Over the past decade, insurers have waged an uphill battle to protect their rights in mass-tort bankruptcy cases. On May 4, 2011, in a 6-4 en banc decision in In re Global Industrial Technologies, Inc. (GIT), the U.S. Court of Appeals for the 3rd Circuit vindicated the constitutional and statutory rights of insurers to object and to be fully heard in bankruptcy plan confirmation proceedings. In a long-awaited opinion, the court declared 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. In short, they at least have bankruptcy standing."
The insurers' appeal involved the creation of a trust to address silica claims against the debtor, GIT, as the successor in interest to A.P. Green Industries. GIT's bankruptcy filing was not driven by silica claims, which were relatively miniscule in number, but rather by hundreds of thousands of asbestos claims, which were to be addressed by a separate trust. Nevertheless, GIT sought to establish a silica trust instead of permitting those claims to return to the tort system.
GIT, however, did not limit its request to the existing claims against it. Instead, GIT contacted attorneys representing thousands of silica claimants on a list GIT obtained from another company's bankruptcy. As a result, more than 5,000 putative silica claimants were solicited to vote on the plan. Of those claimants, the objecting insurers claimed that the vast majority had been diagnosed by doctors whose diagnoses had been widely discredited and who had been "banned" by the Manville Trust as unreliable. The silica trust was to be funded, in large part, by insurance policies that GIT proposed to assign to the trust.
Several insurers objected to the plan alleging that it was founded upon fraud and collusion, and would result in efforts to force the insurers to pay for thousands of bogus claims which their insured had invited. The insurers further objected that the assignment of their policies to the trust without their consent violated the policies' anti-assignment provisions.
The bankruptcy court held that the insurers lacked standing to object to the plan on the grounds that (1) so-called "insurance neutrality" provisions preserved the insurers' rights to resist payment of bogus claims and otherwise preserved their contractual rights, and (2) the insurers' potential financial harm arising from the assignment of the policies to the trusts was too speculative. Although the bankruptcy court conceded that the insurers had standing to object to the assignment of the policies to the trust, the court rejected this challenge on the grounds that the policies' anti-assignment provisions were preempted by federal bankruptcy law. The bankruptcy court thereafter confirmed the GIT plan in November 2007, and its confirmation order was affirmed by the Western District of Pennsylvania.
The 3rd Circuit vacated and remanded the case to the bankruptcy court for further proceedings at which the insurers would have the right to fully participate. The majority opinion, authored by Judge Kent Jordan, declared that the insurers have bankruptcy standing to object to GIT's plan and, given the factual circumstances surrounding the creation of the silica trust, "must be afforded the opportunity to be heard concerning whether it is lawful to channel silica-related claims against GIT into a settlement trust in the context of GIT's reorganization."
At the heart of the 3rd Circuit's opinion is its holding that bankruptcy standing under 11 U.S.C. § 1109(b) is to be interpreted as permissively as the "very generous" standing requirements of Article III of the U.S. Constitution, which requires only an "an injury in fact." Even a "specific 'identifiable trifle' of injury" that is fairly traceable to the challenged action and that can be redressed through a favorable decision is sufficient. Holding that an interpretation of "the 'party in interest' requirement as an additional obstacle to bankruptcy standing would frustrate the purpose of [11 U.S.C.] § 1109(b), which was intended to 'confer[] broad standing at the trial level,'" the 3rd Circuit rejected the lower courts' narrower interpretation of bankruptcy standing. Instead, the 3rd Circuit declared that anyone having a legally protected interest that could be affected by a bankruptcy plan is entitled to be fully heard on its objections to confirmation of the plan.
The majority had no problem concluding on the facts in GIT that the insurers had satisfied their burden of demonstrating their standing to object:
Here, the plan's creation of the APG Silica Trust led to a manifold increase in silica-related claims. That constitutes a tangible disadvantage to Hartford and Century, which, despite having their coverage defenses available, will be faced with coverage obligations to the APG Silica Trust in a world that recognizes the existence of over 4,600 silicarelated claims, as opposed to a pre-Plan world that recognized only 169. Indeed, the Plan-triggered explosion of new claims creates an entirely new set of administrative costs, including the investigative burden of finding any meritorious suits in the haystack of potentially fraudulent ones. Those costs will be enormous, even if [the insurers] never pay a single dollar of indemnity. Accordingly, even if [the insurers'] ultimate liability is contingent, the harm to [the insurers] from the Plan is hardly too speculative for them to be parties in interest.
