To Estimate or Not to Estimate, that is the Question

Kyle F. Arendsen and Christopher J. Giaimo | Squire Patton Boggs

Is there any downside to a debtor filing a motion to estimate a claim?  Or, is an estimation motion simply procedural in nature?  As the debtors recently discovered in In re SC SJ Holdings LLC, a motion to estimate a claim before a bankruptcy court may not always lead to a significantly reduced claim, and may impact plan confirmation.

The Facts

The Debtors in SC SJ Holdings, LLC operate an 805-room luxury convention/group-style hotel located in San Jose, California that was formerly known as the San Jose Fairmont.  The hotel was previously managed by Accor Management US (“Accor”) pursuant to a hotel management agreement (the “HMA”).  As part of its out of court restructuring efforts, the Debtors sought to terminate the HMA, which termination was opposed by Accor.

On March 5, 2021 and March 10, 2021, the Debtors filed for chapter 11 protection in Delaware with the intent to reorganize their business under a new hotel brand.  However, roughly twelve hours before the first bankruptcy filing, Accor asserted a $30 million arbitration claim against the Debtors, alleging that the Debtors had breached the HMA.   Ostensibly, in order to side-step the arbitration, the Debtors filed a motion requesting that Accor’s claim against the Debtors be estimated in the maximum amount of $2,004,408 for all purposes, including plan confirmation and final valuation  (the “Estimation Motion”).  Such dual relief would effectively eliminate the need for the arbitration.  The Debtors argued that the $2 million claim was Accor’s sole remedy in accordance with the HMA’s liquidated damages clause and related provisions and governing California law.  The Debtors also asserted that the arbitration would cause undue delay in the chapter 11 cases and that the bankruptcy court was the proper forum to timely resolve the dispute.

In response, Accor argued that the Estimation Motion was premature and an unnecessarily hastened attempt to estimate an unfiled contract rejection damages claim and circumvent the agreed-to arbitration provision in the HMA.  Accor framed the issue as a state law contract dispute that was being resolved by an expedited arbitration proceeding that would not cause any undue delay to the on-going reorganization efforts of the Debtors.

Shortly after the Debtor filed the Estimation Motion, Accor sought, and was granted, relief from the automatic stay to pursue arbitration of its claims against the Debtor under the HMA.  Notably, the HMA required arbitration for the purposes of determining the scope of damages suffered as a result breach thereof. Accordingly, while potentially mutually exclusive, the court determined to allow the arbitration proceeding and the claims estimation process to run in parallel.

At an initial hearing on the Estimation Motion, the court declined to decide the threshold issue of whether the claims estimation process under section 502(c) of the Bankruptcy Code allows for valuation of the claim for all purposes, including for setting the actual value of the claim, rather than solely for determining the amount of the disputed claims reserve in the context of a plan.  The court then set an evidentiary hearing on the Estimation Motion for a date after which Accor stated the arbitration would conclude.  The court noted that if the arbitration was not concluded by that time, it was “highly likely” that the estimation would be for all purposes, thus eliminating the need for the arbitration and its resulting delay on administration of the bankruptcy estates.

Claims Estimation Under the Bankruptcy Code

The purpose of estimation under section 502(c) is to prevent any undue delay in administering the estate by avoiding the need to delay the case while liability and damage issues in other forums are resolved.  In addition, claim estimation is a procedural device that can assist parties with formulating chapter 11 plans by quickly establishing the amount of liability for potentially large, undetermined claims.

Courts have wide latitude to determine what procedures to use for estimating a claim, subject only to the legal rules that may govern a claim’s ultimate value.  Thus, claims must be appraised on the basis of what would have been a fair resolution of the claims in the absence of bankruptcy, and the court can use whatever method is best suited to the circumstances. Various methods used by courts to estimate claims include summary trials, evidentiary hearings, and simple review of the pleadings and oral argument. Courts can exercise their discretion to estimate a claim for only plan confirmation purposes, or may also estimate a claim to establish the ultimate amount allowed.

