ASBESTOS BANKRUPTCY BASICS ANDSELECTED RELATED INSURANCE ISSUES

Mealey’s Asbestos Bankruptcy Conference June 3, 2003

Mark D. PlevinCrowell & Moring LLPmplevin@crowell.com

www.crowell.com

I. OVERVIEW

A. Why are asbestos defendants filing for bankruptcy?

1. An increasing volume of claims is putting more and morepressure on companies

2. the cost of defending and settling claims has been going upsteadily as other defendants exit the asbestos wars via theirown bankruptcies

a. the bankruptcies of so-called “lead defendants” hasincreasingly led the plaintiff’s bar to focus on “lower-tier,” “peripheral” defendants

3. an asbestos defendant has little ability to handle the claimsagainst it on a coordinated basis

a. state courts do not have nationwide jurisdiction, butbankruptcy courts do

b. there is no “MDL” procedure for coordinating orconsolidating suits pending in different state courts

4. many asbestos defendants feel that state court judges arenot controlling the litigation, leading to too much moneybeing paid to uninjured claimants via “administrative”settlements or otherwise

5. efforts to engage in class settlements have twice beenrejected by the U.S. Supreme Court under Fed. R. Civ. P. 23(see Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999);Amchem Prods., Inc. v. Windsor, 521 U.S. 591 (1997)).

6. Despite express calls by the Supreme Court for “nationallegislation” to address the “elephantine mass of asbestos

cases” (e.g., Ortiz, 527 U.S. at 821), no such legislation hasbeen enacted

7. there appears to be no end in sight to asbestos claims –bankruptcy may be a way to achieve finality

B. for general background on the failure of the civil litigation systemadequately to address asbestos issues, see Ortiz; Amchem; Plevin,Schwartz & Kalish, “Don’t Bankrupt Asbestos,” Legal Times (March19, 2001), at 68; and Schwartz & Lorber, “A Letter to the Nation’sTrial Judges: How the Focus on Efficiency Is Hurting You andInnocent Victims in Asbestos Liability Cases,” 24 Am. J. TrialAdvoc. 247 (2000). For a broad overview of how bankruptcyaddresses some of these issues facing asbestos defendants, seePlevin & Kalish, “What’s Behind The Recent Wave of AsbestosBankruptcies?,” Mealey’s Litigation Report: Asbestos (April 20,2001) at 35-44 (available at www.crowell.com).

II. GENERAL BANKRUPTCY BACKGROUND

A. The bankruptcy process

1. Chapter 7 (11 U.S.C. § 701, et seq.): liquidation by atrustee. Almost never used in asbestos bankruptcies.

2. Chapter 11 (11 U.S.C. § 1101, et seq.): reorganization by a“debtor-in-possession” (officially, a different legal entity thanthe pre-petition debtor).

a. Ordinarily, pre-petition management remains incontrol of the company, although a trustee may beappointed for cause.

b. Chapter 11 gives the debtor an “exclusive” period of120 days (from the filing of the petition) in which to filea plan of reorganization; the debtor’s exclusive periodcan be extended by court order (and in complexcases such as asbestos bankruptcies usually is,sometimes multiple times).

c. A creditors committee (sometimes more than one, ifcreditors have conflicts) is appointed both to monitorthe debtor-in-possession and to represent creditors inplan negotiations

(1) In asbestos bankruptcies, in addition to thetypical committee of unsecured creditors therefrequently is also an “Asbestos Claimants’

Committee” composed of asbestos claimantsand/or their counsel.

(2) In some asbestos bankruptcies, there are twoseparate Asbestos Claimants Committees:one for “bodily injury” claimants, one for“property damage” claimants.

(3) creditors committees typically have broadrights to intervene in adversary proceedinglawsuits filed in the bankruptcy case. See,e.g., 11 U.S.C. § 1109(b); Phar-Mor, Inc. v.Coopers & Lybrand, 22 F.3d 1228, 1241 (3dCir. 1994); In re Marin Motor Oil, Inc., 689 F.2d445 (3d Cir. 1982).

(a) For example, in two adversaryproceedings in the Federal-Mogulasbestos bankruptcy – one involvinginsurance coverage rights, the other asuit by a non-debtor co-insured of thedebtor seeking an injunction againstcertain underlying asbestos claims –both the asbestos claimants’ committeeand the general unsecured creditorscommittee have been permitted tointervene.

(4) on occasion, creditors committees (or otherparties in interest) can seek court approval toprosecute claims of the estate that, for somereason, the debtor-in-possession or trustee isnot prosecuting. Any recovery belongs to theestate, not the prosecuting committee.

(a) See, e.g., In re Commodore Int’l Ltd.,262 F.3d 96 (2d Cir. 2001); In reTogether Dev. Co., 262 B.R. 586(Bankr. D. Mass. 2001) (creditorscommittee may bring certain avoidanceclaims against insiders of a debtor-in-possession who remained in control ofthe debtor); In re Toy King Dists., Inc.,256 B.R. 1 (Bankr. M.D. Fla. 2000)(allowing an unsecured creditorscommittee to stand in the debtor’s shoesto recover property for the estate); In re

Dur Jac Ltd., 254 B.R. 279 (Bankr. M.D.Ala. 2000) (permitting a single creditorto prosecute an avoidance action onbehalf of the debtor’s estate).

(b) a recent decision by the Third Circuitcalled into question the continuingvitality of the line of cases permittingcreditors committees and other partiesin interest to prosecute claims of theestate even with court approval. SeeOfficial Comm. of Unsecured Creditorsv. Chinery (In re Cybergenics), 304 F.3d316 (3d Cir. 2002), vacated pendingen banc review, 2002 U.S. App. LEXIS23786 (3d Cir. Nov. 18, 2002). Seealso Kirpalani, “The Importance ofBeing Plain: A Textual Response toCybergenics II,” 21 Am. Bankr. L.J. 9(Nov. 22, 2002) at p. 1 (analyzing andcriticizing the Third Circuit’s opinion); Inre Newcorn Enterprises, Ltd., 287 B.R.744 (Bankr. E.D. Mo. 2002) (holding thata creditors committee can be givenderivative standing to file an adversarycomplaint to marshal the assets of aChapter 11 estate). The en banc ThirdCircuit reversed the original panel rulingin a decision issued May 29, 2003.

d. Overall goal of a Chapter 11 case: agreement amongall constituencies (the debtor, unsecured creditors,equity holders, others) on a plan of reorganization thatpays a fair portion of the prepetition claims andpreserves the debtor’s going concern value.

B. Code § 301 (11 U.S.C. § 301), Voluntary Petition

1. company (now called the “debtor”) files a simple petition inthe appropriate U.S. bankruptcy court

a. what court is appropriate?

(1) Where the company is incorporated (this iswhy so many major Chapter 11 cases arevenued in Delaware)

(2) Where the company has its principal place ofbusiness

(3) Where an affiliate has a pending bankruptcycase (can be used by a debtor to shoehorn acase into an otherwise unavailable district thatis perceived to be favorable)

2. Once a petition is filed, the debtor’s financial obligations aredivided into two categories, “pre-petition” obligations and“post-petition” obligations

a. “claim” (§ 101(5)): pre-petition only

b. “administrative claim” (§§ 503, 507(1)): post-petitionobligations based on assisting the debtor during thebankruptcy process

3. due to the priorities established in the Code (§ 507):

a. administrative claims are typically paid in full (100cents on the dollar)

b. pre-petition unsecured claims typically are paid atsomething less than 100 cents on the dollar in cash,sometimes with additional consideration such as anote for additional payments over time and/orpreferred and/or common stock in the reorganizedcompany

c. equity holders: unless agreed to in a plan, equityholders typically do not receive anything if pre-petitionunsecured claims don’t receive a full 100 cents on thedollar; if they do get anything, typically it’s adiluted/reduced interest in common stock of thereorganized company

C. Code § 541 (11 U.S.C. § 541), Property of the Estate

1. the bankruptcy filing creates an “estate” comprised of all ofthe debtor’s legal and equitable interests in property

2. this provision enables the debtor to marshal its assets fordistribution to creditors pursuant to a plan of reorganization

3. a debtor’s insurance policies are generally deemed to bepart of the debtor’s estate.

a. See, e.g., Houston v. Edgeworth (In re Edgeworth),993 F.2d 51, 56 (5th Cir. 1993); MacArthur Co. v.Johns-Manville Corp. (In re Johns-Manville Corp.),837 F.2d 89, 91-94 (2d Cir.), cert. denied, 488 U.S.868 (1988); A.H. Robins v. Piccinin, 788 F.2d 994,1001 (4th Cir.), cert. denied, 479 U.S. 876 (1986);Homsy v. Floyd (In re Vitek, Inc.), 51 F.3d 530, 533(5th Cir. 1995).

b. Courts in mass tort bankruptcy cases recognize that adebtor’s insurance may be “the most important assetof the estate.” A.H. Robins, 788 F.2d at 1001, quotingIn re Johns-Manville Corp., 40 B.R. 219, 229(S.D.N.Y. 1984).

