Shakir v U.S. Leasing Intl., Inc.

[*1] Shakir v U.S. Leasing Intl., Inc. 2006 NY Slip Op 52447(U) [14 Misc 3d 1208(A)] Decided on December 22, 2006 Supreme Court, Kings County Knipel, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on December 22, 2006
Supreme Court, Kings County

Shafiq Shakir, et ano., Plaintiffs,

against

U.S. Leasing International, Inc., et al., Defendants.



37664/01



Attorney for Plaintiffs

Richard A. Kerner

Kerner & Kerner

74 Trinity Place

New York, NY 10006

Attorney for Defendant - Siriban

Vicki S. Atlas, Esq.

Bilello & Walisever

760 Woodbury Road

Woodbury, NY 11797

Attorneys for Defendants - U.S. Leasing International, MCI WorldCom and Boglioli

Emily DeJesus

Gibbons, DelDeo, Dolan, Griffinger & Vecchione, P.C.

125 West 55th Street - 11th Fl.

Nwe York, NY 10019

Lawrence S. Knipel, J.

Upon the foregoing papers, plaintiffs, Shafiq Shakir and Mary Shakir (the Shakirs), move for an order to remove the stay of all proceedings herein and to schedule a preliminary conference; defendant MCI Communications Services, Inc., formerly known as and sued herein as MCI WORLDCOM Communications, Inc. (MCI), cross-moves for an order, pursuant to CPLR 3212, granting summary judgment dismissing plaintiffs' complaint and the cross claims of defendant Mario F. Siriban sued herein as Mario E. Siriban (Siriban) and granting its counsel, Gibbons, Del Deo, Dolan, Griffinger & Vecchione, P.C. (Gibbons), leave to withdraw as counsel for defendant John M. Boglioli (Boglioli); and defendant U.S. Fleet Leasing International, Inc., sued herein as U.S. Leasing International, Inc. (USFL), cross-moves for a declaration that MCI owes a defense and indemnification to USFL in this matter.

Background

The Factual Circumstances

This personal injury action stems from a November 19, 1999 multiple motor vehicle accident at about 5:30 PM on the Prospect Expressway in the vicinity of its intersection with Hamilton Avenue in Brooklyn. Plaintiff Shafiq Shakir, who operated one of the vehicles, purportedly suffered personal injuries resulting from the accident, allegedly caused by the negligence of defendants Boglioli and Siriban in operating their respective vehicles. Mr. Boglioli, an MCI employee, operated a vehicle owned by USFL, a commercial leasing company, and leased to MCI in accordance with the October 1, 1996 Fleet Leasing Agreement (the Fleet Lease) between USFL and MCI Telecommunications Corporation, [*2]MCI's predecessor-in-interest. Article 5 of the lease required MCI to indemnify and hold USFL harmless "for, but only for, claims of third parties for physical damage to property and personal injury, including death occurring during the performance of this Agreement . . . and arising out of or relating to the vehicles, or other vehicles provided by [USFL] for the use of [MCI]."

The Procedural History

(a)

Plaintiffs filed their verified complaint commencing this action on October 10, 2001, Siriban thereafter served his November 21, 2001 verified answer asserting cross claims against USFL, MCI and Boglioli, MCI's employee, and MCI undertook USFL's defense pursuant to the above indemnity provision. Gibbons, MCI's counsel, therefore served an answer on December 21, 2001 on behalf of USFL, MCI and Boglioli containing cross claims against defendant Siriban.

(b)

However, WorldCom, Inc. and its 16 direct and 162 indirect subsidiaries (collectively, the WorldCom debtors), including MCI WorldCom Communications, Inc. (formerly known, as mentioned above, as MCI Telecommunications Corporation) began filing voluntary petitions for reorganization on July 21, 2002 under Chapter 11 of title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). Gibbons subsequently served plaintiffs and Siriban with a written notice of the bankruptcy filing on August 7, 2002 which highlighted the resulting automatic stay of any further proceedings in this action pursuant to 11 USC § 362 (a) (1).[FN1] The bankruptcy filing also resulted in Ohrenstein & Brown, LLC (Ohrenstein) replacing Gibbons as counsel for USFL, at USFL's expense, on August 29, 2002.

USFL's parent company, CitiCapital Commercial Leasing Corp. (CCLC), thereafter filed a motion less than a month later, on September 25, 2002, seeking in part to compel the debtor to assume or reject the Fleet Lease, or, alternatively, either relief from the automatic stay or adequate protection. CCLC's supporting papers specifically identified this case as one of seven then-pending lawsuits stemming from accidents involving vehicles leased under the Fleet Lease. The supporting papers highlighted an e-mail from WorldCom's in-house counsel citing the bankruptcy filing and WorldCom's preclusion from continuing to defend and indemnify USFL "in connection with any pending (or future) litigation in which U.S. Fleet Leasing has been named as it involves WorldCom." USFL also referenced the one million dollar deductible in WorldCom's liability insurance and the minimal likelihood of [*3]resulting insurance coverage. Hence, USFL expressed its concern that these developments "left CCLC exposed and subject to potential multi-million dollar verdicts."

