thored this brief in whole or in part, and no person, other than

2

INTEREST OF AMICUS CURIAE

The Bankruptcy Code provides, and this Court has

long recognized, that those who do business with a

debtor in bankruptcy are generally entitled to be paid

before the debtor’s pre-bankruptcy creditors. See gener-

ally Reading Co. v. Brown, 391 U.S. 471 (1968). Specifi-

cally, “the actual, necessary costs and expenses of pre-

serving the estate”—including the expenses necessary to

keep the debtor’s business in operation while it attempts

to reorganize—are known as “administrative expenses”

and granted priority over most pre-bankruptcy claims.

11 U.S.C. § 503(b)(1)(A); id. § 507(a)(2). Congress chose

to grant administrative expenses priority “to provide an

incentive for creditors to continue doing business with

the debtor and an incentive for others to engage in busi-

ness transactions with the debtor.” 4 Collier on Bank-

ruptcy J 503.06[2] (16th ed. 2010). Absent such priority

treatment, a debtor would be unlikely to obtain credit

except on the most onerous terms, and its prospects of

continuing its business and successfully reorganizing

would be severely limited.

As this Court has made clear, the cost of insurance

necessary for a debtor to operate during bankruptcy is a

quintessential administrative expense. See Reading, 391

U.S. at 483. Yet, in the decision below, the Sixth Circuit

held that an insurer that provides a debtor with insur-

ance the debtor needs to operate during bankruptcy is

not entitled to administrative priority for the entire cost

of the insurance. Specifically, it addressed the common

situation in which an insurer provides a debtor with

workers’ compensation insurance under which the in-

amicus and its counsel, made any monetary contribution to the

preparation or submission of this brief.

3

surer pays claims as they arise and the debtor thereafter

pays the insurer a deductible for each claim. The work-

ers’ compensation insurance was required by state law

for the debtor to continue its business, and the deducti-

bles were a very substantial part of the payment the

debtor agreed to make for the insurance coverage. The

Sixth Circuit nonetheless held that the insurer could not

obtain administrative priority for deductibles that came

due after the debtor confirmed its plan of reorganiza-

tion—even though the deductibles were exclusively for

claims that arose prior to confirmation of the plan.

In so holding, the Sixth Circuit followed its prior de-

cision in Zurich American Insurance Co. v. Lexington

Coal Co. dn re HNRC Dissolution Co.), 536 F.3d 683

(6th Cir. 2008) (per curiam). As in HNRC, the court rea-

soned, in essence, that because the deductibles would not

be liquidated until after plan confirmation, they were not

“actual, necessary costs and expenses of preserving the

estate.” 11 U.S.C. § 503(b)(1)(A); see HNRC, 536 F.3d at

683-684.

As an insurer that issues workers’ compensation and

other insurance policies to companies that may find

themselves in bankruptcy, Zurich has a strong interest in

having this Court resolve te important and recurring

issue presented by the petition. As a result of the Sixth

Circuit’s decision in HNRC, now reaffirmed by the deci-

sion below, Zurich has been required to revise its busi-

ness practices with regard to issuing insurance to com-

panies that are in bankruptcy or likely to enter bank-

ruptcy. If this Court were to grant the petition and re-

verse the decision below, adopting a rule under which

unliquidated deductibles are properly treated as adminis-

trative expenses—as Zurich believes the Bankruptcy

Code requires—insurers will again be able to make such

necessary insurance available to debtors on affordable

4

terms, thus benefiting insurers and debtors alike, and

furthering the Bankruptcy Code’s purpose of encourag-

ing reorganization.