4. It is less certain, however, whether the proceeds of adebtor’s insurance are property of the estate. Where theproceeds of a policy are paid to others (e.g., proceeds of aliability policy are paid to third-party claimants, proceeds of alife insurance policy are paid to the debtor’s beneficiaries,etc.), some courts regard policy proceeds as not beingproperty of the estate.

a. See, e.g., 11 U.S.C. § 541(a)(6) (“property of theestate” defined to include, inter alia, “[p]roceeds . . . ofor from property of the estate”); In re Matter of Vitek,51 F.3d 530, 535 (5th Cir. 1995) (asserting that“almost all” courts confronting the issue have held thatproceeds of a debtor’s liability policies are property ofthe debtor’s estate); Ford Motor Credit Co. v. Stevens(In re Stevens), 130 F.3d 1027, 1030 (11th Cir. 1997)(determination of whether policy proceeds areproperty of the estate depends on “the nature andtype of the insurance policy involved and itsrelationship to the bankruptcy estate”); LouisianaWorld Exposition, Inc. v. Federal Ins. Co. (In reLouisiana World Exposition, Inc.), 832 F.2d 1391,1399 (5th Cir. 1987) (proceeds are not property of theestate where the debtor is not entitled to receive theproceeds and payment of the proceeds to a thirdparty would not adversely affect the debtor’s estate).1

1 See also Lindsey v. O’Brien (in re Dow Corning Corp.), 86 F.3d 482, 495 (6thCir. 1996); Feld v. Zale Corp. (In re Zale Corp.), 62 F.3d 746, 758 n.33 (5th Cir. 1995);

(continued…)

(1) Recent cases discussing this issue include:

(a) Adelphia Comms. Corp. v. AssociatedElec. & Gas Ins. Servs., Ltd. (In reAdelphia Comms. Corp.), 285 B.R. 580(Bankr. S.D.N.Y. 2002) (proceeds ofD&O policies deemed property of theestate where the policies reimburse theestate itself in certain circumstancesand where the continued availability ofthe coverage was essential to thedebtor’s ability to reorganize; citingcases on both sides of the issue).

(b) Equinox Oil Co. v. Anthill Constr. Co.(In re Equinox Oil Co.), 2001 WL649806 (E.D. La. June 11, 2001)(proceeds of an indemnity policy, underwhich the debtor is to be reimbursed forlosses owed to third parties, areproperty of the estate under Code §§ 541(a)(1) and (6)).

(c) Landry v. Exxon Pipeline Co., 260 B.R.769 (Bankr. M.D. La. 2001) (concluding,after an extended discussion andcitation of many cases on both sides ofthe issue, that proceeds of liabilityinsurance payable to non-debtors arenot property of the debtor’s estate).

(d) In re Scott Wetzel Services, Inc., 243B.R. 802 (Bankr. M.D. Fla. 1999)(concluding that proceeds of liabilityinsurance policies are not property ofthe estate because the debtor has noright to keep the funds, and that the

(…continued)

Nat’l Union Fire Ins. Co. of Pittsburgh, PA. v. Titan (In re Titan Energy Corp.), 837 F.2d325, 328-29 (8th Cir. 1988); Minoco Group of Cos. v. First State Underwriters Agency ofNew England Reins. Corp. (In re Minoco Group of Cos.), 799 F.2d 517, 519 (9th Cir.1986); Tringali v. Hathaway Machine Co., 796 F.2d 553, 560 (1st Cir. 1986); Robins,788 F.2d at 1001; In re Sfuzzi, 191 B.R. 664 (Bankr. N.D. Tex. 1996); In re Johns-Manville Corp., 33 B.R. at 260.

policy proceeds therefore are notprotected by the automatic stay).

(2) Scott Wetzel gives as examples of insuranceproceeds that are property of the estate thefollowing: “casualty, fire, or theft insuranceproceeds . . . because the debtor directlyreceives the proceeds as merely a change inform of estate property.” 243 B.R. at 804-05,citing In re Asay, 184 B.R. 265 (Bankr. N.D.Texas 1995).

b. In mass tort cases (and other cases where thedebtor’s likely liabilities exceed the availableinsurance coverage), courts are uniform in treatingpolicy proceeds as property of the estate, earmarkedfor holders of claims covered by the policies. This isbecause of the strong bankruptcy policy in favor ofequal treatment of similarly situated claimants.

(1) See MacArthur Co. v. Johns-Manville Corp. (Inre Johns-Manville Corp.), 837 F.2d 89 (2d Cir.),cert. denied, 488 U.S. 868 (1988); Tringali v.Hathaway Machine Co., 796 F.2d 553 (1st Cir.1986); A.H. Robins v. Piccinin, 788 F.2d 994,1001 (4th Cir. 1996), cert. denied, 479 U.S.876 (1986); In re Davis, 730 F.2d 176 (5th Cir.1984).

c. As indicated below, determination of this issue can becomplicated where, for example, a policy contains anaggregate limit for products claims and parties otherthan the debtor – e.g., current or former parents orsubsidiaries, joint venture partners, etc. – potentiallyhave rights to the coverage.

D. Code § 362 (11 U.S.C. § 362), Automatic Stay

1. The automatic stay bars all actions to obtain property of theestate (subject to statutorily-enumerated exceptions for, e.g.,actions taken by government pursuant to its police power)

2. The automatic stay is very broad in scope. It stops alllitigation against the debtor and against property of thedebtor; its purpose is to provide “breathing room” for thedebtor to figure out what to do in the bankruptcy case and tonegotiate a plan with creditors and other constituencies

a. Coverage suits filed by insurers pre-petition arestayed, and they may not be initiated by insurers post-petition (see, e.g., Minoco Group of Cos. v. First StateUnderwriters Agency (In re Minoco Group of Cos.),799 F.2d 517, 519 (9th Cir. 1986)).

b. Ordinarily, the automatic stay applies only to thedebtor and property of its bankruptcy estate, and doesnot protect nondebtors or their property. Lynch v.Johns-Manville Corp., 710 F.2d 1194 (6th Cir. 1983);McCartney v. Integra Nat’l Bank North, 106 F.3d 506,509-10 (3d Cir. 1996).

(1) in instances where a solvent co-defendant hasclaimed entitlement to indemnity under thedebtor’s insurance policies, courts havesometimes stayed actions against the solventco-defendant because a judgment against thesolvent co-defendants would, in effect, be ajudgment against the debtor or its property.See, e.g., A.H. Robins Co. v. Piccinin, 788F.2d 994, 999 (4th Cir.), cert. denied, 479 U.S.876 (1986); American Imaging Services, Inc. v.Eagle-Picher Indus., Inc. (In re Eagle-PicherIndus., Inc.), 963 F.2d 855 (6th Cir. 1992);Adelphia Comms. Corp. v. Associated Elec. &Gas Ins. Servs., Ltd. (In re Adelphia Comms.Corp.), 285 B.R. 580 (Bankr. S.D.N.Y. 2002).See also Executive Risk Indem. Inc. v. BostonRegional Med. Ctr., Inc. (In re Boston RegionalMed. Ctr.), 285 B.R. 87, 95-96 (Bankr. D.Mass. 2002) (post-confirmation, so courtanalyzed propriety of an injunction rather thanapplicability of the stay).

c. However, direct action suits against a debtor’sinsurers are also stayed, because such suits affectproperty of the estate. See, e.g., In re Davis, 730F.2d 176, 184 & n.25 (5th Cir. 1984); In re Int’lHeritage, Inc., 239 B.R. 306, 311 (Bankr. E.D.N.C.1999); Tringali v. Hathaway Machine Co., 796 F.2d553, 560 (1st Cir. 1986); A.H. Robins v. Piccinin, 788F.2d 994, 1001-02 (4th Cir.), cert. denied, 479 U.S.876 (1986); Oberg v. Aetna Cas. & Sur. Co. (In reA.H. Robins Co.), 828 F.2d 1023, 1026 (4th Cir.1987), cert. denied, 485 U.S. 969 (1988); Johns-Manville Corp. v. Asbestos Litig. Group (In re Johns-

Manville Corp.), 40 B.R. 219, 229-31 (S.D.N.Y. 1984).See also cases cited in MacArthur Co. v. Johns-Manville Corp. (In re Johns-Manville Corp.), 837 F.2d89, 92-93 (2d Cir.), cert. denied, 488 U.S. 868 (1988);Johns-Manville Corp. v. Colorado Ins. Guar. Ass’n, 91B.R. 225 (Bankr. S.D.N.Y. 1988).

