Reversing the bankruptcy court, a district judge in Connecticut ruled that a non-operating company was entitled to file a chapter 7 petition to ensure that its limited remaining insurance would be distributed among all “asbestos” creditors, not just those who win judgments first.
The bankruptcy court’s lack of authority to liquidate personal injury tort claims did not mean that dismissal was the proper remedy, District Judge Victor A. Bolden of Bridgeport, Conn., held in his August 5 opinion.
The debtor was a corporation that manufactured pumps containing asbestos. The company ceased operating in 2004 and sold the assets by 2008. It had been facing 30,000 “asbestos” claims.
The company made two settlements with its primary insurance carrier that resolved many of the suits. Still faced with 1,600 claims for $180 million, the company filed a chapter 7 petition in October 2021.
Believing there still might be $3 million in insurance coverage remaining, the trustee listed the case as an “asset case.” The trustee was aiming to distribute the remaining insurance pro rata among the claimants, to prevent a race to the courthouse.
Sua sponte, the bankruptcy judge entered an order directing the trustee and others to show cause why the case should not be dismissed for “cause” under Section 707(a).
The trustee and interested parties opposed dismissal, but the bankruptcy judge dismissed the case on May 25, 2022, saying that (1) 28 U.S.C. § 157(b)(2)(B) bars the bankruptcy court from liquidating personal injury or wrongful death tort claims, and (2) the case lacked “a legitimate bankruptcy purpose.”
The chapter 7 trustee and two insurance companies appealed. The bankruptcy court denied a stay pending appeal on May 27, but the district court granted a stay pending appeal on June 2.
District Judge Bolden heard argument on July 27 and filed his opinion and order nine days later reversing dismissal of the chapter 7 case. He reviewed dismissal for abuse of discretion. No one appeared in district court in support of upholding dismissal.
According to Judge Bolden, the bankruptcy court believed there was no legitimate bankruptcy purpose “where the only assets of the bankruptcy estate are lawsuits that the creditors themselves can pursue outside of bankruptcy.”
On the issue of legitimate purpose, Judge Bolden said that the authorities relied on by the bankruptcy court were “factually distinct.” In a case from the Fifth Circuit, for example, there were no assets, and the statute of limitations had run on lawsuits.
Judge Bolden said that the record did not show any “bad faith attempt by the Debtor or Trustee to use the bankruptcy process to manipulate other proceedings, except to maximize the property available for creditors and ensure equitable distribution.” He cited Bankruptcy Judge Robert E. Gerber of New York for saying that bankruptcy affords a “collective remedy” satisfying “the understandable desire that the debtor’s assets not go to the swiftest, or the most aggressive, of them.” In re Murray, 543 B.R. 484, 494-95 (S.D.N.Y. 2016).
In the case on appeal, Judge Bolden said that “parties are already racing to court to claim a piece of the existing insurance proceeds, proceeds which would be part of the bankruptcy estate, if this case moved forward in Bankruptcy Court.” He cited the Second Circuit for saying that “[t]he whole point of channeling claims through bankruptcy is to avoid creditors getting ahead of others in line of preference and to promote equitable distribution of debtor assets.” In re Tronox Inc., 855 F.3d 84, 106 (2d Cir. 2017).
Rather than dismiss the case “outright” for bad faith, Judge Bolden said the bankruptcy court could have announced that it would not liquidate personal injury or wrongful death tort claims for the purpose for determining distributions to creditors. [Query: Would that be an advisory opinion?]
Judge Bolden reversed and remanded the case to bankruptcy court but denied a motion to assign the case to another bankruptcy judge.
Reversing the bankruptcy court, a district judge in Connecticut ruled that a non-operating company was entitled to file a chapter 7 petition to ensure that its limited remaining insurance would be distributed among all “asbestos” creditors, not just those who win judgments first.
The bankruptcy court’s lack of authority to liquidate personal injury tort claims did not mean that dismissal was the proper remedy, District Judge Victor A. Bolden of Bridgeport, Conn., held in his August 5 opinion.
The debtor was a corporation that manufactured pumps containing asbestos. The company ceased operating in 2004 and sold the assets by 2008. It had been facing 30,000 “asbestos” claims.
The company made two settlements with its primary insurance carrier that resolved many of the suits. Still faced with 1,600 claims for $180 million, the company filed a chapter 7 petition in October 2021.