Despite decades of litigation, asbestos claims still seem to find their way into bankruptcy courtrooms. To respond to the growing number of asbestos-related bankruptcies, Congress enacted section 524(g) to the Bankruptcy Code. In general, Chapter 11 debtors utilizing section 524(g) may channel present and future mass tort related claims to a settlement trust. Doing so effectively discharges these debtors of the obligation to adjudicate present and future mass tort claims.
Liability insurance is often the principal asset used to fund settlement trusts established pursuant to section 524(g). Accordingly, insurers’ rights are undoubtedly affected by reorganization plans implementing such settlement trusts. For example, upon a debtor’s filing for bankruptcy, the number of mass-tort claims often surges. This increase in claimants burdens insurers with the obligation to review, identify and investigate each potential claim. In light of these added costs, insurers are often provoked to challenge the confirmation of plans encompassing section 524(g) trusts.
Challenging the confirmation of a reorganization plan, however, raises standing concerns namely, whether the insurer suffered an injury beyond the scope of what the insurer contracted for. To determine whether an insurer has standing to challenge the confirmation of a plan, courts (in the section 524(g) context) look at whether the plan at issue is “insurance neutral.” Generally, a plan is considered “insurance neutral” if it adequately preserves insurers’ pre-petition contractual rights and defenses. If the plan is deemed “insurance neutral”, courts have held that the insurer faces no injury thereby precluding the insurers’ ability to challenge a debtor’s plan.
The determination of whether a particular plan is “insurance neutral” has proven to be a difficult one to make. This difficulty has resulted in some muddled jurisprudence. For example, in the seminal “insurance neutrality” case In re Combustion Engineering, the Third Circuit closely examined the reorganization plan at issue and determined that the insurers’ pre-petition rights and defenses were in no way affected by the debtor’s proposed plan. Consequently, the court held the insurers did not have standing to challenge the plan’s confirmation. As would be expected, subsequent debtors, insurers and courts relied upon the Combustion court’s analysis. Debtors, for example, drafted reorganization plans with similar language as that deemed “insurance neutral” in Combustion. By the same token, courts examined such reorganization plans through a similar lens as that used in Combustion. This reliance is further evidenced by decisions such as In re Pittsburgh Corning Corporation, In re Leslie Controls and In re Congoleum Corporation.
However, in the Third Circuit’s most recent decision dealing with “insurance neutrality” language, In re Global Industrial Technologies, the court’s insurance neutrality analysis deviated from the approach taken in Combustion and its progeny. Here, the closely divided court (en banc) recognized that the debtor’s plan preserved the insurers’ pre-petition rights and defenses; however, the court held that the plan was not “insurance neutral.” In reaching this conclusion, the court found that a number of claims the insurers would be forced to investigate were “suspect;” that is, the court conceived many claims to be unmeritorious. In granting the insurers standing, the court concluded that the added administrative costs to investigate the merits of these suspect claims increased the insurers’ “quantum of liability” which constituted a “tangible disadvantage” to the insurers.
The “quantum of liability” standard established in Global Industrial Technologies has purportedly generated some uncertainty with respect to whether insurers will have standing to challenge confirmation of a reorganization plan. Despite this purported uncertainty, a recent Ninth Circuit decision, In re Thorpe Insulation Co., has brought back some clarity to this otherwise clouded jurisprudence.
After facing roughly 12,000 asbestos-related lawsuits spanning over 30 years, the debtors in In re Thorpe Insulation Co. were eventually forced to petition for Chapter 11 bankruptcy relief. To account for the estimated 2,000 asbestos claims still pending against the debtors, the debtor’s plan included a section 524(g) trust and three injunctions to channel asbestos claims to the trust. Various insurers funded the trust.