(1) But see In re Scott Wetzel Services, Inc., 243B.R. 802, 805 (Bankr. M.D. Fla. 1999)(proceeds of liability insurance policies that arenot property of the estate are not protected bythe automatic stay); Landry v. Exxon PipelineCo., 260 B.R. 769 (Bankr. M.D. La. 2001)(automatic stay applies to suits against thedebtor’s insurers in states where direct actionsagainst an insurers are not permitted, but thestay does not apply where states (e.g.,Louisiana) permit suit directly against apolicyholder’s insurers without the necessity ofsuing the policyholder first or at all).

d. Where the debtor has a “shared interest” in a policy(i.e., is a co-insured or additional insured), claimsagainst the policy by other insureds should also bestayed.

(1) See, e.g., In re Dow Corning Corp., 86 F.3d482, 495 (6th Cir. 1996) (debtor’s interest inliability policies under which it was a co-insuredwith two non-debtors “is property of theestate”); In re Vitek, 51 F.3d 530 (5th Cir.1995) (affirming approval of settlement, overobjection of non-debtor co-insured, underwhich Chapter 7 trustee utilized all remainingpolicy proceeds to settle claims against debtorand the non-debtor was enjoined from makingclaims against the coverage); Ford MotorCredit Corp. v. Feher (In re Feher), 202 B.R.966, 970 (Bankr. S.D. Ill. 1996) (“in view of thefact that [the debtor] has a shared interest inany proceeds paid under the policy, theproceeds constitute property of [the debtor’s]bankruptcy estate”).

(2) this issue – the respective rights of the debtorand an unaffiliated non-debtor in allegedlyshared insurance policies – is at the heart of

adversary proceedings currently pending inboth the Federal-Mogul (Bankr. D. Del.) andHarbison-Walker (Bankr. W.D. Pa.) asbestosbankruptcies. Generally speaking, in thesecases the policyholders are seeking judicialdeclarations as to the rights, if any, of theunaffiliated non-debtor to access coverageunder the “shared” policies during thependency of the debtor’s bankruptcy case.

3. The automatic stay has the effect of stopping all paymentsfor defense and indemnity under the policies, thus stemmingthe outflow of funds for these purposes during thebankruptcy case

4. although not “automatic,” the stay can be extended by thecourt, on motion by the debtor, to related parties underBankruptcy Code § 105

a. typically, this is done to protect non-debtors such assubsidiaries, officers, directors, or indemnitees fromsuit; can also be used, in appropriate circumstances,to protect the debtor. For example:

(1) in Babcock & Wilcox (Bankr. E.D. La.), thedebtor obtained an injunction barring suitsagainst its parent company, McDermottInternational;

(2) in G-I Holdings (Bankr. D.N.J.), the debtorobtained an injunction barring suits against itsprincipal non-debtor subsidiary, BMCA;

(3) in Pittsburgh Corning (Bankr. W.D. Pa.), thedebtor obtained an injunction barringprosecution of suits against PPG Industries orCorning Inc.;

(4) in W.R. Grace (Bankr. D. Del.), the debtorobtained a preliminary injunction barring suitsagainst Sealed Air Corporation and FreseniusAG, companies which years earlier hadpurchased certain Grace businesses andwhich, under the terms of their purchaseagreements, were entitled to fullindemnification from Grace for any asbestos-related claims;

(5) in Harbison-Walker (Bankr. W.D. Pa.), the debtorobtained a preliminary injunction barring suits againstan unaffiliated non-debtor that claimed it was entitledto coverage under some of the debtor’s policies; and

(6) in Kaiser Aluminum (Bankr. D. Del.), the debtorobtained a preliminary injunction barring suits againstcertain of its non-debtor subsidiaries, and laterobtained an injunction barring direct action suitsagainst its “executive officers” and insurers.

b. Unaffiliated co-defendants of asbestos debtors whodo not enjoy the protection of the automatic stay havesometimes attempted, mostly unsuccessfully, to havethe underlying litigation against them transferred tothe bankruptcy court.

(1) In re Federal-Mogul Global, Inc., 300 F.3d 368(3d Cir. 2002), cert. denied sub nom.DaimlerChrysler Corp. v. Official Comm. ofAsbestos Claimants, 123 S. Ct. 884 (2003):affirming district court’s order denying motionto transfer to bankruptcy court tens ofthousands of asbestos-related tort claims andremanding them to the state courts where theywere originally filed.

(2) Arnold v. Garlock, Inc., 278 F.3d 426 (5th Cir.2002): refusing to order transfer of thousandsof asbestos-related tort claims to bankruptcycourt and remanding them to the state courtswhere they were originally filed.

(3) In re North American Refractories, Co., 380B.R. 356 (Bankr. W.D. Pa. 2002): denyingtransfer to unaffiliated non-debtor co-defendants in underlying asbestos litigation.

(4) In re Asbestos Litig., 271 B.R. 118 (S.D. W.Va. 2001): remanding to state court underlyingasbestos-related suits removed by non-debtors(the “Big Three” automakers) due to the cases’alleged relatedness to the Federal-Mogulbankruptcy).

c. See generally Celotex Corp. v. Edwards, 514 U.S.300, 307-12 (1995); McCartney v. Integra Nat’l Bank

North, 106 F.3d 506, 510 (3d Cir. 1996); AmericanImaging Servs., Inc. v. Eagle-Picher Indus., Inc. (In reEagle-Picher Indus., Inc.), 963 F.2d 855, 860 (6th Cir.1992); MacArthur v. Johns-Manville Corp., 837 F.2d89, 92 (2d Cir. 1988); A.H. Robins Co. v. Piccinin, 788F.2d 994, 1002-03, 1008 (4th Cir.), cert. denied, 479U.S. 876 (1986); In re Davis, 730 F.2d 176, 184-85(5th Cir. 1984); Republic Technologies Int’l, LLC v.Maley (In re Republic Technologies Int’l, LLC), 283B.R. 483 (Bankr. N.D. Ohio 2002) (apparentlyextending stay to protect Chapter 11 debtor’s formermanagers); American Film Techs., Inc. v. Taritero (Inre American Film Techs., Inc.), 175 B.R. 847, 855(Bankr. D. Del. 1994); Eastern Air Lines, Inc. v.Rolleston (In re Ionosphere Clubs, Inc.), 111 B.R.423, 434-35 (Bankr. S.D.N.Y. 1990).

5. The stay does not stop litigation by the debtor, only litigationagainst the debtor or the debtor’s property. Thus, acoverage suit filed by the debtor pre-petition is not stayed bythe bankruptcy filing and may continue. See, e.g., CovantaOnondaga Ltd. v. Onondoga Cty. Resource RecoveryAgency, 283 B.R. 651, 655-56 (N.D.N.Y. 2002).

a. As discussed below, a variety of mechanisms exist topermit the debtor to attempt to centralize all of itslitigation in the bankruptcy court where its Chapter 11case is pending.

6. While the stay is “automatic,” meaning it goes into effectautomatically upon the filing of a bankruptcy petition, withoutthe necessity of any court order, it is not permanent; thebankruptcy court can terminate the stay, or modify its scope,upon motion of a party in interest in the bankruptcy case(see 11 U.S.C. § 362(d)).

a. Outside the mass-tort context, where there isinsurance for a particular claim, bankruptcy courtsfrequently grant relief from the automatic stay topermit suits against the debtor to be filed orcontinued. In such circumstances, the lift-stay ordertypically restricts any recovery to available insurance.In effect, the debtor is only a nominal party to the suit;the real purpose of the suit is to establish the debtor’sliability in order to obtain insurance proceeds.

(1) See, e.g., Fleck v. KDI Sylvan Pools, Inc., 981F.2d 107, 121-22 (3d Cir. 1992); In reFernstrom Storage & Van Co., 938 F.2d 731,735 (7th Cir. 1991) (“debtor-defendants sufferlittle prejudice when sued by plaintiffs whoseek nothing more than a declaration of liabilitythat can serve as a predicate for recoveryagainst insurers, sureties, or plaintiffs”); Landryv. Exxon Pipeline Co., 260 B.R. 769 (Bankr.M.D. La. 2001) (discussed above); In reRobertson, 244 B.R. 880, 882-83 (Bankr. N.D.Ga. 2000) (citing numerous cases).

