Litigation Trustee Denied Intervention in Lawsuit Between Insureds and Insurers

On June 18, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in American Casualty Co. of Reading, PA v. Gelb, 2014 NY Slip Op. 31597(U), denying a motion for intervention.

In American Casualty Co., the plaintiff insurers sought a declaration that the insurance policies they had issued to Lyondell Chemical Company and the defendants--Lyondell's directors and officers--did not cover defense costs from a claim prosecuted by a litigation trust against the defendants in bankruptcy court. The trustee of the litigation trust moved to intervene. The court denied the motion, explaining:

Under New York law, a party may seek intervention as of right under CPLR 1012 (a) or permissive intervention under CPLR 1013 (McKinney). Whether a party seeks to intervene as of right or as a matter of discretion is of little practical significance since a timely motion for leave to intervene should be granted, in either event, where the intervenor has a real and substantial interest in the outcome of the proceedings.

A third party is not entitled to intervene in a pending action in which the rights of the prospective intervenors are already adequately represented, and there are substantial questions as to whether those seeking to intervene have any real present interest in the property which is the subject of the dispute. A non-direct or speculative interest is insufficient to satisfy this burden. Courts also deny intervention where parties in the case adequately represent the proposed intervenor's interests.

[The] Litigation Trustee, cannot properly intervene in the coverage litigation because he does not have a real and substantial interest in the outcome of the proceedings. The Litigation Trustee's claims for insurance coverage under the Policies are speculative and indirect. The Litigation Trustee argues he has a real and substantial interest in the outcome of the coverage litigation because the resolution of the matter against the directors and officers may effectively eliminate its ability to recover on its claims against the directors and officers in the Adversary Proceeding. However, the Litigation Trustee's interest is·first conditioned upon succeeding in the Adversary Proceeding, then obtaining a recovery from the Insureds and, finally, establishing that funding for such a recovery will not exist absent insurance coverage. [The Litigation Trustee] has no legally recognized claim to assert against the Insureds: he has not obtained a judgment against the Insureds, and is not a party or third party beneficiary of the policies. [The Litigation Trustee] has a speculative interest that is not subject to a potential res judicata effect.

(Internal quotations and citations omitted) (emphasis added). The court also ruled that the defendants were adequately represented, and thus there was no basis upon which to grant intervention.

Intervention is liberally granted, but as this decision shows, it is by no means automatic.