The Bankruptcy Court heard USFL's motion on October 22, 2002 and thereafter issued an order, dated November 12, 2002, denying the motion in all respects. However, the denial came

without prejudice (1) to the right of USFL to commence a declaratory judgment action in this [bankruptcy] case seeking determinations pertaining to indemnification and insurance obligations of [MCI] under the [Fleet Lease], as to: (i) [USFL's] right to indemnity and to be defended by [MCI] with respect to claims for personal injury and property damage arising subsequent to July 21, 2002, from the possession, operation and use of its vehicles under the [Fleet Lease]; (ii) [USFL's] right to reimbursement for legal expenses and costs of defense in defending claims of third parties arising from [MCI's] possession, operation and use of its vehicles; and (iii) [USFL's] right to payment of the foregoing as an expense of administration entitled to priority under Section 503(b)(1) of the Bankruptcy Code, and (2) to the right of [MCI] or any other party in interest to object to or otherwise oppose any such relief in any manner.

(c)

The Bankruptcy Court had also issued an October 29, 2002 order,[FN2] pursuant to Bankruptcy Rule 3003 (c) (3),[FN3] establishing a January 23, 2003 deadline (the "Bar Date") for filing proofs of claim and concurrently authorized, pursuant to Bankruptcy Rule 2002 (l),[FN4] notice by publication. Such notice subsequently appeared in the December 19, 2002 national editions of the Wall Street Journal, the New York Times and the Washington Post and in the December 19, 2002 edition of the Clarion-Ledger, a Mississippi daily newspaper, as required by the Bankruptcy Court's October 29, 2002 order. None of the parties herein assert having filed any proof(s) of claim relating to the present litigation.

(d)

Gibbons thereafter agreed in a May 6, 2003 letter to once again represent USFL in this and other then-pending cases that had named USFL as a defendant where accidents involved [*4]vehicles leased by MCI under the Fleet Lease.[FN5] However, Gibbons' associate advised Ohrenstein in that letter that she would hold the executed substitution of counsel in this and one other case "until such time as the Plaintiff in each of these actions takes steps to proceed with the litigation." Then, "we will immediately file the Substitutions of Counsel." The Gibbons' associate explained that "we will hold off filing the executed Substitutions to maintain the status quo of the actions. Our clients will be adversely [a]ffected if a Substitution is filed in each of the foregoing two cases in that the other side will take steps to reignite an otherwise dormant litigation." Ohrenstein reports then forwarding the substitution of counsel and the litigation file in this case to Gibbons.

(e)

The Bankruptcy Court about three weeks later, by order dated May 28, 2003, set a confirmation hearing regarding the initial joint plan of reorganization filed by the WorldCom debtors, and subsequently confirmed, by order dated October 31, 2003, WorldCom's Modified Second Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the Confirmed Plan). This Confirmed Plan took effect on April 20, 2004.[FN6]

(f)

MCI, about nine and a half months later, agreed with GE Commercial Finance (GE), the successor-in-interest to USFL and CCLC, to settle claims of those succeeded entities. Hence, a letter settlement agreement, dated February 4, 2005, acknowledged those entities' bankruptcy claims and scheduled payments owed to them in the bankruptcy case (which collectively concerned pre-petition maintenance and rent),[FN7] provided for MCI's payment of [*5]a fixed sum to resolve those claims [FN8] and then provided for USFL's release and discharge of all its previous claims.[FN9]

(g)

Plaintiff's motion papers, dated February 7, 2006 and filed February 16, 2006, seeking to remove the stay and schedule a preliminary conference subsequently spurred Ohrenstein to contact Gibbons and pursue filing of the previously deferred substitution of counsel. However, MCI regards its defense and indemnity obligation to USFL and Bogliori as no longer viable and Gibbons has thus refused to resume representing USFL in response to Ohrenstein's written requests in March 2006. Gibbons, though, has retained the litigation file in this case.

In addition, Gibbons' April 21, 2006 letter to defendant Boglioli reiterated MCI's discharge position, informed him that a conflict of interest prevents the Gibbons firm from representing him and notified him about the firms' motion to withdraw as his attorney.[FN10] The letter also urged him to immediately retain a lawyer to represent his interests and advised him to contact an associate of the court-appointed WorldCom monitor to discuss filing a claim from an approximately $10 million indemnification fund.

The Parties' Positions

Plaintiffs' Position

Plaintiffs contend that the Confirmed Plan, effective April 20, 2004, fully resolved the subject bankruptcy proceeding and thereby dissolved the automatic stay otherwise applicable. [*6]Alternatively, they urge that a bankruptcy stay still allows reactivating and severing a state court personal injury action against the remaining non-bankrupt parties. They also adopt defendant Siriban's position and contend that relevant federal and state statutes and case law permit a tort claimant to even proceed against the discharged debtor to recover against the debtor's insurer.

Defendant MCI's Position

MCI asserts that only the Bankruptcy Court exercises jurisdiction concerning the automatic stay and the injunction resulting from discharging a debt. Hence, it views plaintiffs' motion as a collateral attack on the bankruptcy stay and discharge injunction which only the Bankruptcy Court can entertain.