(2) Some courts have noted that where the debtorhas retained risk, such as through a deductibleor self-insured retention, this factor militatesagainst lifting the stay. See, e.g., In re SecurityServices, Inc., 203 B.R. 708, 710-12 (W.D.Mich. 1996) (discussing discharge injunctionunder Code § 524); In re Apex Oil Co., 884F.2d 343 (8th Cir. 1989).

b. However, bankruptcy courts typically refuse to lift thestay where the claims against the insured exceed allavailable coverage. Again, the policy of treatingsimilarly-situated claimants similarly takesprecedence.

(1) See, e.g., Tringali v. Hathaway Machine Co.,796 F.2d 553 (1st Cir. 1986); A.H. Robins v.Piccinin, 788 F.2d 994 (4th Cir. 1996), cert.denied, 479 U.S. 876 (1986).

E. Code § 1121 (11 U.S.C. § 1121), Plan of Reorganization

1. A plan of reorganization is, in essence, a court-approvedcontract between the debtor and its creditors and equityholders about how the debtor’s pre-petition obligationsshould be altered so that the debtor may continue as a goingconcern.

2. A plan can only be confirmed by the bankruptcy court if itmeets the requirements of 11 U.S.C. § 1129.

3. A plan may be largely or entirely negotiated before abankruptcy is filed (a “pre-packaged” bankruptcy, or“prepack”).

a. in the “traditional” Chapter 11 bankruptcy case, thedebtor files its petition, commences negotiations withcreditors, equity holders, and other parties in interest,files a plan of reorganization and disclosurestatement, obtains court approval of the disclosurestatement, solicits votes in favor of the plan, andproceeds to a hearing on confirmation of the plan.

(1) this can be a drawn-out and thereforeexceedingly expensive process; many“traditional” Chapter 11 asbestos bankruptcieshave been on file for years.

b. in “pre-packaged” bankruptcy cases, by contrast, thedebtor conducts many of these activities before filingits petition. Thus, prior to commencing its bankruptcycase, the debtor will: negotiate a plan with key partiesin interest; circulate a plan and disclosure statementto impaired creditors and solicit and obtain therequisite votes in favor of the plan; then, once thedebtor has obtained enough votes to confirm the plan,the debtor will file its petition. The court will hold acombined hearing on approval of the disclosurestatement and confirmation of the plan.

(1) the debtor’s goal is to move the case throughthe bankruptcy court as quickly and asinexpensively as possible.

(2) in J T Thorpe (Bankr. S.D. Tex.), for example,the confirmation hearing was completed just 82days after the petition was filed.2

(3) in Combustion Engineering (Bankr. D. Del.),the confirmation hearing commenced just nineweeks after the petition was filed.

c. a variation on both “traditional” and “pre-packaged”bankruptcies is the so-called “pre-arranged”bankruptcy, in which some of the steps of a “pre-packaged” bankruptcy (principally, the negotiation of a

2 The order confirming Thorpe’s plan has been stayed pending appeal, however,by the Fifth Circuit; oral argument in the Fifth Circuit took place on May 6, 2003. Theappeal and stay have added at least six months to the debtor’s anticipated schedule.

plan) takes place pre-petition, but other steps (e.g.,circulation of a disclosure statement and balloting)take place post-petition.

(1) Asbestos Claims Mgt. Corp. (Bankr. N.D. Tex.)is an example of this kind of bankruptcy.

d. in the asbestos bankruptcy context, approval of aprepack is dependent on pre-petition compliance withthe rules for asbestos bankruptcies and channelinginjunctions in Code Section 524(g) (discussed below),including the involvement in plan negotiations of arepresentative of future claimants.

F. Code § 524(g) (11 U.S.C. § 524(g)), Asbestos Trusts

1. The goal of this section, enacted in the wake of the Johns-Manville Chapter 11 case, is to establish a pot of assetsconsisting of, inter alia, cash, securities, a stream of futurepayments, insurance proceeds, etc., that is held in trust topay the claims of those who are presently injured or impairedby asbestos as well as those who were exposed to asbestospre-petition but whose injuries have not manifested by thetime of plan confirmation. In exchange for providing thisconsideration, the debtor and – in some cases – its affiliates,insurers, and possibly others are entitled to receive a broadinjunction against all future asbestos claims against them.The injunction “channels” all present and future asbestosclaims to the trust assets for payment.

a. The trust pays claimants whose injuries manifestedpre-petition

b. The trust also pays persons who were exposed toasbestos pre-petition but whose injuries do notmanifest until after the plan is confirmed

(1) courts are not in agreement concerningwhether such “future claims” are “claims” underthe Bankruptcy Code

(a) Expansive view of future claims: UnitedStates v. LTV Corp. (In re ChateaugayCorp.), 944 F.2d 997 (2d Cir. 1991); Inre Piper Aircraft Corp., 162 B.R. 619(Bankr. S.D. Fla.), aff’d, 168 B.R. 434(S.D. Fla. 1994), aff’d sub nom. Epsteinv. Official Comm. Of Unsecured

Creditors (In re Piper Aircraft Corp.), 58F.3d 1573 (11th Cir. 1995); In reWaterman S.S. Corp. v. Aguair, 141B.R. 552, 556 (Bankr. S.D.N.Y. 1992).

(b) Limited view of future claims: In re M.Frenville Co., 744 F.2d 332 (3d Cir.1984); Schweitzer v. Consolidated RailCorp., 758 F.2d 936 (3d Cir. 1985)(debtor’s former employees who had notyet developed injuries from theirexposure to asbestos did not holdclaims); In re Eagle-Picher Indus., 144B.R. 69, 71-72 (Bankr. S.D. Ohio 1992)(individuals exposed to asbestos, lead,and silica pre-petition but who had notmanifested injuries did not have“claims).

(2) The asbestos trust provision of the Codetherefore refers to future “demands,” ratherthan future “claims,” and defines “demand” as“a demand for payment, present or future, that. . . was not a claim during the proceedingsleading to the confirmation of a plan ofreorganization” (11 U.S.C. § 524(g)(5)(A)).

c. A channeling injunction may not issue unless thebankruptcy court appoints a future claimsrepresentative, who has standing to participate in thecase and in plan negotiations on behalf of (as-yetunidentified) persons who were exposed to asbestospre-petition but who have not manifested any injuries(11 U.S.C. § 524(g)(4)(B)(i)).

(1) The “futures representative” has no right tovote on the plan

(a) It has been asserted, however (such asby the futures representative in Babcock& Wilcox) that no “channeling injunction”may be entered without the consent ofthe futures representative (citing 11U.S.C. §§ 524(g)(4)(B) and 524(h)).

(2) A plan may provide for “future demands”through an asbestos trust and channeling

injunction only if the actual amounts, numbers,and timing of such demands cannot bedetermined. 11 U.S.C. § 524(g)(2)(B)(ii)(II).

2. The trust and related channeling injunction must beestablished via a confirmed plan of reorganization; once thetrust is established and funded pursuant to the plan (by thedebtor and possibly others), the trust pays all asbestos-related claims against the debtor

a. frequently, the debtor contributes to the trust theproceeds of its insurance policies (such as proceedsobtained via settlements achieved while the Chapter11 case has been pending) or, where the insurancehas not been liquidated or is subject to coveragedisputes, its rights under the policies

(1) for example, the debtor’s original plan in theBabcock & Wilcox bankruptcy proposes tocontribute to the trust insurance rights worth,according to the debtor, $1.15 billion.

(2) In In re Fuller-Austin Insulation, 1998 U.S. Dist.LEXIS 18340 (D. Del. 1998), the debtor’s planprovided that the trust formed under the planwould continue prosecution of coveragelitigation pending in California.

b. Parents and/or subsidiaries of the debtor maycontribute cash or other assets to the trust

3. Typically, plans that establish asbestos trusts also providefor issuance of a “channeling injunction” that enjoins allpersons asserting asbestos claims (including all “futuredemands” relating to asbestos) from asserting such claimsagainst the reorganized company or the assets of thereorganized company; under the terms of such injunctions,“future demands” may be asserted only against the trustestablished by, and funded under, the debtor’s confirmedplan of reorganization

a. all asbestos-related claims are said to be “channeled”to the trust by way of the injunction, entered as part ofits order confirming the plan

(1) to be valid, the channeling injunction must be“issued or affirmed” by a district judge rather

than a bankruptcy judge (11 U.S.C.§ 524(g)(3)(A).

b. parties contributing to the trust (e.g., insurers throughsettlements) frequently bargain to be included withinthe scope of the channeling injunction, thereby cuttingoff all future asbestos claims against them. (See 11U.S.C. § 524(g)(4)(A)(ii)(III) and discussion below.)

