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In the Matter of: Thorpe Insulation Company v. Thorpe Insulation Company; Pacific Insulation Company

January 24, 2012

IN THE MATTER OF: THORPE INSULATION COMPANY, DEBTOR, MOTOR VEHICLE CASUALTY COMPANY; CENTRAL NATIONAL INSURANCE COMPANY OF OMAHA; CENTURY INDEMNITY COMPANY, SUCCESSOR TO CIGNA SPECIALTY INSURANCE COMPANY, FKA CALIFORNIA UNION INSURANCE COMPANY, APPELLANTS,
v.
THORPE INSULATION COMPANY; PACIFIC INSULATION COMPANY, APPELLEES, NATIONAL FIRE INSURANCE COMPANY OF HARTFORD, AS SUCCESSOR BY MERGER TO TRANSCONTINENTAL INSURANCE COMPANY; CONTINENTAL INSURANCE COMPANY, AS SUCCESSOR IN INTEREST TO CERTAIN POLICIES ISSUED BY HARBOR INSURANCE COMPANY; OFFICIAL COMMITTEE OF UNSECURED CREDITORS, OF THORPE INSULATION COMPANY AND PACIFIC INSULATION COMPANY; CHARLES B. RENFREW, REAL PARTIES IN INTEREST. IN THE MATTER OF: THORPE INSULATION COMPANY, DEBTOR, NATIONAL FIRE INSURANCE COMPANY OF HARTFORD, AS SUCCESSOR BY MERGER TO TRANSCONTINENTAL INSURANCE COMPANY; CONTINENTAL INSURANCE COMPANY, AS SUCCESSOR IN INTEREST TO CERTAIN POLICIES ISSUED BY HARBOR INSURANCE COMPANY, APPELLANTS,
v.
THORPE INSULATION COMPANY; PACIFIC INSULATION COMPANY, APPELLEES, CENTRAL NATIONAL INSURANCE COMPANY OF OMAHA; MOTOR VEHICLE CASUALTY COMPANY; CENTURY INDEMNITY COMPANY, SUCCESSOR TO CIGNA SPECIALTY INSURANCE COMPANY, FKA CALIFORNIA UNION INSURANCE COMPANY; OFFICIAL COMMITTEE OF UNSECURED CREDITORS, OF THORPE INSULATION COMPANY AND PACIFIC INSULATION COMPANY; CHARLES B. RENFREW, ADMINISTRATIVE LAW JUDGE, REAL PARTIES IN INTEREST.



D.C. No. 2:10-cv-01493-DSF Appeal from the United States District Court for the Central District of California Dale S. Fischer, District Judge, Presiding

The opinion of the court was delivered by: Gould, Circuit Judge:

FOR PUBLICATION

OPINION

Argued and Submitted August 30, 2011-Pasadena, California

Before: Mary M. Schroeder and Ronald M. Gould, Circuit Judges, and Richard Seeborg, District Judge.*fn1

Opinion by Judge Gould

OPINION

The district court affirmed a bankruptcy court's confirmation of a Chapter 11 plan of reorganization under 11 U.S.C. § 524(g), a special provision for the reorganization of companies facing substantial asbestos-related liability. Appellants are several insurance companies that did not reach settlements with Thorpe Insulation Company (Thorpe) and Pacific Insulation Company (Pacific), together the Debtors in bankruptcy court, and who were denied standing to challenge the reorganization plan. The district court held that the reorganization plan was insurance neutral, and so Appellants did not have standing to object to the plan; and it also held that the plan preempted Appellants' state law contract rights. We affirm the district court's conclusion that the plan preempted Appel- lants' state law contract rights. We disagree with the position of Debtors that the appeal is equitably moot, and, reaching the merits, we reverse the district court's conclusion that Appellants lacked standing. We remand to the district court with instructions that it return the case to the bankruptcy court to give Appellants the opportunity to present their proof and argument.

