Insurer Standing in Asbestos Bankruptcy Proceedings
We are into a new year and with it comes a glimmer of hope that insurers will be heard (at least to some extent) in asbestos bankruptcy proceedings. However, two new decisions from the Ninth Circuit are a mixed bag, on the one hand allowing insurers standing to be heard on a debtor’s reorganization plan, but holding that insurance policy anti-assignment clauses and pre-petition agreements to arbitrate are not enforceable when they “conflict” with the purposes of the bankruptcy code.
The Ninth Circuit in In Re Thorpe Insulation, (January 24, 2012) __ F.3d _ (12 C.D.O.S. 939), reversed a district court’s finding that non-settling insurers lacked standing to challenge the asbestos debtor’s reorganization plan under 11 U.S.C.§ 524(g). The Ninth Circuit found the plan has a financial impact on the insurers despite the bankruptcy court’s decision the plan was “insurance neutral.” The Ninth Circuit held the insurers’ appeal was not moot even though the plan was already in force and operational. However, the Ninth Circuit held California law upholding an insurance policy’s anti-assignment clause is preempted by federal bankruptcy law.
In In Re Thorpe Insulation, (January 31, 2012) __ F.3d __ (2012 US App Lexis 1691), the Ninth Circuit held the insurer (Continental) could not enforce its pre-petition agreements with Thorpe to arbitrate disputes because the issues to be arbitrated were core issues, intertwined with other issues to be decided in the reorganization. Further, the bankruptcy court had discretion to deny the request for arbitration where in conflict with the purposes of the bankruptcy code.
Thorpe Insulation Company and its related companies distributed, installed and repaired asbestos insulation products. There have been over 12,000 suits against Thorpe from claimants alleging injury from asbestos exposure. Thorpe’s insurers defended and settled many of the suits, paying more than $180 million in settlement before exhausting their policies’ aggregate limits. Thorpe then claimed the asbestos claims should implicate the insurers’ non-aggregate limits for “operations” claims. Many insurers settled with Thorpe with the settlement proceeds being used to fund a trust established pursuant to 11 U.S.C. § 524(g).
Thorpe obtained bankruptcy court approval for its reorganization plan. Insurance companies that had not settled with Thorpe attempted to challenge the plan but were denied standing by the bankruptcy court. Among other things, the plan purported to be insurance neutral and preserve all defenses of the non-settling insurers. The non-settling insurers disagreed, alleging the plan economically impacted them and that, by allowing Thorpe to assign their policies to the trust, the plan violated anti-assignment provisions in the insurers’ polices.
The district court confirmed the plan in September 2010. The plan became effective and operational on October 22, 2010 and the trust began paying claims.
The non-settling insurers sought an emergency stay challenging the plan which was denied. The insurers appealed. In this decision, the Ninth Circuit reversed and remanded.
Standing
To have standing in bankruptcy court, a party must meet three requirements: (1) be a “party in interest” under 11 U.S.C.§ 1109(b); (2) have a traceable interest in the outcome as required by Article III of the U.S. Constitution; and (3) meet the federal court’s prudential (“zone of interest”) test.
The Ninth Circuit found the insurers met the “party in interest” requirement, agreeing with the insurers that the plan could have a negative financial impact on non-settling insurers under several scenarios, including that the plan vests the trustee with power to make liability decisions without input from the insurers on the reasonableness of the trustee’s decision. Further, the plan authorizes the trustee to order claim payments from the insurers that may be higher than what they would pay absent the plan. In addition, the plan restricts the insurers’ contribution rights as well as contractual rights to seek reinsurance against settling insurers. It also impacts the insurers’ potential to recover in the event the plan’s trust were to become insufficiently funded. Finally, the plan allows asbestos claimants to file suits against the insurers, which is direct evidence the insurers are a party in interest to the bankruptcy proceeding.
The Ninth Circuit also found the insurers met the constitutional and prudential standing requirements because they were able to show: (1) an injury in fact traceable to the challenged action; and (2) that they were within the prudential zone of interest as they were subject to the plan’s payment structure.
Mootness
The Ninth Circuit rejected Thorpe’s argument that the appeal was moot since the plan was already operational and had begun to pay claims. The Ninth Circuit held the appeal was not constitutionally moot because an appellate court was able to give effective relief to the insurers by reversing the plan confirmation or requiring modification of the plan to address the insurers’ legitimate economic and contractual concerns.
The Ninth Circuit held the appeal was not equitably moot based on four factors: 1) the insurers had actively pursued their rights by seeking a stay that was refused by the Ninth Circuit and district court; 2) the plan had not been substantially consummated because only $135 million of the $600 million in settlement proceeds had been transferred to the trust with only a portion of trust proceeds distributed to claimants; 3) the bankruptcy court could fashion a remedy that adequately protects the rights of all parties; and 4) the bankruptcy court could also modify the plan and devise a remedy that addressed the relief sought by insurers.
Examples, according to the Ninth Circuit, of how the plan could be modified included the following. First, Thorpe could be ordered to contribute more to the trust. Second, the plan could be amended to make clear trust distribution procedures were not binding on direct suits filed against the non-settling insurers. Third, the bankruptcy court could allow the non-settling insurers to present evidence and argue for modification of the trust distribution procedure. Fourth, the bankruptcy court could place the trust under new governance if the non-settling insurers were able to show the trust was in the hands of biased parties.
Anti-assignment
However, the Ninth Circuit upheld the district court’s ruling that federal bankruptcy law preempted state law on the insurers’ anti-assignment clause issue. The bankruptcy code provides that a debtor’s property becomes the property of the estate notwithstanding a contract provision that restricts transfer of the debtor’s interest. (11 U.S.C. § 541(c).) This provision expressly contemplates the inclusion of a debtor’s insurance policy in the bankruptcy estate.
Arbitration
In a decision the following week, the Ninth Circuit upheld the bankruptcy court’s and district court’s rulings that Continental could not compel arbitration. Continental had sought to enforce its agreement with Thorpe, pursuant to the Wellington Agreement of 1998 and a Settlement Agreement entered in 2003, that disputes would be arbitrated. Continental’s dispute with Thorpe related to that Thorpe had: 1) acquired settling insurers’ contribution, indemnity and subrogation rights against Continental; 2) assigned rights to the bankruptcy trust; and 3) negotiated, structured, and confirmed a plan for claimants to pursue direct actions against Continental. All of this was in contravention of the Settlement Agreement.
The Ninth Circuit found the bankruptcy court was within its rights to deny the motion to compel arbitration because Continental’s claims were a core matter. According to the Ninth Circuit, Continental’s claims would have to be coordinated with the plan confirmation process, Continental’s challenges to Thorpe’s actions involved Thorpe’s exercise of rights in bankruptcy, and Continental’s claim could not stand alone.
Further, the Ninth Circuit held the bankruptcy court had discretion to decline to enforce an otherwise valid arbitration clause in order to further the purposes of the bankruptcy code.
