The United States District Court for the Western District of Pennsylvania has held that an excess liability insurer had no standing to object to a Chapter 11 bankruptcy debtor's reorganization plan where the plan, although requiring contributions from the insurer's policyholder, was not contingent on the policyholder obtaining any funds or proceeds from its insurer. Hartford Accident and Indemnity Co., et al. v. North Am. Refractories Cos. et al., Civ. Action No. 07-1750, Bankr. Case No. 02-20198 (JFK) (W. D. Pa. Jul. 25, 2008).
In this case, the bankruptcy court confirmed the debtor's reorganization plan, which established a trust for the resolution of asbestos-related personal injury claims pursuant to § 524(g) of the Bankruptcy Code. Under the plan, the reorganized debtor was to fund 79% of the trust through outstanding common stock, and the policyholder, another corporation, was to fund 21% of the trust via cash payments and pay all trust expenses. Although the policyholder intended to fund its contribution through insurance proceeds, its obligation was not dependent on its ability to do so. The policyholder was involved because both the debtor and the policyholder had historically shared the costs of managing their asbestos-related litigation. The bankruptcy court held that the insurer lacked standing to object to confirmation of the plan because the plan was not dependent on the policyholder's insurance proceeds and made no determination regarding coverage or liability.
On appeal, the district court agreed, holding that the insurer could not establish standing to participate in plan confirmation proceedings under either Article III standing principles or the Bankruptcy Code's more stringent "party in interest" standard. The court noted that although the policyholder likely intended to satisfy its funding commitment through insurance proceeds, its "obligation to contribute to the Trust is in no way dependent on [the policyholder] collecting any insurance proceeds." Instead, it noted, the policyholder was obligated to make payments regardless of its ability to access such proceeds. The plan, it held, had no effect on the policies, as it was not just "insurance neutral" but was "insurance silent." The court also noted that the insurer conceded "that no liability against it will arise upon confirmation of the Plan and that it will retain all defenses under its policies after confirmation." Thus, the court held, the insurer could not claim to have suffered an injury satisfying Article III standing, which requires an "injury in fact," nor could it demonstrate "party in interest" status under the Bankruptcy Code, which requires a "sufficient stake in the proceeding," meaning an "interest that is directly or adversely affected" by the proceeding.