I. Background

A

Thorpe is a California company that distributed, installed, and repaired asbestos insulation products between 1948 and 1972. This led to substantial asbestos-related litigation. In the past thirty years, Thorpe has faced about 12,000 claims and lawsuits for personal injury or wrongful death based on asbestos exposure. Robert and Linda Fults owned Thorpe until 2008, when they transferred their shares to their sons Eric and David Fults. In 2000, Thorpe incorporated Pacific as a wholly-owned subsidiary and conveyed to it the assets associated with its materials division. Robert and Linda Fults were the sole shareholders of Pacific. Pacific, a profitable business, has been named in asbestos-related lawsuits as a successor-in-interest to Thorpe. In 2004, Thorpe sold its remaining assets to Farwest Insulation Contracting ("Farwest"), owned by Eric and David Fults, in a private foreclosure sale. Farwest is also a party to many asbestos-related lawsuits and insurance coverage litigation.

Thorpe purchased insurance policies with many companies that covered "products claims" (or "products/completed operations," for injuries caused by asbestos exposure after a product is relinquished or an operation completed), which are subject to aggregate limits, and "operations claims" (or "non-products," for injuries caused by asbestos exposure before a product is relinquished or an operation completed), which are not subject to aggregate limits. Since 1978, Thorpe's many insurers have handled the defense and settlement of asbestos suits. Thorpe's insurers paid more than $180 million defending and indemnifying Thorpe until, in their view, the policies' aggregate limits were exhausted.*fn2

B

Debtors Thorpe and Pacific filed for protection under Chapter 11 of the Bankruptcy Code on October 15, 2007 and October 31, 2007, respectively. Thorpe estimated that, at the time of the bankruptcy filing, 2,000 asbestos cases were pending against it, and Thorpe anticipated that many more suits would be filed in the future.

Thorpe applied to employ the law firms of Snyder Miller & Orton LLP and Morgan Lewis & Bockius LLP as special insurance counsel. Appellants objected that the firms had conflicts of interest because they represented asbestos claimants against Thorpe, but the bankruptcy court approved the employment of the law firms, taking the view that Appellants lacked standing to object. The issue was appealed, the district court remanded for fact-finding, and the bankruptcy court again approved the firms' retention without input from Appellants.

In May 2008, Thorpe, Pacific, the appointed Official Committees of Unsecured Creditors, and the appointed legal representative for holders of future asbestos-related claims ("Appellees") filed a § 524(g) joint plan of reorganization. The current and Fifth Amended Plan of reorganization was filed in December 2009. It is that plan, approved by the bankruptcy court and the district court, that is the subject of this appeal.

Section 524(g) allows a bankruptcy court to issue sweeping channeling injunctions in Chapter 11 cases involving asbestos claims. § 524(g); 4 COLLIER ON BANKRUPTCY ¶ 524.07. The statute was enacted to adopt the approach taken in the Johns-Manville bankruptcy case, wherein a trust (the "Manville Trust") was established together with a series of injunctions to channel asbestos-related claims to the trust. See Kane v. Johns-Manville Corp., 843 F.2d 636 (2d Cir. 1988). Because of the often lengthy latency period of asbestos-related injuries, the § 524(g) injunction aims to "control the future litigation of all asbestos-related claims against the parties it protects" by preventing "any entity from taking legal action to collect a claim or demand that is to be paid in whole or in part by a trust created through a qualifying plan of reorganization." COLLIER ON BANK. ¶ 524.07. The injunction may bar actions against the debtor itself as well as claims against the debtor directed at third parties who are directly or indirectly liable-such as where a third party has insured the debtor. Id.; § 524(g)(4)(A)(ii). The bankruptcy court may establish such an injunction if it determines that (1) "the debtor is likely to be subject to substantial future demands for payment arising out of" asbestos-related claims; (2) "the actual amounts, numbers, and timing of such future demands cannot be determined"; and (3) "pursuit of such demands outside the [trust] is likely to threaten the [reorganization] plan's purpose to deal equitably with claims and future demands." § 524(g)(2)(B)(ii).