MCI concurrently seeks to dismiss plaintiffs' claims and defendant Siriban's cross claims as discharged under WorldCom's Confirmed Plan which, in turn, permanently enjoins their adjudication herein. In addition, it views the absence of proof of claim filings in the Bankruptcy Court as a failure to preserve claims and a bar against receiving insurance proceeds. Allowing the action to resume against such proceeds, it notes in any event, will adversely affect other creditors in the WorldCom bankruptcy case. The Bankruptcy Court alone, it urges, should thus consider the equities affecting all parties in interest.

MCI separately seeks this court's approval for Gibbons to withdraw as defendant Boglioli's counsel by citing the conflict of interest with defendant Boglioli if he challenges the discharge of his defense and indemnity claim in the Bankruptcy Court or then litigates the defense and indemnity issue. It regards such conflict as arising from the bankruptcy discharge and not as an insurance coverage issue.

MCI also challenges USFL's declaratory judgment cross motion as both (1) procedurally defective in the absence of USFL's cross claim against it and (2) substantively barred by the Bankruptcy Court's ruling on USFL's motion for indemnity, the discharge of such defense and indemnity claim under WorldCom's Confirmed Plan and GE's February 4, 2005 letter settlement agreement with MCI containing a general discharge and release broadly embracing USFL's defense and indemnity claim asserted herein.

Defendant USFL's Position

USFL agrees with MCI that the Bankruptcy Court maintains exclusive jurisdiction regarding the automatic stay and thus also opposes plaintiffs' motion to lift that stay. USFL urges retaining a stay, in any event, should the court grant MCI's cross motion for Gibbons to withdraw as Boglioli's counsel to afford him sufficient opportunity to obtain new counsel.

USFL opposes MCI's summary judgment cross motion, seeks leave to file a cross claim against MCI and argues for declaratory judgment regarding its lease-based rights to defense and indemnity protection. It contends that Gibbons' resumption in handling this case, as expressed in its May 6, 2003 letter, created an estoppel and seeks return of the litigation file herein to Ohrenstein pending the outcome of the motion and cross motions.

Defendant Siriban's Position

Siriban, like MCI and USFL, agrees that exclusive jurisdiction regarding the automatic stay resides with the Bankruptcy Court and therefore equally opposes plaintiffs' [*7]motion to lift that stay. He additionally opposes MCI's cross motion for Gibbons to withdraw as Boglioli's counsel as being procedurally defective for failing to follow the rule requiring an order to show cause for initiating such a motion. He further regards defendant Boglioli's representation as raising an insurance coverage issue more appropriately presented as a declaratory judgment action. Defendant Siriban defends his cross claim as viable and opposes MCI's summary judgment cross motion for its dismissal by contending that relevant case law and federal and state statutory provisions allow proceeding against a discharged debtor as a prerequisite for recovery from a liability insurer. He thus urges that his cross claim remain in full force and effect.



Discussion

Plaintiff's Motion to Remove The Automatic Bankruptcy Stay and

MCI's Summary Judgment Cross Motion To Dismiss Plaintiff's Complaint

and Defendant Siriban's Cross Claims

(a)

The Appellate Division, Second Department, in Carr v McGriff, 8 AD3d 420, 422 [2004] has explained that

"[t]he United States Bankruptcy Code provides for an automatic stay of certain prescribed actions against the debtor or the debtor's property (11 USC § 362 [a]). The automatic stay is one of the fundamental debtor protections provided by the bankruptcy law . . . . It is undisputed that only a bankruptcy court has jurisdiction to terminate, annul, or modify the automatic stay" (internal citations omitted).

Indeed, several state and federal court decisions, both before and after the Carr case, have recognized this principle of bankruptcy court exclusivity. The Appellate Division, First Department, for example, this October cited the Carr decision in also recognizing that "[o]nly the bankruptcy court has jurisdiction to grant relief from this stay" (Levant v National Car Rental, Inc., 33 AD3d 367, 368 [2006]; see also Emigrant Savings Bank v Rappaport, 20 AD3d 502, 503 [2005]; Homeside Lending, Inc. v Watts, 16 AD3d 551, 553 [2005]).