(1) Recently, a number of unaffiliated non-debtorasbestos defendants (i.e., Honeywell in theNARCO bankruptcy, Bendix in the Federal-Mogul bankruptcy) have either negotiated tocome within the protection of the channelinginjunction or have announced their intentions toso try. These attempts have been opposed byasbestos claimants, who generally argue that ifthese companies want the protections of achanneling injunction, they should file their ownChapter 11 cases.

4. The asbestos claimants with present injuries must beseparately classified for voting and payment purposes andmust approve the plan by a supermajority 75% vote (see 11U.S.C. § 542(g)(2)(B)(ii)(IV)(bb)).

a. Although they have no right to vote, the interests of“future claimants” nevertheless must be protected orelse a plan containing an asbestos trust cannot beconfirmed.

(1) See, e.g., 11 U.S.C. § 524(g)(B)(ii)(V) (theremust be “a reasonable assurance that the trustwill value, and be in a financial position to pay,present claims and future demands that involvesimilar claims in substantially the samemanner); 11 U.S.C. § 524(g)(4)(B)(ii) (a plancannot be confirmed unless it is deemed to be“fair and equitable with respect to persons thatmight subsequently assert such [future]demands”).

5. The plan may be modified if financing for the trust provesinsufficient (see, e.g. Findley v. Falise (In re Joint Eastern &Southern Dist. Asbestos Litigation), 878 F. Supp. 473, 570-71 (E. & S.D.N.Y. 1995).

6. Cases discussing Section 524(g) include:

a. In re Babcock & Wilcox Co., 2000 U.S. Dist. LEXIS5626 (E.D. La. 2000) (debtor asked for withdrawal ofthe reference of asbestos claims, so that the claimswould be considered in district court rather than inbankruptcy court, to facilitate negotiation of a planhaving a trust and channeling injunction pursuant to §524(g)).

b. In re National Gypsum Co., 257 B.R. 184, 203 (Bankr.N.D. Tex. 2000) (court would not be drawn intonegotiations among the parties seeking to formulate aplan with a global settlement under § 524(g)).

c. In re Fuller-Austin Insulation, 1998 U.S. Dist. LEXIS18340 (D. Del. 1998) (insurers being sued incoverage action in California Superior Court weredenied standing to object to a plan proposed by thedebtor under § 524(g)).

d. In re Celotex Corp., 204 B.R. 586 (M.D. Fla. 1996)(plan confirmed by court using authority under §§524(g) and 105).

e. In re Eagle-Picher Indus., 203 B.R. 256 (Bankr. S.D.Ohio) (injunction under § 524(g) held applicable onlyin cases involving corporations that had already beensued for asbestos-based torts before the bankruptcypetition), aff’d , 1996 U.S. Dist. LEXIS 17160 (S.D.Ohio 1996).

f. Walter v. Celotex Corp. (In re Hillsborough HoldingsCorp.), 197 B.R. 372 (Bankr. M.D. Fla. 1996) (courtapplied § 524(g) to enjoin attempts to attack anagreement against veil-piercing that was necessaryfor Hillsborough to confirm its own plan distinct fromthat of Celotex).

g. In re Hillsborough Holdings Corp., 197 B.R. 366(Bankr. M.D. Fla. 1996) (court approved separateplan for Hillsborough based on § 524(g)).

h. In re Eagle-Picher Indus., 189 B.R. 681 (Bankr. S.D.Ohio) (court estimated future claims against theasbestos trust).

i. See also In re National Gypsum Co., 257 B.R. 184(Bankr. N.D. Tex. 2000) (considering motion toestablish alternate claims facility to replace anasbestos trust created before the enactment of§ 524(g)).

G. Code § 502 (Proofs of Claim, Estimation)

1. Estimation

a. under Section 502(c) of the Bankruptcy Code, “aclaim that is ‘contingent or unliquidated’ shall be‘estimated’ [for purposes of allowance] if the ‘fixing orliquidation [of the claim] would unduly delay theclosing of the case.’”

b. some asbestos debtors have asked courts to orderestimation of all asbestos bodily-injury claims prior toplan confirmation.

(1) their apparent goal in doing so is to presenttheir defenses to the claims in bulk, establishthe claims’ lack of merit, and therefore reducethe amount of cash or stock to be paid to theclass of asbestos claimants as a whole.

(2) Asbestos Claimants Committees havegenerally resisted such requests on thegrounds, inter alia, that estimation proceedingswould delay the case and impair the dueprocess rights of payments.

2. Proofs of Claim

a. in order for a claimant to establish a right to paymentfrom a debtor, it generally must file a “proof of claim”on or before the “bar date” established by the court asthe last day for filing proofs of claim.

(1) a claimant whose claim is listed accurately inthe debtor’s schedules need not file a proof ofclaim. However, many creditor lawyerscounsel filing a proof of claim in all events.

b. Many asbestos bankruptcy plans do not requireasbestos claimants to file proofs of claim during thebankruptcy case. Instead, the claimants are onlyrequired to file their claims with the trust established

after confirmation of the plan for the purpose ofpaying such claims.

c. The Bankruptcy Code does not expressly authorizethe filing of proofs of claim on a class basis. Earlydecisions refused to recognize class proofs of claim.See, e.g., In re Baldwin-United Corp., 52 B.R. 146(Bankr. S.D. Ohio 1985); In re Standard Metals Corp.,817 F.2d 625, 631-32 (10th Cir. 1987); In reAllegheny Int’l, Inc., 94 B.R. 877 (Bankr. W.D. Pa.1988). See also In re FIRSTPLUS Fin., Inc., 248 B.R.60, 67-73 (Bankr. N.D. Tex. 2000) (following what thecourt acknowledged to now be the minority ruleprohibiting class proofs of claim).

(1) more recent decisions, however, mostlyrecognize and authorize the filing of classproofs of claim. See, e.g., In re BirtingFisheries, Inc., 92 F.3d 939 (9th Cir. 1996);Reid v. White Motor Corp., 886 F.2d 1462 (6thCir. 1989); In re Charter Co., 876 F.2d 866(11th Cir. 1989); In re American ReserveCorp., 840 F.2d 487, 493 (7th Cir. 1988); In reUnited Cos. Fin. Corp., 276 B.R. 368 (Bankr.D. Del. 2002); In re First Interregional EquityCorp., 227 B.R. 358, 366 (Bankr. D.N.J. 1998);In re Woodward & Lothrop Holdings, Inc., 205B.R. 365, 370 (Bankr. S.D.N.Y. 1997).

III. INSURANCE ISSUES ARISING IN ASBESTOS BANKRUPTCIES

A. There are generally five types of important insurance-related issuesthat may arise during an asbestos bankruptcy:

1. Coverage litigation may continue or, if not filed pre-petition,may be filed by the debtor post-petition. In addition to theusual array of issues that arise, there may be bankruptcy-specific issues.

2. Issues concerning an insurer’s rights to participate in thebankruptcy case as a “party in interest,” including the right toobject to plan provisions.

3. Issues concerning settlement of coverage disputes.

4. Issues concerning the debtor’s obligation to pay policyproceeds during the bankruptcy process, and possiblebenefits to an insurer of doing so.

5. Issues concerning “pre-pack” bankruptcies (disclosure in,and confirmation of, such plans).

B. Coverage Litigation Issues

1. Forum and Venue

a. As mentioned above, the automatic stay stopslitigation against the debtor and its estate, but doesnot prohibit the debtor from continuing or filing acoverage action in which it is the plaintiff.

(1) insurers who filed coverage suits pre-petition,or who wish to file such suits post-petition, mayseek relief from the automatic stay in order toproceed with such suits.

b. An immediate issue that arises is: where willcoverage disputes be litigated?

(1) Bankruptcy jurisdiction is very broad. 28U.S.C. § 1334(b) gives federal courtsjurisdiction over all civil proceedings “arisingunder” the Bankruptcy Code, or “arising in” or“related to” bankruptcy cases.

(a) District courts are authorized to referproceedings to bankruptcy courts foradjudication. Referral occursautomatically in every district court, butthe reference may be withdrawn inindividual cases (see 11 U.S.C.§ 157(d)).

(2) In particular, the grant of “related to” jurisdictionis very broad. A leading case defines it toinclude any proceeding that “could conceivablyhave any effect on the estate beingadministered in bankruptcy.” Pacor, Inc. v.Higgins, 743 F.2d 984, 994 (3d Cir. 1984).See also In re Xonics, Inc., 813 F.2d 127, 131(7th Cir. 1987).

(a) Bankruptcy courts have “related to”jurisdiction over disputes betweendebtor-policyholders and their insurers.See In re United States Brass Corp.,110 F.3d 1261 (7th Cir. 1997).