To determine whether the plan at issue in Thorpe was” insurance neutral”, the Ninth Circuit solely examined the “real-world impact” of the express terms set forth in the debtor’s plan. Notably, the Ninth Circuit did not mention the Third Circuit’s “quantum of liability” standard or any potential administrative costs the insurers may have been called to bear. In looking at the express terms of the debtor’s plan, the court recognized that the plan included a provision stating that it is “insurance neutral” because it preserves all “Asbestos Insurance Defenses.” Despite this provision, four exceptions to these otherwise preserved defenses were included in the debtor’s plan.
Comparing the debtor’s plan to the plan deemed “insurance neutral” in Combustion, the Thorpe court held the exceptions contradict the plan’s purported insurance neutrality for four reasons. First, the exceptions may have a preclusive effect in asbestos claims brought against the appealing insurers; that is, the appealing insurers may be bound by decisions made by the trust with respect to resolving asbestos-related claims. Second, the plan requires the appellants to indemnify settlement payments made by the trust without allowing the insurers to challenge the reasonableness of such settlements. Third, the exceptions permit the trust to allow asbestos claimants to file suit directly against the appellants. Fourth, the court noted other potential economic impacts the plan has on the appellants.
After examining the four “insurance neutrality” exceptions in the debtor’s plan, the court held that the plan has a “real-world” monetary impact on the appellants and, therefore, was not “insurance neutral”. In so holding, the court granted the appellants standing to challenge the plan’s confirmation. How the Thorpe decision will impact the way in which the Third Circuit decides the issue of insurer-standing in the bankruptcy context is yet to be resolved. However, by avoiding the Third Circuit’s “quantum of liability” standard, the Ninth Circuit may have brought some certainty back to the insurer-bankruptcy-standing arena.
Peter I. Tsoflias, Law Clerk
Ferry Joseph, P.A.
For a full discussion of the Third Circuit’s treatment of insurer standing in the bankruptcy context, see Peter I. Tsoflias, Note, Insurance Neutrality: Affecting an Insurer’s Right to Bankruptcy Standing, 37 Del. J. Corp. L. (forthcoming 2012), available at www.ssrn.com.
4 W. Market St.
Case Study: Asbestos Litigation is Still Creeping into Bankruptcy Courtrooms
Despite decades of litigation, asbestos claims still seem to find their way into bankruptcy courtrooms. To respond to the growing number of asbestos-related bankruptcies, Congress enacted section 524(g) to the Bankruptcy Code. In general, Chapter 11 debtors utilizing section 524(g) may channel present and future mass tort related claims to a settlement trust. Doing so effectively discharges these debtors of the obligation to adjudicate present and future mass tort claims.
Liability insurance is often the principal asset used to fund settlement trusts established pursuant to section 524(g). Accordingly, insurers’ rights are undoubtedly affected by reorganization plans implementing such settlement trusts. For example, upon a debtor’s filing for bankruptcy, the number of mass-tort claims often surges. This increase in claimants burdens insurers with the obligation to review, identify and investigate each potential claim. In light of these added costs, insurers are often provoked to challenge the confirmation of plans encompassing section 524(g) trusts.
Challenging the confirmation of a reorganization plan, however, raises standing concerns namely, whether the insurer suffered an injury beyond the scope of what the insurer contracted for. To determine whether an insurer has standing to challenge the confirmation of a plan, courts (in the section 524(g) context) look at whether the plan at issue is “insurance neutral.” Generally, a plan is considered “insurance neutral” if it adequately preserves insurers’ pre-petition contractual rights and defenses. If the plan is deemed “insurance neutral”, courts have held that the insurer faces no injury thereby precluding the insurers’ ability to challenge a debtor’s plan.
The determination of whether a particular plan is “insurance neutral” has proven to be a difficult one to make. This difficulty has resulted in some muddled jurisprudence. For example, in the seminal “insurance neutrality” case In re Combustion Engineering, the Third Circuit closely examined the reorganization plan at issue and determined that the insurers’ pre-petition rights and defenses were in no way affected by the debtor’s proposed plan. Consequently, the court held the insurers did not have standing to challenge the plan’s confirmation. As would be expected, subsequent debtors, insurers and courts relied upon the Combustion court’s analysis. Debtors, for example, drafted reorganization plans with similar language as that deemed “insurance neutral” in Combustion. By the same token, courts examined such reorganization plans through a similar lens as that used in Combustion. This reliance is further evidenced by decisions such as In re Pittsburgh Corning Corporation, In re Leslie Controls and In re Congoleum Corporation.