The Third Circuit Court of Appeals in January, like other federal circuit and district courts, also stressed, in an opinion of now Supreme Court Justice Alito, that "the onus is on the party seeking to proceed to petition the Bankruptcy Court for relief from the stay . . . . To the extent that an equitable exception to the automatic stay exists, it rests solely in the Bankruptcy Courts " (Acands, Inc. v Travelers Cas. and Sur. Co., 435 F3d 252, 259, 261 [3rd Cir 2006], cert denied sub nom. Travelers Cas. and Sur. Co. v Acands Inc., __ US __, 126 S Ct 2291 [2006] [Alito, J. taking no part therein]); see also Farley v Henson, 2 F3d 273, [*8]275 [8th Cir 1993] ["(o)nly the bankruptcy court may grant relief from the automatic stay"]; Maritime Elec. Co. v United Jersey Bank, 959 F2d 1194, 1204 [3rd Cir 1992] ["(o)nly the bankruptcy court with jurisdiction over the debtor's case has the authority to grant relief from the stay of judicial proceedings against the debtor"]; Matter of Barbier v Shearson Lehman Hutton Inc., 943 F2d 249, 250 [2nd Cir 1991] ["(r)elief from the effect of the automatic stay provisions may be granted only by the bankruptcy court"]; Cathey v Johns-Manville Sales Corp., 711 F2d 60, 63 [1983] ["(r)elief from the stay may only be achieved in accordance with the statutory mechanism established by Congress"]; Matter of Dominquez, 312 BR 499, 505 [Bankr Ct, SDNY 2004] ["(o)nly a bankruptcy court has jurisdiction to terminate, annul, or modify the automatic stay"] [emphasis in original - internal citations omitted]; In re Siskin, 258 BR 554, 561-562 [Bankr Ct, EDNY 2001]). Hence, plaintiffs must address their motion to remove the automatic stay regarding MCI to the Bankruptcy Court.

(b)

However, it has been termed well-settled that the automatic stay provisions of the Federal bankruptcy laws do not extend to nonbankrupt co-defendants (Merrill, Lynch, Pierce, Fenner & Smith, Inc., 13 AD3d 89, 89 [2004]; see also United States v Lyons, 292 AD2d 683, 684 fn [2002], lv denied 98 NY2d 606 [2002]; Velez v Seymour Moslin Assocs., Inc., 278 AD2d 164, 165 [2000]; Maynard v George A. Fuller Co., 236 AD2d 300, 300 [1997]). The Appellate Division, Second Department, recognizing the broad choices in matters involving nonbankrupt defendants, has thus summarized that "it is in the discretion of the court to grant a severance . . . as well as a stay" (Rosenbaum v Dane & Murphy, Inc., 189 AD2d 760, 761 [1993] [internal citations omitted]). "[T]he balance of the equities lies with plaintiffs when one defendant has received an automatic stay pursuant to 11 USC § 362 (a)" (Rapini v New Plan Excel Realty Trust, Inc., 8 AD3d 1013, 1014 [2004] [internal citations and internal quotation marks omitted]). Here, the already prolonged and indefinite nature of the automatic bankruptcy stay makes severance relief appropriate under CPLR 603.[FN11]

(c)

(1)

The permanent discharge injunction supplanting the automatic stay similarly provides no impediment to enforcing a bankruptcy discharge or allowing recovery against an insurer. The Appellate Division, Second Department, has highlighted that state courts retain the power, subject to statutory exceptions, to determine the effect of a discharge in bankruptcy (Vleming v Chrysler Corp., Dodge Div., 90 AD2d 773, 774 [1982]; see also State v Wilkes, 41 NY2d 655, 657 [1977]; Chevron Oil Co.v Dobie, 40 NY2d 712, 714 [1976], rearg denied 40 NY2d 1093 [1977]). Indeed, MCI's summary judgment cross motion seeking to dismiss [*9]the plaintiffs' complaint and defendant Siriban's cross claim reflects a recognition of such state court power.

Here, the WorldCom bankruptcy case discharged plaintiffs' claims and

defendant Siriban's cross claims against MCI.[FN12] The Confirmed Plan's discharge, protected by the Confirmation Order and the statutory permanent injunction, thus allows summary judgment extinguishing plaintiffs' claims and defendant Siriban's cross claims against MCI itself.

However, "a claim asserted for the sole purpose of establishing the liability of a party's insurer is not barred by that party's discharge in bankruptcy" (Roman v Hudson Telegraph Associates, 11 AD3d 346, 347 [2004]; see also Presutti v Suss, 254 AD2d 785, 785 [1998] ["the action is not barred by the discharge of defendant in bankruptcy where, as here, plaintiff seeks to proceed against him for the sole purpose of establishing the liability of a vicariously liable party or an insurer"]; Carrols Corp. v Candy Candy, Inc., 241 AD2d 955, 955-956 [1997]).

An earlier decision, Lumbermens Mut. Cas. Co. v Morse Shoe Co. (218 AD2d 624, 625 [1995]), in fact, had highlighted that "11 USC §524 (e) provides that discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt'." Consequently, that decision referenced federal rulings that "[w]here, as here, a tort claimant seeks to proceed against a discharged debtor only for the purpose of recovering against an insurer, it has been held that suit is not barred by the discharge injunction (Green v Welsh, 956 F2d 30 [2d Cir (1992)]; Matter of Edgeworth, 993 F2d 51, 54 n 6 [5th Cir (1993])" (id.).

