For a second time in three years, the Third Circuit declined to rule on whether an insurance company is protected by the so-called channeling injunction in the “asbestos” plan confirmed by W.R. Grace & Co. 10 years ago, in a chapter 11 reorganization begun 20 years ago.
Simplified, the September 15 opinion by Circuit Judge Julio M. Fuentes remanded the case for the bankruptcy judge to decide as a fact-finding matter whether providing workplace inspections was an obligation imposed on the insurance company by the insurance policies. If the services weren’t required by the policies, the insurance company was not protected by Grace’s chapter 11 plan and must face lawsuits lodged by workers at the company’s asbestos mine.
Warning: Only asbestos mavens should read this story. For anyone else, it’ll induce a fatal attack of narcolepsy.
The Prior Appeal
The Grace plan created a trust to pay asbestos claims and contained a channeling injunction protecting both the debtor and its insurers under Section 524(g).
In a decision three years ago, Third Circuit Judge Thomas L. Ambro described a channeling injunction as one “that channels [asbestos] liability to a trust set up to compensate persons injured by the debtor’s asbestos.” He said it “can also protect the interests of non-debtors, such as insurers.” In re W.R. Grace & Co., 900 F.3d 126, 129 (3d Cir. 2018). To read ABI’s report on the prior decision, click here.
Giving rise to the prior appeal and the new one, asbestos claimants had sued an insurance company that provided Grace with workers’ compensation and employers’ liability coverage, based on the insurer’s right but not obligation to inspect the company’s facilities.
After the plaintiffs sued in Montana state court, the insurance company sought a declaratory judgment in bankruptcy court in Delaware. The bankruptcy court granted the insurer’s motion for summary judgment and ruled that the channeling injunction enjoined the plaintiffs from suing the insurance company.
On the prior appeal, Judge Ambro upheld the bankruptcy court’s conclusion that the insurance company’s policies were covered by the channeling injunction. However, that wasn’t the end of the story, because a channeling injunction can go no further than Section 524(g) allows in protecting non-debtor third parties.
Judge Ambro remanded the case to the bankruptcy court to decide whether the injunction exceeded the limits laid down by Section 524(g).
Citing Section 524(g)(4)(A)(ii) and providing guidance for the bankruptcy court on remand, Judge Ambro said that the claims must arise “‘by reason of’ one of four statutory relationships between the third party and the debtor” before a channeling injunction can protect a third party. Id. at 135. Judge Ambro examined two of the four.
First, Judge Ambro examined whether the Montana claimants were seeking to hold the insurance company “directly or indirectly liable for the conduct of, claims against, or demands on” Grace, as specified in Section 524(g)(4)(A)(ii). He said that the statute limits the permissible scope of the injunction to claims based on derivative liability, meaning that the insurance company’s liability must “arise by reason of” the provision of insurance to Grace.
Judge Ambro remanded the case to the bankruptcy court, saying that the “proper inquiry is to review the law applicable to the claim being raised against the third party (and when necessary to interpret state law) to determine whether the third-party’s liability is wholly separate from the debtor’s liability or instead depends on it.” Id. at 137.
Next, Judge Ambro analyzed the so-called statutory relationship requirement, also in Section 524(g)(4)(A)(ii). He remanded the case for the bankruptcy judge to review “the applicable law to determine the relationship’s legal relevance to the third-party’s alleged liability.” Id. at 138. He said that the bankruptcy court should “examine the elements necessary to make [a claim under Montana law] and determine whether [the] provision of insurance to Grace is relevant legally to these elements.” Id.
The Decision Remand
On remand, the plaintiffs contended that the insurers were negligent and failed to warn about the dangers of exposure to asbestos. In substance, the bankruptcy judge concluded that the negligence and failure-to-warn claims were not derivative in nature and were therefore not subject to the channeling injunction.
