Supreme Court Won’t Rule On Injunctive Relief Under Bankruptcy Code Section 524(g)

 WASHINGTON, D.C. — (Mealey’s) The U.S. Supreme Court today denied a petition to resolve the question of whether a bankruptcy court’s order barring the assertion of contribution claims against settling insurers must be accompanied by the establishment of alternative means for the nonsettling insurers to receive compensation for those claims (OneBeacon Insurance Co., et al. v. Plant Insulation Co., et al., U.S. Sup., No. 13-1090) [ subscribers may access Supreme Court brief for this case].

The high court denied a petition by eight insurers of debtor Plant Insulation Co. to review a ruling by the Ninth Circuit U.S. Court of Appeals vacating Plant Insulation’s reorganization plan and holding that the plain language of Section 524(g) of the U.S. Bankruptcy Code “explicitly permits injunctions of the Non-Settling Insurers claims and nowhere provides for any compensation for their lost rights.”

Plan Approved

Plant Insulation filed for relief under Chapter 11 in the U.S. Bankruptcy Court for the Northern District of California in 2009. The company’s reorganization plan was confirmed by Bankruptcy Judge Thomas E. Carlson on March 2012 over the objection of the nonsettling insurers. Judge Carlson found an injunction barring assertion of contribution claims against the settling insurers necessary to the plan.

On appeal, U.S. Judge Richard Seeborg of the Northern District of California affirmed, rejecting the nonsettling insurers’ argument that the proposed injunctive relief interferes with their common-law and contractual rights and contravenes general principles of equity.

The Ninth Circuit U.S. Court of Appeals vacated the plan, finding that it fails to satisfy the requirement of Section 524(g) that an asbestos trust maintain control of a reorganized debtor and holding that Section 524(g) allows the Bankruptcy Court to enjoin the nonsettling insurers’ contribution claims.

Petition For Review

In their petition for review, filed March 20, the insurers argued that the Ninth Circuit’s ruling creates a split with the Second Circuit U.S. Court of Appeals’ ruling in MacArthur Corp. v. Johns-Manville Corporation, 837 F.2d 89 (2d Cir. 1988) [enhanced version]. In the Johns-Manville case, a distributor of Johns-Manville products objected to an injunction prohibiting claims against settling insurers. While the Second Circuit upheld the injunction, the reasoning employed by the court “squarely conflicts with the reasoning of the decision below,” the insurers argued.

The Ninth Circuit ruling also conflicts with fundamental principles of bankruptcy law and equity jurisprudence, the insurers contended. The decision “construes Section 524(g) in a manner completely at odds with otherwise settled bankruptcy principles, including established law regarding the authority to sell assets in bankruptcy (Section 363) and the scope of the bankruptcy court’s equitable authority,” the insurers said.

Ripe For Review

Finally, the issue presented is an important one and is ripe for review, the insurers argued.

“If Section 524(g) can be used to extinguish third-party contribution claims, debtors and claimants can offer sweeping protection to induce more generous settlements, effectively capturing and monetizing the claims of third parties for the benefits of claimants without compensating those parties,” the insurers argue. “Moreover as is true in this case, with each settlement, the pressure on remaining co-insurers — who face the threat of being forced to shoulder an increasingly disproportionate share of the debtor’s liability — rises. Given the magnitude of the claims at issue, and the coercive and inequitable structure of the trust injunction, prompt review by this Court is appropriate.”

Plant Insulation waived its right of response to the petition.

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 Dentons in Boston; Robert B. Millner of Dentons in Chicago; 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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