The Court of Appeals has similarly noted that "[w]here there has been a discharge in bankruptcy, federal courts have held that the permanent injunction that follows does not bar a plaintiff in a personal injury action from obtaining a judgment against the bankrupt defendant for the limited purpose of pursuing payment from the defendant's insurance carrier (see e.g. Green v Welsh, 956 F2d 30 [2d Cir 1992]" (Lang v Hanover Ins. Co., 3 NY3d 350, 355 [2004]; see also Terwilliger v Terwilliger, 206 F3d 240, 247-248 [2d Cir 2000]; In re Shondel, 950 F2d 1301, 1307 [7th Cir 1991] ["Section 524 (e) was intended for the benefit of the debtor but was not meant to affect the liability of third parties or to prevent establishing such liability through whatever means required"] [internal citation omitted]; In re Walker, 927 F2d 1138, 1142 [10th Cir. 1991] ["it is well established that (11 USC § 524[e]) permits a creditor to bring or continue an action directly against the debtor for the [*10]purpose of establishing the debtor's liability when . . . establishment of that liability is a prerequisite to recovery from another entity"] [internal citations omitted]).

(2)

The federal cases cited above and other federal and New York cases have allowed suits against third parties even where the suing party failed to file a proof of claim or seek relief in bankruptcy court (Matter of Edgeworth, 993 F2d at 55; Green v Welsh, 956 F2d at 34-35; In re Jet Florida Systems, Inc., 883 F2d 970, 974-975, and cases cited therein [11th Cir 1989]; In re White, 73 BR 983, 984-985 [Bankr Ct D DC 1987]; In re Mann, 58 BR 953, 955, 958 [Bankr Ct WD Va 1986]; Carrols Corp. v Candy, Candy, Inc., 241 AD2d at 955; Lumbermens Mut. Cas. Co. v Morse Shoe Co., 218 AD2d at 624; Minafri v United Artists Theatres, Inc., 5 Misc 3d 474, 478 [2004] ["plaintiff seeks to proceed against defendants in order to recover from their insurer, a party which may be liable to plaintiff in the underlying personal injury action. [11 USC] Section 524 (e), and case law interpreting it, permit such course of action"]; Andriani v Czmus, 153 Misc 2d 38, 41-42 [1992]).

(3)

"Moreover, Insurance Law § 3420 (a) (1)[[FN13]] requires liability insurance policies in New York to provide that insolvency or bankruptcy of the insured shall not release the insurer from the obligation to pay for covered injury or loss sustained while the policy is in effect" (Roman v Hudson Telegraph Associates, 11 AD3d at 347). The Court of Appeals subsequently stressed that "the bankruptcy or insolvency of an insured is precisely the situation Insurance Law § 3420 was intended to address. The statute makes clear that bankruptcy does not relieve the insurance company of its obligation to pay damages for injuries or losses covered under an existing policy (Insurance Law § 3420 [a] [1])" (Lang v Hanover Ins. Co., 3 NY3d at 355).

(4)

MCI's now elaborated, rather unique insurance arrangement, though, still makes the Bankruptcy Court the proper forum for evaluating the equities herein. A one million dollar, "matching-deductible," primary liability insurance policy, provided by Zurich-American Insurance Company (Zurich), covered MCI from July 1, 1999 through July 1, 2000 and thus applies to plaintiffs' claims regarding the November 19, 1999 accident herein. The matching [*11]deductible policy, known as a "fronting policy," makes MCI's deductible equal to the limits of the policy. Hence, the policy obligates MCI, not Zurich, to first use up to one million dollars of MCI's own assets to pay claims before excess coverage applies.

The Sixth Circuit Court of Appeals has instructed that "[t]he term fronting' refers to situations in which the business pays a greatly discounted premium to an insurance company with insurance licensing and filing capabilities in particular states in exchange for an insurance policy that complies with the financial-responsibility laws of each state in which the business is required to maintain proof of financial responsibility" (White v Insurance Co. of State of Pa., 405 F3d 455, 457 [6th Cir 2005][internal citation and internal quotation marks omitted]). The Circuit Court further noted that "[p]ractically speaking, the business is renting an insurance company's licensing and filing capabilities, which is often economically advantageous for the business. In typical fronting policies, the deductible matches the limit of liability, such that the business bears the entire risk of loss" (id. - emphasis added) (internal citation and internal quotation marks omitted).

Former District and now Circuit Court Judge Sotomayor equally explained that "[f]ronting is an arrangement in which an insurer, for a fee, issues a policy with the intent of passing most or all of the risk back to the policyholder" (Insurance Co. of North America v Pyramid Ins. Co. of Bermuda Ltd., 1994 WL 88701 at *4 [SD NY 1994] [internal citations and internal quotation marks omitted]). Judge Sotomayor observed that "insurance policies which do not actually transfer risk to the insurer but that serve other purposes are very much a custom of the industry" (id.). Consequently, Zurich,[FN14] like the insurer in the Southern District case, "would not have to indemnify its insured for any sum paid by the insured" (id.). MCI therefore, in essence, serves as a primary carrier or initial self-insurer in this case (see New York Forest Ins., Ltd. v American Motorists Ins. Co., 1994 WL 97138 at *1 [SD NY 1994] ["(a)lthough technically Amico (the insurer) issued to IPC (the insured) a primary liability policy, by virtue of the deductible that equaled the limit of coverage under the Fronting Policy, IPC itselfnot AMICO had for all practical purposes assumed the role of primary insurer"]).