The bankruptcy judge authorized the plaintiffs to continue litigation against the insurers in Montana state court. Continental Casualty Co. v. Carr (In re W.R. Grace & Co.), 607 B.R. 419 (Bankr. D. Del. Sept 23, 2019). To read ABI’s report, click here.
Naturally, the insurance company appealed. The case was heard by a different panel.
Ruling on the new appeal, Judge Fuentes said that the bankruptcy court had “misapplied our guidance.” Like the bankruptcy court, he held that the plaintiffs’ claims meet the “derivative liability requirement,” but the record did not permit the circuit court to decide whether the claims “meet the statutory relationship requirement.”
He was careful to say that the bankruptcy court is not required to decide the state-law claims on the merits.
Derivative Liability Requirement
The outcome of the appeal turned on Montana law, which, in turn, follows Section 324A of the Restatement (Second) of Torts, dealing with liability to third persons other than the intended beneficiary of the contractual undertaking. In short, the insurance company’s liability under the Restatement turns on whether its liability is dependent on Grace’s liability or wholly separate from it.
It was “indisputable,” Judge Fuentes said, that the injuries were caused by Grace’s conduct. Therefore, the insurance company’s liability was not “wholly independent” of Grace’s.
Judge Fuentes therefore agreed with the bankruptcy court that the circumstances met the derivative liability requirement.
But there’s more.
Statutory Relationship
With regard to Section 324(g)’s requirement of a statutory relationship, the bankruptcy court decided that the requirement was not satisfied because providing insurance to Grace had no relevance to the insurance company’s liability under the Restatement or state law.
Judge Fuentes disagreed. He said:
[T]he appropriate question is whether the Montana Plaintiffs have made a prima facie case that [the] provision of insurance was legally relevant to [the insurance company’s] allegedly negligent undertaking of industrial hygiene and medical monitoring services. Or, put another way, whether they have shown that the services allegedly provided by [the insurance company] were incidental to its provision of insurance.
Judge Fuentes had a narrower understanding of Montana law than the insurance company. State law, he said, only requires that the insurance company affirmatively undertook to render services to a third party and that it should have recognized that the services were necessary for the protection of others.
“In other words,” Judge Fuentes said, the Restatement “is unconcerned with why [the insurance company] undertook to render services; only that it did so.”
The record, Judge Fuentes said, did not show whether the services provided by the insurance company were “within the scope of its provision of services to Grace.” There was no evidence, he said, as to whether inspections or loss-control recommendations are generally central to insurance underwriting and risk management. Likewise, the appeals court did not know whether “industrial-hygiene services of the type” were standard insurance-related services.
Even if the circuit court knew the industry standard, Judge Fuentes said that the record did not show whether the services were within the scope of the Grace policies. In that regard, the appeals court only had the policy that said that the insurance company was permitted, but not obligated, to inspect the facilities.
Judge Fuentes remanded for the bankruptcy court to make factual findings “as to what services were included in [the] provision of insurance to Grace, and whether the Montana Plaintiffs have made a prima facie showing under Montana law that [the insurance company] provided services beyond these.”
If the insurance company provided services beyond the policy, Judge Fuentes said that “the Montana Claims do not meet the statutory relationship requirement; if not, however, then the claims at issue meet all of the requirements of § 524(g) and are barred by the channeling injunction.”
After remand, Judge Fuentes said that the panel “will retain jurisdiction over any future appeals.”
For a second time in three years, the Third Circuit declined to rule on whether an insurance company is protected by the so-called channeling injunction in the “asbestos” plan confirmed by W.R. Grace & Co. 10 years ago, in a chapter 11 reorganization begun 20 years ago.
Simplified, the September 15 opinion by Circuit Judge Julio M. Fuentes remanded the case for the bankruptcy judge to decide as a fact-finding matter whether providing workplace inspections was an obligation imposed on the insurance company by the insurance policies. If the services weren’t required by the policies, the insurance company was not protected by Grace’s chapter 11 plan and must face lawsuits lodged by workers at the company’s asbestos mine.