The Court’s Holding

After taking the Estimation Motion and related pleadings under advisement, the court entered an order estimating Accor’s claim in the amount of $22.24 million, but only for the purpose of determining plan feasibility, thus denying the Debtors’ request that it be valued for all purposes under the Bankruptcy Code. The court reasoned that the $22.24 million figure was appropriate because Accor’s claim was only being estimated for plan purposes, and that such amount represented the “highest value [Accor] could reasonably receive to ensure that there will be funds necessary [under the plan] if Accor’s is ultimately successful on its claim.”

While there was insufficient evidence for a determination of value for all purposes, the court concluded that cause existed to estimate Accor’s claim solely for the purpose of determining plan feasibility.  Because the scope of estimation was limited to such, it did not eliminate the need for further liquidation in the arbitration proceeding.  The court noted that its ruling should not be binding on the arbitration proceeding to liquidate Accor’s claim, thus allowing the arbitration to proceed to conclusion.

Takeaways

As the Debtors discovered in SC SJ Holdings, LLC, an estimation motion may not always result in a forum-selected favorable ruling, nor will it always be the exclusive forum for litigating a creditor’s contingent claim.  Indeed, in the SC SJ Holdings, LLC case, it did neither.  Not only were the Debtors handed an estimated claim that was over ten times larger than they argued for, the Debtors still had to contend with the arbitration proceeding in parallel with the estimation process.  The results are ominous in that Accor’s $22.4 million estimated claim is impaired under the Debtors’ plan of reorganization and the amount of the claim will likely make it more difficult for the Debtors to confirm their plan in the event Accor votes to reject the plan; not to mention what the ultimate amount may be from the arbitration. As SC SJ Holdings, LLC demonstrates, claims estimation is not always an efficient and beneficial procedure for debtors to employ, as it may not preclude liquidation in another forum and may result in a higher estimation for plan feasibility purposes to preserve the creditor’s rights at confirmation.

Blindly Relying on Public Adjuster or Loss Consultant’s False Estimate Can Play Out Badly

David Adelstein | Florida Construction Legal Updates

Insurance policies, particularly property insurance policies, have a concealment or fraud provision that, in essence, gives the insurer an out if the insured submits a fraudulent claim, a false claim, or conceals material facts.   Unlike a traditional fraud claim where a party needs to prove intent, the provision is broad enough that it does not require any intent behind making a false statement.  See Mezadieu v. Safepoint Ins. Co., 46 Fla.L.Weekly D691c (Fla. 4th DCA 2021).   For this reason, and as exemplified below, do NOT blindly rely on a public adjuster or loss consultant’s estimate that contains false statements because those false statements, particularly if you know they are false, can play out badly for you! Review the estimate and ask questions about it to make sure you understand what is being included in the loss or damages estimate.

In Mezadieu, a homeowner submitted a claim to her property insurance carrier due to a second-floor water leak emanating from her bathroom.  She submitted an estimate from her public adjuster that included damages for her kitchen cabinets directly below the second-floor bathroom, as well as other items on her first-floor.  Her carrier denied coverage based on the exclusion that the policy excludes damage caused by “[c]onstant or repeated seepage of water or steam…which occurs over a period of time.”

The homeowner filed a lawsuit against her property insurance carrier.  In interrogatory answers, she verified she was seeking the damages per the estimate prepared by her public adjuster.  During her deposition, she reiterated this point.  However, and this is a big however, she acknowledged that her public adjuster’s estimate contained false statements: “when asked if the reported leak caused damage to the kitchen cabinets, [she] disclosed that the cabinets had actually been damaged by a prior leak in the kitchen – a leak which [she] made a claim for with a different insurer – and the leak did not cause any damage to the kitchen cabinets.”  Mezadieu, supra.   Indeed, she conceded that her second-floor bathroom leak caused no damage to her kitchen and she did see any water damage on her first floor, although such damage was included in her public adjuster’s estimate.