MCI's payment responsibility under its fronting policy makes pursuing the action to recover against Zurich somewhat illusory. Such pursuit seemingly constitutes an impermissible, secondary impact upon the bankruptcy estate thereby potentially violating the Confirmed Plan, the Bankruptcy Court's October 31, 2003 Confirmation Order and the statutory discharge injunction in 11 USC § 524 (a) (2), all referenced above in footnote 12. Previously cited case law notes that insufficient insurance to cover claims would threaten to secondarily impact the debtor's estate (see Matter of Edgeworth, 993 F2d at 56), and MCI's [*12]matching deductible, fronting policy could likewise impact MCI's bankruptcy estate. "[The] exception to the permanent injunction under Section 524 (a) is necessarily conditioned upon the debtor's being exempted from any exposure to personal expense or liability, resulting from the creditor's action, which would imperil its fresh start'" (In re Jason Pharmaceuticals, Inc., 224 BR 315, 323 [Bankr Ct D Md 1998] [internal citations omitted]; see also In re Walker, 927 F2d 1138, 1142 [10th Cir 1991]; In re Jet Florida Systems, Inc., 883 F2d at 975]).

(5)

In addition, MCI posted a $19 million dollar letter of credit to secure its deductible obligations as a condition to purchasing the presently involved fronting policy and other similar fronting policies. The Bankruptcy Court, by so ordered stipulation dated June 18, 2004, has authorized Zurich to use the proceeds of the letter of credit to pay approximately 223 claims arising before the bankruptcy (prepetition claims) and return unused amounts to MCI. Allowing plaintiffs and defendant Siriban to proceed in this action against MCI to recover against Zurich, the insurer, therefore appears to actually impact MCI's assets as well as the Bankruptcy Court's so ordered stipulation concerning creditors before the Bankruptcy Court which, in turn, implicates the Bankruptcy Court's jurisdiction.

Permitting the action to proceed potentially reduces MCI's bankruptcy estate by possibly further diminishing the remaining proceeds to MCI from the letter of credit used to satisfy existing creditors in the bankruptcy proceeding. Affecting the proceeds of the letter of credit in turn may or may not actually affect existing creditor claims but the Bankruptcy Court's so ordered stipulation concerning the $19 million letter of credit provides (in paragraph 15 therein) that "the [Bankruptcy] Court shall retain jurisdiction to hear any matters or disputes arising from, or relating to, this Stipulation." Consequently, the Bankruptcy Court emerges as the most appropriate forum to weigh the equities and determine the permissibility of recovery by plaintiffs and defendant Siriban against MCI in this case in the context of the so-ordered stipulation affecting other creditors' interests in the available assets (In re United States Lines, Inc., 197 F3d 631, 637 [2d Cir 1999]).

(6)

The Bankruptcy Court also appears best suited in this case to determine if the Confirmed Plan and its October 31, 2003 Confirmation Order covered and discharged MCI's reimbursement responsibility to Zurich which would then preempt utilizing MCI's $19 million letter of credit and allow continuation of this suit against MCI. Only such coverage by the discharge would then allow perpetuation of this action as occurred in Lumbermens Mut. Cas. Co. v Morse Shoe Co. (218 AD2d at 626) (insured's obligation to reimburse $100,000 deductible discharged); see also Lightowler v Continenal Ins. Co., 255 Conn 639, 647-648, 650-651 [2001] ["Brayton's (the insured's) obligation to pay the ($5,000) deductible to Continental (the insurer) also was extinguished when he received his discharge in bankruptcy and, consequently, Brayton has no exposure to personal liability under the provisions of the policy"; . . . . [therefore] "plaintiff can maintain her action against Brayton solely for the purpose of obtaining a judgment against Brayton as a necessary [*13]prerequisite to seeking a recovery against Continental without subjecting Brayton to any exposure to personal liability under the policy"]). Staying this action for the parties to seek a ruling from the Bankruptcy Court, as discussed above, thus emerges as the most prudent approach under the rather distinctive circumstances herein.

MCI's Motion For Gibbons To Withdraw as Defendant Bogliori's Counsel

CPLR 321 (b) (2) pertinently provides that an attorney of record's application to withdraw from representing the client requires a "motion on such notice to the client of the withdrawing attorney . . . as the court may direct." The Appellate Division, Second Department has observed that "the Legislature declined to specifically delineate the manner in which service of the required notice was to be effected. Instead, the Legislature determined that the manner of service was best left to the court, whose discretion was to be exercised on a case-by-case basis" (Wong v Wong, 213 AD2d 399, 400 [1995] [internal citations omitted]).

Cases and commentaries have interpreted "such notice . . . as the court may direct" to mean by order to show cause (Bynoe v Riverside Church in City of New York, 13 Misc 3d 628, 631 [2006]; Aiello v Adar, 193 Misc 2d 649, 654 [2002]; People v ELRAC, Inc., 192 Misc 2d 78, 82 [2002]; Alexander, Practice Commentaries, McKinney's Cons. Laws of NY, Book 7B, CPLR C321:2, Discharge or Withdrawal of Attorney, p 320 [2001]; Siegel, NY Prac § 115, fn 10 [4th ed]). The Uniform Rules for the New York State Trial Courts, Section 206.8 (c) [FN15] has now codified the show cause order requirement when moving to withdraw as counsel.

