Excess Insurers Have Standing In Bankruptcy Court To Object To A Plan Of Reorganization Where The Plan Process Resulted In Additional Potential Liability For The Insurers
Hartford Accident and Indemnity Company, et al. v. Global Industrial Technologies, Inc., et al. (In re Global Industrial Technologies, Inc.), Case No. 08-3650 (3d Cir. May 4, 2011) (C.J. McKee, J. Scirica, J. Ambro, J. Fuentes, J. Smith, J. Fisher, J. Chagares, J. Jordan, J. Vanaskie, J. Nygaard)
One vote separated the Third Circuit from splitting directly down the middle in its 6-4 determination that Hartford Accident and Indemnity Company, First State Insurance Company, and Twin City Fire Insurance Company (collectively, “Hartford”), as well as Century Indemnity Company and Westchester Fire Insurance Company (collectively, “Century”) had standing to challenge the confirmation of a plan of reorganization filed by Global Industrial Technologies, Inc. (“GIT”). The appellants were comprised of Hartford, Century, and various related American International Group, Inc. (“AIG”) entities, while the appellees included GIT, the Official Committee of Asbestos Creditors and Unsecured Trade Creditors, and the Legal Representatives for Future Asbestos and Silica Claimants. Consistent with the Third Circuit’s opinion, arguments made by any of the appellees will simply be attributed to GIT for simplification and convenience.
In sum, the majority held that “when a federal court gives its approval to a plan that allows a party to put its hands into other people’s pockets, the ones with the pockets are entitled to be fully heard and to have their legitimate objections addressed.”
Factual Background
GIT was a publicly traded holding company for several businesses, including manufacturers and sellers of refractory products, which are “construction-type materials specifically designed and manufactured for use in high-temperature applications.” One such manufacturer – A.P. Green Industries, Inc. (“APG”) – was purchased by GIT in 1998. However, APG used asbestos in some of its products prior to 1976, subjecting APG to voluminous asbestos litigation. To a lesser degree, APG was also the subject of silica-related personal injury claims – in fact, as of February 2002, APG was defending a single class action suit consisting of 169 claims.
In February of 2002, GIT, APG, and certain related entities (collectively, the “Debtors”) filed for protection under Chapter 11 of the Bankruptcy Code. The proposed plan of reorganization (the “Plan”) called for, in relevant part, entry of an injunction (the “Silica Injunction”) channeling silica-related claims to a silica trust (the “APG Silica Trust”), as well as an asbestos injunction (The “Asbestos Injunction”) which would channel all asbestos claims into a trust specifically created to address and resolve such claims (the “APG Asbestos Trust” and, together with the APG Silica Trust, the “Trusts”). Hartford and Century were among the insurers whose policies were to be assigned to APG Silica Trust.
In exploring whether the silica-related liability was sufficiently onerous to jeopardize the Debtors’ reorganization if not resolved via the APG Silica Trust and the Silica Injunction, the Debtors obtained a list of silica claimants from another company’s bankruptcy and then solicited confirmation votes from those claimants’ counsel. An explosion of silica claims ensued, with a total of 5,125 votes being cast on the Debtors’ Plan on behalf of persons alleging that APG was responsible for their claimed silica- related injuries.
Hartford, Century and AIG objected to the Plan, asserting that the APG Silica Trust and the Silica Injunction were the products of collusion with the asbestos claimants’ counsel and were neither necessary nor appropriate for the debtors’ successful reorganization. Hartford, Century and AIG took particular issue with the following elements of the silica claims: (1) of the silica claims filed, 56.9% included diagnoses by a physician or facility that was banned in an asbestos bankruptcy for a separate entity (the “Manville Bankruptcy”); and (2) more than half of the silica claims were based upon diagnostic methods which were categorized in the Manville Bankruptcy as “rang[ing] from questionable to abysmal. In total, Hartford, Century and AIG questioned the legitimacy of 91.5% of the silica claims made against the Debtors.
In response to these concerns, the Bankruptcy Court requested additional information from the silica claimants regarding their diagnoses and exposure to APG’s silica products, and the claims determined to be at issue dropped from 5,125 to around 4,600. Ultimately, however, the Bankruptcy Court concluded that the APG Silica Trust and the Silica Injunction were necessary to the Debtors’ reorganization and confirmed the Plan on November 14, 2007.
Moreover, the Bankruptcy Court determined that that Hartford and Century lacked standing to object to the Plan because: (1) the assignment of the insurance policies in contravention of the terms therein was not injurious because both the Bankruptcy Code and state law rendered those provisions a nullity; (2) any potential financial harm arising out of the assignments was too speculative as Hartford and Century made no contribution to the APG Silica Trust and retained their coverage and contractual defenses under the terms of the Plan. As a creditor, AIG’s standing was not contested.
