Two recent decisions by the Second and Third Circuit United States Courts of Appeals have set forth with more clarity the standards by which insurers may establish standing in Chapter 11 bankruptcy proceedings and have opened the door for increased insurer involvement in such proceedings.
In In re Global Industrial Technologies, No. 08-3650, 2011 US App LEXIS 9109 (3d Cir, May 4, 2011), the United States Court of Appeals for the Third Circuit held in a published decision that various insurers had sufficient interests to meet constitutional and bankruptcy standing requirements such that the insurers could challenge the confirmation of the Chapter 11 plan of reorganization put forth by their insureds.
In 2002, citing adverse business conditions and a large number of asbestos-related lawsuits pending against them, Global Industrial Technologies and its subsidiary, A.P. Green Industries, Inc. (collectively, the "debtors"), sought Chapter 11 protection. The debtors also faced a number of silica-related claims. The debtors submitted a plan of reorganization which would establish a trust to pay silica-related claims and which would be funded by assignment of the insurers' policies. In seeking confirmation votes from claimants, the debtors recognized through solicitation a much larger number of silica-related claims (over 4,600) than the 169 which had been previously pending. The insurers sought to oppose the plan of reorganization on the basis that the plan was neither necessary nor appropriate under the Bankruptcy Code, and also alleged collusion between the silica-related claimants and the debtors. In evidentiary hearings, the insurers presented evidence questioning the legitimacy of 91.5% of the silica claims made against the debtors. Id. at *16.
The bankruptcy court confirmed the debtors' plan of reorganization and held that the insurers lacked standing to object to the plan. Because the insurers would still be able to assert their coverage defenses if ever faced with putative obligations to reimburse the silica-claims trust, the bankruptcy court determined that the insurers had not suffered the requisite injury to object. Id. at *18. The district court affirmed.
On appeal, the Third Circuit reversed, finding that the insurers met both the Federal Constitutional requirement of "injury in fact" as well as the Bankruptcy Code's standing requirement as "parties in interest." Id. at *25. As the funding sources ultimately responsible for contesting the liabilities of the silica trust, the insurers were ostensibly injured by the creation of the trust and the resulting dramatic increase in silica-related claims. "Here," the court explained, "the plan's creation of the [trust] led to a manifold increase in silica-related claims. That constitutes a tangible disadvantage to [the insurers]" as it "creates an entirely new set of administrative costs, including the investigative burden," of determining which of the claims, if any, were valid. Id. at *35.
The Third Circuit remanded for further development of the factual record with respect to the insurer's allegations of collusion in the creation of the silica-claims trust.
Just two weeks after In re Global Industrial Technologies, in In re Heating Oil Partners LP, No. 10-733-bk, 2011 US App LEXIS 9978 (2d Cir, May 16, 2011) (unpublished), the United States Second Circuit Court of Appeals similarly found that an insurer was sufficiently impacted by its insured's bankruptcy proceedings such that the insurer could enforce the terms of the automatic stay in the proceedings.
In In re Heating Oil Partners, a third-party claimant had secured a default judgment against the debtor. The debtor's insurer moved in bankruptcy court for an order declaring a default judgment against the debtor void on the basis that the order was entered in violation of the automatic stay triggered by the debtor's Chapter 11 bankruptcy petition. Id. at *2. The bankruptcy court granted the motion, and the district court affirmed.
On appeal, the third-party claimant argued that the insurer lacked standing to invoke the protections of the automatic stay.
Under the Bankruptcy Code "party in interest" standard, which takes into consideration whether the party has a "sufficient stake" in the outcome of the bankruptcy proceeding (including a pecuniary interest directly affected), the Second Circuit found that the insurer had a sufficient interest in whether the default judgment was void in that the insurer would have to indemnify the insured in full or in part for the judgment. "Without a doubt," the court stated, the insurer "has a personal stake" and "is a party in interest pursuant to" the Bankruptcy Code. Id. at *5. As such, the bankruptcy court's declaration that the default judgment was void was affirmed.
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