(b) Bankruptcy courts have been held tohave jurisdiction over nondebtor claimsagainst a debtor’s co-insureds, as longas the outcome of the proceedingsmight deplete the coverage available forthe debtor. See In re Dow CorningCorp., 86 F.3d 482 (6th Cir. 1996), cert.denied, 117 S.Ct. 718 (1997); A.H.Robins v. Piccinin, 788 F.2d 994 (4thCir.), cert. denied, 479 U.S. 876 (1986).

(c) Bankruptcy courts have been held tohave jurisdiction over nondebtor claimsagainst a debtor’s co-defendants, whohave potential claims against the debtorfor indemnification and contribution.See Dow Corning, supra; A.H. Robins,supra.

i) But see In re Zale Corp., 62 F.3d 746(5th Cir. 1995) (bankruptcy court lackedjurisdiction over claims of nondebtorsagainst debtor’s insurers for bad faithsettlement with debtor-policyholder,because outcome of bad faith claimswould not affect debtor’s rights underthe policies; debtor’s agreement undersettlement to indemnify the insureragainst bad faith claims could not createjurisdiction).

c. The grant of bankruptcy jurisdiction, while broad, isnot exclusive. Other state and federal courts withconcurrent jurisdiction over proceedings falling withinbankruptcy jurisdiction may hear those proceedingstoo. See, e.g., In re United States Brass Corp., 110F.3d 1261, 1268 (7th Cir. 1997).

d. In fact, the Bankruptcy Code and related jurisdictionalprovisions provide a number of mechanisms to permiteither side (the debtor-policyholder or the insurers) toforce the litigation into bankruptcy court, but there area number of available strategies to maintain (orreturn) such litigation to state court.

(1) Suits in other federal courts can be transferredto the court where the bankruptcy case is

pending by motion under the general federaltransfer statute, 28 U.S.C. § 1404, or itsbankruptcy-specific analog, 28 U.S.C. § 1411.

(2) Suits pending in state court can be removed tofederal court, even if there is no diversity andno federal question and even though the usualtime for removal has passed: variousprovisions in the federal judicial code (i) extendfederal jurisdiction to non-diversity, non-federalquestion matters relating to the bankruptcycase and (ii) authorize removal within 90 daysof the bankruptcy filing.

(a) 28 U.S.C. § 1334 extends federaljurisdiction to non-diversity, non-federalquestion matters “related to” thebankruptcy case.

(b) 28 U.S.C. § 1452 permits removal ofany action that is within federaljurisdiction under 28 U.S.C. § 1334.Bankruptcy Rule 9027(a)(2) generallypermits petitions to remove already-pending actions to be filed within 90days of the filing of the bankruptcypetition. Fed. R. Bankr. P.9027(a)(2)(A). But see Fed. R. Bankr.P. 9027(a)(2)(B) and (C) (setting othertime periods in certain instances). Onmotion, these time periods can beextended. Fed. R. Bankr. P. 9006(b)(1);Jandous Elec. Constr. Corp. v. City ofNew York (In re Jandous Elec. Constr.Corp.), 106 B.R. 48 (Bankr. S.D.N.Y.1989); In re St. Joseph’s Hospital, 103B.R. 643 (Bankr. E.D. Pa. 1989).

(c) unlike the general federal removalstatute, 28 U.S.C. § 1441, it is generallyaccepted that any single party canremove a case under 28 U.S.C. § 1452,even if other parties do not consent tothe removal. See, e.g., Creasy v.Coleman Furniture Corp., 763 F.2d 656,600 (4th Cir. 1985); Sommers v.Abshire, 186 B.R. 407, 409 (E.D. Tex.

1995); In re Eagle Bend Dev., 61 B.R.451, 457 (Bankr. W.D. La. 1986). Butsee Ross v. Thousand Adventures ofIowa, Inc., 178 F.Supp.2d 996, 1002(S.D. Iowa 2001) (rejecting analysis ofSommers v. Abshire and enforcingunanimity requirement for removalunder 28 U.S.C. § 1452), citing Hills v.Hernandez, 1998 WL 214518 (E.D. La.1998).

(d) It is possible that the bankruptcy courtwill abstain and/or remand the action tostate court after it has been removed tofederal court.

i) In all cases, a bankruptcy court maychoose to abstain. See 28 U.S.C.§ 1334(c)(1) (a bankruptcy court mayvoluntarily abstain “in the interest ofjustice”).

ii) In some circumstances, a bankruptcycourt must abstain, and remand thematter to state court, if certainrequirements are met. See 28 U.S.C.§ 1334(c)(2), 28 U.S.C. § 157(b)(4).3

iii) Where an action has been removedfrom state court, the federal court mayremand “on any equitable ground.” 28U.S.C. § 1452(b).

(3) Compare In re United States Brass Corp., 110F.3d 1261, 1264-66 (7th Cir. 1997) (courtdetermined that coverage litigation involvingthe debtor’s products liability coverage shouldproceed in state court rather than bankruptcycourt); Orion Pictures Corp. v. ShowtimeNetworks (In re Orion Pictures Corp.), 4 F.3d1095, 1102 (2d Cir. 1993) (coverage suits are

3 There is a conflict in the cases as to whether “mandatory abstention” under 28U.S.C. § 1334(c)(2) applies to actions removed from a state court to bankruptcy court.See, e.g., In re Adelphia Comms. Corp., 285 B.R. 127, 140-44 (Bankr. S.D.N.Y. 2002).

“non-core” proceedings that cannot be finallyresolved by a bankruptcy court; the districtcourt may take jurisdiction by withdrawing thereference); and Federal Ins. Co. v. Glen IvyMgt. Co. (In re Glen Ivy Resorts, Inc.), 171B.R. 98, 102-03 (Bankr. C.D. Cal. 1994) (legalobligations arising under state law are non-core; bankruptcy court lifted stay to let statecourt hear coverage action) with In rePrudential Lines, Inc., 170 B.R. 222 (S.D.N.Y.1994) (litigation involving coverage forasbestos liabilities went forward in bankruptcycourt); and In re Celotex Corp., 152 B.R. 667,672 (Bankr. M.D. Fla. 1993) (same).

e. Can a debtor side-step the possibility of abstentionand/or remand by simply filing a coverage suit in thebankruptcy court, where jurisdiction is available?Potentially “yes,” but the “first-filed” rule may bar sucha new action if it overlaps substantially with a pre-existing coverage suit (even where the pre-existingsuit is subject to the stay). See In re United StatesBrass Corp., 173 B.R. 1006 (E.D. Tex. 1994).

C. Standing Issues

1. 11 U.S.C. § 1109(b) permits any party-in-interest to “beheard on any issue” in a Chapter 11 case. Creditors areclearly “parties-in-interest,” and this may include insurers tothe extent they are owed premium (retrospective orotherwise) or have other claims against the debtor. But whatif the insurer’s interest is not that of a creditor, but a partywho the debtor and other constituencies (e.g., the tortclaimants) are looking to for funding of the plan?

2. Cases finding insurers have standing include: In re Keck,Mahin & Cate, 241 B.R. 583 (Bankr. N.D. Ill. 1999) (insurerhas standing to object to plan confirmation to extent planprovisions affect its interests); In re UNR Industries, 71 B.R.467, 471 (Bankr. N.D. Ill. 1987); and In re Johns-ManvilleCorp., 31 B.R. 965, 971-72 (S.D.N.Y. 1983).

a. In In re Standard Insulations, Inc., 138 B.R. 947(Bankr. W.D. Mo. 1992), the court held that insurerswere “parties in interest” where they would beresponsible for payment of asbestos claims.

b. See also U.S. Brass Corp. v. Travelers Ins. Group (Inre U.S. Brass Corp.), 301 F.3d 296 (5th Cir. 2002)(discussing impact of insurers’ objections to planconfirmation).

3. Cases finding insurers do not have standing include: In reNew Era Inc., 135 F.3d 1206 (7th Cir. 1998) (insurer lackedstanding to oppose settlement that would assign estate’sbad faith claim to creditors or to oppose stay relief to permitaction against the debtor); In re Joint Eastern & SouthernAsbestos Litigation, 78 F.3d 357 (2d Cir. 1996) (insurerlacked standing to appeal district court order modifyingclaimants’ trust); Travelers Ins. Co. v. H.K. Porter Co., 45F.3d 737 (3d Cir. 1995) (insurer lacked standing to appealorder reinstating claim against debtor but limiting recovery toinsurance proceeds); Travelers Cas. & Sur. Co. v. Corbin (Inre First Cincinnati, Inc.), 286 B.R. 49 (6th Cir. BAP 2002)(insurer lacked standing to appeal from lift-stay order thatpermitted claimants to sue debtor for property damage andwarranty claims and liquidate their claims against debtor’sinsurers); In re Fuller-Austin Insulation Co., 1998 U.S. Dist.LEXIS 18340 (D. Del. 1998) (insurers lacked standing toobject to plan); Metropolitan Life Ins. Co. v. Alside SupplyCenter of Knoxville (In re Clemmer), 178 B.R. 160 (Bankr.E.D. Tenn. 1995).