REASONS FOR GRANTING THE WRIT

I. THE SIXTH CIRCUIT’S OVERLY NARROW INTERPRETA-

TION OF ADMINISTRATIVE EXPENSES CONFLICTS WITH

DECISIONS OF THIS COURT AND OTHER CIRCUITS AND

WRONGLY DECIDES AN ISSUE OF SUBSTANTIAL IMPOR-

TANCE TO DEBTORS AND INSURERS

This Court should grant certiorari to resolve the con-

fusion created by the Sixth Circuit regarding a question

of exceptional and wide-ranging significance: the defini-

tion of “administrative expense” in bankruptcy. Admin-

istrative expenses are obligations incurred by the debtor

or bankruptcy trustee during the bankruptcy case. They

include, for example, loans, leases, supply agreements, or

other contracts enabling the debtor to continue its busi-

ness while it is attempting to reorganize; wages paid by

the business while in bankruptcy; and tort or environ-

mental liabilities incurred through the debtor’s opera-

tions while it is in bankruptcy. See generally Reading

Co. v. Brown, 391 U.S. 471 (1968). As defined by the

Bankruptcy Code, administrative expenses include all

“actual, necessary costs and expenses of preserving the

estate.” 11 U.S.C. § 503(b)(1)(A).

The Bankruptcy Code provides that administrative

expenses receive priority over the claims of other credi-

tors. 11 U.S.C. § 507(a). Priority status is important to a

creditor’s recovery because the claims against a bank-

ruptcy estate typically far outstrip the value of the

debtor’s assets. Creditors with high-priority claims may

be paid in full, whereas those lower in the hierarchy will

likely recover only pennies on the dollar, or nothing at all.

As noted above, Congress chose to grant administrative-

5

expense claims priority “to provide an incentive for

creditors to continue doing business with the debtor and

an incentive for others to engage in business transactions

with the debtor.” 4 Collier on Bankruptcy { 503.06[2]

(16th ed. 2010). Lenders, suppliers, and others consider-

ing dealing with a debtor will be understandably wary

that credit they extend might not be repaid. This con-

cern is allayed if, in the event “the debtor fails to reha-

bilitate itself and winds up in liquidation, they can move

to the front of the distributive line, ahead of the debtor’s

pre-ban»™sptcy creditors.” Nostas Assocs. v. Costich (In

re Klein . ‘zep Prods., Inc.), 78 F.3d 18, 20 (2d Cir. 1996).

Without that assurance, a debtor’s ability to obtain

credit—or, as in this case, affordable insurance with a

deductible arrangement—and thus to reorganize and

emerge from bankruptcy as a going concern would be se-

verely compromised.

The decision below, together with the Sixth Circuit’s

prior decision in HNRC, marks a radical departure from

the otherwise settled understanding of § 503(b)(1)(A),

under which a creditor who provides services to a debtor

during the bankruptcy case is entitled to administrative

priority for all payments due to it in return for those ser-

vices.

There can be no question that the insurers’ claims for

deductibles in this case and in HNFC arose from a trans-

action with the bankruptcy estate and directly and sub-

stantially benefited the estate. Indeed, the debtors were

required by state law to carry workers’ compensation in-

surance in order to operate their businesses during the

bankruptcy case. See Zurich Am. Co. v. Lexington Coal

Co. (In re HNRC Dissolution Co.), 371 B.R. 210, 217

(£.D. Ky. 2007) (“[T]he insurance coverage provided by

the Zurich Policies was critical to [Horizon’s] operations.

Without the insurance provided by Zurich, [Horizon]

6

would have been unable to operate [its] business as a go-

ing concern ... during the pendency of the bankruptcy.”);

Pet. App. 7a (“The parties agree that the provision of in-

surance benefitted the estate[.]”). The insurance con-

tracts the debtors entered into obligated them to reim-

burse their insurers for the deductibles the insurers ad-

vanced. And a debtor’s obligations under a contract nec-

essary to operate its business are ipso facto actual, nec-

essary costs of preserving the estate.

Nonetheless, the Sixth Circuit below held that the

debtor’s obligation to pay deductibles was not an “actual,

necessary cost[] and expense[]} of preserving the estate”

under § 503(b)(1)(A). The court reasoned that the de-

ductibles were not “actual” expenses of preserving the

estate because the debtor would not become obligated to

pay them until after the bankruptcy case had ended and

because their amount could not be ascertained with cer-

tainty until that time. Pet App. 10a. Similarly, the Sixth

Circuit reasoned in HNRC (adopting the reasoning of the

district court) that “the payment of the deductibles, when

and if they should arise ... does not provide a direct and

substantial benefit to, nor act to preserve, a bankruptcy

estate where there is no longer an estate to benefit.” 371

B.R. at 228.

