No Easy Out for Firm Sunk by Asbsestos Cases

(CN) - Reorganization of Plant Insulation Co., which went bankrupt in the face of mounting asbestos litigation, must include provisions for future asbestos claimants, the 9th Circuit ruled.

Plant Insulation began selling Fiberboard-manufactured asbestos-based insulation in the late 1930s. The first flood of lawsuits involving asbestos-related diseases began to emerge in the 1970s, swallowing several major companies.

Fibreboard defended Plant from these lawsuits until 1989 when its other insurers took over. One by one, however, these insurers bowed out, claiming that Plant had exhausted its coverage, and by 2001, no insurer was willing to defend or indemnify Plant against asbestos-related claims. At the time, more than 1,500 such claims were still pending against Plant. Between 2001 and 2006, an additional 4,000 suits were filed.

In May 2001, Plant's president left the company and started his own insulation-contracting business, Bayside Insulation & Construction. Plant transferred its business to Bayside and stopped all operations in its own name.

Plant was able to pay 1,100 asbestos claimants after obtaining $35 million in coverage by suing the California Insurance Guarantee Association under policies Plant had purchased from an insolvent insurance company. Thousands of claims nevertheless still remained.

Plant then decided to find out whether it had actually exhausted its coverage with its original insurance companies, and sued the insurers in a California Superior Court for declaratory relief. Plant then tendered the 3,800 asbestos claims over to these insurers, who defended the claims under a reservation of rights.

As it was clear that bankruptcy was looming for Plant, the asbestos claimants formed an informal committee, the Pre-Petition Committee. The committee demanded that Bayside merge with Plant as part of a contemplated Chapter 11 bankruptcy reorganization, or face a deluge of successor-liability lawsuits. Bayside agreed in principle to a plan to merge with Plant.

Plant's insurance policies were its only meaningful remaining asset when it filed for Chapter 11 bankruptcy in 2009. The firm received cash from some of the insurers - the "settling insurers" - who repurchased their policies from Plant. This payout guaranteed the settling insurers complete peace from future litigation, as well as protection from contribution claims that might be brought by the "non-settling insurers." These non-settling insurers still face potential asbestos-related claims on behalf of Plant.

On Monday, a three-judge panel of the 9th Circuit panel found that Plant's bankruptcy reorganization plan mostly complied with Section 524(g) of the Bankruptcy Code, which calls for a court-appointed fiduciary to stand in for future asbestos claimants. These plans allow present and future asbestos claimants to obtain recovery from a trust that is funded by insurance proceeds and securities in the reorganized debtor. "Channeling injunctions" prevent anyone from taking legal action to collect a claim that is to be paid by the trust.

The proposed bankruptcy plan for Plant calls for the creation of a trust primarily comprised of funds from the settling insurers, which totals approximately $131.5 million, from which asbestos claimants can seek recovery.

A "Settling Insurer Injunction" incorporated in the plan bars non-settling insurers from going after settling insurers for equitable contribution when the non-settling insurers have to pay claims of injured persons.

The panel agreed with the bankruptcy court that "enjoining the Non-Settling Insurers' contribution claims was 'fair and equitable' to future asbestos plaintiffs and, in providing the finality and protection from future suit, supplied the necessary incentive for insurers to settle in the first place."

However, the panel found that the plan did not satisfy the Section 524(g) requirement that the trust be entitled to own a majority of the voting shares of the reorganized debtor.

As part of the proposed plan, the trust is required to invest $2 million in Bayside, in exchange for a 40 percent interest in the company, which is valued at $500,000. The trust would have a warrant to purchase an additional 11 percent of Bayside at this set price per share. The trust would also receive a promissory note from Bayside in the amount of $250,000, secured by the shares of other shareholders.

The bankruptcy court found that the plan met the requirement that the trust be entitled to own a majority of the voting shares because the trust would be able to gain 51 percent ownership of Bayside by using its warrant to purchase the additional 11 percent of shares, or by securing enough outstanding stock in Bayside to bring its ownership to 50 percent if Bayside were to default on the $250,000 note.

These "contingencies" fail, however, to meet the standards under Section 524(g), the ruling states.

"A mere right of the plan to purchase shares ordinarily will not suffice; a trust that is struggling to pay claims cannot be expected to purchase control of the reorganized debtor and such a right leaves the trust in scarcely a better position than a third party," Judge Diarmuid O'Scannlain wrote for the appellate panel. "This is especially true where, as here, the price the trust would have to pay is fixed at roughly four times the current value of the equity."

The note-default condition also fails, because, if a reorganized debtor defaults on such insignificant payments, the debtor is essentially insolvent and its shares are, therefore, negligible.

"Because the present plan does not call for the trust to control the reorganized debtor either after confirmation or at any point where control would meaningfully benefit the trust, it does not comply with § 524(g)," O'Scannlain wrote.

The panel vacated the bankruptcy court's confirmation of Plant's plan of reorganization and remanded the case for a decision consistent with the circuit's findings.

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit