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Insurers Beware: Recent Eleventh Circuit Court of Appeals Opinion Limits Ability of Insurance Companies to Lift Automatic Stay for “Defensive Actions”

Feb 9, 2022

InsurersBeware: Recent Eleventh Circuit Court of Appeals Opinion Limits Ability ofInsurance Companies to Lift Automatic Stay for “Defensive Actions”


           On November 16, 2021, a three-judge panel of the U.S. Court of Appeals for the Eleventh Circuit (which has jurisdiction over federal cases originating in the states of Alabama, Georgia, and Florida) issued an opinion in State Farm Fla. Ins. Co. v. Carapella (Inre Gaime), No. 20-12240, 2021 U.S. App. LEXIS 34133 (11th Cir. Nov. 16,2021) upholding a decision by a bankruptcy judge to deny an insurance company’s motion for relief from the automatic stay for the purpose of intervening in a state court action to vacate a substantial default judgment against its insured, which thereby limited its ability to defend a claim against the company for bad-faith made by the trustee for the insolvent insured’s bankruptcy estate. The ruling is certain to have significant effects on the strategic decisions made by insurance companies as to how they defend insureds under their policies.


           The unanimous opinion of the panel ⸻penned by Judge Kevin C. Newsom, on behalf of himself and Judges Elizabeth L.Branch and Barbara Lagoa ⸻ briefly summarized the “truly horrific” facts of the underlying matter. Kristina Gaime, a resident of Land O’Lakes, Florida, had two minor children, Matthew and Adam (then six- and eight-years old, respectively, at the time of the incident), with her ex-husband, Stephen Rotell. The couple were engaged in a bitter custody dispute. Gaime made unsubstantiated allegations of sexual abuse against Rotell, but after multiple investigations by the authorities, Rotell was cleared of any wrongdoing, which left him free to pursue custody of his two sons.

           Soon thereafter, in 1999, Gaime drugged both children with morphine and placed them in the family’s minivan in the home’s closed garage. She then attempted a murder-suicide via carbon monoxide poisoning by running a hose from the tailpipe to the interior of the vehicle and starting the engine; Matthew died, but she and Adam both survived.

           Even though she was initially charged with first-degree murder, Gaime accepted a plea deal in October 2005 in which she pled guilty to second-degree murder and attempted second-degree murder. The trial court judge sentenced Gaime to 20 years in prison, which is where she remained until her eventual release on April 28, 2016, after serving a total of 17 years.

           While Gaime was incarcerated, Rotell, Adam, and Matthew’s estate (collectively, the “Rotells”) all sued her in aFlorida state court action for wrongful-death and bodily injury (the “civil suit”) in April 2001. Gaime maintained policies for both automobile and homeowners insurance with affiliates of the State Farm insurance company (“StateFarm”), and her defense in the civil suit was tendered to the insurer. StateFarm defended Gaime under a reservation of rights, while contemporaneously filing separate declaratory judgment actions against both Gaime and the Rotells “seeking determinations that Gaime’s policies didn’t cover the incident and that it had no duty to defend or indemnify her.”

           In Spring 2011, the Rotells made a settlement offer to Gaime’s insurance counsel in the civil suit. Under the terms of the proposed settlement, State Farm would remain subject to a bad-faith lawsuit for an amount in excess of policy limits, and Gaime would assign to the Rotells any bad-faith claims she might have against State Farm. Unsurprisingly, counsel from State Farm advised Gaime to reject the settlement offer, even though Gaime wanted to accept it since it would absolve her of any potential liability; the offer was formally rejected.

           The Rotells had filed a FourthAmended Complaint against Gaime in the civil suit, and Gaime’s State Farm appointed counsel filed a Renewed Motion to Dismiss, or in the Alternative, forJudgment on the Pleadings (the “Motion to Dismiss”) on April 11, 2012. The state court reserved any ruling on the Motion to Dismiss until State Farm’s declaratory judgment actions were adjudicated.

           The Rotells did not file a response to the Motion to Dismiss. Instead, at the hearing on the motion on May 24, 2012, the Rotells made an oral motion for leave to amend their complaint, and theCourt granted them leave to do so within 20 days from the date of entry of the order granting leave.

           Thereafter, judgments were entered in State Farm’s favor in the declaratory judgment actions, with the courts ruling that State Farm had no coverage obligations under the policies or any duty to defend Gaime. Insurance counsel from State Farm quickly withdrew from the civil suit on June 19, 2012, leaving Gaime without representation.

           It wasn’t until March 2, 2016, when the Rotells finally filed their Fifth Amended Complaint, almost four years after the deadline and well after State Farm’s appointed counsel for Gaime had withdrawn. Gaime, who was still incarcerated, did not respond to the FifthAmended Complaint, and the Rotells obtained a default judgment against her on liability. A jury trial as to damages was held and the jury awarded the Rotells a total sum of almost $505 million. According to State Farm, it was not given notice of the jury trial or judgment in the civil suit.

           After the jury award was entered, the Rotells filed an involuntary Chapter 7 petition in bankruptcy court against Gaime, who never responded to the petition. The bankruptcy court entered an order granting the petition and appointing Dawn Carapella as trustee. The jury award was Gaime’s only liability, and her only assets were claims against StateFarm for bad-faith and malpractice. Trustee Carapella, on behalf of the bankruptcy estate, filed suit against State Farm in Florida state court, alleging that the insurance company acted in bad-faith when it rejected the Rotells’ settlement offer in the civil suit.

           State Farm subsequently filed a motion for relief from the automatic stay in the Gaime’s bankruptcy case for the purpose of moving to intervene and vacate the default judgment against Gaime in the civil suit by claiming that the Rotells’ Fifth Amended Complaint was untimely. By voiding the default judgment, State Farm sought to rid Gaime’s bankruptcy estate of any bad-faith claims against the company. The bankruptcy court denied State Farm’s motion for relief from stay, and the decision was affirmed on appeal by the district court. State Farm then appealed the matter to the U.S.Court of Appeals for the Eleventh Circuit.

