Facts

Plaintiffs Joseph and Kristen Martinez contracted with a business for a remodeling project on their home. Ultimately, they sued the business for defects in its performance and damage to the property. The business was insured by Lincoln General Insurance Company (Lincoln General). Lincoln General provided the business with their defense.

Just before trial was set to begin, the parties agreed to submit the case to binding arbitration. The arbitration lasted five days and ended with the arbitrator delivering a preliminary ruling against the business and awarding plaintiffs over $700,000. Thereafter, the business filed for Chapter 7 bankruptcy protection. The bankruptcy court lifted the automatic stay, permitting the plaintiffs to seek the business' insurance payout. The arbitrator then issued his ultimate award, which included attorney and arbitration fees and costs. The plaintiffs also secured from the bankruptcy an assignment of right so that they could pursue the award.

Subsequently, the plaintiffs filed suit against Lincoln General for bad faith and breach of contract, as both judgment creditors and assignees. Lincoln General had the case removed to federal district court.

PLAINTIFF'S CONTENTIONS:
The plaintiffs claimed that the insurance proceeds were a part of the business' bankruptcy estate. As such, they argued, the trustee had the power to assign the right of recovery to them as creditors. They further argued that the property damage alleged was covered by Lincoln General's "first manifestation" agreement with the business.

DEFENDANT'S CONTENTIONS:
Lincoln General argued that the assignment by the bankruptcy trustee was invalid because the bankruptcy court had limited plaintiffs' ability to pursue the case against the insured to available insurance proceeds which did not include bad faith damages. Lincoln General further claimed that judgment creditors, as plaintiffs claimed to be, could not recover interest or damages arising out of Lincoln General's alleged bad faith. Lincoln General finally argued that plaintiffs failed to sufficiently prove that the damage was covered by the first manifestation policy.

Settlement Discussions

The plaintiffs offered to settle for $718,840; Lincoln General offered to settle for $500,000.

Damages

The plaintiffs sought to recover over $1.5 million including the over $700,000 arbitration award, which included the costs associated with tearing the entire house down and rebuilding, attorney fees, costs, interest, damages for bad faith conduct, and Brandt fees.

Result

The court ruled in favor of Lincoln General finding the plaintiffs failed to meet their burden of proof of demonstrating covered damages, and the trustee's assignment void.