Apparently, property owners setting their buildings on fire to collect the insurance is a thing in Pennsylvania, the location of our story. We say this because the Pennsylvania legislature adopted a statute which requires that before an insurance company pays out proceeds from a fire policy to a “named insured,” it check with the local municipality to see if any property taxes are owed on the property. If so, the municipality grabs the payout to satisfy the delinquent taxes.
You can kind of see where this is going, can’t you? Yes, one entity owned the burned building, while another entity was the named insured.
We usually leave insurance matters to our law partner Tred Eyerly, who blogs about insurance coverage and related matters. Stuff like that is above our pay grade, and we defer to professionals.
But the U.S. Court of Appeals’ opinion in Trustees of Conneaut Lake Park, Inc. v. Park Restoration, LLC, No. 16-2516 (May 2, 2017) is a little different because lurking in this case about insurance is a takings issue.
After a fire burned down the Beach Club a building at Conneaut Lake Park owned by the Trustees and managed by Park Restoration, the insurance company was ready to pay $611,000 under its policy to the latter, the named insured. But first, the insurer checked with Summit Township about property taxes. And sure enough, the Trustees owed $478,260 in delinquent taxes, going back to 1996, “well before Park Restoration signed its management agreement with the Trustees.” These taxes were owed on the entire 55 acre Park, not just the Beach Club building. The insurer notified the Park Restoration that it was going to pay $478k to the Township, and not the full amount of the policy. When Park Restoration objected, the insurer interpleaded the funds and said “you guys figure this out, we’re outta here” (or words to that effect).
It ended up in Bankruptcy Court after the Trustees filed for bankruptcy, in case you are wondering how a takings issue ended up in a federal court. Park Restoration argued it was entitled to the entire $611k (it’s our policy, and the PA statute only applies where the “named insured” also owes the taxes) or that it was only liable for the Beach Club’s pro rata share of the overall parcel taxes, the Township argued it was entitled to $478k to satisfy the back taxes owed, while the Trustees agreed that the Township should be paid off, and that the Trustees (not Park Restoration) would get the balance.
After the Bankruptcy Court weighed in, the District Court rejected the Trustees’ claim that they were entitled to the balance of the insurance proceeds, but ruled in favor of Park Restoration that it didn’t owe the back property taxes, and therefore the statute could not be applied to allow the Township to grab the insurance proceeds. The Township appealed.
The Third Circuit concluded that the statute is applied as it reads, and that it doesn’t matter that Park Restoration didn’t owe the delinquent taxes (the Trustees did), or that the value of the Beach Club was only 9% of the overall value of the Trustees’ 55 acres and thus at most, Park Restoration should be liable for 9% of the delinquency. The statute is the statute, and it says the “named insured” is on the hook for the taxes, regardless of who owns the property or actually owes the taxes. Slip op. at 7.
But where’s the takings angle, you ask? Park Restoration argued that you can’t apply this statute to us — make us, in effect, pay the Trustees’ delinquent property taxes — because to do so would be a taking. The Third Circuit held “this argument [is] tenuous at best.” Slip op. at 11. Why? Because Park Restoration didn’t have a property interest. How’s that? Surely as the named insured and the entity entitled to the proceeds, it had a protected property interest in the insurance payout, no?
No:
Here, it is clear that Park Restoration had no legally cognizable property interest in the entirety of the proceeds from its insurance policy because Section 638 made receipt of such proceeds conditional on satisfying the delinquent taxes owed on the insured property. The policy states that “[Erie] will pay [Park Restoration] unless some other person is named in the policy or is legally entitled to receive payment,” Conneaut Lake Park, Inc., 543 B.R. at 199, and that “[t]his policy conforms to the laws of the state in which [Park Restoration’s] principal office is located.” Id. at 205. Section 638 had been enacted by the General Assembly and adopted by the required local ordinance long before Park Restoration obtained its insurance policy from Erie. Thus, the insurance policy incorporated the statute.
Slip op. at 13. In other words, you agreed to this, Park Restoration. Id. at 14 (“In sum, when Park Restoration insured the Beach Club, its rights to any insurance proceeds were subject to the claim of the Taxing Authorities. Without a legally cognizable property interest, Park Restoration has no cognizable takings claim.”).
Sorry, that is weak sauce. First, the right to collect on an insurance policy you buy seems to us to be a pretty fundamental property right. Contracts and all that. Second, the question is whether the PA statute took that right when it directed the insurer to pay someone else and not you. Horne, anyone?
But what about that provision in the insurance contract that it must conform to the laws of the state — doesn’t that make all that constitutional stuff irrelevant? Park Restoration agreed to this. Not in our view. Because the Fifth Amendment is also the law of Pennsylvania (last we checked), this provision is a wash – if the statute is a taking it’s a taking, and the language of the insurance contract doesn’t cut one way or the other. Park Restoration agreed to have the laws of Pennsylvania apply, but it also agreed to have the U.S. Constitution apply.
To us, a statute which directs an insurance company to pay contracted money to the government, and not to the policy’s beneficiary, and which requires A to pay for B’s liability, is a taking.
In sum, in our view Park Restoration’s takings argument is not “tenuous at best,” but actually pretty solid.
Trustees of Conneaut Lake Park, Inc. v. Park Restoration, LLC, No. 16-2516 (3d Cir. May 2, 2017)