UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT …

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK -------------------------------------------------------------x In re:

Frontier Insurance Group, Inc. and Frontier Insurance Group, LLC,

Debtor/Reorganized Debtor. -------------------------------------------------------------x Benjamin Lawski, Superintendent of Financial Services of the State of New York, as Liquidator of Frontier Insurance Company,

Chapter 11 Case No. 05-36877 (CGM)

Plaintiff,

v.

Adv. Pro. No. 14-9022 (RDD)

Frontier Insurance Group, LLC, and County of Sullivan Industrial Development Authority,

Defendants. -------------------------------------------------------------x

APPEARANCES:

Counsel:

Costigan Law PLLC, by William F. Costigan, Esq. and Otterbourg, P.C., by Melanie L. Cyganowski, Esq. for Plaintiff

Allegaert Berger & Vogel, LLP, by Robert E. Malchman, Esq. for Reorganized Debtor/Defendant

MEMORANDUM OF DECISION AFTER TRIAL Hon. Robert D. Drain, United States Bankruptcy Judge

This is a dispute between plaintiff Benjamin Lawski, as Superintendent of Financial Services of the State of New York (the "Liquidator"),1 as the statutory liquidator of

Frontier Insurance Company ("FIC"), on the one hand, and Frontier Insurance Group, LLC, the

1 Mr. Lawski was succeeded by Maria T. Vullo as Superintendent of Financial Services of the State of New York. Liquidator's Proposed Findings of Fact and Conclusions of Law ? 1.

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reorganized debtor/defendant herein ("FIGL"), on the other, over title to the reversionary interest from defendant County of Sullivan Industrial Development Authority (the "IDA")2 in land and improvements thereon in Sullivan County, New York that the parties have labeled in this litigation "Parcels B and C."

FIGL is the successor to Frontier Insurance Group, Inc. ("FIGI") under FIGI's chapter 11 plan (the "Plan"), which was confirmed on December 2, 2005 and became effective on September 20, 2007.3 FIGI was the corporate parent of FIC, an insurance company, among other subsidiaries. Both had their headquarters on land (the "Rock Hill Property") with an address at 195 Lake Louise Murray Rd., Rock Hill, New York that included the 2.7 acres and improvements comprising Parcel B and the 12.967 acres and improvements comprising Parcel C, as well as approximately 15.23 acres that included FIGI and FIC's headquarters building and the parking lot immediately adjacent to it that the parties have referred to here as "Parcel A." None of the buildings apparently had an address in addition to the Rock Hill Property address.

It is worth emphasizing at the outset that the parties' present Parcel A, B and C designations were not used when the events giving rise to this dispute occurred, including during FIGI's chapter 11 case. Rather, the parties and their predecessors referred to buildings -- the headquarters building, which sits on Parcel A; a daycare center, referred to as "Nana's House," and a tool shed or "pole barn," which sit on Parcel C -- and, at times, the parking lots adjacent to those structures, including the parking lot on Parcel B that is adjacent to Nana's House (and could supplement the parking lot adjacent to the headquarters building) and the parking lot on Parcel A that is adjacent to the headquarters building.

2 As discussed below, since February 2014 the IDA lacked an interest in the real property at issue. It therefore has no stake in this proceeding with the exception of needing to know whether it should deliver title to Parcels B and C to the Liquidator or to FIGL, and it has neither answered nor otherwise appeared. 3 The Plan is found at FIGL Trial Ex. D.

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The Supreme Court of the State of New York placed FIC in a temporary rehabilitation proceeding under the New York Insurance Law on August 27, 2001, and entered a final rehabilitation order on October 10, 2001. That order appointed the New York Superintendent of Insurance (the "Rehabilitator" or the "Insurance Bureau"), who is the statutory predecessor of the Liquidator,4 to take possession of FIC's property, conduct FIC's business, and take such steps as reasonably necessary to remove the causes and conditions which made the rehabilitation proceeding necessary.5 For several years, the Rehabilitator administered FIC in the hope that it could be rehabilitated, satisfy its obligations and resume business without further supervision.

