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At the time of the fire, the debtor owed back taxes, dating back to at least 1996, on the entire property in the amount of $478,260.75. Erie notified Park Restoration that it intended to deduct $478,260.75 from the $611,000 insurance proceeds to satisfy the outstanding tax obligation.

Park Restoration objected and Erie filed an action in Pennsylvania state court. The matter was transferred to the U.S. Bankruptcy Court for the Western District of Pennsylvania after the debtor entered bankruptcy.

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The taxing authorities and Park Restoration each moved for summary judgment before the bankruptcy court.

The taxing authorities argued that, under the law, Erie was required to transfer $478,260.75 to the taxing authorities to satisfy the debtor's outstanding tax liability on the insured property before it could release the remainder of the insurance proceeds to Park Restoration.

Tax debt

Park Restoration argued that the statute applied only to those situations in which the insured owned the insured property and, therefore, was financially responsible for the delinquent taxes. In other words, Park Restoration argued, because it didn't own the Beach Club and because it wasn't financially responsible for the debtor's delinquent taxes, the law couldn't be invoked to force Park Restoration to assume responsibility for the debt. To do so, Park Restoration argued, would be an unconstitutional taking in violation of both the U.S. constitution and the Pennsylvania constitution.

For its part, the debtor also opposed Park Restoration's motion for summary judgment. The debtor argued that Park Restoration wasn't entitled to any of the insurance proceeds, even the portion that would remain after the proceeds were applied to the tax debt. The debtor claimed that it was the beneficiary of the insurance policy (as opposed to Park Restoration) because the debtor owned the Beach Club.

The bankruptcy court granted partial summary judgment in favor of the taxing authorities and partial summary judgment in favor of Park Restoration. The bankruptcy court concluded that:

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   1. The Pennsylvania law unambiguously mandated that the delinquent taxes be deducted from the insurance proceeds.
   2. Because the statute was enacted prior to the date that the insurance was purchased, Park Restoration was held to be on notice that it did not have a protected property interest in the insurance proceeds.
   3. There was no “taking” of a protected property interest in violation of the Takings Clauses in the federal and Pennsylvania constitutions.
   4. The taxing authorities were entitled to $478,260.75 of the insurance proceeds.
   5. The debtor was not an insured beneficiary under the insurance policy.
   6. As such, the remaining $132,739.25 of the insurance proceeds belonged to Park Restoration.

Park Restoration and the debtor appealed to the district court.

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The U.S. District Court's Decision

The district court determined that Park Restoration was entitled to the full amount of the insurance proceeds. In its decision, the district court first ruled that Park Restoration had not agreed to assume the debtor's tax liability simply by purchasing an insurance policy on the debtor's property.

It then found that the Pennsylvania law was ambiguous because it used the terms “named insured” and “the insured property owner” interchangeably. In the district court's view, if the insured party meant the “named insured” then, arguably, the statute was applicable to the debtor's situation. If, however, the term insured party meant the “insured property owner,” then the statute was not applicable because Park Restoration did not own the Beach Club or the property on which it was located.

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Examining the legislative history, the district court decided that it was intended to apply only to insured property owners — the entities that had the “financial responsibility” for property taxes. Therefore, it ruled, the statute could not be used to shift the debtor's tax burden onto Park Restoration.

Insurable interest

The district court then found that Park Restoration had an insurable interest in the Beach Club derived from “its undisputed right to long term possession and use of the Beach Club.” As the district court explained:

Not only did Park Restoration stand to suffer pecuniary loss from its loss of income related to operating the facility, but per the terms of the Management Agreement, Park Restoration was obligated to invest its own money into the Beach Club facilities. Clearly, the destruction of the Beach Club caused Park Restoration “pecuniary loss.”

Finally, the district court decided that the insurance policy did not dictate that the proceeds be paid to the debtor. It found that:

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  • The debtor was not listed as the named insured under the policy.
  • The policy was meant to protect Erie from having to pay twice under the policy and was not a method to convert the debtor into the named insured.
  • The debtor was not a third party beneficiary of the policy.
  • The debtor was not the only party that suffered a loss — Park Restoration had suffered a pecuniary loss when the Beach Club was destroyed.

Accordingly, it concluded, Park Restoration was entitled to the full amount of the insurance proceeds.

The case is In re Trustees of Conneaut Lake Park, Inc., No. 1:16-cv-00006-BJR (W.D. Penn. May 4, 2016).