That reasoning suffers from a fundamental! flaw: It

asks whether payment of the deductibles would preserve

or benefit the estate, rather than asking whether the zn-

surance the debtor received in return for agreeing to pay

premiums and deductibles (in addition to the cash-flow

benefit of the deductible arrangement itself) preserved

or benefited the estate. As the concurring judge on the

Sixth Circuit panel explained, “{F]ramed this way, there

can be just one answer—a cost incurred by a business (let

alone a bankrupt one) by definition provides no benefits

and, arguably, does not become actual or necessary until

7

the debtor receives the bill, which may not occur until

after plan confirmation.” Pet. App. 13a-14a. That mode

of analysis cannot be reconciled with this Court’s control-

ling decisions or with common sense. Rather, “[o]nly by

analyzing the cost’s purpose—assessing the services pro-

vided in exchange—can courts determine whether the

expense meets § 503(b)’s requirements.” /d. at 14a.

In Reading, this Court construed the predecessor to

§ 503(b)(1)(A) under the Bankruptcy Act of 1898, which

similarly granted administrative priority to “the actual

and necessary costs and expenses of preserving the es-

tate,” to include tort claims against a debtor arising dur-

ing its bankruptcy. 391 U.S. at 475. The Court reasoned

that “actual and necessary costs’ should include costs or-

dinarily incident to operation of a business, and not be

limited to costs without which rehabilitation would be

impossible.” Jd. at 483. Accordingly, because the tort

claim was the result of the debtor’s operacion of its busi-

ness during the bankruptcy, the claim was entitled to

administrative priority.

Reading thus expressly rejected one of the key

premises underlying the Sixth Circuit’s analysis: the no-

tion that a payment must benefit the estate to be entitled

to administrative priority. Instead, the proper inquiry is

whether the debt was incurred through the operation of

the debtor’s business, as a result of its efforts to continue

the business as a going concern (either for reorganization

or sale to the highest bidder). That is unquestionably

true here: The insurance coverage provided permitted

the debtors to continue operating as they sought to reor-

ganize, to the benefit of the estates and their creditors—

even if the reorganization attempt ultimately failed. And

the rule recognized in Reading makes sense. The pay-

ment of a debt never benefits the estate; the benefit that

8

the estate receives is the goods or services that it obtains

in exchange for its obligation to pay for them.

In contrast to the Sixth Circuit, other courts of ap-

peals have recognized that a claim for payment need not

mature or be liquidated prior to plan confirmation to be

an administrative expense, as long as the payment is in

return for a benefit conferred on the bankruptcy estate.

See, e.g., Devan v. Simon DeBartolo Group, L.P. (In re

Merry-Go-Round Enters., Inc.), 180 F.3d 149, 157-158

(4th Cir. 1999) (future rent owed by the debtor under a

lease entered into during bankruptcy was an administra-

tive expense even though it did not become due until af-

ter failure of the reorganization); Klein Sleep Prods., 78

F.3d at 22-26 (same; explaining that “assumption of an

unexpired lease transforms all liability under the lease

. into administrative expenses” and that a contrary

holding “would mean that any post-bankruptcy contract,

entered into for the benefit of a bankrupt’s estate, would

cease to be entitled to priority the moment the deal

turned sour,” contravening the purpose of the adminis-

trative-expense provisions); Juniper Dev. Group v. Kahn

(in re Hemingway Transp. Inc.), 99% F.2d 915, 934 (1st

Cir. 1993) (if creditor held a valid «}.m for clean-up costs

under CERCLA, “past and future [clean-up] costs should

be estimated and allowed as administrative expenses en-

titled to priority” (footnote omitted)); Carter-Wallace,

Inc. v. Davis-Edwards Pharmacal Corp., 443 F.2d 867,

874 (2d Cir. 1971) (unliquidated patent infringement

claim arising from the debtor’s post-petition activity was

entitled to administrative priority). Equally fundamen-

tally, as the concurrence below recognized and the peti-

tion for certiorari explains, other courts of appeals are in

accord in focusing on what the estate obtains—be it

goods, services, or simply the ability to operate the

debtor’s business—not what the estate pays, in deter-

9

mining whether a claim is an “actual, necessary cost of

preserving the estate” entitled to administrative priority.