4. The issue of insurer standing is presently pending before theFifth Circuit in J T Thorpe, in which the bankruptcy anddistrict courts held that insurers lacked standing to object todebtor’s “pre-packaged” plan of reorganization. The FifthCircuit recently stayed the confirmation order pendingdetermination of this appeal. Oral argument took place May6, 2003.

a. in the recently-completed confirmation hearing inCombustion Engineering , no party challenged theinsurers’ standing to be heard at confirmation.

D. Settlements

1. Typically, settlements between insurers and policyholdersare confidential and not subject to court approval (althoughCalifornia courts sometimes order disclosure to excessinsurers of a policyholder’s settlements with underlyinginsurers, see, e.g., Home Ins. Co. v. Superior Court, 46 Cal.App.4th 1286 (1996)).

2. In the bankruptcy context, however, all settlements involvingthe debtor or property of the estate are subject to courtapproval under Bankruptcy Rule 9019. In order to obtainbankruptcy court approval of a proposed settlement, theterms of the settlement typically must be filed on the publicrecord and served on all parties-in-interest.

a. In asbestos cases, it is possible that the tort claimantswill complain that the settlement amount is too low orwill be paid over too long a time.

b. The standard used to determine whether proposedsettlements should be approved is akin to a “businessjudgment” standard, where the court will give greatweight to the debtor’s stated reasons in favor of thesettlement.

(1) Typically, the standard is low. See, e.g., In reDow Corning Corp., 192 B.R. 415, 421 (Bankr.E.D. Mich. 1996) (court should approve asettlement that is fair and equitable and doesnot fall “below the lowest point in the range ofreasonableness); In re Texaco, Inc., 84 B.R.893, 902 (Bankr. S.D.N.Y.), appeal dismissed,92 B.R. 38 (S.D.N.Y. 1988); In re GrantBroadcasting of Philadelphia, Inc., 71 B.R. 390,395 (Bankr. E.D. Pa. 1987).

(2) However, some courts suggest that a slightlyhigher standard of scrutiny might be applicableto insurance settlements in a mass tort context.See, e.g., In re Dow Corning Corp., 198 B.R.214, 222 (Bankr. E.D. Mich. 1996).

3. As in the non-bankruptcy context, coverage settlements inbankruptcy can take one of two forms: buy-out settlements,or coverage-in-place settlements.

4. It may not be possible to bind co-insureds to settlementswith a debtor, since they have independent rights against thesettling insurer. See In re Zale Corp., 62 F.3d 746 (5th Cir.1995); In re Forty-Eight Insulations, Inc., 133 B.R. 973(Bankr. N.D. Ill. 1991), aff’d , 149 B.R. 860 (N.D. Ill. 1992); Inre Dow Corning Corp., 192 B.R. 415 (Bankr. E.D. Mich.1996) (acknowledging force of this argument in approvingdebtor’s settlements with co-insureds). But see MacArthurCo. v. Johns-Manville Corp., 837 F.2d 89 (2d Cir.) (binding

co-insured of debtor to settlement because essential toreorganization), cert. denied, 488 U.S. 868 (1988).

a. binding co-insureds to a settlement may beproblematic where the settlement proposed is for lessthan policy limits. In those circumstances the debtor-policyholder may be forced to enter into separatesettlements with its co-insureds. This is whathappened in Dow Corning , supra.

b. the interests others have in the policies (e.g.,underlying claimants or alleged co-insureds) mayinhibit the debtor’s ability to settle with its insurers. InIn re Allied Prods Corp., 288 B.R. 533 (Bankr. N.D. Ill.2003), the debtor sought to “sell” its policies back tothe issuing insurers in exchange for a lump-sumamount that the debtor planned to make available togeneral creditors of the estate, as well as aninjunction protecting the insurers from having to payany claims under the policies. The court refused toapprove the proposed sale unless the debtor firstprovided “adequate protection” for the interests ofunderlying claimants against the debtors whoseclaims would potentially be subject to coverage underthe policies proposed to be sold.

E. Issues concerning the debtor’s obligation to pay policy proceedsduring (or as a result of) the bankruptcy process.

1. The “UNR Issue”

a. In UNR Indus., Inc. v. Continental Cas. Co., 942 F.2d1101 (7th Cir. 1991), cert. denied, 503 U.S. 971(1992), the debtor was an asbestos manufacturerwhose confirmed plan of reorganization transferred63% of its stock to a trust to pay asbestos claimants.(The case predated the 1994 enactment of the“asbestos trust” provisions now found in 11 U.S.C. §524(g).) The excess insurer’s policy required it toindemnify only “sums paid as damages in settlementof a claim or in satisfaction of a judgment.” The issueaddressed by the court was: Is the confirmedbankruptcy plan a “settlement” or “judgment” asrequired by the policy?

b. Trial Court holding

(1) The district court held here was no “settlement”or “judgment” under the policies, anddismissed the policyholder’s suit seeking adeclaration of coverage. The court concludedthat UNR could obtain indemnity only byproving the amount that specific asbestosclaimants actually receive on their claims.

c. Appellate holding

(1) The 7th Circuit reversed, concluding that“UNR’s bankruptcy resulted in a judgment orsettlement (which one does not matter) againstUNR in the amount of $254 million on theasbestos claims.”

(2) Although the plan required UNR to transferonly $150 million of stock to a trust to payasbestos claims, the court concluded that theamount of the “judgment or settlement” wasapproximately $254 million, which was thevaluation of the asbestos claims fixed by theparties who negotiated the bankruptcy plan.Allowing the insurer to indemnify just theamount UNR transferred to the trust ($150million) would, in the court’s eyes, confer a“windfall” on the insurer, since that amountreflected “only a portion” of the claimants’actual damages. No determination of thevalidity of any specific claim was necessary.

(3) The plan’s valuation of the asbestos claimswas binding on the insurer despite the no-action clause in its policy, the court held. Theinsurer had the opportunity to participate in theplan negotiations, the court said, and thevaluation – negotiated by parties having anincentive to seek a low valuation of theasbestos claims – was, “without dispute,”reasonable.

(4) The 7th Circuit left for resolution by the trialcourt the question of what proof was requiredto show the amount of claims involving bodilyinjury during the insurer’s policy periods (case-by-case proof vs. random sampling and/orstatistical analysis).

d. There have not been many other court decisionsaddressing the issue decided by UNR. However, thedecision has been broadly criticized bycommentators. See, e.g., Fischer, “InsuranceCoverage for Mass Exposure Tort Claims: TheDebate Over the Appropriate Trigger Rule,” 45 DrakeL. Rev. 625, 662 n.139 (1997); A. Jarvis & K. Cannon,“Liability Insurance Settlements In Mass TortBankruptcy Cases: The Important Role ThatInsurance Policies Play Under Chapter 11,” 41 Fed.Bar News & J. 199 at nn. 31-33 (1994). In In re DowCorning Corp., 198 B.R. 214, 226 (Bankr. E.D. Mich.1996), the court noted that, if certain insurers had notsettled with the debtor-policyholder, they “wouldcertainly contest the UNR holding here.”

(1) Although UNR is frequently cited in asbestosbankruptcies today, there is a strong argumentthat it has been overridden by provisions in 11U.S.C. § 524(g) which require that a court find,as a prerequisite to issuance of a channelinginjunction, that the “actual amounts, numbers,and timing of” future claims “cannot bedetermined.” 11 U.S.C. § 524(g)(2)(B)(ii)(II).

(a) To comply with this provision, debtorsmust sponsor evidence supporting sucha finding. Once they have done so,there is little or no basis for a court tothen fix the amount of the future claims,and the evidence and argumentpresented by a debtor in support of sucha finding ought to be deemed a judicialadmission estopping them from makingcontrary assertions later, such as duringa coverage case when a debtor seeks ajudgment of liability against its insurerswith respect to future claims.

(b) For example, in JT Thorpe, thecompany’s president testified as followsat the confirmation hearing:

Q What would you estimate to be the volumeand/or amount of future claims that could beasserted against the company from this point intime forward?

A I don't believe it's possible to accuratelyestimate the number and the timing of futureclaims.

Q Why is that?

A For several reasons. I think, predominantlyrelying on the experience that I have of, havingseen other efforts to estimate future claims.

For example, in connection with theManville personal injury settlement trust, I thinkthat those estimates have proven to beinaccurate and subject to changes as timeprogresses. So, in general I think thatexperience has shown that it's not possible toaccurately predict the number of future claims.