However, in the Third Circuit’s most recent decision dealing with “insurance neutrality” language, In re Global Industrial Technologies, the court’s insurance neutrality analysis deviated from the approach taken in Combustion and its progeny. Here, the closely divided court (en banc) recognized that the debtor’s plan preserved the insurers’ pre-petition rights and defenses; however, the court held that the plan was not “insurance neutral.” In reaching this conclusion, the court found that a number of claims the insurers would be forced to investigate were “suspect;” that is, the court conceived many claims to be unmeritorious. In granting the insurers standing, the court concluded that the added administrative costs to investigate the merits of these suspect claims increased the insurers’ “quantum of liability” which constituted a “tangible disadvantage” to the insurers.
The “quantum of liability” standard established in Global Industrial Technologies has purportedly generated some uncertainty with respect to whether insurers will have standing to challenge confirmation of a reorganization plan. Despite this purported uncertainty, a recent Ninth Circuit decision, In re Thorpe Insulation Co., has brought back some clarity to this otherwise clouded jurisprudence.
After facing roughly 12,000 asbestos-related lawsuits spanning over 30 years, the debtors in In re Thorpe Insulation Co. were eventually forced to petition for Chapter 11 bankruptcy relief. To account for the estimated 2,000 asbestos claims still pending against the debtors, the debtor’s plan included a section 524(g) trust and three injunctions to channel asbestos claims to the trust. Various insurers funded the trust.
To determine whether the plan at issue in Thorpe was” insurance neutral”, the Ninth Circuit solely examined the “real-world impact” of the express terms set forth in the debtor’s plan. Notably, the Ninth Circuit did not mention the Third Circuit’s “quantum of liability” standard or any potential administrative costs the insurers may have been called to bear. In looking at the express terms of the debtor’s plan, the court recognized that the plan included a provision stating that it is “insurance neutral” because it preserves all “Asbestos Insurance Defenses.” Despite this provision, four exceptions to these otherwise preserved defenses were included in the debtor’s plan.
Comparing the debtor’s plan to the plan deemed “insurance neutral” in Combustion, the Thorpe court held the exceptions contradict the plan’s purported insurance neutrality for four reasons. First, the exceptions may have a preclusive effect in asbestos claims brought against the appealing insurers; that is, the appealing insurers may be bound by decisions made by the trust with respect to resolving asbestos-related claims. Second, the plan requires the appellants to indemnify settlement payments made by the trust without allowing the insurers to challenge the reasonableness of such settlements. Third, the exceptions permit the trust to allow asbestos claimants to file suit directly against the appellants. Fourth, the court noted other potential economic impacts the plan has on the appellants.
After examining the four “insurance neutrality” exceptions in the debtor’s plan, the court held that the plan has a “real-world” monetary impact on the appellants and, therefore, was not “insurance neutral”. In so holding, the court granted the appellants standing to challenge the plan’s confirmation. How the Thorpe decision will impact the way in which the Third Circuit decides the issue of insurer-standing in the bankruptcy context is yet to be resolved. However, by avoiding the Third Circuit’s “quantum of liability” standard, the Ninth Circuit may have brought some certainty back to the insurer-bankruptcy-standing arena.
Peter I. Tsoflias, Law Clerk
Ferry Joseph, P.A.
For a full discussion of the Third Circuit’s treatment of insurer standing in the bankruptcy context, see Peter I. Tsoflias, Note, Insurance Neutrality: Affecting an Insurer’s Right to Bankruptcy Standing, 37 Del. J. Corp. L. (forthcoming 2012), available at www.ssrn.com.