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SAN FRANCISCO - (Mealey's) Because Thorpe Insulation Co.'s Chapter 11 plan of reorganization could harm insurance companies, the plan is not "insurance neutral" and, therefore, the insurers have standing to object to it, the Ninth Circuit U.S. Court of Appeals held Jan. 24 in reversing approval of the plan and remanding the case so the insurers' arguments can be heard (Motor Vehicle Casualty Company, et al. v. Thorpe Insulation Company, et al.[In The Matter of Thorpe Insulation Company] and National Fire Insurance Company of Hartford, et al. v. Thorpe Insulation Company, et al. [In the Matter of Thorpe Insulation Company], Nos. 10-56543 and 10-56622, 9th Cir.).
(Opinion available. Document #48-120130-039Z.)
Section 524(g) Plan
Thorpe and Pacific Insulation Co. (collectively, Thorpe) filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in 2007 in the U.S. Bankruptcy Court for the Central District of California. In 2010, the Bankruptcy Court confirmed Thorpe's reorganization plan pursuant to Section 524(g) of the Bankruptcy Code, and the U.S. District Court for the Central District of California affirmed the confirmation of the plan.
Under Section 524(g), the plan established a trust for the payment of claims of present and future asbestos personal injury claimants. In establishing the plan and trust, Thorpe reached settlements with more than a dozen insurers that provided for more than $600 million in cash and securities to fund the trust in exchange for releases of claims and protection of Section 524(g) injunctions. The debtors also contributed to the trust.
In affirming the reorganization plan, the District Court held that it was insurance neutral, so nonsettling insurance companies did not have standing to object to the plan. The court also held that the plan preempted the insurers' state law contract rights. The plan became effective on Oct. 22, 2010, and implementation of the plan began.
Two groups of nonsettling insurers appealed the District Court's ruling to the Ninth Circuit: Motor Vehicle Casualty Co., Central National Insurance Company of Omaha and Century Indemnity Co., successor to Cigna Specialty Insurance Co. f/k/a California Union Insurance Co.; and Continental Insurance Co., as successor in interest to certain policies issued by Harbor Insurance Co., and National Fire Insurance Company of Hartford, as successor by merger to Transcontinental Insurance Co. (collectively Continental Insurance). The Ninth Circuit consolidated the appeals.
Thorpe moved to dismiss the appeals as equitably moot, arguing that its reorganization plan had been substantially consummated and that reversing or modifying the orders approving the plan would deprive asbestos claimants of their insurance rights vested in the asbestos settlement trust.
But the Ninth Circuit panel of Circuit Judges Mary M. Schroeder and Ronald M. Gould and U.S. Judge Richard Seeborg of the Northern District of California, sitting by designation, found that although the plan has commenced, it has not been substantially consummated because all of the property the plan proposes to transfer to the trust has not been transferred. Only $135 million has been transferred to the trust so far, and only $15 million has been distributed to asbestos claimants, the panel found.
The panel further held that the appeals are not moot because Thorpe's plan can still be modified "in a way that does not affect third party interests to such an extent that the change is inequitable," even though asbestos claimants already voted to approve the plan. "While the claimants agreed to the plan, they did not agree to a plan that promised no future changes," the panel said.
The panel also found that if the Bankruptcy Court ultimately determines that the plan violates the nonsettling insurers' legal rights, the court should be able to find a remedy that is appropriate. "The plan has thus far proceeded to a point where it may not be viable totally to upset the plan, to tip over the § 524(g) apple cart. Yet, that does not mean that there could not be plan modifications adequate to give remedy for any prior wrong. Where equitable relief, though incomplete, is available, the appeal is not moot," the panel said.
The panel, in an opinion written by Judge Gould, then held that the insurers should be allowed to seek remedies because they have party-in-interest standing under Section 1109 of the Bankruptcy Code and standing under Article III of the U.S. Constitution to object to the plan. The insurers also must meet federal court prudential standing requirements, the panel held.
The panel said it looked at "the real-world impacts of the plan to see if it increases insurance exposure and likely liabilities of" the nonsettling insurers and found that it does, in part because it creates four exceptions to the insurers' defenses to future asbestos claims.
The panel said the plan is not insurance neutral because it allows direct actions against the nonsettling insurers, allows the trust to pay out claims and then to seek indemnification from the insurers and terminates the insurers' ability to collect claims from settling insurers.
Further, the reorganization plan affects the nature of the insurers' contracts with Thorpe, the panel said. "Though § 524(g) contemplates this kind of interference with insurers' contracts, there is no doubt that the vast changes to the insurance policies and relationships have the potential substantially to impact Appellants economically," the panel held.
"The bankruptcy court and district court erred by concluding that the proposed § 524(g) plan was insurance neutral and that Appellant insurers did not have party in interest standing to challenge the plan," the panel said. "Because the plan had likely effects that would increase economic exposure of the insurer Appellants to asbestos claimants, they had a right to be heard fully and fairly before the plan was finalized."
However, the panel affirmed the Bankruptcy Court's and District Court's conclusions that the anti-assignment clauses in the policy contracts between the insurers and Thorpe are preempted by federal law.
The panel said that while there is "no entirely tidy way to resolve this case because the plan has proceeded without stay and without full input from insurer parties who will be economically affected by the plan," the best place to start is by reversing the judgment of the District Court and remanding the case to the District Court with instructions that it remand to the Bankruptcy Court "to permit Appellants to submit their proof on all issues they previously preserved."
Motor Vehicle, Central and Century are represented by Tancred V. Schiavoni of O'Melveny & Myers in New York; Richard B. Goetz of O'Melveny & Myers in Los Angeles; Jonathan Hacker of O'Melveny & Myers in Washington, D.C.; and Alan S. Berman of the Berman Law Group in Woodland Hills, Calif.
Continental and National Fire are represented by David C. Christian II of Seyfarth Shaw in Chicago, James M. Harris of Seyfarth Shaw in Los Angeles and Todd C. Jacobs of Grippe & Elden in Chicago.
Thorpe is represented by Thomas E. Patterson, Kenneth N. Klee, Daniel J. Bussel and David M. Guess of Klee, Tuchin, Bogdanoff & Stern in Los Angeles and Jeremy V. Richards and Scotta E. McFarland of Pachulski, Stang, Diehl & Jones in Los Angeles.
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