Pet. 22-24; Pet. App. 13a-16a.

The contrary rule applied in the Sixth Circuit is an

unduly narrow interpretation of the Bankruptcy Code’s

administrative-expense provisions. If left uncorrected, it

will significantly impair financially distressed companies’

ability to reorganize. Reorganization depends critically

on the willingness of lenders, suppliers, landlords, insur-

ers, and other parties to provide the debtor with needed

credit, goods, and services during the bankruptcy.

Unless these parties are willing to extend credit or pro-

vide goods and services to the debtor on a post-petition

basis, debtors will be unable to preserve or rehabilitate

their businesses. The administrative-expense provisions

of the Code assure such parties that if they do business

with a company in bankruptcy, they will be paid amounts

due to them in full. The Sixth Circuit’s reasoning under-

mines that assurance, imposing on parties contracting

with debtors the risk that, if the debtor’s reorganization

efforts fail, they will be left unpaid. Such uncertainty will

seriously threaten debtors’ ability to obtain the goods

and services they need to reorganize.

This risk is particularly acute for debtors that re-

quire insurance covering claims likely to arise while they

attempt to reorganize. Insurers will be unwilling to offer

debtors the type of insurance policies they are most

likely to be able to afford—policies requiring the pay-

ment of deductibles, which reduce premiums and offer a

substantial cash-flow benefit to cash-strapped debtors.

Cf. Eastern Air Lines v. Insurance Co. of State of Penn.

(In re Ionosphere Clubs, Inc.), 85 F.3d 992, 994 (2d Cir.

1996) (noting that no insurance company was willing to

offer guaranteed-cost workers’ compensation coverage to

financially distressed airline). As this Court explained in

10

Reading, “ijt is of course obvious that proper insurance

premiums must be given priority, else insurance could

not be obtained,” 391 U.S. at 483, and insurance is neces-

sary to every debtor’s business. Without affordable in-

surance, many Chapter 11 debtors will have no opportu-

nity to attempt reorganization and will be forced to liqui-

date.

Il. THE SIXTH CIRCUIT’S DECISION SPLITS WITH OTHER

CIRCUITS ON THE IMPORTANT AND RECURRING QUES-

TION OF THE MEANING OF “CLAIM” IN BANKRUPTCY

The Sixth Circuit’s reasoning in HNRC, adopted by

the decision below, rested in significant part on the

court’s conclusion that the insurer’s claim for reimburse-

ment for deductibles under its policies would not “arise”

until the debtor’s obligation to pay the deductibles ac-

crued as a matter of state contract law. The court rea-

soned that the “deductible obligations do not even exist”

until the workers’ compensation claims are presented.

HNRC, 371 B.R. at 228. The underlying premise of this

reasoning—that a “claim” “does not even exist” for pur-

poses of bankruptcy law until a state-law right to pay-

ment has ripened—cannot be squared with either the

language of the Bankruptcy Code or the reasoning of

every other court of appeals to address the issue.

One of the most important and fundamental ques-

tions in bankruptcy law is the question when a bank-

ruptcy “claim” arises. The answer to that question plays

a crucial role in a claimant’s recovery. If a claim arises

before the filing of the bankruptcy petition, it receives no

special priority, unless it falls into one of the narrow

categories set out in § 507. If such a pri -bankruptcy

claim is unsecured, it will likely receive only pennies on

the dollar, if it is paid at all. If, on the other hand, a claim

arises during the bankruptcy, it will generally be an ad-

1]

ministrative expense entitled to priority over the claims

of most pre-bankruptcy creditors. Such administrative-

expense claimants will typically receive a far higher pro-

portion of the amount they are owed. Finally, if a claim

does not arise until after the bankruptcy case is con-

cluded, it is not entitled to payment in the bankruptcy at

all (nor is it discharged in bankruptcy). In that case, if

the debtor succeeds in reorganizing, the claim may be as-

serted against the reorganized entity. But in the com-

mon event that the debtor liquidates—as occurred

here—the claimant will almost certainly recover nothing:

“{I]ts mght to recover exists in theory but is not enforce-

able in practice.” Reading, 391 U.S. at 478.