A show cause order enables the court, by fashioning the method of service, to maintain fairness by satisfying itself that the moving attorney has used appropriate means to notify the affected client. Here, an especially heightened concern exists considering that Gibbons seeks to withdraw in view of MCI's bankruptcy discharge and its ensuing conflict of interest claim after having represented defendant Bongliori since 2001. MCI's cross motion prevented the court from determining the appropriate means of notification and its ordinary mail service, as noted in the cross motion's accompanying affidavit of service, fails to provide sufficient assurance of personal receipt by defendant Bongliori.[FN16] Hence, the procedural deficiency herein prevents considering the merits of the cross motion for Gibbons to withdraw as counsel for defendant Bongliori and requires re-service for that relief by order to show cause, with a copy of this order and decision, whereby the court can mandate personal service on defendant Bongliori.

USFL's Declaratory Judgment Cross Motion [*14]

This cross motion preliminarily requires determining whether to allow USFL to amend its answer to assert a cross claim against MCI for defense and indemnification. CPLR 3025 (b)[FN17] and case law encourage allowing a pleading's amendment except where such an amendment would prove insufficient or lacks merit (Ruddock v Boland Rentals, Inc., 5 AD3d 368, 370 [2004] ["(a)lthough leave to amend a pleading should be freely given absent prejudice to the opposing party . . . leave should be denied if the proposed amendment is palpably insufficient as a matter of law or is totally devoid of merit"] [internal citations omitted]). Indeed, "a court must examine the underlying merit of the proposed claims, since to do otherwise would be wasteful of judicial resources" (Butt v New York Medical College, 7 AD3d 744, 745 [2004] [internal citations and internal quotation marks omitted]).

Here, MCI's initial, lease-based representation of USFL through Gibbons understandably mooted originally asserting such a cross claim. MCI's later and current position that the bankruptcy discharge prevented such representation, even after its counsel agreed to resume USFL's defense, therefore might normally furnish grounds for amending USFL's answer to now allow a cross claim against MCI.

However, even if USFL's estoppel arguments overcame MCI's objections that its discharge negated USFL's defense and indemnification claim and that the Bankruptcy Court's November 12, 2002 order denying USFL's relief motion had already resolved this issue therefore requiring the Bankruptcy Court alone to address USFL's present request, USFL's February 4, 2005 settlement with MCI released and discharged USFL's previous claims relating to the Fleet Lease. The release in other words thus covers the defense and representation claim herein.

In addition, MCI's asserted position in September 2002 opposing USFL's defense and indemnification claim and the Bankruptcy Court's November 12, 2002 ruling at least alerted MCI about the potential value of filing a proof of claim before the January 23, 2003 bar date. The sequence of events occurring before Gibbons' May 6, 2003 letter agreeing to resume handling USFL's defense and long before MCI's current refusal to continue USFL's defense represent factors for the Bankruptcy Court to consider in evaluating USFL's estoppel arguments regarding the absence of its proof of claim by January 23, 2003. Here, the February 4, 2005 release preempts USFL's estoppel argument regarding its defense and indemnification claim. Gibbons, though, must relinquish the litigation file in this case to Ohrenstein. Accordingly, it is

ORDERED that plaintiffs' motion to remove the stay of all proceedings herein and to schedule a preliminary conference is denied with leave to renew and, if advisable, to seek severance of the action against defendants USFL, Boglioli and Siriban after further [*15]proceedings in Bankruptcy Court to determine if plaintiffs may proceed against MCI to recover against Zurich, its insurer; and it is further

ORDERED that the portion of defendant MCI's summary judgment cross motion to dismiss plaintiffs' complaint and the cross claims of defendant Siriban is held in abeyance pending proceedings in the Bankruptcy Court to determine if plaintiffs may proceed against MCI to recover against Zurich, its insurer under the legal and factual circumstances discussed in this opinion; and it is further

ORDERED that the portion of MCI's cross motion to grant its counsel leave to withdraw as counsel for defendant Boglioli is dismissed with leave to renew by order to show cause with a copy of this order and decision; and it is further

ORDERED that defendant USFL's application to amend its answer to assert a cross claim against MCI is denied; and it is further

ORDERED that defendant USFL's cross motion for a declaration that MCI owes a defense and indemnification to USFL in this matter is denied; and it is further

ORDERED that the Gibbons law firm shall forthwith provide the litigation file in this case as pertains to defendant USFL to the Ohrenstein law firm.

This constitutes the decision and order of this court.

E N T E R,

J. S. C.

Footnotes

Footnote 1: That provision prohibits "the commencement or continuation, including the issuance or employment of process, of a judicial, or 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, or to recover a claim against the debtor that arose before the commencement of the case under this title."

Footnote 2: This order and other documents in the WorldCom bankruptcy case, not otherwise annexed to the submitted motion papers herein, appear at www.elawforworldcom.com, an approved Bankruptcy Court website and through www.nysb.uscourts.gov., the Bankruptcy Court's official website.

