9th Circuit Vacates Asbestos Bankruptcy Reorganization; Says Trust Isn’t In Control

 SAN FRANCISCO — (Mealey’s) The Ninth Circuit U.S. Court of Appeals on Oct. 28 vacated the bankruptcy reorganization plan for a former asbestos insulator, finding that the plan failed to satisfy the requirements of Section 524(g) of the Bankruptcy Code dealing with control by asbestos trusts (In Re:  Plant Insulation Co., Fireman’s Fund Insurance Company, et al. v. Plant Insulation Company, Nos. 12-17466 and 12-17467, 9th Cir.).

The panel of the Ninth Circuit reversed the affirmance of the reorganization plan for Plant Insulation Co. by the U.S. District Court for the Northern District of California.  The panel said the plan did not comply with Section 524(g), under which a court-appointed fiduciary stands in for future asbestos claimants and the court ensures that any proposed plan is fair to the claimants.

Although the plan is fair and equitable to future asbestos plaintiffs in light of benefits provided to the trust by settling insurers and is properly funded with securities of the reorganized company, the panel said, the plan failed to satisfy the requirement that the trust is entitled to own a majority of voting shares in the reorganized debtor.

“Because the present plan does not call for the Trust to control the reorganized debtor either after conformation or at any point where control would meaningfully benefit the Trust, it does not comply with § 524(g),” the panel wrote.

The Ninth Circuit remanded the consolidated cases to the District Court for proceedings consistent with the opinion.

Expert Challenges Rebuffed

Separately, nonsettling insurers appealed the admission of two experts as having conflicts of interest and using unreliable methods.  They argued that Steven Snyder and David McClain have a direct financial stake in the outcome of the case because of their relationships with Plant Insulation and the Creditor’s Committee.

The nonsettling insurers are OneBeacon Insurance Co., American Home Assurance Co., Granite State Insurance Co., Insurance Company of the State of Pennsylvania, Insurance Company of the West, Safety National Casualty Corp., Transport Indemnity Co., United States Fidelity and Guaranty Co. and United States Fire Insurance Co.

The court said that under circuit court case law, evidence of bias goes to the credibility of a witness, not to his or her competency to testify.

Methodology Not Required

The nonsettling insurers also argued that Snyder and McClain did not use reliable principles or methods in presenting their testimony.  The panel said the reliability and relevancy requirements of Federal Rule of Evidence 702 “are flexible.”

“Under this inquiry, an expert can testify on the basis of his experience without using an explicitly scientific methodology,” the panel said.  “This was the case here.”

The nonsettling insurers also argued that the reorganization plan was not proposed in good faith under Section 1129(a)(3) of the Bankruptcy Code.  The panel said the insurers failed to point to specific facts that would undermine the bankruptcy court’s findings establishing good faith.

“Neither general allegations of unseemliness nor assertions that the plan undermined their nonbankruptcy rights suffices to demonstrate clear error,” the panel said.  “Similarly, there is no evidence in the record suggesting that the reorganized debtor will breach any obligation to the Non-Settling Insurers.”

The Reorganization Plan

Plant Insulation filed a voluntary petition in the Bankruptcy Court in 2009 for relief under Chapter 11 of the Bankruptcy Code.  The company’s reorganization plan provides two ways for compensating asbestos personal injury claimants:  from a trust funded in part by more than $183 million in payments from insurers that have settled their coverage disputes with Plant and by preserving the claimants’ right to file tort actions against Plant and insurers that have not settled their coverage disputes.

U.S. Bankruptcy Judge Thomas E. Carlson of the Northern District of California Bankruptcy Court confirmed the plan in March 2012, overruling the many objections filed by the nonsettling insurers.  The bankruptcy judge held that the plan was proposed in good faith and that Plant’s merger with affiliated company Bayside Insulation and Construction Inc. is necessary for the plan’s success.  The bankruptcy judge found that an injunction barring the assertion of contribution claims against the settling insurers also is necessary to the success of the plan.

The bankruptcy judge’s confirmation order provides for the establishment of the asbestos trust and authorizes the Bayside merger agreement, under which Plant will merge into Bayside, with reorganized Bayside the surviving corporation.

‘Sham Company’

The nonsettling insurers appealed the confirmation order to the U.S. District Court for the Northern District of California.  While the nonsettling insurers said the reorganization plan illegally sets up a sham company that will be funded by the asbestos trust, plan proponents Plant, the Official Committee of Unsecured Creditors and the future claimants’ representative (FCR) countered that the insurers were merely seeking to continue to avoid asbestos injury claims in the tort system that had been put on hold by the bankruptcy.

In 2012, Judge Richard Seeborg overruled all of the insurers’ objections and affirmed confirmation of the plan, finding that the plan’s proposed injunctive relief for Plant, Bayside and the settling insurers does not violate the nonsettling insurers’ rights under the U.S. Constitution, exceed the authorization provided by the Bankruptcy Code, interfere with the nonsettling insurers’ common-law and contractual rights under state law or contravene general principles of equity.

The nonsettling insurers appealed to the Ninth Circuit, with U.S. Fire filing a separate appeal.  The court consolidated the appeals.

Panel, Counsel

Circuit Judge Diarmuid Fionntain O’Scannlain wrote the opinion.  The other panel members were Circuit Judges John T. Noonan Jr. and N. Randy Smith.

Plant is represented by Peter J. Benvenutti and Ryan T. Routh of Jones Day in San Francisco.  The Official Committee of Unsecured Creditors is represented by Michael H. Ahrens and Steven B. Sacks of Sheppard, Mullin, Richter & Hampton in San Francisco and Peter Van N. Lockwood of Caplin & Drysdale in Washington, D.C.  The FCR is represented by Gary S. Fergus of Fergus Law Office in San Francisco.

The nonsettling insurers are represented by Mark D. Plevin and M. Kay Martin of Crowell & Moring in San Francisco; Cynthia L. Kendrick, Leslie A. Davis and Tacie H. Yoon of Crowell & Moring in Washington; Lynn H. Murray of Grippo & Elden in Chicago; Andrew T. Frankel, Kathrine A. McLendon and Craig S. Waldman of Simpson Thacher & Bartlett in New York; Deborah L. Stein of Simpson Thacher in Los Angeles; Philip A. O’Connell Jr. of SNR Denton US in Boston; Robert B. Millner of SNR Denton in Chicago; Paul E.B. Glad and Joel T. Muchmore of SNR Denton in San Francisco; Richard Goetz and Jaclyn Blankenship of O’Melveny & Myers in Los Angeles; Patricia B. Hsue of O’Melveny & Myers in San Francisco; Tancred V. Schiavoni of O’Melveny & Myers in New York; Alan S. Berman of The Berman Law Group in Woodland Hills, Calif.; Philip R. Matthews and Ray L. Wong of Duane Morris in San Francisco; Jeff Carlisle, Randall J. Peters, David K. Morrison and Rosemary H. Do of Lynberg & Watkins in Los Angeles; Michael S. Davis of Zeichner Ellman & Krause in New York; Clinton E. Cameron and Seth M. Erickson of Troutman Sanders in Chicago; Lawrence A. Tabb of Musick, Peeler & Garrett in Los Angeles; Chad A. Westfall of Musick, Peeler & Garrett in San Francisco; and Valerie A. Moore and Eugenie Gifford Baumann of Haight, Brown & Bonesteel in Los Angeles.

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