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Asbestos is one of the major factors impeding growth in the insurance industry. The recent surge in asbestos liability claims has threatened insurance company reserves. Estimates show that insurance industry asbestos losses in the United States may ultimately reach $65 billion. As a result, insurance companies are at the forefront of asbestos-related issues, including taking an active role in lobbying for legislation that would compensate asbestos victims from a multibillion-dollar national fund. Insurance companies have also emerged as key players in bankruptcy proceedings in which debtor corporations are seeking to shed their asbestos liabilities. Specifically, insurance companies have become increasingly involved in cases employing the “channeling injunction” set forth in �524(g) of Title 11 of the U.S. Code (the Bankruptcy Code), which allows a debtor to establish a funded trust to assume all existing and future asbestos claims against it. The insurance companies’ heightened interest in asbestos bankruptcy cases stems in large part from Fuller-Austin Insulation Co. v. Fireman’s Fund Insurance Co., No. BC116835, 2002 WL 31005090, at 1 (Calif. Super. Ct. Aug. 6, 2002), in which a debtor used a confirmed plan under �524(g) to fix and accelerate the insurance companies’ liabilities, despite the fact that the insurance companies were not permitted to participate in the formulation of the debtor’s plan of reorganization. Section 524(g) was added to the Bankruptcy Code in 1994 to provide a mechanism to protect the future of corporations subject to asbestos liability, while providing asbestos victims with an efficient, uniform system for settling their claims and maximizing the pool of assets from which such claimants can recover. Findley v. Falise (In re Joint E. and S. Dist. Asbestos Litig.), 878 F. Supp. 473, 571 (E.D.N.Y. 1995), aff’d in part, vacated in part, 78 F.3d 764 (2d Cir. 1996), aff’d, 100 F.3d 944 (2d Cir. 1996), aff’d, 100 F.3d 945 (2d Cir. 1996). The addition of �524(g) to the Bankruptcy Code was in large part the result of Congress’ concern that claimants would be ill-served if companies with significant asbestos-related liabilities were forced into liquidation. The enactment of �524(g) has elevated bankruptcy to the preferred method for corporations to limit their future asbestos liability. Section 524(g) allows the bankruptcy court to “enter a sweeping injunction against any entity taking legal action to collect a claim or demand that is to be paid in whole or in part by a trust created through a qualified plan of reorganization.” 4 Collier on Bankruptcy (15th ed. 2001) �524.07. Pursuant to an otherwise qualified plan of reorganization, as determined under 11 U.S.C. 1129, a �524(g)(1)(A) injunction prevents parties from taking legal action against a debtor for the purpose of “directly or indirectly collecting, recovering, or receiving payment” with respect to any asbestos claim that is to be paid in whole or in part by a qualified trust. 11 U.S.C. 524(g)(1)(B). The injunction addresses the claims of entities holding all asbestos claims, including claims for injuries that are not known or manifested at the time of the bankruptcy case. This channeling injunction may also bar actions against third parties that may be liable for asbestos claims against the debtor. 11 U.S.C. 524(g)(4)(A)(ii). STRICT REQUIREMENTS Due to the strict requirements under �524(g), such cases are often prenegotiated and are filed as “prepackaged” Chapter 11 plans. Such requirements include the following provisions: The debtor’s plan of reorganization must provide for the injunction to be implemented in connection with a trust fund that will assume the liabilities of a debtor which “has been named as a defendant in a personal injury, wrongful death or property-damage action seeking recovery for damages allegedly caused by exposure to asbestos or asbestos-containing products.” 11 U.S.C. 524(g)(2)(B)(i)(I). The trust fund described in the plan must be funded in whole or in part by the securities of one or more debtors involved in the plan of reorganization and by the obligation of the debtor or debtors to make future payments, including dividends. 11 U.S.C. 524(g)(2)(B)(i)(II). The trust fund must own, or, if certain contingencies occur, be entitled under the plan to become the owner of, a majority of the voting shares of each debtor, the parent corporation of each debtor, and any subsidiary of each debtor that is also a debtor. 11 U.S.C. 524(g)(2)(B)(i)(II). “This provision … ensure[s] that, if there are not sufficient funds in the trust … the trust may obtain control of the debtor company.” Additionally, the trust must use its assets or income to pay claims and demands of the asbestos claimants. 11 U.S.C. 524(g)(2)(B)(i)(IV). The separate class or classes of the claimants whose claims are to be addressed by the trust must vote, by at least 75 percent of those voting, in favor of the plan. 11 U.S.C. 524(g)(2)(B)(ii)(IV)(bb). The trust must provide some mechanism to ensure that it will value present and future demands that involve similar claims in substantially the same manner. 11 U.S.C. 524(g)(2)(B)(ii)(V). To comply with due process requirements, the court must appoint a legal representative to protect the rights of those that might subsequently assert demands of any kind. 11 U.S.C. 524(g)(4)(B)(i). The court must determine that confirmation of the plan of reorganization is fair and equitable with respect to those who might subsequently assert demands, in light of the benefits provided to the trust on behalf of the debtor, co-debtors and any third party. 