In a recent decision arising out of the Chapter 11 bankruptcy case of Global Industrial Technologies, Inc. (GIT),1 the U.S. Court of Appeals for the Third Circuit, sitting en banc, held that insurance companies that had issued liability insurance policies to a manufacturer before its bankruptcy filing had standing to object to confirmation of the company’s Chapter 11 plan of reorganization, even though the plan had been designed to be “insurance neutral” with regard to the policies. In the May 4, 2011 opinion, a six judge majority of the en banc court disagreed with the holdings of the lower courts that had denied standing to the insurers. Stated succinctly, the court held: “[W]hen 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.”2 Four members of the en banc panel, however, dissented, concluding that the majority’s decision was not only in error but could have “alarming consequences” in future cases.
The decision emanated from the Chapter 11 bankruptcy case filed in 2002 by GIT and certain of its subsidiaries, including A.P. Green Industries, Inc. (APG). GIT was a holding company formed in 1995 that owned several businesses, including companies that manufactured and sold refractory products. In 1998, GIT acquired APG, a long-time manufacturer and seller of refractory products. Before the mid-1970s, some of APG’s products contained asbestos. APG’s use of asbestos eventually triggered “an avalanche” of personal injury lawsuits. These liabilities ultimately forced GIT and APG – like many other asbestos manufacturers – to seek relief under Chapter 11 of the Bankruptcy Code. At the time of the bankruptcy filings, APG had spent approximately $448 million in resolving more than 200,000 asbestos-related claims, and it had approximately 235,000 additional asbestos-related claims still pending against it, including $491 million in liquidated claims.
APG also had incurred liability for silica-related personal injury claims but “on a vastly smaller scale.” From 1977 to 2002, APG dealt with only 23 silica-related lawsuits. One of its insurance companies had spent approximately $312,000 settling or litigating those suits and APG itself had contributed only $50,000 towards settling one of the suits. At the time of the bankruptcy filings, only one silica-related suit was pending, a class action including 169 claims against APG in a Texas state court. The debtors did not identify silica-related liability as a motivation for seeking bankruptcy relief.
In 2005, the debtors filed a Chapter 11 plan of reorganization (the Plan) which sought to address the debtors’ mass tort liabilities pursuant to section 524(g) of the Code. The Plan provided for the imposition of a channeling injunction pursuant to which the asbestos-related claims would be channeled to a trust specifically created to assess and resolve the asbestos claims (the Asbestos Trust). The Plan also provided for the imposition of an injunction (the Silica Injunction) channeling the silica-related claims to a trust for silica-related claims (the Silica Trust). Insurance was to fund both trusts, either in the form of cash from APG’s settlement of disputes involving certain insurance policies or, with respect to the Silica Trust, in the form of insurance coverage under certain policies to be assigned to the Silica Trust by APG. Hartford Accident & Indemnity Company (Hartford) and Century Indemnity Company (Century) were among the insurance carriers whose policies were to be assigned to the Silica Trust.
Relying upon the precedent established by the Third Circuit’s earlier decision in In re Combustion Engineering, Inc.,3 the debtors designed the Plan to be “insurance neutral,” i.e., the Plan provided that nothing therein or in the confirmation order would preclude the insurers whose policies were assigned to the Silica Trust from asserting any rights or defenses under the policies, except those related to “anti-assignment provisions.” The insurers’ obligations were still contingent upon establishing the Silica Trust’s liability to the claimants and then establishing the insurers’ liability on any claims for reimbursement asserted by the Silica Trust.
The Third Circuit held that for the Silica Injunction to be valid, the debtors needed to establish that the Plan’s resolution of the silica-related claims was “necessary or appropriate” under section 105 of the Code, which required a showing with specificity that the Silica Injunction was fair and necessary to the reorganization. In practical terms, this required the debtors to demonstrate that their silica-related liabilities were sufficiently burdensome as to jeopardize the debtors’ reorganization if not resolved by way of the Silica Injunction and the Silica Trust.
To obtain approval of the Plan, the debtors needed to obtain favorable votes from 75 percent of the asbestos claimants and 75 percent of the silica claimants. To solicit the required votes, the debtors contacted attorneys that represented the asbestos claimants, many of whom also represented persons with silica-related claims. After the debtors began soliciting confirmation votes from the silica claimants, the number and amount of the silica claims “exploded.” Ultimately, 5,125 votes were cast in favor of the Plan on behalf of persons alleging that APG was responsible for silica-related injuries. Five law firms that submitted votes on behalf of asbestos claimants also accounted for 4,039 of the silica claimants’ votes. Hartford, Century and other insurers objected to confirmation of the Plan, asserting that the Silica Trust and the Silica Injunction were the products of collusion with the asbestos claimants’ counsel and that the silica-related provisions of the Plan were neither necessary nor appropriate for the debtors’ successful reorganization. In response, the bankruptcy court ordered the silica claimants to provide supplemental information regarding their silica-related diagnoses, their exposure to APG’s silica products, and any prior diagnoses of or claims for asbestos-related diseases. The claimants provided several thousand supplemental submissions and, ultimately, 4,626 individual silica claims were recognized by the bankruptcy court to be at issue.
