435 F.

3d 252

ACANDS, INC., Appellant

v.
TRAVELERS CASUALTY AND SURETY COMPANY.
No. 04-3926.
No. 04-3929.

United States Court of Appeals, Third Circuit.

Argued July 11, 2005.
January 19, 2006.

COPYRIGHT MATERIAL OMITTED COPYRIGHT MATERIAL

OMITTED John E. Heintz (argued), David B. Killalea, Donna L. Wilson,
Marla H. Kanemitsu, Glenn Schlactus, Gilbert Heintz & Randolph LLP,
Washington, DC, Laura Davis Jones, Curtis A. Hehn, David W.
Carickhoff, Jr., Pachulski, Stang, Ziehl, Young, Jones & Weintraub PC,
Wilmington, DE, for Appellant.
Barry R. Ostrager (argued), Mary Beth Forshaw, Bryce L. Friedman,
Simpson, Thatcher & Bartlett LLP, New York, NY, Samuel J. Arena, Jr.,
Stradley, Ronon, Stevens & Young LLP, Philadelphia, PA, for Appellee.
Before ALITO and BECKER, Circuit Judges, and SHADUR District
Judge.*
OPINION OF THE COURT
ALITO, Circuit Judge.

This case involves the applicability of the Bankruptcy Code's automatic stay
provision, 11 U.S.C. 362(a), to an arbitration panel's resolution of an
insurance coverage dispute. We hold that the arbitration proceeding became
subject to the automatic stay after Travelers Casualty ("Travelers") submitted
arguments supporting an award against the debtor ACandS, and that the panel's
award granting Travelers affirmative relief violated the automatic stay by
diminishing the bankruptcy estate. We therefore reverse the order of the

District Court.
I.
2

For decades, ACandS, formerly Armstrong Contracting and Supply and now a
subsidiary of Irex Corporation, was one of the nation's largest installers of
asbestos insulation. Since the early 1970's, the company has been embroiled in
asbestos litigation. On September 16, 2002, after selling many of its assets to
Irex, ACandS filed for bankruptcy and began to devote its full attention and
resources to the issues surrounding the asbestos claims and related insurance
matters. See In re ACandS, Inc., 311 B.R. 36 (Bankr.D.Del.2004). This appeal
combines two related disputes arising out of the same set of insurance policies
issued to ACandS between 1976 and 1979 by Travelers' predecessor, the Aetna
Casualty & Surety Co.

Each of the four identical policies provides two types of coverage: broad
coverage for operations claims and more limited coverage for products claims.
The products coverage in each policy was capped by a $1 million per
occurrence limit and a $1 million aggregate limit. ACandS does not dispute that
the coverage provided for products claims has been exhausted. The operations
coverage is limited by a $1 million per occurrence limit but has no aggregate
cap, meaning that Travelers' exposure to asbestos claims arising from ACandS's
operations during the years 1976-79 was potentially unlimited. The present
dispute turns on the classification of products versus operations claims and a
disagreement over whether all of ACandS's asbestos operations can be
considered a single occurrence.

In 1988, seeking to avoid the cost and difficulty of classifying large pools of
claims, the parties reached an agreement (the "Letter Agreement") allocating
set percentages of asbestos claims to either products or operations. The Letter
Agreement initially allocated 55% of the claims to products and the remaining
45% to operations. Because of the aggregate limit on products coverage,
Travelers remained liable only for the 45% of claims allocated to operations
after the company paid the first $1 million of products claims under each
policy. The Letter Agreement also established a three-step process for changing
the allocation. First, after two years had passed and at any time thereafter, either
party could make a demand on the other for a change in the allocation. Upon
the making of the demand, both parties were to conduct a "claims study" in
order to determine the proper allocation of claims. If the parties failed to reach
agreement on a new allocation, the parties were to submit to non-binding
dispute resolution overseen by a neutral mediator. Finally, if the mediation
failed, the parties agreed to submit to binding arbitration. In the arbitration, the

party seeking the adjustment of the allocation bore the burden of establishing
that the existing allocation should be changed.
5

Both parties quickly explored ways of modifying the bargain. In 2000,

Travelers sought to limit its exposure to operations claims by informing
ACandS that it would treat all of the operations claims as arising out of the
same occurrence (ACandS's use of asbestos), thereby subjecting the claims to
the $1 million per occurrence limit. ACandS filed a motion for declaratory
judgment in the District Court for the Eastern District of Pennsylvania seeking
to have each claim recognized as a separate occurrence ("Number of
Occurrences Action"). See JA6-1438 (Complaint, filed September 12, 2000).
On November 8, 2000, the District Court granted a joint motion for a stay
pending mediation and arbitration. JA6-1455 (Order, filed November 8, 2000).
It is this action that the District Court dismissed as moot in the order now on
appeal.

