The United States Court of Appeals for the Third Circuit, which has a track record of deciding major asbestos-bankruptcy issues, will hear the appeal of Hartford Accident & Indemnity Co. et al. v. American Capital Equipment, LLC et al. (In re American Capital Equipment, LLC et al.), No. 07-2546 (3d Cir.). This case presents issues regarding an insurer's ability to challenge a pre-packaged bankruptcy filed by policyholders solely to reach insurance proceeds, including whether such a filing is subject to dismissal for "bad faith" under the Bankruptcy Code.

The policyholder here faced many thousands of asbestos claims. Because of these claims, the policyholder filed for chapter 11 bankruptcy protection and proposed a plan creating a trust funded solely by insurance proceeds to pay asbestos claimants based on values determined by a "disease matrix." The United States District Court for the Western District of Pennsylvania held that insurers whose policies will be used to fund the policyholder's bankruptcy had standing to challenge the bankruptcy, but then went on to hold that a bankruptcy filed solely to maximize asbestos claimants' abilities to obtain insurance proceeds was not filed in bad faith. See Hartford Accident & Indemnity Co. v. American Capital Equip., No. 06-0891 (W.D. Pa. May 11, 2007). The insurers have appealed, arguing that the policyholder is improperly employing the bankruptcy code to effectuate an "insurance scam" and, therefore, the bankruptcy should be dismissed.

This will be an interesting appeal to watch as the United States Court of Appeals for the Third Circuit again addresses key questions of fairness in the context of policyholder pre-packaged bankruptcy filings.