The Bankruptcy Code defines a “claim” as any “right

to payment, whether or not such right is reduced to

judgment, liquidated, unliquidated, fixed, contingent, ma-

tured, unmatured, disputed, undisputed, legal, equitable,

secured, or unsecured.” 11] U.S.C. § 101(5)(A). As Con-

gress explained when the Code was enacted, “[b]y this

broadest possible definition,” the Code “contemplates

that all legal obligations of the debtor, no matter how

remote or contingent, will be able to be dealt with in the

bankruptcy case.” H.R. Rep. No. 95-595, at 309 (1977),

reprinted in 1978 U.S.C.C.A.N. 5963, 6266.

Notwithstanding the Bankruptcy Code’s very broad

definition of a “claim,” for many years the courts of ap-

peals were sharply divided on the question whether a

“claim” exists, as a matter of bankruptcy law, at a time

when the acts giving rise to liability have occurred, but

when the claimant has not yet suffered the type of injury

that would entitle it to sue under non-bankruptcy law.

In Avellino & Bienes v. M. Frenville Co. (In re M.

Frenville Co.), 744 F.2d 332 (3d Cir. 1984), the Third Cir-

cuit employed the same analysis as the Sixth Circuit be-

12

low, holding that a “claim” under the Bankruptcy Code

does not arise until the right to payment accrues as a

matter of non-bankruptcy law. In Frenville, a group of

banks sued an accounting firm that the debtors had en-

gaged as an auditor for negligently preparing the debt-

ors’ financial statements. See id. at 333. The accounting

firm wished to obtain indemnification or contribution

from the debtors via a third-party complaint, which was

permissible under the automatic-stay provision, 11

U.S.C. § 362(a)(1), only if the firm’s elaim arose before

the filing of the bankruptcy petiticn. See 744 F.2d at 333-

334. The court acknowledged that “the debtor[s’] acts

which form the basis of [the] suit”—preparation of the

financial statements—“occurred pre-petition,” but never-

theless, looking to New York law, held that the account-

ing firm’s claim for contribution or indemnification from

the debtor arose only post-petition, once it had been sued

by the banks. /d. at 334, 337 (“[Tlhe threshold question

of when a right to payment arises ... ‘is to be determined

by reference to state law.”’).

Every other court of appeals to consider this issue

has rejected Frenville, noting the breadth of the defini-

tion of “claim” under the Bankruptcy Code and the unde-

sirable consequences that follow from an overly restric-

tive reading of that definition. See United States v. LTV

Corp. (In re Chateaugay Corp.), 944 F.2d 997 (2d Cir.

1991) (EPA had a contingent “claim” in bankruptcy for all

future clean-up costs arising from the debtor’s pre-

bankruptcy discharge of hazardous waste); Grady v. A.H.

Robins Co., 839 F.2d 198, 201 (4th Cir. 1988) (expressly

rejecting the reasoning of F’renville and concluding that a

claimant who had a Dalkon Shield inserted before the

bankruptcy petition had a “claim” for purposes of the

automatic-stay provisions even if injury would not mani-

fest itself until post-petition), affg In re A.H. Robins Co.,

13

63 B.R. 986, 993 (Bankr. E.D. Va. 1986) (holding that a

claim arises at the “time when the acts giving rise to the

alleged liability were performed” (internal quotation

marks omitted)); Butler v. NationsBank, N.A., 58 F.3d

1022, 1029 (4th Cir. 1995) (expressly refusing to follow

"renville, and concluding that a bank “had a claim as

soon as [the debtor] deposited the fraudulently endorsed

check,” even though recovery “was contingent upon the

receipt of notice of the forgery”); California Dep't of

Health Servs. v. Jensen (In re Jensen), 995 F.2d 925, 930

(9th Cir. 1993) (“all future ... cost{s] based on pre-petition

conduct that can be fairly contemplated by the parties at

the time of [the] bankruptcy” are “claims” under the

Bankruptcy Code (internal quotation marks omitted));

