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In re Trustees of Conneaut Lake Park, Inc.

United States Court of Appeals, Third Circuit

May 2, 2017

In re: THE TRUSTEES OF CONNEAUT LAKE PARK, INC., Debtor
v.
ERIE INSURANCE EXCHANGE; THE TRUSTEES OF CONNEAUT LAKE PARK, a charitable trust; CRAWFORD COUNTY, a political subdivision; SUMMIT TOWNSHIP, a municipal corporation; TAX CLAIM BUREAU OF CRAWFORD COUNTY; CONNEAUT SCHOOL DISTRICT SUMMIT TOWNSHIP, a municipal corporation; CRAWFORD COUNTY, a political subdivision; THE TAX CLAIM BUREAU OF CRAWFORD COUNTY; THE CONNEAUT SCHOOL DISTRICT, Appellants PARK RESTORATION, LLC

          Argued January 18, 2017

         On Appeal from the United States District Court for the Western District of Pennsylvania (D.C. No. 1-16-cv-00006) District Judge: Honorable Barbara Jacobs Rothstein

          John F. Mizner [Argued] Mizner Law Firm 311 West Sixth Street Erie, PA 16507

          Counsel for Appellee Lawrence C. Bolla Michael P. Kruszewski Arthur D. Martinucci [Argued] Quinn Buseck Leemhuis Toohey & Kroto Counsel for Appellants

          Before: FISHER [*], HARDIMAN, and GREENAWAY, JR., Circuit Judges.

          OPINION

          HARDIMAN, Circuit Judge.

         Pennsylvania law prohibits insurance companies from paying fire insurance proceeds to a "named insured" unless the local municipality certifies that no delinquent taxes are owed on the property where the insured structure was located. 40 Pa. Stat. § 638. The District Court held that "named insured" as used in Section 638 includes only those who own the structure at issue and are responsible for the delinquent taxes. Because the Bankruptcy Court rightly held that this interpretation contravenes the text of the statute, we will reverse.

         I

         This appeal involves Conneaut Lake Park, which abuts Conneaut Lake in Crawford County, Pennsylvania. The Park included a historic venue known as the Beach Club, which was owned by the Trustees of Conneaut Lake Park, Inc. Appellant Park Restoration, LLC, operated the Beach Club under a management agreement with the Trustees. Park Restoration insured the Beach Club against fire loss for $611, 000 through Erie Insurance Exchange. When the Beach Club was destroyed by fire in 2013, Park Restoration submitted a claim to Erie. Erie did not dispute the claim, but in accordance with 40 Pa. Stat § 638, it required Park Restoration to obtain a certificate from the local municipal treasurer stating whether back taxes were owed on the property.

         Park Restoration received a certificate showing a total of $478, 260.75 in delinquent property taxes owed by the Trustees to Summit Township, Crawford County, the Tax Claim Bureau of Crawford County, and Conneaut School District (collectively, Taxing Authorities). These delinquent taxes dated back to 1996, well before Park Restoration signed its management agreement with the Trustees, and the taxes were owed on the entire 55.33 acre parcel on Conneaut Lake, not just the single acre that included the Beach Club. Nonetheless, because of the tax delinquency, Erie notified Park Restoration that it would transfer to the Taxing Authorities $478, 260.75 of the $611, 000 insurance proceeds. Park Restoration objected, prompting Erie to interplead the proceeds in the Court of Common Pleas of Crawford County.

         The interpleader action was transferred to the United States Bankruptcy Court for the Western District of Pennsylvania after the Trustees filed for bankruptcy. In the Bankruptcy Court, Park Restoration argued that Section 638 "applies solely to those situations where the fee owner of the property is insured and where the tax liabilities at issue are the financial responsibility of the owner as well." In re Trustees of Conneaut Lake Park, Inc., 543 B.R. 193, 198 (Bankr. W.D. Pa. 2015). Park Restoration argued that any other construction would violate the Takings Clauses of the United States Constitution and the Pennsylvania Constitution. The Trustees responded that Park Restoration was not entitled to any of the insurance proceeds because Park Restoration insured the Trustees' property. Therefore, the Trustees sought the remaining insurance proceeds after the Taxing Authorities were compensated.

         The Taxing Authorities and Park Restoration filed cross motions for summary judgment. The Bankruptcy Court granted partial summary judgment in favor of both parties. It held that under Section 638 the Taxing Authorities were entitled to full payment of the delinquent taxes ($478, 260.75), and that Park Restoration, as the named insured, was entitled to the balance of the insurance proceeds.

         Park Restoration and the Trustees filed cross-appeals to the United States District Court for the Western District of Pennsylvania. Park Restoration argued, for the first time, that because the insured property constituted only 9% of the tax value of the parcel, Park Restoration's insurance proceeds should apply pro rata to the tax debt. It also argued that anything more would be an unconstitutional taking. Meanwhile, the Trustees claimed entitlement to the balance of the insurance proceeds because they owned the Beach Club.

         The District Court affirmed the Bankruptcy Court's summary judgment for Park Restoration as against the Trustees, but reversed the Bankruptcy Court's summary judgment for the Taxing Authorities as against Park Restoration. The Court held that Section 638 is ambiguous because it uses "named insured" and "insured property owner" interchangeably. In re Trustees of Conneaut Lake Park, Inc., 551 B.R. 577, 584-85 (W.D. Pa. 2016). The District Court then considered legislative intent and concluded that the General Assembly intended Section 638 to apply only to property owners. The Court reasoned that because Park Restoration did not own the Beach Club or the ...


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