Several other aspects of the majority opinion are also noteworthy. First, although the 3rd Circuit recognized the insurers' standing in this case, it conditionally endorsed the idea of "insurance neutrality" as "a meaningful concept" in situations where a bankruptcy plan "does not materially alter the quantum of liability that the insurers would be called to absorb." By contrast, according to the court, the GIT plan "appears to have staggeringly increased – by more than 27 times – the pre-petition liability exposure. Thus, on the record here, it cannot fairly be said that the GIT plan is 'insurance neutral'..."
Second, the court carefully emphasized that it was addressing only the issue of standing at the bankruptcy court level and was leaving for another day the extent to which objecting insurers can satisfy the stricter "person aggrieved" standard for appellate standing, opining that "further development of the factual record may aid in the resolution of other issues, including appellate standing." One hopeful sign that the insurers' appellate standing will be recognized in any future appeal in this case is the 3rd Circuit's repeated references to its prior Congoleum decision, in which the court held that "insurers had appellate standing to raise an issue regarding disqualification of counsel, reasoning that the issue 'implicate[d] the integrity of the bankruptcy court proceeding as a whole' and would 'affect the fairness of the entire bankruptcy proceeding.'" Moreover, the court appeared to emphasize the importance of insurer appellate standing in such situations, especially where "it was 'highly unlikely that any of the parties other than the insurers' would raise the issue." It stated:
Not to put too fine a point on it, the assertion is that GIT sold out [the insurers] by setting up a system in which they would pay for newly ginned-up silica claims in exchange for the asbestos claimants casting their votes in favor of the GIT Plan. It is a profoundly serious charge and not without record support. Moreover, it is a charge that apparently no one has an incentive to pursue, other than the insurers slated to provide coverage to the APG Silica Trust.
Third, the court seemingly declined to address GIT's contention that "the anti-assignment provisions in the Objecting Insurers' policies are rendered null by the Bankruptcy Code and state law." Nevertheless, immediately after the court stated that it "need not address that argument here," the court wrote the following: "Moreover, the discussion of anti-assignment provisions in Combustion Engineering, 391 F.3d at 218-20, should suffice." While observing that "the majority does not clearly articulate a position on whether the anti-assignment provisions of this Reorganization Plan constitute a contractual injury," the dissent asserted that the 3rd Circuit's prior "holding in Combustion Engineering that validated the Bankruptcy Code's authorization to preempt anti-assignment policy provisions [is] both fully applicable to this case and ... binding precedent that eliminates any claim by the insurers that this provision is the source of any injury." It remains to be seen whether the dissent is correct in declaring this issue a dead letter or if the majority in fact intended to leave the door open for future consideration of this issue, including the insurers' argument that this apparent holding in Combustion Engineering was erroneous. We note that the same issue has been raised by insurers appealing the confirmation order in the Federal-Mogul bankruptcy that currently is pending before the 3rd Circuit.
Finally, the majority chided the dissent for equating a collusive plan to pay bogus claims with insurance money to "the risks that occur to insurers within the normal course of their business," such as earthquakes and tornadoes, that result in larger indemnity obligations than the insurer projected in underwriting the policy:
The Dissent evidently dismisses our standing analysis as founded on nothing more than a naïve concern about some largely imagined and contingent occurrence of the sort common to insurers' risktaking. ... Whatever else the normal course of the insurance business may entail, though, it certainly ought not include judicial approval for liability manufactured by and for the benefit of the insured, as is the central concern in this appeal.
Thus, as the 3rd Circuit emphatically made clear, bankruptcy courts cannot merely tell insurers that they can assert coverage defenses against bogus claims and, on that basis, be thrown out of court while collusive bankruptcy plans are confirmed. Instead, the insurers plainly have standing to litigate their objections and to prevent confirmation of the collusive plan, and the resulting harm to the insurers, in the first place.
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