The insurance carrier, after amending its affirmative defenses, moved for summary judgment based on the concealment or fraud provision which excluded coverage if an insured: “(1) Intentionally concealed or misrepresented any material fact or circumstance; (2) Engaged in fraudulent conduct; or (3) Made a false statement; relating to this insurance.” Mezadieu, supra.

The trial court granted summary judgment attributing the false statements to the homeowner “because she adopted the estimate as her own in both her sworn interrogatory answers and deposition testimony, and because [her adjuster] was acting as her agent.”  Mezadieu, supra.  The appellate court concurred because: (a) she adopted the estimate as her own statement; and (b) even if she did not intend to rely on false statements in her public adjuster’s estimate, the policy does not require that a false statement needs to be made with intent.  As the appellate court explained, and reinforcing why reviewing and asking questions about any estimate is a must:

[An] insured cannot blindly rely on and adopt an estimate prepared by his or her loss consultant without consequence.  This is not to say that an insured will always be bound by the representations made in an estimate prepared by his or her loss consultant. However, when an insured relied on or adopt an estimate containing material false statements to support his or her claim, the insured is bound by the estimate and cannot avoid application of the concealment or fraud simply because he or she did not prepare the estimate.

Heads I Win, Tales You Lose. Court Finds Indemnity Provision Went Too Far

Garret Murai | California Construction Law Blog

We all love David and Goliath stories. The underdog winning against the far stronger (and dastardly) opponent. Think Rocky Balboa versus Ivan Drago, the Star Wars Rebellion versus the Galatic Empire, Indiana Jones versus a good chunk of the Third Reich. And now, we have Margaret Williams.

The Story of Margaret Williams and her LLC

The story, told in Long Beach Unified School District v. Margaret Williams, LLC, Case No. B290069 (December 9, 2019), is about Margaret Williams. Ms. Williams (we’ll just call her “Margaret” going forward because it just  sounds better when telling a story) worked for nearly ten years full-time for the Long Beach Unified School District, toiling day in and day out doing construction management and environmental compliance work, including work involving the clean up of  material at a school construction site contaminated with arsenic.

Although she worked full-time for the District for nearly ten years, she wasn’t an employee. Rather, she was a contractor. And, on top of it all, as a condition of working for the District, the District required that she form a company in order to contract with the District. According to Margaret, “In order to work with the District, I was directed . . . to form a corporation or partnership. This was the only way I could work for the District: I could not enter into a contract with the District as an individual.” So, in 2006, she formed a company, simply called Margaret Williams, LLC.

In 2013, the District’s general contractor for a new school illegally brought contaminated material onto the project site. Margaret directed Link Corporation, the District’s construction supervisor at the site, to remove the contaminated materials. Link, however, ignored her. Through the following year, Margaret tried to resolve the problem by discussing it with two District administrators, one of whom, told her to oversee the cleanup at the site.

According to Margaret, District employees overseeing the site “deliberately interfered” with her efforts to prevent the mishandling of contaminated material. She wrote a letter to District administrators telling them that her ability oversee the cleanup of the site was “completely neutralized,” that her access to her District email account and a facility server had been disabled, and that no one would explain these events. Again, according to Margaret, “[M]y ability to do my  job has been completely eliminated by these actions, the ability to run my business impacted. I cannot even contact my own company staff without getting on the server and accessing my emails. I have worked in the District for almost 10 years and everything is on that computer . . .”

When Margaret sent a report to the Department of Toxic Substances and Control asking for their help to ensure the District properly clean up the site she received a letter from the District terminating its contract  with Margaret’s company based on its employee’s failure to return to work. Shortly thereafter, Williams was rushed to the hospital due to sudden illness and diagnosed with arsenic poisoning. But, of course, since this is a legal blog, you know that’s not the kicker.