While FIC's rehabilitation process was ongoing, a third-party that was also engaged in the insurance business, Insurance Management Group, Inc. ("IMG") bought the debt secured by a first lien on substantially all of FIGI's assets, and FIGI commenced its chapter 11 case on June 5, 2005 with the goal of enabling IMG to obtain FIGI's interest in FIC, along with other property of FIGI, and working with the Rehabilitator to facilitate FIC's rehabilitation under the ultimate control of IMG.6

Confirmation of the Plan achieved the first step of that goal, through the transfer of FIGI's assets (with the exception of certain specifically excluded property that under the Plan went to pay administrative claims or to a creditor trust), including FIGI's shares in FIC, to FIGL, which in turn was owned by IMG.

In the end, however, FIC was not rehabilitated. Instead, on November 9, 2012, almost seven years after confirmation of the Plan, the Albany County Supreme Court converted FIC's rehabilitation proceeding to a liquidation proceeding, vesting the Liquidator with "title to all of

4 Direct Testimony of Scott D. Fisher, ?? 45-46 [Dkt. 55]. 5 Liquidator's Trial Ex. 23. 6 Direct Testimony of John A. Petrilli, ?? 3-5 [Dkt. 48].

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[FIC's] property, contracts and rights of action" and directing him to liquidate [FIC's] business

and affairs in accordance with" the New York Insurance Law. In the Matter of the Liquidation of Frontier Insurance Co., Index No. 97/06 (Sup. Ct. Albany Cty., Nov. 9 2012).7

As discussed below, until this event the Rehabilitator and FIGI/FIGL appear to have

agreed on who owned the reversionary interests in Parcels A, B and C, or, more accurately, the

headquarters building and adjacent parking lot (Parcel A) and Nana's House and the pole barn

and the adjacent parking lot (Parcels B and C). However, the effective separation of FIGL and

FIC upon conversion of FIC's rehabilitation proceeding to a liquidation proceeding led the

parties initially to assert conflicting claims in the liquidation proceeding with respect to Parcel A

and, in an action in the Albany County Supreme Court, to Parcels A, B and C. The Albany

County action was removed to the United States District Court for the Northern District of New

York and ultimately transferred on June 11, 2014 to this Court. See Lawski v. Frontier Ins. Grp,

LLC (In re Frontier Ins. Grp., LLC), 517 B.R. 496, 502-503 (Bankr. S.D.N.Y. 2014) (CMG) (the

"Abstention Decision"), familiarity with which is assumed.

The Liquidator moved to remand this proceeding to the State Supreme Court and/or for

this Court to abstain on various grounds, which the Abstention Decision addressed. Id. The Court (Morris, C.B.J.)8 denied the remand/abstention motion based on the role of the Plan in the

dispute. Noting that confirmation of the Plan would be binding on the parties if the Plan covered

the ownership issue, the Court retained jurisdiction:

The Court need not step on the toes of the state court by making a determination on whether the various contracts between and among the parties grant a right of reversion to [FIGI, and its successor FIGL]. The Court need only look to the [P]lan and confirmation order to determine whether the property was included in the [P]lan, whether the Liquidator's claim was dealt with in the [P]lan, whether

7 See also Direct Testimony of Scott D. Fischer, ? 46. 8 Chief Bankruptcy Judge Morris later recused herself from this adversary proceeding.