The District Court affirmed the Bankruptcy Court’s confirmation of the Plan and its determination that Hartford and Century lacked standing to challenge the Plan.
Though presented with two separate issues regarding Hartford and Century’s standing – first, whether Hartford and Century had standing to object to confirmation of the Plan and second whether Hartford and Century had standing to appeal the confirmation ruling – the Third Circuit held that its determination that Hartford and Century had standing to contest confirmation of the Plan and resulting remand of the proceeding might aid in the resolution of the other issues and thus declined to determine the issue of appellate standing. As indicated above, the majority concluded that Hartford and Century had presented sufficient evidence of the requisite “specific, identifiable trifle of injury and thus had standing to challenge the Plan.
Concerned with the potentially broad reach of the majority’s opinion, Judge Nygaard composed a dissent, in which Judges Fuentes, Fisher, and Scirica joined, citing the preservation of Hartford and Century’s contractual rights and the Third Circuit’s opinion in Combustion Engineering in support of their conclusion that Hartford and Century had not suffered any injury which might entitle them to object to the Plan. A breakdown of the division of the judges is as follows:
Majority Dissent
Chief Judge McKee Judge Nygaard (author)
Judge Ambro Judge Scirica
Judge Smith Judge Fuentes
Judge Chagares Judge Fisher
Judge Jordan (author)
Judge Vanaskie
Discussion
The majority determined that the dramatic increase in silica-related claims resulting from the plan confirmation process, in conjunction with the allegations of collusion between the Debtors and the silica claimants – which found support in the record – were sufficient to establish the injury required for standing. In order to object to the confirmation of a plan of reorganization in the Bankruptcy Court, a party must meet the Article III requirements for standing that litigants in all federal cases face. That is, they must demonstrate an “injury in fact” that is “concrete”, “distinct and palpable” and “actual or imminent.”
The majority then examined standing as it related, in particular, to bankruptcy cases. Observing that 11 U.S.C. § 1109(b), which also addresses standing in the Bankruptcy Court, “has been construed to create a broad right of participation in Chapter 11 cases,” the majority amplified its previously established “party in interest” test with the Seventh Circuit’s bankruptcy-specific determination that a party in interest is “anyone who has a legally protected interest that could be affected by a bankruptcy proceeding.”
This determination – as well as the majority’s subsequent clarifications – effectively put to rest the notion that the “party in interest” requirement in the context of a bankruptcy is “more exacting” than the constitutional injury-in-fact requirement.
Hartford and Century argued that they qualified as parties in interest because they were the funding sources who would have to address the liabilities of the APG Silica Trust, giving them a personal – and certainly more than a trifling – stake in whether the Plan was approved. GIT contended that Hartford and Century lacked standing because the Plan preserved their coverage defenses and therefore was “insurance neutral,” making pecuniary injury arising out of the Plan too speculative to establish standing.
First, the majority found that the Plan at issue was not, in fact, “insurance neutral,” despite the attempt to follow the language of a Plan which was determined to be insurance neutral by the Third Circuit in Combustion Engineering. Unlike the Plan in Combustion Engineering, which “neither increased the insurer’s pre-petition obligations nor impaired their pre-petition contractual rights under the insurance policies”, the Plan at issue appeared “to have staggeringly increased – by more than 27 times – the pre-petition liability exposure.”
Second, the majority held that the Plan’s adverse effects on Hartford and Century were not too speculative to be recognized. Citing the Supreme Court opinion of Clinton v. City of New York, the majority discarded the argument that Hartford and Century’s injuries’ contingent status rendered them incognizable, and focused instead on the “explosion of new [silica-related] claims” and the resultant “entirely new set of administrative costs” associated therewith, as well as the allegations of collusion surrounding the creation of the APG Silica Trust, which implicated the integrity of the bankruptcy process and with respect to which Hartford, Century, and other insurers slated to provide coverage to the APG Silica Trust were the only ones with the incentive to explore and challenge these “profoundly serious charge[s]”.
The majority was not swayed by the fact that the Bankruptcy Court had considered Hartford and Century’s arguments, reasoning that the ability to participate fully as a party would provide Hartford and Century with an opportunity to more fully flesh out and present their concerns.
Dissent
The concerns of the dissenting judges are set forth clearly and concisely in the first sentence of their opinion and are as follows: that “[t]he majority’s grant of standing to parties who have no injury, either actual or contingent, is a departure from the well-established requisite of an injury in fact, and it has broad deleterious implications for the jurisprudence of Article III standing.” In sum, the dissent rests on the fact that the Plan preserved Hartford and Century’s contractual rights, and that any additional liability which Hartford and Century now face is simply “another way of describing the leitmotif of the insurance industry within its normal course of business.”