11 U.S.C. 524(g)(4)(B)(ii). THE ROLE OF INSURERS Subject to the foregoing conditions, �524(g) allows a debtor to channel its claims to a funded trust. Often, insurance policies or proceeds are included in the res of such trusts. Accordingly, the insurance companies may be called upon to satisfy their payment obligations upon establishment of the trust pursuant to a plan of reorganization, rather than when the liability of the debtor actually arises, thereby accelerating the insurance companies’ liabilities. Moreover, a trust may fix such liabilities, which may deprive insurance companies of their ability to contest the amount of their obligations, and to otherwise exercise their rights as provided in the applicable policies. Nevertheless, insurance companies have had difficulty convincing debtors and courts that they have a right to meaningful participation in the bankruptcy process. The importance of such participation is illustrated by litigation surrounding Fuller-Austin Insulation. Fuller-Austin, a Canadian company, filed for Chapter 11 and, pursuant to a plan of reorganization, established a trust fund under �524(g) of the Bankruptcy Code to address asbestos claims. The company’s proposed plan of reorganization provided that all claims and defenses of the debtors’ asbestos insurance providers would remain unaffected by the implementation of such a plan. As a result, the district court blocked the insurance companies from objecting to confirmation. The district court found that the insurance companies were not “directly, indirectly or adversely affected” by the implementation of the plan and, therefore, were not parties in interest entitled to object to confirmation of a plan under �1128(b) of the Bankruptcy Code. In re Mid-Valley Inc., No. 03-35592-JFK (March 25, 2004.) (Memorandum Opinion and Order of Court). Accordingly, the insurance companies were not permitted to object to confirmation of Fuller-Austin’s proposed plan. A RELATED STATE COURT CASE On the heels of Fuller-Austin’s bankruptcy case came Fuller-Austin Insulation Co. v Fireman’s Fund Insurance Co., No. BC116835, 2002 WL 31005090, at 1 (Calif. Super. Ct. Aug. 6, 2002), a state court action in which Fuller-Austin sought a declaratory judgment from a California superior court fixing the obligations of its asbestos insurance companies. The California superior court determined that the debtor’s confirmed plan was an “adjudication” of the debtor’s liability, which triggered coverage under the insurance policies. As such, the court held that confirmation of Fuller-Austin’s plan of reorganization fixed the liability of the insurance companies with respect to the asbestos claims. Therefore, confirmation of the plan triggered the insurance companies’ obligations to fund the asbestos trust. Id. at 20. The California superior court reached this decision notwithstanding the court’s finding in Fuller-Austin’s bankruptcy case that the insurer’s “rights under their respective insurance policies are reserved for adjudication in the coverage litigation,” and that the insurance companies did not have standing in the bankruptcy case. Id. Fuller-Austin set an unsettling precedent for insurance companies and underscored the possibility that asbestos bankruptcy cases can fix and accelerate insurance companies’ liabilities — even absent the insurance companies’ participation in the bankruptcy process and irrespective of the language in the plan preserving their rights to dispute liability. As a result, insurance companies’ role in asbestos cases has become increasingly high profile. Such participation often causes delay and, in at least one case, led to the court denying confirmation of a proposed plan. In re AC and S Inc., 297 B.R. 395 (Bankr. D. Del. Aug. 25, 2003). PREPACKAGED PLANS A prepackaged plan is designed to minimize the time that a debtor remains or operates in Chapter 11. Moreover, the prepackaged process permits a debtor to exercise greater control over the bankruptcy process. From the perspective of an asbestos debtor, the involvement of insurance companies in the bankruptcy process is likely to undermine both of these goals. Accordingly, asbestos debtors have taken steps to ensure that their proposed plan is “insurance neutral” (i.e., does not affect the rights of insurers under the applicable policies) in an effort to eliminate insurer standing during the bankruptcy process. At first glance, the inclusion of comprehensive “insurance neutral” language in a plan would seem to put to rest the insurance companies’ concerns about Fuller-Austin. Such provisions expressly permit the insurance companies to retain their rights to contest the amount and existence of their liability. However, in at least one recent asbestos bankruptcy case, the prospect of an insurance-neutral plan was not enough to satisfy the insurance companies that their contractual rights would remain unaffected by confirmation of a �524(g) plan. In their plan of reorganization, the Halliburton debtors, including, among others, Mid-Valley Inc., Kellogg Brown & Root Inc., DII Industries LLC and Kellogg Brown & Root International Inc., received bankruptcy court and district court approval of a prepackaged plan of reorganization that included a $4.17 billion settlement of asbestos and silica claims. In re Mid-Valley Inc., No. 