Margaret and her company later sued the District under Government Code section 12653 which permits employees, contractors and/or agents to sue if discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against in the terms and conditions of his her employment. Her company’s contract with the District, however, contained an indemnity provision requiring her company to indemnity and hold the District entirely harmless from all liability arising out of:

  1. Death or bodily injury to a person;
  2. Injury to, loss or theft of property;
  3. Any failure or alleged failure to comply with any provision of law [note: that’s a whopper of a provision]; or
  4. Any other loss, damage expense due to any of the foregoing suffered by Margaret’s company, anyone employed by Margaret’s company or District, or in any way connected with the Project.

The District, relying on the indemnity provision, filed a cross-complaint against Margaret Williams, LLC alleging that her company had breached its contract by failing to indemnify the District from the company’s own claim and the claim of its employee, Margaret.

In response, Margaret Williams, LLC filed an anti-SLAPP motion asking the trial court to strike the District’s cross-complaint in its entirety, basically, on the ground that the cross-complaint was an end-run around to prevent Margaret and her company from suing the District for retaliatory termination. In its opposition, the District argued that it’s cross-complaint was not based on Margaret and her company’s underlying complaint, but rather, on the Margaret William, LLC’s refusal to defend and indemnify the District at it had agreed to in in its contract.

The trial court was having none it. At the hearing on the anti-SLAPP motion, the Court stated, “[I]f I read it correctly it essentially says regardless of how plaintiff prevails or fails to prevail on the main complaint, that no monies will be paid because she has agreed to indemnify everyone in the case.” The trial court granted the motion finding that the cross-complaint arose from protected activity and that the District had failed to demonstrate a probability of prevailing.

The District appealed. It also appealed an order from the trial court denying its application to include nine additional pages to its opposition brief.

The Appeal

On appeal, the 2nd District Court of Appeal explained a two-step process in analyzing anti-SLAPP motions. The first, explained the Court is that a defendant, here Margaret, must take two related showings. First, “[c]omparing its statements and conduct against the statute, it must demonstrate activity qualifying for protection.” And, second, “comparing that protected activity agains the complaint, it must also demonstrate that the activity supplies one or more elements of a plaintiff’s claims.” “Protected activity,” explained the Court, “includes the filing and prosecution of lawsuits” as well as “conduct in furtherance of the exercise of the constitutional right of petition or the constitutional right of free speech in connection with a public issue or an issue of public interest.”

Here, held the Court of Appeal, the District’s cross-claims for defense and indemnity would have no basis without Margaret and her company’s underlying complaint:

The District’s own position is that its cross-claims arose from Williams LLC’s refusal to defend and indemnify the District in the Underlying Action. This refusal was protected conduct in furtherance of petitioning connection with an issue of public interest. A refusal to fund the defense of one’s own litigation – and the defense of a co-plaintiff’s claims arising from the same facts – is out in furtherance fo the litigation. Further, the Underlying Action is connected with an issue of public interest. Its allegations concern an environmental hazard at a construction site for a public school, violations of the state’s requirements for remedying that hazard, and a public school district’s punishment of resistance to those violations.

The second step in analyzing anti-SLAPP motions explained the Court of Appeal, is that the plaintiff, here the District, must demonstrate a probability of prevailing on each claim arising from protected activity. In analyzing a plaintiff’s burden, explained the Court, the court applies a “summary-judgment-like procedure,” “does not weigh evidence or resolve conflicting factual claims,” and “should consider whether the defendant’s evidence in support of an affirmative defense is sufficient, and if so, whether the plaintiff has introduced contrary evidence, which, if accepted, would negate the defense.”