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the Liquidator is enjoined [under the Plan confirmation order] from proceeding against [FIGL], whether [FIGL] is released from any liability and whether a violation of the discharge has occurred, as was alleged by [FIGL]. Id. at 504. The Court further held, "If the Court determines that this issue was not covered by the [P]lan, it will send the matter back to state court so that the issue [of who owns the reversionary interests] can be decided under state law." Id. Thus, if ownership of Parcels B and C9 was not "covered by the Plan," Parcels B and C were not "included in the Plan," or the Liquidator's claim to Parcels B and C was not "dealt with in the Plan" as approved and implemented by the order confirming the Plan, all other issues raised by the parties, such as the interpretation of the pre-bankruptcy contracts, the applicability of New York's Statute of Frauds, adverse possession, reformation, and equitable estoppel, will be decided upon remand of this proceeding to the State Supreme Court. One might think that whether Parcels B and C were covered by the Plan and the confirmation order would be easy to decide, requiring merely an examination of how those documents address the parties' claims to that property. However, for reasons discussed below the issue of whether Parcels B and C were covered by, included in, or dealt with by the Plan and confirmation order, and, more specifically, the context in which those documents should be read, required fact-finding regarding the nature of FIGI's disclosure of its asserted property interests during its bankruptcy case, the extent of the involvement of the Liquidator's predecessor, the Rehabilitator, in that case, and the parties' mutual understanding of their respective claims to the property at issue when the Plan was confirmed. Accordingly, after the parties engaged in discovery, the Court conducted a trial on those issues.

9 Although FIGL initially asserted a claim to ownership of Parcel A, it has since waived any such claim. 5

This Memorandum of Decision states the Court's reasons, based on the trial record, including witness testimony, agreed deposition designations and the exhibits admitted into evidence, as well as the parties' post-trial proposed findings of fact and conclusions of law, for determining that the Plan sufficiently addressed FIGI's ownership of Parcels B and C and their transfer to FIGL for the Court to declare the Liquidator is bound by the Plan and confirmation order not to contest or interfere in FIGL's reversionary ownership of that property, and to direct the IDA to transfer ownership of it to FIGL.

Jurisdiction This Court has subject matter jurisdiction pursuant to 28 U.S.C. ?? 157(a)-(b) and 1334(b) and the Amended Standing Order of Reference, dated January 31, 2012 (Preska C. D.J.). This is a "core proceeding" under 28 U.S.C. ? 157(b)(2)(E) and (O) that the Court may determine by a final order under Stern v. Marshall, 564 U.S. 462, 497 (2011), because, as provided in the Abstention Decision, this Court is deciding only issues limited to core aspects of the adjustment of the debtor/creditor relationship: how did the Plan's confirmation affect the parties' prepetition claims to or interests in Parcels B and C, and does the injunction provided for in ? 11.08 of the Plan and ? 7 of the Court's December 1, 2005 Order confirming the Plan (the "Confirmation Order"),10 which prevents interference with the Plan or the property covered by the Plan, apply? See also Travelers Indem. Co. v. Bailey, 557 U.S. 137, 153-55 (2009); Netflix, Inc. v. Relativity Media, LLC (In re Relativity Fashion, LLC), 696 Fed. Appx. 26, 28-29 (2d Cir. 2017); Elliott v. GM LLC (In re Motors Liquidation Co.), 829 F.3d 135, 153-54 (2d Cir. 2016), cert. denied, GM LLC v. Elliott, 137 S. Ct. 1813 (2017). The Court retains post-confirmation jurisdiction because ? 12.01(f) of the Plan and ? 18 of the Confirmation Order reserve the

10 FIGL Trial Ex. J. 6

Court's jurisdiction to decide such issues, and the dispute clearly has a close nexus to the Plan. Cohen v. CDR Creances, S.A.S. (In re Euro-American Lodging Corp.), 549 Fed. Appx. 52, 54 (2d Cir. 2014); Ace Am. Ins. Co. v. DPH Hldgs. Corp. (In re DPH Hldgs. Corp.), 448 Fed. Appx. 134, 137 (2d Cir. 2011); SP Special Opportunities, LLC v. LightSquared, Inc. (In re LightSquared, Inc.), 539 B.R. 232, 240-42 (S.D.N.Y. 2015). Here, FIGL is seeking to enforce the Plan as to Parcels B and C, which 11 U.S.C. ? 1142(b) specifically authorizes the Court to direct. In re Relativity Fashion, 696 Fed. Appx. at 28; Harper v. Oversight Comm. (In re Conco, Inc.), 855 F.3d 703, 711 (6th Cir. 2017).