After extensive hearings, the bankruptcy court confirmed the Plan, including the Silica Trust and the Silica Injunction, over the objections of Hartford, Century and the other objecting insurers. The bankruptcy court also determined that Hartford and Century lacked standing to object to the Plan. The bankruptcy court rejected their argument that they had suffered injury from the Plan, concluding instead that (i) the assignment of the policies to the Silica Trust was not injurious because the Bankruptcy Code and state law rendered the policies’ anti-assignment provisions unenforceable and (ii) any potential financial harm to the insurers was too speculative because they had not contributed and were not required to contribute anything to the Silica Trust, and would still be able to assert their coverage defenses and contractual rights if confronted with claims for reimbursement by the Silica Trust. The district court affirmed both confirmation of the Plan and the lower court’s determination that Hartford and Century lacked standing to object to the Plan.
The Third Circuit majority initially noted that two types of standing were being contested: (i) the objecting insurers’ standing to object to confirmation of the Plan and (ii) the objecting insurers’ standing to appeal the confirmation order. In disposing of the appeal, the court found that it needed to address only bankruptcy standing. To have standing to bankruptcy proceedings, a party must, in the first instance, meet the requirements for standing that litigants in all federal cases face under Article III of the Constitution. To have “constitutional standing,” a party must demonstrate an “injury in fact” that is “concrete,” “distinct and palpable,” and “actual or imminent.”4 The party also must establish that the injury “fairly can be traced to the challenged action and is likely to be redressed by a favorable decision.”5
Standing in bankruptcy cases also is governed by the terms of section 1109(b) of the Bankruptcy Code, which provides that a “party in interest” may “raise and appear and be heard on any issue in a case under the [Code].” The court noted that the Seventh Circuit has described a “party in interest” as “anyone who has a legally protected interest that could be affected by a bankruptcy proceeding”6 and noted that the Seventh Circuit’s test comports with the Third Circuit’s definition of “party in interest” as one who “has a sufficient stake in the proceeding so as to require representation.”7 The court noted further that the Code expressly provides that parties in interest “may object to confirmation of a plan,” quoting section 1128(b) of the Code.
The Third Circuit majority concluded that, under the relevant authorities, Hartford and Century possessed the requisite standing to object to the Plan. The court rejected the debtors’ argument that the objecting insurers lacked standing because the Plan preserved their coverage defenses and was, therefore, “insurance neutral.” The court was most influenced by the fact that, as a result of the Plan’s provisions, the number and amount of silica claims had increased dramatically: “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 silica-related claims, as opposed to a pre-Plan world that recognized only 169.”
The Third Circuit majority distinguished this case from Combustion Engineering (where the court had found that, with limited exceptions, insurers did not have standing to appeal an order confirming a plan that had insurance neutrality provisions) because, in that case, unlike the present case, the plan did not “materially alter the quantum of liability that the insurers would be called to absorb.”8 Thus, the court found, “it cannot fairly be said that the GIT plan is ‘insurance neutral’ in the same sense as was the plan in Combustion Engineering.9 The court concluded that recognizing the insurers’ bankruptcy standing was “particularly appropriate because the challenges they want to bring implicate the integrity of the bankruptcy process.”10 The majority declined to address whether the objecting insurers also had “appellate standing” because it was unnecessary to the court’s decision regarding bankruptcy standing and also because the bankruptcy court’s disposition on remand might alter the analysis.
In a dissenting opinion, four judges expressed the view that “The 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.” The dissent found that there was nothing in the record, that had been amassed over five years with the “full participation” of the objecting insurers, and nothing in the Plan itself that substantiated the objecting insurers’ claims that they had incurred or would incur an injury in fact as a result of the Plan.
The implications of the Third Circuit’s holding in Global Industrial Technologies for future cases are unclear. Insurers whose policies are used to fund Chapter 11 claims trusts are likely to cite the case as establishing their presumptive standing to object to the plan. Plan proponents, by contrast, may argue that the case stands for only a limited exception to the broader principle established by Combustion Engineering that insurers generally do not have standing to object to a plan whose provisions are “insurance neutral.” To be sure, the Third Circuit’s ruling in Global Industrial Technologies breathes some new life into insurers’ arguments regarding their ability to participate in a policyholder’s bankruptcy case where the insurance policy proceeds are likely to be a significant – if not the most significant – asset funding a tort claims trust.