The United States District Court for the Western District of Pennsylvania has affirmed two final orders of the bankruptcy court finding that (1) the debtor's insurers lacked standing to object to confirmation of the bankruptcy plan; (2) a channeling injunction for silica claims was appropriately included in the debtor's plan; (3) an assignment of the debtor's rights under its insurance policies to the personal injury trust was authorized by bankruptcy law; and (4) the debtor's reorganization plan was confirmable under the Bankruptcy Code. Hartford Accident & Indemnity Co. v. Global Indus. Tech., Inc., Civil Action No. 07-1749, Bankr. Case No. 02-21626 (JKF) (W.D. Pa. Jul. 25, 2008). In doing so, the district court held that assignment of the insurer's policies to a personal injury trust did not provide the insurers standing to participate in plan confirmation proceedings before the bankruptcy court and that this assignment did not violate the anti-assignment clauses in the policies.

In this case, the bankruptcy court confirmed a reorganization plan that included an injunction channeling all silica-related personal injury claims against the debtor to a trust to be funded by the proceeds of settlement agreements the debtor negotiated with certain of its insurers. In addition, the plan provided that the debtor's rights under certain insurance policies would be assigned to the trust. Several of the debtor's insurers objected to these provisions and appealed confirmation of the plan. The objecting insurers argued that these plan provisions subjected them to an "inflated and accelerated indemnification obligation," forced them to defend baseless silica claims that would not have existed outside of bankruptcy and violated the anti-assignment clauses in their policies. Two of the three objecting insurers were not allowed to participate in plan confirmation proceedings before the bankruptcy court. The other objecting insurer was also a creditor of the debtor, and the debtor, therefore, conceded that it had standing to participate before the bankruptcy court and on appeal.

On appeal, the district court noted that there are two distinct standing issues: (1) standing to appeal and (2) standing to participate before the bankruptcy court. The court first addressed the debtor's argument that two of the three objecting insurers did not have standing to appeal the bankruptcy court's ruling. The court, however, held that it need not decide whether those insurers had standing to appeal the bankruptcy court orders. The court explained that regardless of these insurers' standing, the other insurer, which is also a creditor, has standing, as admitted by the debtor. Given that one of the insurers had standing and this insurer had raised the same issues raised by the other two, all of the issues on appeal were properly before the court.

The district court then affirmed the bankruptcy court's ruling that the non-creditor insurers lacked standing to participate in plan confirmation proceedings. The court concluded that the insurers had not identified any controlling precedent granting an insurer standing to participate in plan confirmation proceedings in a similar context. It distinguished its ruling in Hartford Accident & Indemnity Corp. v. Am. Capital Equipment, 06-0891 (W. D. Pa.), Aug. 25, 2006, Memorandum and Opinion, that the insurers had a right to participate in plan confirmation proceedings because the insurers' standing there "was based on the unique facts of that case." Specifically, the insurance policies in that case "were the only asset owned by the debtor" and "there would be no operational 'reorganized debtor' post-bankruptcy." In the instant case, the court explained, the personal injury trust would be funded by insurance settlement proceeds and would exist irrespective of whether the trust would be able to recover anything under the objecting insurers' policies. In addition, the court noted that recovery under the objecting insurers' policies would be "decided in a separate action under the terms of the particular policy, in accordance with the insurance neutrality provisions of the Plan."

Next, the court affirmed the bankruptcy court's finding that an injunction channeling silica-related personal injury claims to a trust was necessary to the debtor's reorganization. The court concluded that the bankruptcy court properly applied the "flexible approach" set out in In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000), which permits a bankruptcy court to issue injunctive relief under § 105(a) of the Bankruptcy Code "where 'unusual circumstances' exist, such as in cases involving 'settlement of massive liabilities against debtors and co-liable parties.'" In reaching its conclusion, the court found that the bankruptcy court had considered all relevant factors and "carefully addressed the evidence." The court rejected the insurers' objection that the silica injunction did not comply with the requirements of § 524(g) of the Bankruptcy Code because that § applies only to asbestos channeling injunctions.

The court also concluded that assignment of the debtor's rights under its insurance policies to the personal injury trust was authorized by bankruptcy law notwithstanding the anti-assignment clauses in the subject policies. The court explained that in In re Combustion Engineering, 391 F.3d 190 (3d Cir. 2004), the Third Circuit ruled that the Bankruptcy Code allowed the transfer of insurance policies from an estate to an asbestos trust despite anti-assignment clauses in the policies. Accordingly, the court concluded that "as a matter of bankruptcy law, assignment of the insurance policies to a personal injury trust does not violate anti-assignment clauses in those policies."

Finally, the court rejected the insurers' argument that the bankruptcy court should not have confirmed the bankruptcy plan because the debtor faced no silica liability outside of bankruptcy and because the plan was "a scheme to obtain votes in favor of plan confirmation in exchange for paying worthless silica claims." The court found that expert testimony heard by the bankruptcy court "indicated that [the debtor's] silica liability is real, and if nothing else, will impose significant defense costs on [the debtor] post-bankruptcy."

This case as well as the companion case addressed in this issue of Bankruptcy Alert continue to raise issues regarding when and if an insurer will be able to participate in its policyholder's bankruptcy proceedings. Although these cases are both adverse to insurers, arguably they can be distinguished from instances addressing the broader concerns raised by insurers regarding their right to be heard in a bankruptcy proceeding where the insurance policy proceeds, if available, are likely to be a significant, if not the most significant, tool in funding asbestos and silica trusts.