The Binding Effect of Plan Confirmation It is often stated that a chapter 11 plan is a new contract between the debtor and its creditors, albeit one signed only by the plan proponent, in this case FIGI. In re Conco, 855 F.3d at 711, quoting In re Dow Corning Corp., 456 F.2d 668, 676 (6th Cir. 2006); see also In re Montgomery Ward Hldg. Corp., 306 B.R. 489, 495 (Bankr. D. Del. 2004) (a confirmed plan is "a legally binding agreement"); In re Pettibone Corp., 134 B.R. 349, 351-52 (Bankr. N.D. Ill. 1991) ("A plan of reorganization is a contract which binds the debtor and its creditors."). References to chapter 11 plans as contracts or agreements -- while useful for purposes of interpreting plans, Silvervan v. Cent. Equities Credit (In re 18th Ave. Realty, Inc.), 2010 Bankr. LEXIS 1553, at *14-15 (Bankr. S.D.N.Y. May 7, 2010) -- are only by analogy, however. The binding effect of a chapter 11 plan is in fact premised on statutory and common law claim preclusion. That is, for the debtor, its creditors and holders of interests, the chapter 11 plan is the crucible by which the parties' claims and rights in property dealt with by the plan are transformed and governed postconfirmation -- a "super-contract" -- not because it is signed by all of the parties with claims

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against the debtor and holders of interests affected by the plan who participated in the case, but

because of applicable provisions of the Bankruptcy Code and principles of res judicata.

First, in addition to providing for the discharge of a reorganizing debtor under a chapter

11 plan, section 1141 of the Bankruptcy Code prescribes the binding nature of a confirmed plan:

(a) . . . [T]he provisions of a confirmed plan bind the debtor, any entity issuing securities under the plan, any entity acquiring property under the plan, and any creditor, equity security holder, or general partner in the debtor, whether or not the claim or interest of such creditor, equity security holder, or general partner is impaired under the plan and whether or not such creditor, equity security holder, or general partner has accepted the plan.

(b) Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all property of the estate in the debtor.

(c) . . . [E]xcept as otherwise provided in the plan or in the order confirming the plan, after confirmation of a plan, the property dealt with by the plan is free and clear of all claims and interests of creditors, equity security holders, and of general partners in the debtor.

11 U.S.C. ? 1141(a)-(c). Thus, a confirmed plan binds, among others, the debtor and its

creditors to its terms and vests all property of the debtor's estate in the reorganized debtor unless

otherwise provided in the plan,11 and, moreover, can vest the property that is dealt with by the

plan free and clear of all claims and interests of creditors and interest holders even if it was not

necessarily property of the estate pre-confirmation. Id.12

Moreover, the doctrine of res judicata applies to orders confirming chapter 11 plans.

"The confirmation of a plan in a Chapter 11 proceeding is an event comparable to the entry of a

final judgment in an ordinary civil litigation." Silverman v. Tracar, S.A. (In re Am. Preferred

Prescription, Inc.), 255 F.3d 87, 92 (2d Cir. 2001). Thus, in addition to the preclusive effects of

11 See also Diamond Z Trailer, Inc. v. JZ L.L.C. (In re JZ L.L.C.), 371 B.R. 412, 418, 420-21 (BAP 9th Cir. 2007) (section 1141(b) vests property in the debtor post-confirmation regardless whether listed on debtor's schedules, subject, on a fact based analysis, to principles of judicial estoppel for conflicting post-confirmation claims to unscheduled assets). 12 See also authorities cited in the following discussion of the res judicata effect of plan confirmation.

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