Footnote 3: That provision, entitled "Time for filing," pertinently provides that "[t]he court shall fix and for cause shown may extend the time within which proofs of claim or interest may be filed."

Footnote 4: That provision, entitled "Notice by publication," provides that "[t]he court may order notice by publication if it finds that notice by mail is impracticable or that it is desirable to supplement the notice."

Footnote 5: Ohrenstein, USFL's replacement and current counsel, claims that Gibbons' return resulted after negotiations with MCI, its third party, court-appointed administrator and its general liability insurance carrier, Zurich-American Insurance Company (Zurich).

Footnote 6: The October 31, 2003 confirmation order extinguishes the rights of claim or equity interest holders and pertinently provides in this regard that once the effective date occurred each such holder and any trustees, agents and affiliate(s) of such holder

"shall be deemed to have forever waived, released, and discharged the Debtors, to the fullest extent permitted by section 1141 of the Bankruptcy Code, of and from any and all Claims, Equity Interests, rights and liabilities that arose prior to the Effective Date. Upon the Effective Date, all such persons shall be forever precluded and enjoined, pursuant to section 524 of the Bankruptcy Code, from prosecuting or asserting any such discharged Claim against or terminated Equity Interest in the Debtors."

Footnote 7:The settlement agreement acknowledged that "GE COMMERCIAL FINANCE (formerly, US FLEET LEASING INC[.] AND CITICAPITAL COMMERCIAL LEASING CORP[.]), filed claims in the Bankruptcy Case and/or that MCI has scheduled amounts owed to GE COMMERCIAL FINANCE in the Bankruptcy Case" and referenced them "collectively as GE COMMERCIAL FINANCE Claims'."

Footnote 8: More specifically, the settlement agreement references the Fleet Agreement, designated therein as the "Assumed Contract," and pertinently provides that "[i]n consideration of the mutual promises set forth in this Agreement, the Parties agree that the Contract Cure Amount for the Assumed Contract will be $86,889.28. MCI will pay the Cure Amount to GE COMMERCIAL FINANCE in accordance with the terms set forth in the Plan of Reorganization."

Footnote 9: More specifically, the settlement agreement pertinently provides that

"[e]xcept as set forth in this Agreement, GE Commercial Finance, its predecessors, successors, parents, assigns, liens, agents and attorneys, agree to release and discharge MCI, its predecessors, successors and assigns from all actions, causes of action, claims (whether scheduled or filed), suits, debts, damages, judgments and demands whatsoever, whether now known or unknown, whether before a local, state or federal court or state o[r] federal administrative agency or commission arising out of or related to GE COMMERCIAL FINANCE claims and/or the Assumed Contract occurring prior to the date that GE COMMERCIAL FINANCE executes this Agreement" (emphasis added).

Footnote 10: More specifically, the letter stated that "[b]ecause MCI's obligations in this matter were discharged in the Bankruptcy Case, MCI will not be defending or indemnifying you or paying your legal fees, costs or any settlement on your behalf. Additionally, Gibbons cannot continue to represent you in the Shakir Litigation because there is a conflict of interest between MCI and yourself with respect to any claim for indemnification you may have against MCI."

Footnote 11: That provision pertinently provides that "[i]n furtherance of convenience or to avoid prejudice the court may order a severance of claims, or may order a separate trial of any claim, or of any separate issue."

Footnote 12: 11 USC § 524 (a) (2) provides in this regard that "(a) [a] discharge in a case under this title . . . (2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived." In addition, the Bankruptcy Court's October 31, 2003 Confirmation Order, paragraph 18 and the Confirmed Plan, § 10.04 similarly prohibit continuing an action against MCI.

Footnote 13: That provision provides that

"(a) No policy or contract insuring against liability for injury to person, except as provided in subsection (g) hereof [inapplicable herein], or against liability for injury to, or destruction of, property shall be issued or delivered in this state, unless it contains in substance the following provisions or provisions which are equally or more favorable to the insured and to judgment creditors so far as such provisions relate to judgment creditors:

"(1) A provision that the insolvency or bankruptcy of the person insured, or the insolvency of his estate, shall not release the insurer from the payment of damages for injury sustained or loss occasioned during the life of and within the coverage of such policy or contract."

Footnote 14: Indeed, other litigation shows that Zurich has previously utilized such fronting policies (see Pacific Employers Ins. Co. v Domino's Pizza, Inc., 144 F3d 1270, 1272, 1273 [9th Cir 1998] [Zuirch provided primary general liability and automobile liability policies to Domino's Pizza which required that policyholder "to pay all indemnity and defense obligations for losses covered by the policy"]).

Footnote 15: That provision provides that "[n]o motion by an attorney seeking to be relieved as counsel for a party shall be placed on the calendar unless initiated by order to show cause."

Footnote 16: Gibbons also presents no proof of defendant Bongliori's personal receipt of the firm's April 21, 2006 forewarning letter to him.

Footnote 17: That provision pertinently provides that "[a] party may amend his pleading, or supplement it by setting forth additional or subsequent transactions or occurrences, at any time by leave of court . . . Leave shall be freely given upon such terms as may be just . . ."