Following a different track, ACandS sought to increase its potential recovery

under the policies by submitting a demand seeking an increase in the allocation
of claims to operations. On January, 31, 2001, the company filed a formal
demand pursuant to the 1988 Letter Agreement. Although the demand did not
specify the desired reallocation, it stated that the allocation to operations should
approach 100%, and acknowledged Travelers' position "that all of the asbestos
bodily injury claims pending against ACandS are [products] claims." Although
the Letter Agreement contemplates a collaborative approach to reallocation,
ACandS did not invite Travelers to participate in the claims study it conducted
in 2000.1 No agreement was reached regarding reallocation, and a mediation
was held in August 2001 under the direction of Professor James J. White. After
mediation failed to resolve the dispute, the parties proceeded to arbitration. The
panel instructed both parties to submit statements of their position. See JA2-467
(Statement of Position of ACandS, Inc., submitted July 31, 2002); JA2-505
(Travelers Casualty and Surety Company's Statement of the Case, submitted
August 6, 2002). ACandS's statement largely tracks its demand letter. Travelers'
statement says that it would "demonstrate during this proceeding [that] the
correct allocation ... would allocate no claim payments to non-products
coverage." JA2-506.

In arguments submitted to the panel, the parties presented conflicting

definitions of "operations claims." The arbitration panel agreed with Travelers'
interpretation that operations claims encompassed only those claims arising
from asbestos exposure during the policy period. JA2-531 (Arbitration Award,
filed July 31, 2003). The panel found, as a matter of fact, that ACandS had
ceased manufacturing and installing asbestos in 1974.2 The Panel concluded

that any claim arising during the policy period was necessarily a products claim
and therefore allocated 100% of the claims to the products coverage.
8

After the arbitration panel was constituted, but before the award was issued,
ACandS settled a raft of asbestos claims, totaling more than $2.6 billion.
Shortly thereafter, the company filed for Chapter 11 bankruptcy in the District
of Delaware. JA4-1050 (Bankruptcy filing, September 16, 2002). The
Bankruptcy Court refused to confirm the reorganization plan because it treated
similarly situated claimants differently based on the order in which they filed
their claims. In re ACandS, 311 B.R. at 43. As a result, the company remains in
receivership, and the bulk of the settled claims persist in a state of limbo.

ACandS filed a motion in the District Court for the Eastern District of
Pennsylvania, seeking to have the arbitration award vacated. The District Court
denied the motion and affirmed the arbitration award. The District Court also
dismissed the Number of Occurrences Action on the ground that the award's
finding that no claims arose from operations rendered the question presented
moot. The two matters were joined for the purposes of this appeal.

II.
10

ACandS's challenge to the validity of the arbitration award raises three issues
related to the panel's decision to grant Travelers affirmative relief by revising
the allocation of operations claims to zero: (1) whether the panel exceeded its
authority by granting Travelers affirmative relief despite Travelers' failure to
file a formal demand, (2) whether the relief granted Travelers violated the
Bankruptcy Code's automatic stay provision in 11 U.S.C. 362, and (3)
whether ACandS was prejudiced by inadequate notice regarding Travelers'
intent to seek affirmative relief in the arbitration proceeding. Because we hold
that the proceeding and award violated the automatic stay, it is unnecessary to
address the remaining issues. Because the award must be vacated, the
allocation of claims under the Letter Agreement remains at 45% operations and
55% products. Accordingly, ACandS's action seeking a declaratory judgment
regarding the number of occurrences is not moot.

A.
11

The District Court's determination that the award did not violate the
Bankruptcy Code's automatic stay provision is a purely legal question subject to
plenary review. In reviewing a District Court decision concerning the validity
of an arbitration award, our assessment of the arbitration panel's actions is
governed by the same standard that governed the District Court's review.