03-3559, supra. The trusts created under the debtors’ proposed plan do not include insurance policies or proceeds. In re Mid-Valley Inc., Disclosure Statement, ��4.1(e), 4.2(e) (Sept. 18, 2003). Instead, such trusts are funded by cash and stock contributions from the debtors and their nondebtor affiliates. In re Mid-Valley Inc., Disclosure Statement, �4.1(e) (Sept. 18, 2003). Under this proposed plan, the parties contributing to the trust assume the risk that such contributions may not be recoverable from insurance policies. Nevertheless and despite the Halliburton debtors’ inclusion of comprehensive insurance neutrality provisions in their original proposed plan, from the beginning of the Halliburton cases, the insurance companies aggressively sought a voice in the proceedings. In re Mid-Valley Inc., Disclosure Statement, Joint Pre-Packaged Plan of Reorganization, Art. XI, �11.4 at B-19 (Sept. 18, 2003). The day after the Halliburton debtors filed their Chapter 11 petitions, the insurance companies filed motions to dismiss the cases based upon, among other things, their allegation that the filing of such cases was in bad faith. The insurance companies argued that the Halliburton debtors should not be permitted to file for Chapter 11 protection because the companies were solvent. Simultaneously, the insurance companies filed objections to the appointment of Eric D. Green, professor of law at Boston University, as the future claims representative, arguing that the proposed representative had a conflict of interest and was therefore ineligible to represent the future claimants. MOTIONS DENIED On Feb. 11 the bankruptcy court in the Halliburton cases ruled that the insurance companies did not have standing with respect to the motions to dismiss and the objections to the appointment of Green. In re Mid-Valley Inc., No. 03-35592-JFK (March 25, 2004.) (Memorandum Opinion and Order of Court). In its decision, the court emphasized that the proposed asbestos trust was not funded by the insurers, but rather by the Halliburton debtors and their nondebtor affiliates. As a result, the court found that the plan did not affect the insurance companies’ ability to raise the defenses to coverage set forth in the applicable insurance policies (i.e., the insurance companies retain the right, among other things, to dispute the amount of their liability). In light of the foregoing, the court concluded that the insurers were not economically injured or disadvantaged by the proposed plan and, therefore, were not parties in interest entitled to seek dismissal of the case or object to the appointment of the future claims representative. The insurance companies subsequently sought to object to confirmation of the Halliburton debtors’ proposed plan. The court again held that the insurance company lacked standing to object to confirmation. In re Mid-Valley Inc., Transcript of Hearing, Case No. 03-35592 (JKF), at 120 (April 13, 2004). The insurance companies’ involvement in the Halliburton cases can in large part be attributed to their desire to avoid the pitfalls of Fuller-Austin. Although the insurance-neutrality language agreed upon by the debtors and the insurance companies in the Halliburton cases is considerably more comprehensive than that included in Fuller-Austin’s confirmed plan of reorganization, and the insurance companies were presumably protected from such a result because neither its insurance policies nor proceeds were used to fund the trusts, the insurance companies feared that the Halliburton debtors would misuse the confirmation order and cause a Fuller-Austin-like result. Transcript of Hearing, Case No. 03-35592 (JKF), at 96 (April 13, 2004). At the Halliburton debtors’ confirmation hearing, the insurance companies emphasized to the court that their fear of Fuller-Austin is not “irrational” and requested that the court enjoin state courts from fixing insurance companies’ coverage obligations based on the Halliburton debtors’ plan. The court refused, and stated that under the facts of the Halliburton cases, it is not realistic to think that the Fuller-Austin result could ever be reached. In re Mid-Valley Inc., Transcript of Hearing, Case No. 03-35592 (JKF), at 99. The court in the Halliburton cases made clear in its standing decisions and its statements on the implausibility of a Fuller-Austin result that it did not believe that the Halliburton debtors’ proposed plan impacted the rights of insurance companies — either in the bankruptcy proceedings or in future state coverage litigation. On the other hand, it is not clear that such a view was based solely on the inclusion of the comprehensive insurance-neutrality language in the proposed plan, or whether the involvement of the insurance companies — which created a strong record for state courts to rely on to determine the intent of the plan and its impact on the insurance companies’ rights — eliminated any doubt as to its interpretation and thus, as to the nonapplication of Fuller-Austin. In light of the foregoing, it seems apparent that insurance companies will continue to steadfastly pursue their rights in asbestos bankruptcy cases, to avoid, at all costs, a Fuller-Austin-like result. Gary A. Saunders is a partner-elect, and Stefanie J. Birbrower is an associate, in the financial restructuring and bankruptcy group of the New York office of Atlanta-based King & Spalding. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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