Watson v. Parker (In re Parker), 313 F.3d 1267, 1269-

1270 (10th Cir. 2002) (holding that a malpractice claim

arises on the date the underlying conduct occurred, not

on the date a cause of action accrued under state law);

E'pstein v. Of = mm. of Unsecured Creditors of Es-

tate of Piper i ‘orp. (In re Piper Aircraft Corp.),

58 F.3d 1578, 15% =. 1th Cir. 1995) (“The debtor’s prepe-

tition conduct gives rise to a claim to be administered in a

case only if there is a relationship established before con-

firmation between an identifiable claimant ... and [the

debtor’s] prepetition conduct.”).

Significantly, the en bane Third Circuit recently re-

jected the reasoning of F’renville (and implicitly that of

the Sixth Circuit), holding that, in the tort context, a

“claim” arises under bankruptcy law when the claimant is

exposed to a product or conduct that later causes injury.

The en banc court observed that “there seems to be

something approaching a consensus among the courts ...

that “a ‘claim’ arises when an individual is exposed pre-

petition to a product or other conduct giving rise to an

injury which underlies a ‘right to payment’ under the

14

Bankruptcy Code.” Jeld-Wen, Inc. v. Van Brunt (In re

Grossman's Inc.), 607 F.3d 114, 125 (8d Cir. 2010) (en

banc). Grossman’s recognized that the “accrual test in

Frenville,” like the reasoning of the Sixth Circuit, “does

not account for the fact that a ‘claim’ can exist under the

Code before a right to payment exists under state law.”

Id. at 121. And it concluded that F’renville “imposes too

narrow an interpretation of a ‘claim’ under the Bank-

ruptey Code. Accordingly, the Frenville accrual test

should be and now is overruled.” /d.

As the Third Circuit noted in Grossman’s, the courts

are “approaching a consensus” on this issue of bank-

ruptcy law. 607 F.3d at 125. And that consensus is di-

rectly contrary to the holding of the Sixth Circuit below

that an insurer cannot have a “claim” before its right to

payment would accrue under non-bankruptecy law. In

reasoning that closely tracks F'renville’s rejected “ac-

crual” test, the Sixth Circuit concluded that “until [an in-

surer] has made a payment” on a claim and thus is per-

mitted to “seek[] reimbursement from the insured” under

non-bankruptcy law, its claim is not “actual” and there-

fore is not entitled to administrative expense priority.

Pet. App. 10a.

The Third Circuit correctly recognized that this rea-

soning was out of step with the emerging consensus

among the courts of appeals, observing that its F'renville

decision was “one of the most criticized and least followed

precedents under the current Bankruptcy Code.”

Grossman’s, 607 F.3d at 120 (internal quotation marks

omitted). The Third Circuit therefore went en banc to

reconsider Frenville and bring its precedent into line

with the overwhelming majority view. But the Sixth

Circuit, notwithstanding the strong suggestion by two of

the three members of the panel that the court rehear this

case en banc (Pet. App. 13a-18a), has declined to do so.

15

Accordingly, only this Court can bring uniformity to the

courts of appeals’ treatment of this fundamental question

of bankruptcy law.

CONCLUSION

The petition for certiorari should be granted.

Respectfully submitted.

KAREN LEE TURNER CRAIG GOLDBLATT

ECKERT, SEAMANS, Counsel of Record

CHERIN & MELLOTT,LLC DANIELLE SPINELLI

2 Liberty Place WILMER CUTLER PICKERING

50 South 16th Street HALE AND DORR LLP

Philadelphia, PA 19102 1875 Pennsylvania Ave., N.W

(215) 851-8400 Washington, D.C. 20006

(202) 663-6000

JANUARY 2011