In Re: Global Industrial Technologies, Inc. (May 4, 2011, 3rd Circuit (PA))
The United States District Court for the Third Circuit has given insurers the opportunity to contest the formation of mass-tort bankruptcy trusts, and potentially to minimize potential tort claims. Despite a strong four-judge dissent and recognizing the insurer’s financial stake in such proceedings, the Third Circuit succinctly summarized its holding:
The decision we announce is no more far-reaching that this: when a federal court gives its approval to a plan that allows a party to put its hands into other people’s pockets, the ones with the pockets are entitled to be fully hear and have their legitimate objections addressed. In short, they at least have bankruptcy standing.
Global Industrial Technologies, Inc. and several of its subsidiaries filed for bankruptcy protection. The bankruptcy resulted, in large part, from the number of asbestos claims made against one of the company’s subsidiaries, the totaling over 400,000 separate claims nearly $1 billion in costs. Although not cited as a reason for the bankruptcy, one class action involving 169 silica claims existed at the time of the bankruptcy.
As part of the bankruptcy plan, an asbestos trust was established. The plan also called for an injunction of silica-related claims, and channeling of those claims to a separate silica trust. The trust was to be fully funded by insurance, with assignments of policies made to the silica trust. In order to obtain approval for the plan, the debtors needed to show that the plan, including the silica trust was both necessary and fair. In order to obtain the necessary claimant votes for the silica trust, the debtors obtained lists of silica claimants from another company’s bankruptcy. As a result, potential claims rose from 169 to over 5,000.
The insurers objected, arguing that the silica trust was neither necessary nor appropriate. The insurers also noted that many of the proposed silica claims were likely illegitimate, had resulted from diagnoses made by physicians previously deemed “not credible” in other silica litigation, and existed amongst claimant who had already made asbestos claims. Thus, it appeared over 90% of the proposed silica claims were suspect. The bankruptcy court confirmed the plan notwithstanding the objection, holding that the issue of claim legitimacy was ultimately irrelevant and that the insurers had no standing to object, particularly because the insurers would still maintain their coverage defenses. In other words, since the insurers were only there to pay liability claims they had no interest in the formation of the trust.
The Third Circuit reversed, citing the “broad right” of participation in bankruptcy cases, and finding that the silica trust would not be “insurance neutral” because the mere promise of the trust increased claims by 27 times, creating a increase in exposure including new administrative costs and litigation costs to ferret out fraudulent claims. The Court also held that based upon the facts presented, allegations of collusion between the debtor and plaintiffs’ counsel was warranted.
For a copy of the decision click here