Here, held the Court of Appeal, Williams LLC raised an affirmative defense in its anti-SLAPP motion that the District could not prevail on its cross-claims because the indemnity provision is unconscionable and that the District had failed to negate that defense. Discussing the “substantive unconscionability” of the District’s indemnity provision, the Court stated:

Here, the indemnity provision drafted by the District . . . purports to preclude any possibility of Williams LLC obtaining meaningful recovery on a broad category of meritorious claims. The provision requires Williams LLC to indemnify the District for all liability for specified types fo damage sustained by Williams LLC itself as a result of the District’s conduct . . .

Further, explained the Court of Appeal, the District’s indemnity provision was “procedural unconscionable” because it was a contract of adhesion offered on a “take it, or leave it, basis,” Margaret only formed her company at the demand of the District who would not enter into a contract with her as an individual, and the indemnity provision itself came with a “surprise” in that it required each party to bear their own attorney’s fees and costs yet at the same time required Margaret’s company to defend the District thereby nullifying that very same provision.

Conclusion

We all love indemnity clauses when we can dictate their terms. However, Margaret Williams, LLC, while based on some pretty unique facts, provides an example of when indemnity provisions can go too far.

Roofing Project Specifications—The Details Required For Quality Roofing Insurers Rarely Pay For Or Mention in Estimates

Chip Merlin | Property Insurance Coverage Law Blog | December 4, 2019

Insurance estimators, appraisers, and adjusters of roofing claims should read the attached partial specifications of a commercial roofing project. There has been some discussion of what a “reasonable” cost should be, but I think most would require that the scope of a commercial roofing job involving insurance be one that is going to result in a “quality” job. So, how do you determine what a quality commercial roofing job would be? I suggest you would look at specifications that the construction industry has come up with to prevent non-quality work from occurring.

Where do you find the specifications for quality construction? The Construction Specifications Institute.

The Construction Specifications Institute is a national non-profit technical organization dedicated to the improvement of specifications and building practices in the construction industry through service, education, and research. Founded in 1948, CSI provides a forum for architects, engineers, designers, specification writers, contractors, manufacturer’s representatives, suppliers, and all others in the construction industry. Membership is open to all who are involved in the built environment.

Historically, the CSI helped ensure quality construction through standards of materials and methods of construction. I would encourage anybody who is in the insurance restoration business, as a restoration contractor or an individual who is somehow responsible for determining the scope of methods and materials to be used in a particular restoration project, to become intimately familiar with using the reference materials available from the CSI. I would also suggest that you contemplate obtaining certification from the Construction Specifications Institute as well.

Thought For The Day

Associate with men of good quality if you esteem your own reputation; for it is better to be alone than in bad company.
—George Washington

Arbitrator: Produce Those Construction Documents . . . And Me: You Have No Authority!

Matthew DeVries | Best Practices Construction Law | November 18, 2019

Construction disputes often involve voluminous amounts of discovery, including documents in the hand of third parties.   And if the case is subject to arbitration, it is likely that there will be a dispute about whether the arbitrator has the authority to compel production of third-party documents or witnesses for deposition.

On September 18, 2019, in Managed Care Advisory Group, LLC v. Cigna Healthcare, Inc.the Court of Appeals for the Eleventh Circuit concluded that Section 7 of the Federal Arbitration Act (“FAA”) precludes all pre-hearing discovery from non-parties.  Specifically, the court considered the enforcement of summonses sent to non-parties to appear by video conference and to produce documents.  According to the court, any non-party discovery must take place in person at the arbitration hearing.  Even if the arbitrator’s request is limited to document production, the non-party must appear at the hearing in person with the documents in hand.  This appears to now be the rule in the Second, Third, Fourth, Ninth and Eleventh Circuits.  The Eighth Circuit has held otherwise, suggesting that pre-hearing discovery is available under the FAA.

So what? As a practical matter, the majority of the circuits now hold that if a non-party receives an arbitral summons for pre-hearing discovery, this is outside the scope of the arbitrator’s power.  However, an arbitral summons may require discovery at the hearing so long as the non-party physically appears.