TheEleventh Circuit’s Ruling

           The Eleventh Circuit panel unanimously held: “(1) that 11 U.S.C. § 362(a)’s automatic stay provision applies to StateFarm’s motion to intervene in the wrongful-death suit against Gaime, (2) that StateFarm hasn’t been deprived of due process, and (3) that there otherwise was no cause to lift the stay.”

           First, in its examination of the automatic stay provisions of the Bankruptcy Code, the panel took a textualist approach and focused intently on the “plain language” of the statute. 11 U.S.C.§ 362(a)(1) states, in pertinent part:

(a)  [A] petition filed under section . . . 303 of this title . . . operates as a stay, applicable to all entities, of –

     (1)  the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title . . . .

The panel found that State Farm was an “entity” whose proposed motion to intervene constituted a “continuation” of the civil suit “against the debtor,” which was“commenced” before the involuntary bankruptcy petition was filed. State Farm vehemently argued that every other Circuit, in an analysis of whether a particular action or proceeding was “against the debtor,” differentiated between“actions for affirmative relief against the debtor’s estate, which are stayed, and defensive actions, which are not.” However, the panel’s reading of the text meant that it was immaterial whether or not State Farm was acting “offensively”against the debtor in some manner versus “defensively” in assistance of the debtor (in addition to its own interests). Furthermore, even if Florida law would not have permitted State Farm to file its motion to intervene before the trustee had brought a bad-faith claim, it was irrelevant since the bankruptcy case had already commenced. In the panel’s view, any further action by the state court in the civil suit, such as entry of an order granting State Farm’s motion to intervene, would be a “continuation” of the action “against the debtor.”

           Second, the panel considered whether an inability of State Farm to obtain relief from the automatic stay under 11U.S.C. § 362(a) violated the Due Process Clause of the U.S. Constitution by depriving it of a “potentially meritorious defense.” Based on the U.S. Supreme Court’s precedents, the panel held that due process only required the “opportunity to be heard . . . at a meaningful time and in a meaningful manner.” Here, the court found that State Farm “assumed the risk that it might later face abad-faith lawsuit” when it advised Gaime to reject the Rotells’ settlement offer, while simultaneously seeking a declaratory judgment that it had no duty to defend her. In essence, State Farm was now trying to “unwind those previous decisions, or at least their consequences.” Had the company not withdrawn its counsel from the civil suit, it could have sought to void the default judgment against Gaime before the filing of the involuntary bankruptcy petition. In addition, State Farm had another opportunity to be heard by continuing to contest the validity of the default judgment in the trustee’s bad-faith action. Even though the judge in that action held that State Farm lacked standing to do sounder Florida law, State Farm could have appealed that ruling through the state-court system. Quoting from a Seventh Circuit case, the panel emphasized that due process “requires only that a person have a meaningful opportunity to present his claims; it does not guarantee success.”

           Finally, State Farm asserted that the bankruptcy court procedurally erred and abused its discretion in refusing to lift the stay since it required State Farm to prove, and not the trustee to disprove, that there was just cause for the stay to be lifted. 11 U.S.C. § 362(g)places the burden of proof on the party requesting relief from the automatic stay only on the issue of “the debtor’s equity in property,” while the party opposing relief from stay has the burden of proof “on all other issues.” The panel agreed with State Farm that the bankruptcy court had made a procedural error. Nevertheless, the panel ruled the error to be harmless since, in its view, the trustee clearly demonstrated that there was no just cause for the stay to be lifted.

StateFarm’s Next Steps

           Dissatisfied with the panel’s opinion,State Farm filed a Petition for Panel Rehearing and Rehearing En Banc in the appellate case on December 7, 2021. In its Petition, State Farm cited to decisions from the Third, Seventh, Eighth, Ninth, District of Columbia, andFederal Circuit Courts (as well as an unpublished panel decision from theEleventh Circuit) that supported its position that its proposed motions to intervene and vacate the default judgment in the civil suit would not be a violation of the automatic stay because “those motions were filed in response to, and defended against, the trustee’s lawsuit.” State Farm argued that the panel’s refusal to differentiate between offensive claims against the debtor versus defensive claims not against the debtor within the same action or proceeding inits analysis of the automatic stay had now created a significant split of authority among the Courts of Appeals. However, the Eleventh Circuit refused to reexamine the issue, and entered an order denying State Farm’s Petition onJanuary 14, 2022. Only time will tell if State Farm takes the next step in seeking judicial review of the Eleventh Circuit’s ruling with the U.S. Supreme Court. 

TheRuling’s Affect on the Insurance Industry

           As noted by State Farm, the EleventhCircuit’s holding is clearly in the minority among the Courts of Appeals.Nonetheless, there are a sizable number of insurance companies in Alabama,Georgia, and Florida, with a total of 1,558, 1,736, and 2,150 doing business in each state, respectively, according to a 2020 Insurance Department ResourcesReport published by the National Association of Insurance Commissioners (NAIC).Therefore, the court’s opinion in In re Gaime is likely to have widespread effects on the companies in the foregoing states. For example, insurance companies will certainly be more cautious about any sort of circumstances which might give rise to claims of bad-faith against them. In addition, in order to preserve any potential defenses against such claims, insurance companies might need to expend large amounts of resources to continue to monitor and track the progress of suits from which it has withdrawn. If only StateFarm had tracked the Gaime civil suit after its counsel withdrew, it would have been able to file its proposed motion to intervene to vacate the default judgment against its insured long before the involuntary bankruptcy petition was ever filed.

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