In an appeal dealing with an “insurance neutral” chapter 11 plan resolving asbestos claims, the Fourth Circuit explored the differences among standing in bankruptcy court under Section 1109(b), standing to appeal in bankruptcy cases and constitutional or Article III standing.
The February 14 opinion is perhaps most significant because it holds that an insurer has no right to participate in negotiations dealing with the insurance policy, as long as the plan ends up being “insurance neutral.”
The opinion by Circuit Judge G. Steven Agee teaches us that an insurance company found by the bankruptcy court to have no standing does have standing to appeal the denial of standing to object to confirmation of the chapter 11 plan. On the other hand, if the appeals court confirms that the plan is “insurance neutral,” then the insurance company has no standing in the bankruptcy court or on appeal to object to the merits of the plan pertaining to any other aspects of the plan.
The ‘Asbestos’ Case
Faced with 14,000 pending lawsuits, the corporate debtor proposed a chapter 11 plan under Section 524(g) to create a trust dealing with present and future asbestos claims. All asbestos claims were to be channeled to the trust.
The principal asset for the trust was the debtor’s primary insurance policy, with a coverage limit of $500,000 per claim. The insurer was obliged by the policy to defend and indemnify the debtor, even if the claim were false or fraudulent. The policy had no maximum aggregate limit, and it was non-eroding, meaning that defense costs were not counted against the policy limit for each claim.
The plan divided asbestos claims into two classes: (1) those covered by the policy; and (2) those not covered by the policy. Uninsured claims were to be paid entirely by the trust.
Claims covered by insurance were to be litigated in the tort system, nominally against the debtor but subject to the coverage limit for each claim. The trust would pay the $5,000 deductible for each claim.
The claims covered by insurance remained subject to the insurer’s prepetition coverage defenses.
The uninsured claims were subject to antifraud provisions under the plan to protect the trust by requiring the claimants to provide disclosures designed to avoid fraud and duplicate claims. The plan had no antifraud provisions for insured claims.
Unsecured creditors were to be paid in full.
The asbestos claimants, the only class impaired by the plan, voted unanimously in favor of the plan. The only confirmation objection came from the insurer.
The insurer contended that the plan was not proposed in good faith and that the plan was not insurance neutral. The bankruptcy court wrote an opinion recommending that the district court approve the plan, finding that it was insurance neutral and filed in good faith. Because the plan was insurance neutral, the bankruptcy court concluded that the insurer was not a party in interest under Section 1109(b) and thus lacked standing to challenge the plan.
The district court confirmed the plan, adopting the bankruptcy court’s findings in toto after de novo review.
The insurer appealed to the circuit.
Bankruptcy Standing
The debtor contended that the insurer had no standing to appeal because the plan was insurance neutral.
In the Fourth Circuit, the concept of bankruptcy appellate standing requires that the appellant be a “person aggrieved” who is directly and adversely affected in a pecuniary sense.
The former Bankruptcy Act had a provision specifically imposing the “person aggrieved” test for appellate standing. The textual limitation was omitted alongside adoption of the Bankruptcy Code in 1978, but Judge Agee noted how circuit courts continued imposing the “person aggrieved” test.
Judge Agee described the differences between standing in bankruptcy court and standing to appeal.
For standing in bankruptcy court, distinguished from standing to appeal, the insurer’s standing was governed by Section 1109(b), which confers on “[a] party in interest, including . . . a creditor . . . . ,” the right to “appear and be heard on any issue” in the chapter 11 case.
Judge Agee held that the insurer “indisputably [had] standing to appeal the district court’s conclusion that it lacked § 1109(b) standing, either as an insurer or as a creditor, to challenge the Plan in the first instance.” He pointed to the Third Circuit for having held that standing to appeal the substance of the bankruptcy court’s decision is distinct from the right to appeal “bankruptcy standing” under Section 1109(b).
Were a creditor unable to appeal denial of bankruptcy standing under Section 1109(b), Judge Agee again cited the Third Circuit for the proposition that an erroneous finding of a lack of bankruptcy standing would preclude the creditor from appealing the erroneous finding.
In sum, Judge Agee said that the insurer had standing to appeal the district’s decision that it did not have bankruptcy standing under Section 1190(b). In a footnote, he also said that the insurer had Article III, or constitutional, standing to challenge the finding of insurance neutrality.
Insurance Neutrality
If the plan was truly insurance neutral, then the insurer would have no bankruptcy standing. Judge Agee reviewed the neutrality findings de novo.
Following the Third Circuit, Judge Agee said that a plan is insurance neutral if it does not increase the insurer’s prepetition obligations or impair the insurer’s prepetition rights under the policy. He found the plan to be neutral, in part because it preserved the insurer’s coverage defenses.
The insurer had other arguments. Primarily, the insurer contended that the plan was not insurance neutral because the debtor precluded the insurer from negotiating the plan.
Judge Agee found “nothing in the policy provision [that] suggests that the Debtors’ assistance-and-cooperation obligations extend to bankruptcy-plan negotiations.” More particularly, he said that the debtor’s assistance obligations under the policy involve “traditional litigation activities, as opposed to activities typically undertaken in a bankruptcy proceeding.”
The insurer also contended that the plan was not neutral because insured claims were not subjected to the antifraud provisions that applied to uninsured claims. Judge Agee rejected the argument, because “those alleged rights never existed under the policies.”
Having found that the plan indeed was insurance neutral, Judge Agee held that the insurer, but only in its capacity as an insurer, did not have bankruptcy standing as a party in interest under Section 1109(b).
Bankruptcy Appellate Standing
The insurer argued that it also had standing on appeal to challenge other provisions of the plan, such as good faith, because it also was a creditor on account of unpaid deductibles. In that respect, Judge Agee said that the insurer, in its capacity as a creditor, was subject to the strictures of Article III standing, also known as constitutional standing. That is to say, was there a case or controversy?
As a creditor, the insurer was unimpaired and had no objections to its treatment as a creditor. Thus, Judge Agee said, the insurer alleged no injury in fact as a creditor. Consequently, the insurer had no Article III standing “to object to aspects of a reorganization plan that in no way relate to its status as a creditor but instead implicate only the rights of third parties (who actually support the Plan).” [Emphasis in original.]
Judge Agee affirmed the district court’s judgment because (1) insurance neutrality left the insurer bereft of bankruptcy standing under Section 1109(b), and (2) the insurer had no Article III standing as a creditor to object to other aspects of the plan.
In an appeal dealing with an “insurance neutral” chapter 11 plan resolving asbestos claims, the Fourth Circuit explored the differences among standing in bankruptcy court under Section 1109(b), standing to appeal in bankruptcy cases and constitutional or Article III standing.
The February 14 opinion is perhaps most significant because it holds that an insurer has no right to participate in negotiations dealing with the insurance policy, as long as the plan ends up being “insurance neutral.”
The opinion by Circuit Judge G. Steven Agee teaches us that an insurance company found by the bankruptcy court to have no standing does have standing to appeal the denial of standing to object to confirmation of the chapter 11 plan. On the other hand, if the appeals court confirms that the plan is “insurance neutral,” then the insurance company has no standing in the bankruptcy court or on appeal to object to the merits of the plan pertaining to any other aspects of the plan.