In the ongoing bankruptcy action involving the Congoleum Corporation (Congoleum), the bankruptcy court refused to approve a settlement and policy buyback between Congoleum and one of its insurers, ruling that the lack of creditor support for the settlement and the lack of evidence regarding the volume and type of claims covered by the settlement precluded the court's ability to approve the settlement. In re Congoleum Corporation, No. 03-51524 (Bankr. D.N.J. May 11, 2004).

Congoleum, a flooring manufacturer that has entered bankruptcy in order to manage its ongoing asbestos liabilities, and one of its insurers had reached a settlement whereby the insurer would pay a total of $25 million resulting in a release of all future liability on the subject insurance policies. This settlement was structured as a sale of the policies from Congoleum to the insurer.

As an initial matter, the court addressed the validity of the sale, and stated that the liability "policies are undeniably property of the estate that may be sold pursuant to § 363(b)." In addition, any sale must meet at least one of five possible circumstances outlined in § 363(f) of the Bankruptcy Code. The court noted that one such circumstance is if lienholders consent, and ruled that the sale met the qualification because the Collateral Trustee was the only lienholder and he consented to the transaction.

Addressing the merits of the settlement, the court noted that the Future Claims Representative (FCR) "vociferously objected to the proposed settlement," and that the other creditor representatives showed "grudging non-opposition." Challenging the settlement, the FCR asserted that the settlement was not made in "good faith" and was not for an "adequate price." Asserting that the settlement was not made in good faith, the FCR argued that because the same attorneys negotiating this settlement are also involved in similar negotiations regarding the ACandS bankruptcy that the resulting settlement is the product of collusion given an alleged likelihood that the attorneys will treat each other favorably. The court rejected this argument, stating that in challenging a settlement on good faith, "[a]n objector has to show more than an opportunity to collude; an objector must provide some evidence or indication of actual collusion." In addition, the court noted that such overlap of professionals, and "opportunity for back-scratching," highlights the need for asbestos legislative reform given that courts are only able to "address these problems on a macro level."

The court then addressed the FCR's arguments that the settlement did not represent an "adequate price" given "the paramount interests of creditors." The court noted that no creditor constituency actively supported the settlement. This was deemed to be of "paramount importance" because Congoleum's only interests in the insurance proceeds are to create an adequate plan for reorganization and provide funds to pay creditors. The FCR argued that "the true beneficiary of the insurance, such as the future asbestos claimants, should be the ones who decide how to deal with the insurance companies."

The FCR further contended that there was insufficient evidence before the court to address the adequacy of the settlement. Addressing this concern, the court agreed that it could not evaluate the adequacy of the settlement given that no evidence had been presented regarding the volume and types of claims that would be addressed by the insurance policies at issue. The court objected to ruling on "this settlement in a vacuum." The combination of the creditors' concerns and the inability to evaluate the adequacy of the settlement led the court to deny Congoleum's motion seeking approval of the insurer settlement.