Metromedia Energy, Inc. v. Enserch Energy Servs., Inc., 409 F.3d 574, 578 (3d
Cir.2005). An arbitration award will be enforced if its form can be rationally
derived from either the agreement between the parties or the parties'
submissions to the arbitrators and the terms of the arbitral award are not
completely irrational. Mut. Fire, Marine & Inland Ins. Co. v. Norad Reins. Co.,
868 F.2d 52, 56 (3d Cir.1989); see also Swift Indus., Inc. v. Botany Indus., Inc.,
466 F.2d 1125, 1131 (3d Cir.1972); Ludwig Honold Mfg. Co. v. Fletcher, 405
F.2d 1123, 1128 (3d Cir.1969).
12

A long-standing exception to this general rule provides that courts may refuse
to enforce arbitration awards that violate well-defined public policy as
embodied by federal law. See Exxon Shipping Co. v. Exxon Seamen's Union, 11
F.3d 1189 (3d Cir.1994) (vacating labor arbitration award that required the
reinstatement of an able bodied seaman who was found to be highly intoxicated
while on duty). We hold that the automatic stay provision of the Bankruptcy
Code promotes a public policy sufficient to preclude enforcement of an award
that violates its terms or interferes with its purposes. See In re Cavanaugh, 271
B.R. 414, 424 (Bankr.D.Mass.2001) ("[T]he automatic stay is the single most
important protection afforded to debtors by the Bankruptcy Code."); see also
Exxon Shipping, 11 F.3d at 1193 n.7 ("[A]n award may properly be vacated
either because it `violates a specific command of some law' or `because of
inconsistency with public policy.'") (quoting Honold, 405 F.2d at 1128 n. 7)
(emphasis supplied).

13

The District Court's order dismissing the Number of Occurrences action as

moot is subject to plenary review. See Ruocchio v. United Transp. Union, Local
60, 181 F.3d 376, 382 n. 8 (3d Cir.1999) ("The plenary standard of review
seems appropriate since mootness doctrine relates to courts' constitutional
authority to hear a case....").

B.
14

ACandS argues that, because the arbitration panel considered and accepted the
argument that operations should be zero, the arbitration proceeding and award
violated the automatic stay provision of 11 U.S.C. 362. Section 362 of the
Bankruptcy Code provides in part:

15

Automatic Stay.

16

(a) Except as provided in subsection (b) of this section, a petition filed under
section 301, 302, or 303 of this title... operates as a stay, applicable to all

entities, of
17

(1) the commencement or continuation, including the issuance or employment

of process, 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....

18

(3) any act to obtain possession of property of the estate or of property from the
estate or to exercise control over property of the estate

19

11 U.S.C. 362(a).

20

The stay mandated by this provision is automatic in that the debtor does not
have to make any formal request that it be issued or that it apply to a particular
proceeding. Rather, the onus is on the party seeking to proceed to petition the
Bankruptcy Court for relief from the stay. See 11 U.S.C. 362(d). The scope of
the automatic stay is broad and covers all proceedings against a debtor,
including arbitration. Ass'n. of St. Croix Condominium Owners v. St. Croix
Hotel Corp., 682 F.2d 446, 448 (3d Cir.1982) (citing H.R.Rep. No.95-595, at
340 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6296-97). "Because
the automatic stay serves the interests of both debtors and creditors, it may not
be waived and its scope may not be limited by a debtor." Maritime Elec. Co. v.
United Jersey Bank, 959 F.2d 1194, 1204 (3d Cir.1992). Sub-sections 362(a)
(1) and 362(a)(3) differ in that the stay of actions and proceedings provided for
by 362(a)(1) applies only to actions brought against the debtor"the statute
does not address actions brought by the debtor which would inure to the benefit
of the bankruptcy estate." St. Croix, 682 F.2d at 448. Section 362(a)(3), on the
other hand, applies to actions against third parties as well as actions against the
debtor. See In re Krystal Cadillac Oldsmobile GMC Truck, Inc., 142 F.3d 631,
637 n. 11 (3d Cir.1998).

21

ACandS argues that the arbitration panel's award violates both 362(a)(1) and
362(a)(3). We agree that the automatic stay applied to the arbitration and that
the panel should have halted the arbitration once it became apparent that
proceeding further could negatively impact the bankruptcy estate. We also hold
that the arbitration award is invalid because it diminishes the property of the
estate.