The requirements for a § 524(g) injunction include: (1) there must be a notice and a hearing and the 524(g) plan must be in connection with the confirmation of a Chapter 11 plan of reorganization; (2) there must be a trust established to assume the liabilities of the debtor that has been named in asbestos-related actions; (3) the trust must be funded in whole or in part by the securities of at least one debtor and by the obligation of the debtor to make future payments; (4) the trust must own, or be entitled to own, a majority of the voting shares of the debtor, its parent corporation, and any subsid- iary; (5) the court must find that the debtor meets certain criteria related to the significance of the threats posed by potential asbestos liability; (6) the court must appoint a legal representative to protect the rights of future claimants against the debtor; and (7) the court must determine that the injunction is fair and equitable with respect to future claims (including a determination that third parties like insurers that come within the protection of the injunction have contributed adequate amounts to the trust). § 524(g).

The Fifth Amended Plan filed by Debtors provided for the issuance of injunctions to channel certain asbestos-related liabilities to a newly-created trust, with sole responsibility for distributions to present and future holders of asbestos-related claims. The plan merges Thorpe and Pacific into the "Reorganized Debtor" and discharges Thorpe, Pacific, and the Reorganized Debtor from all debts. It creates a trust, controlled by the Trust Advisory Committee, to oversee how claims are allowed, valued, and distributed. The Trust uses "trust distribution procedures" to evaluate claims.

In establishing the plan and trust, Thorpe reached settlements with thirteen insurers ("settling insurers") (in addition to four insurers that settled, contingent on a bankruptcy filing, before Thorpe filed). The settlements provided for more than $600 million in cash and securities to fund the Trust in exchange for releases of claims and protection of 524(g) injunctions. The Debtors contributed the following to the plan: their indemnity claim against the Johns-Manville asbestos trust; the proceeds of the settlements with the Settling Insurers; the "Asbestos Insurance Rights" as defined in the plan; $500,000 cash; and two promissory notes in the amount of $1.25 million, secured by 51% of the common stock of Reorganized Debtor. Appellants received from the trust a "Business Loss Allocation;" the trust pays to them a percentage of the money contributed to the trust by the insurance companies up to $5.25 million.

The plan creates three injunctions. First, the Channeling Injunction bars the assertion of any asbestos-related claim against any protected party and allows for asbestos-related claims only against the trust, the Reorganized Debtor, and non-settling insurers. Second, the Settling Asbestos Insurer Injunction protects settling insurers by preventing the assertion of contribution claims held by non-settling insurers.*fn3

Instead, the trust absorbs the cost of those barred contributions and reduces dollar-for-dollar any judgment obtained against non-settling insurers holding contribution claims. Id. Third, the Asbestos Insurer Injunction prohibits actions against asbestos insurers without permission by the trust; the trust may not allow such actions unless asbestos claimants agree to the same judgment reduction that is binding on the trust before proceeding against non-settling insurers.

The plan contains a valuation matrix. The Matrix gives a way for the trust to value claims consistently across time because of the lengthy latency period of asbestos-related injuries. The value given a claim depends on, inter alia, the disease the claimant has, age, work history, and personal history factors.

The plan assigns Debtors' insurance rights to the trust, including policies with the non-settling insurers. The plan contains a section stating that it is "insurance neutral," preserving all "Asbestos Insurance Defenses." However, in apparent contradiction of the neutrality characterization, the plan includes four exceptions to the otherwise preserved defenses. It does not permit a defense:

(a) that is based on the assertion that the transfer of the Asbestos Insurance Rights to the Trust . . . is invalid, unenforceable or otherwise breaches the terms of any Asbestos Insurance Policy, Asbestos Insurance Settlement, or any other agreement with any Asbestos Insurer, (b) that has been released, waived, altered or otherwise resolved, in full or in part, in any Asbestos Insurance Settlement, or any other agreement with any Asbestos Insurer, (c) to the extent affected by application of principles of res judicata, collateral estoppel, claim preclusion or issue preclusion, or (d) premised upon the commencement of Chapter 11 Cases under Section 301 of the Bankruptcy Code.

The plan allows claimants either to bring their claim against the trust or to get permission from the trust to sue non-settling insurers directly under Thorpe's insurance policies.

Without giving Appellants the opportunity to be heard fully on all relevant issues, the bankruptcy court affirmed the Fifth Amended Joint Plan ...


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