(c) On the basis of this testimony, the JTThorpe bankruptcy court in its findingsof fact and conclusions of law in supportof confirmation found, in conformity withthe statute, that “[t]he actual amounts,numbers, and timing of future Demandscannot be determined. Thus, the Plansatisfies Section 524(g)(2)(B)ii)(II) of theBankruptcy Code.”

(d) Similarly, in Combustion Engineeringthe debtor presented expert evidencethat the “volume of future claims is notdeterministic” because there is no wayof knowing how many current claimsexist and traditional asbestosforecasting models used in bankruptcydo not take account of institutionalchanges such as existing and proposedtort reform. For such reasons, CE’sexpert opined, “assuming that the priorclaims experience is predictive of thefuture results in large forecast errors.”

(2) A pre-UNR decision that covers much of thesame ground, but reaches a different resultthan UNR, is Amatex Corp. v. Aetna Cas. &Sur. Co. (In re Amatex Corp.), 97 B.R. 220

(Bankr. E.D. Pa), aff’d, 102 B.R. 411 (E.D.Pa.), aff’d without op., 908 F.2d 961 (3d Cir.)

(a) In Amatex, the debtor sought to havethe insurers turn over their policy limitson the basis that a bankruptcy courtestimation of the underlying claimsshowed that the claims exceeded thelimits

(b) The insurers argued that such an orderto make lump sum payments would becontrary to the terms of their policies,because they were obligated toindemnify only actual adjudicated claimsor approved settlements. They arguedthey were not obligated to pay for mereestimates of past and future asbestosliabilities

(c) The court agreed with the insurers,concluding it did not have the power tocompel the insurers to turn over theirpolicy limits until the policy’s terms andconditions for payment of the claimswere satisfied.

e. More recently, a California trial judge in a statement ofdecision in Fuller-Austin Insulation Co. v. Fireman’sFund Ins. Co., No. BC 116835 (Cal. Super. Ct., LosAngeles Cty. Aug. 6, 2002), a coverage case beingtried following confirmation of a Chapter 11reorganization plan containing an asbestos trust andchanneling injunction, held the debtor’s confirmedplan “served to establish [the debtor’s] liability forasbestos-related injuries, the quantum of damages towhich each asbestos victim is legally entitled, and theprocedure for satisfying the liability.” In so holding,the California court stated, “The Court finds nomeaningful differences between the law and factspresented in UNR and the Fuller-Austincircumstances,” and “that the approaches andprinciples set forth in the UNR decision arepersuasive.” The court further held:

(1) the confirmation of the plan was an“adjudication,” rendering the insurers’ lack of

consent “moot.” (The insurers had pointed topolicy provisions stating that coverage was notavailable for settlements not consented to bythe insurers.)

(2) the “legal obligation” that the insurers must payis the full “allowed amount” of the debtor’sliability to each asbestos claimant, withoutregard to the fact that the debtor might only bepaying a percentage of each claimant’sallowed claim.

(3) the debtor would be permitted to introduceevidence of its full aggregate asbestos liabilityunder the plan – “i.e., the present liability ofFuller-Austin to pay pending and futureasbestos claims.”

f. In a subsequent phase of trial, a jury on May 2, 2003found that several of Fuller-Austin’s insurers wereliable for future claims in an aggregate amount ofalmost $200 million. The jury specifically found that“the amount of Fuller-Austin’s liability for futureasbestos claims [can] be reasonably estimated,” anddetermined that the amount was $750 million.

g. The insurers in Fuller-Austin have stated their intentto appeal.

h. The basic problem with UNR is that it although theinsurers obligated themselves only to indemnifysettlements or judgments for bodily injury, the 7thCircuit required the insurer to pay even though:

(1) there was no proof of how much was paid toany particular injured claimant for his or herbodily injury (i.e., it was not established that thedebtor had liability to any particular individualclaimants in any specific amounts, triggeringcoverage in particular policy periods);

(2) the company’s pre-petition unsecured creditors(excluding the injured claimants) benefitedfrom the insurance proceeds in the amount ofapproximately $96 million, the differencebetween the value of the stock set aside for theasbestos claimants and the assumed value of

the claims that the court held wasindemnifiable;

(3) UNR’s direct settlement with the claimants andother creditors, reached without theinvolvement of the insurer, may haveabrogated insurance policy clauses giving theinsurer the right to control (or at least associatein) the defense and settlement of claimsaffecting the insurance; and

(4) the UNR plan used policy proceeds forpayment of general creditors and claims,despite the fact that under the policiespayments were limited only to pay coveredclaims.

i. in other cases in which policyholders seek to invokeUNR, two issues that likely will be litigated as factorsthat potentially distinguish UNR are (i) whether theinsurers were given a real “opportunity” to participatein the discussions with the plaintiffs and (ii) whetherthere is a large class of impaired non-asbestosclaimants who had a personal incentive to negotiate alow valuation of asbestos claims. The Seventh Circuitin UNR implied that its holding could not be appliedwhere insurers did not have an opportunity tonegotiate with the plaintiffs and where there was not agroup of significant creditors with interestsantagonistic to those of the asbestos claimants.

2. Treatment of Deductibles and SIRs

a. Must a policyholder-debtor pay deductibles and SIRsbefore being permitted to access coverage, or can thebankruptcy court, as a court of equity, require insurersto provide coverage even if the policyholder is unableto satisfy the SIR or pay the deductible?

b. Cases holding that the insurer is not entitled to the fullbenefit of the SIR or deductible:

(1) Columbia Cas. Co. v. Federal Press Co. (In reFederal Press Co.), 104 B.R. 56, 62-64 (Bankr.N.D. Ind. 1989), which held that the debtor’sinability to satisfy its retained limit due to its

bankruptcy does not relieve the insurer of itsduty to indemnify the debtor-policyholder;

(2) Home Ins. Co. of Illinois v. Hooper, 294 Ill.App.3d 626, 632-34, 691 N.E.2d 65 (1998),which held (i) the insurer was obligated to paythe portion of a judgment in excess of the SIRwhether or not the debtor-policyholder paid theSIR, but (ii) the insurer was not obligated to“drop down” and provide coverage within theSIR; and

(3) Haisten v. Grass Valley Reimbursement Fund,Ltd., 784 F.2d 1392, 1403 (9th Cir. 1986),holding that a policy that indemnified apolicyholder for amounts it paid for damageswithin policy coverage was required to providecoverage even though the debtor-policyholderwas unable to “pay” the damages first.

c. Cases holding that the insurer is entitled to the fullbenefit of the SIR or deductible:

(1) Amatex Corp. v. Aetna Cas. & Sur. Co. (In reAmatex Corp.), 107 B.R. 856, 871-72 (Bankr.E.D. Pa. 1989), which held, in the context of asuit by the debtor against the insurer, that theinsurer was entitled to deduct the amount ofthe SIR from any obligation it owed the debtor,and could not be required to pay the SIR andthen assert an unsecured claim to recover thatamount; and

(2) Kleban v. National Union Fire Ins. Co. ofPittsburgh, PA., 2001 Pa. Super. 92 (2001),which held, in the context of an action by ajudgment creditor of the debtor against thedebtor’s insurer, that the insurer only had topay the amount of the judgment that wasabove the SIR and within limits. This decisiongives the insurer the full protection of the SIR.

3. Insurer Releases

a. Before agreeing, as part of a settlement, to paymillions of dollars of policy proceeds to the estateand/or a trust established by an asbestos or mass tort

reorganization plan, insurers usually desire a broadrelease against future claims.

(1) Generally, a confirmed plan may enjoin futureactions only against a debtor. See 11 U.S.C. §524(e); Feld v. Zale Corp. (In re Zale Corp.), 62F.3d 746, 760-61 (5th Cir. 1995). Thus, in thetypical case a bankruptcy court might not beable to confer the broad release desired.

b. In the asbestos context, however, 11 U.S.C. §524(g)(4) expressly authorizes injunctions in favor ofnon-debtors, specifically including insurers, if anumber of statutory requirements are met. Thoserequirements include:

(1) The third party must be “identifiable from theterms of such injunction (by name or as part ofan identifiable group);”

(2) The third party must be “alleged to be directlyor indirectly liable for the conduct of, claimsagainst, or demands on the debtor to theextent such liability of such third party arises byreason of . . . the third party’s provision ofinsurance to the debtor or a related party;” and

(3) The court determines that identifying such thirdparty in the injunction “is fair and equitable”with respect to claimants who might assert“future demands.”

As a consequence, an insurer who settles coverageissues with the debtor pursuant to the plan may beable to obtain broad protection against ever having topay additional sums on account of asbestos claimsunder the debtor’s policies.