1.
22

With respect to the application of 362(a)(1), the District Court held that the

automatic stay did not apply because the arbitration was an action initiated by
the debtor. JA1-18. While in the context of a trial it is simple to distinguish
between claims and counter-claims that may support judicial relief, in the
context of arbitration, especially in the absence of a joint statement of issues
submitted, it is impossible to definitively classify the arguments presented.
Travelers contends that its arguments in favor of a zero allocation of claims to
the products coverage should be classified as a permissible defense. Defenses,
as opposed to counter-claims, do not violate the automatic stay because the stay
does not seek to prevent defendants sued by a debtor from defending their legal
rights and "the defendant in the bankrupt's suit is not, by opposing that suit,
seeking to take possession of it...." Martin-Trigona v. Champion Fed. Sav. &
Loan Ass'n., 892 F.2d 575, 577 (7th Cir.1989). In the trial context, a
defendant's failure to formally plead a counter-claim prevents the court from
granting affirmative relief on the basis of the defendant's arguments. See Fed.
R. Civ. Pro. 8. By contrast, an arbitration award will be affirmed so long as its
form can be rationally derived from either the agreement between the parties or
the parties' submissions to the arbitrators and the terms of the arbitral award
are not completely irrational. Mut. Fire, Marine & Inland Ins. Co., 868 F.2d at
56. This procedural flexibility, which is essential to the utility of arbitration,
allows Travelers to make a colorable argument that it respected the stay by
merely defending its interests when there is no question that in the trial context
it would have been required to file a counterclaim in order to obtain the result it
seeks to uphold. See Maritime Elec. Co., 959 F.2d at 1204 ("[W]ithin one case,
actions against a debtor will be suspended even though closely related claims
asserted by the debtor may continue.") (emphasis omitted). Despite the
importance of procedural informality, however, the panel's authority must yield
when a dispute threatens the rights of third parties in violation of the laws of the
United States. To avoid interfering with the broad purposes served by the
automatic stay, it was necessary for the arbitration proceeding to halt as soon as
the scope of the parties' submissions supported an award that could diminish
ACandS's estate. By continuing beyond this point, the proceeding violated
362(a)(1), and the panel's deliberations and the resulting award are therefore
void.
2.
23

The District Court rejected ACandS's argument that the arbitration award itself,
as distinct from the proceeding, violated 362(a)(3) by stripping ACandS of a
valuable property right. ACandS argues that the award's reallocation of claims
under the Letter Agreement to 0% operations and 100% products deprived the
bankruptcy estate of property covered by the automatic stay by reducing the
amount of insurance coverage available to the debtor. We agree with this

argument because the contractual right secured by the Letter Agreement

allocating 45% of the asbestos claims to operations was property of the
bankruptcy estate. By effectively terminating ACandS's insurance coverage, the
arbitration award had a clear adverse effect on that property interest.
24

The interests classified as "property of the estate" protected by 362(a)(3) are

defined by 11 U.S.C. 541. In re Atlantic Bus. & Community Corp., 901 F.2d
325, 328 (3d Cir.1990). It has long been the rule in this Circuit that insurance
policies are considered part of the property of a bankruptcy estate. Estate of
Lellock v. The Prudential Ins. Co. of Am., 811 F.2d 186, 189 (3d Cir.1987)
(holding that an insurance policy is property of the estate within 11 U.S.C.
541 even though the policy has not matured, has no cash surrender value and is
otherwise contingent); see also Tringali v. Hathaway Mach. Co., 796 F.2d 553,
560 (1st Cir.1986); see generally 3-362 Collier on Bankruptcy P 362.03 (15th
ed. revised) ("[T]he prevailing view is that an insurance policy is property of
the estate, protected by the automatic stay of 362(a)(3)."). The fact that the
Letter Agreement is not itself an insurance policy, and so the rights secured by
that contract merely pertain to ACandS's right to coverage, does not exclude
these contractual rights from the broad definition of property found in 541.
See Westmoreland Human Opportunities, Inc. v. Walsh, 246 F.3d 233, 242 (3d
Cir.2001) (definition of property "encompasses rights and interests arising from
ordinary contractual relationships"). Furthermore, the contractual rights secured
by the Letter Agreement and insurance policies are property of the estate
regardless of the fact that all of the proceeds from any recovery will be
exhausted in satisfaction of outstanding settlements. See Maertin v. Armstrong
World Indus., Inc., 241 F.Supp.2d 434 (D.N.J.2002); In re Johns-Manville
Corp., 40 B.R. 219, 230-31 (S.D.N.Y.1984).

