Feb. 17 (Westlaw Journals) - Several insurance companies that were denied standing to challenge Thorpe Insulation Co.’s bankruptcy reorganization plan will have the right to have their objections heard by the bankruptcy judge, the 9th U.S. Circuit Court of Appeals has ruled.
In the Matter of Thorpe Insulation Co., Nos. 10-56543 and 10-56622, 2012 WL 178998 (9th Cir. Jan. 24, 2012).
Although it may be unfair to toss out the plan entirely, there are viable remedies for amending it if the insurers can show their claims have merit, the panel said in a written opinion.
Tanc Schiavoni of O'Melveny & Myers, who represents some of the insurers, said, “the 9th Circuit had come to a landmark decision both on insurer standing to be heard in bankruptcy proceedings and on what is called equitable mootness—the concept that a case is moot if it is too late to come to an equitable result for the moving party.”
He said it was the first decision to reach the issue in the 9th Circuit and would affect future bankruptcies, ensuring more just outcomes.
Gary Svirsky, also of O’Melveny & Myers, said the insurer standing holding ‘recognizes that insurers have a broad right to be heard in bankruptcies where their policies could potentially be impacted.’
The U.S. District Court for the Central District of California approved the bankruptcy judge’s creation of a trust to settle Thorpe’s asbestos-related debts in September 2010 under 11 U.S.C. § 524(g). That section of the Bankruptcy Code allows for “the reorganization of companies facing substantial asbestos-related liability,” the opinion says.
Thorpe’s financial difficulty stemmed from its distribution of asbestos-containing products between 1948 and 1972, which led to about 12,000 lawsuits filed against it claiming personal injury for asbestos exposure.
Several insurance companies, including Motor Vehicle Casualty Co. and Century Indemnity Co., which had general liability policies with Thorpe, did not reach a settlement with the company regarding the reorganization plan.
The court-approved plan allowed claimants to sue non-settling insurers directly under Thorpe’s insurance policies. The non-settling insurers objected to the District Court’s approval of the plan. U.S. District Judge Dale S. Fischer said they did not have standing to challenge the plan, which the judge described as “insurance-neutral.”
The insurers appealed to the 9th Circuit. The three-judge panel said that calling the plan insurance-neutral does not settle the issue.
The insurers have standing because the plan might increase their liability, the panel said.
The judges rejected Thorpe’s contention that the insurers’ appeal was moot because of the finality of the District Court’s confirmation of the plan.
“This is not a case where the appellants sat on their rights,” the panel said. They sought a stay, and even if it was rejected, failure to obtain a stay does not mean the parties did not exercise due diligence in trying to protect their rights, the panel explained.
"To say that a party's claims, although diligently pursued, are equitably moot because of the passage of time, before the party had a chance to present views on appeal, would alter the doctrine to be one of inequitable mootness," the appeals court said.
“There are several ways to get some relief without completely upsetting the plan,” the judges added.
They noted that the Bankruptcy Court could require the settling parties to pay more to the trust or it could allow the objecting insurers to present evidence and ask for changes to the trust distribution procedures.
“We expect there are many options open to the Bankruptcy Court other than complete plan reversal that can remedy some of the appellants’ claims if proved valid,” the panel said.
The panel reversed the District Court’s judgment and ordered remand to the Bankruptcy Court to allow the appellants to submit proof of their claims.
(Reporting by Kenneth Bradley, Esq., Westlaw Journal Asbestos)