25

For a claim to fall within the scope of 362(a)(3), it must also be shown that
the grant of affirmative relief to Travelers constitutes an act to obtain
possession of ACandS's contractual right to a 45% allocation of claims to the
operations coverage. Although it cannot accurately be said that Travelers
obtained ACandS' rights under the policy, we nevertheless hold that the grant of
affirmative relief was an act barred by the automatic stay. The possession or
control language of Section 362(a)(3) has consistently been interpreted to
prevent acts that diminish future recoveries from a debtor's insurance policies.
See, e.g., A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1001 (4th Cir.1986)
(noting that a debtor's insurance policy may well be the most important asset of
the estate, and that "any action in which the judgment may diminish this
`important asset' is unquestionably subject to a stay under [11 U.S.C. 362(a)
(3)]") (quoting In re Johns-Manville Corp., 40 B.R. at 229). In Matter of J & L
Transport, Inc., 47 B.R. 51 (Bankr.W.D.Wis.), the court held that an insurer

was barred by 362(a)(3) from cancelling the debtor's policy so long as the
debtor was not in monetary default. Similarly, because the grant of affirmative
relief to Travelers had the effect of terminating ACandS's coverage, we hold
that it violated the automatic stay.
3.
26

Travelers argues that even if the panel's award violates the automatic stay,
equity precludes its application in this case. This argument fails because no
equitable power to grant relief from an automatic stay rests with the District
Court. To the extent that an equitable exception to the automatic stay exists, it
rests solely in the Bankruptcy Courts. "Only the bankruptcy court with
jurisdiction over a debtor's case has the authority to grant relief from the stay of
judicial proceedings against the debtor." Maritime Elec. Co., 959 F.2d at 1204.

C.
27

The District Court dismissed the Number of Occurrences Action on the

grounds that the enforceable arbitration award rendered it moot. The action was
brought by ACandS in response to Travelers' stated intention to treat all
operations claims as arising out of the same occurrence, and therefore subject to
the $1 million per occurrence cap. The District Court addressed this issue in
footnote 9:

28

The complaint in this case deals with the "number of occurrences" under the
insurance policies ACANDS has with Travelers. Since the Arbitration Panel
has rendered this issue moot by ruling that there is zero remaining coverage
under the products policies in this case, there is no reason for this court to
decide the "number of occurrences" posed by ACANDS in this case.

29

JA1-20 (District Court Opinion). As explained above, the panel's award

violates the automatic stay and is therefore void ab initio. See Maritime Elec.
Co., 959 F.2d at 1206. As a result, ACandS is still entitled to a 45% allocation
of claims to the policies' operations coverage, and the dispute concerning
whether the asbestos claims present multiple or single occurrences under those
policies is justiciable. Accordingly, the Number of Occurrences Action should
not have been held to be moot.

III.
30

For the reasons stated above, the order of the District Court is vacated. The
case is remanded with instructions to vacate the arbitration award for resolution

of the pending action.

Notes:
*

Honorable Milton I. Shadur, United States District Judge for the Northern
District of Illinois, sitting by designation

In a collateral proceeding not directly relevant to this appeal Travelers sought to

forestall ACandS's resort to the Letter Agreement's dispute resolution
processSee JA2-423 (Complaint, filed February 15, 2001). Travelers' argument
was that it could not be required to arbitrate the allocation dispute because
ACandS failed to satisfy the prerequisites to arbitration as set forth in the Letter
Agreement, primarily the requirement that there be a joint claims study. The
Connecticut District Court denied a preliminary injunction and later stayed the
action pending the outcome of the arbitration. See JA4-1018 (Order, filed
October 16, 2001).

Any challenge to this finding was waived when ACandS failed to raise it before
the District CourtSee JA2-374 (ACandS's motion to vacate, filed October 30,
2003).