Acands, Inc. v. Travelers Cas. and Sur. Co.

• Decision Date: 19 January 2006
• Docket Number: No. 04-3926.,No. 04-3929.,04-3926.,04-3929.
• Citation: 435 F.3d 252
• Parties: ACANDS, INC., Appellant v. TRAVELERS CASUALTY AND SURETY COMPANY.
• Court: U.S. Court of Appeals — Third Circuit

Page 252

435 F.3d 252

ACANDS, INC., Appellant v. TRAVELERS CASUALTY AND SURETY COMPANY.

No. 04-3926.

No. 04-3929.

United States Court of Appeals, Third Circuit.

Argued July 11, 2005.

January 19, 2006.

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John E. Heintz (argued), David B. Killalea, Donna L. Wilson, Marla H. Kanemitsu, Glenn Schlactus, Gilbert Heintz & Randolph LLP, Washington, DC, Laura Davis Jones, Curtis A. Hehn, David W. Carickhoff, Jr., Pachulski, Stang, Ziehl, Young, Jones & Weintraub PC, Wilmington, DE, for Appellant.

Barry R. Ostrager (argued), Mary Beth Forshaw, Bryce L. Friedman, Simpson, Thatcher & Bartlett LLP, New York, NY, Samuel J. Arena, Jr., Stradley, Ronon, Stevens & Young LLP, Philadelphia, PA, for Appellee.

Before ALITO and BECKER, Circuit Judges, and SHADUR District Judge.^*

OPINION OF THE COURT

ALITO, Circuit Judge.

This case involves the applicability of the Bankruptcy Code's automatic stay provision, 11 U.S.C. § 362(a), to an arbitration panel's resolution of an insurance coverage dispute. We hold that the arbitration proceeding became subject to the automatic stay after Travelers Casualty ("Travelers") submitted arguments supporting an award against the debtor ACandS, and that the panel's award granting Travelers affirmative relief violated the automatic stay by diminishing the bankruptcy estate. We therefore reverse the order of the District Court.

I.

For decades, ACandS, formerly Armstrong Contracting and Supply and now a subsidiary of Irex Corporation, was one of the nation's largest installers of asbestos insulation. Since the early 1970's, the company has been embroiled in asbestos litigation. On September 16, 2002, after selling many of its assets to Irex, ACandS filed for bankruptcy and began to devote its full attention and resources to the issues surrounding the asbestos claims and related insurance matters. See In re ACandS, Inc., 311 B.R. 36 (Bankr.D.Del.2004). This appeal combines two related disputes arising out of the same set of insurance policies issued to ACandS between 1976 and 1979 by Travelers' predecessor, the Aetna Casualty & Surety Co.

Each of the four identical policies provides two types of coverage: broad coverage for operations claims and more limited coverage for products claims. The products coverage in each policy was capped by a $1 million per occurrence limit and a $1 million aggregate limit. ACandS does not dispute that the coverage provided for products claims has been exhausted. The operations coverage is limited by a $1 million per occurrence limit but has no aggregate cap, meaning that Travelers' exposure to asbestos claims arising from ACandS's operations during the years 1976-79 was potentially unlimited. The present dispute turns on the classification of products versus operations claims and a disagreement over whether all of ACandS's asbestos operations can be considered a single occurrence.

In 1988, seeking to avoid the cost and difficulty of classifying large pools of claims, the parties reached an agreement (the "Letter Agreement") allocating set percentages of asbestos claims to either products or operations. The Letter Agreement initially allocated 55% of the claims to products and the remaining 45% to operations. Because of the aggregate limit on products coverage, Travelers remained liable only for the 45% of claims allocated to operations after the company paid the first $1 million of products claims under each policy. The Letter Agreement also established a three-step process for changing the allocation. First, after two years had passed and at any time thereafter, either party could make a demand on the other for a change in the allocation. Upon the making of the demand, both parties were to conduct a "claims study" in order to determine the proper allocation of claims. If the parties failed to reach agreement on a new allocation, the parties were to submit to non-binding dispute resolution overseen by a neutral mediator. Finally, if the mediation failed, the parties agreed to submit to binding arbitration. In the arbitration, the party seeking the adjustment of the allocation bore the burden of establishing that the existing allocation should be changed.

Both parties quickly explored ways of modifying the bargain. In 2000, Travelers sought to limit its exposure to operations claims by informing ACandS that it would treat all of the operations claims as arising out of the same occurrence (ACandS's use of asbestos), thereby subjecting the claims to the $1 million per occurrence limit. ACandS filed a motion for declaratory judgment in the District Court for the Eastern District of Pennsylvania seeking to have each claim recognized as a separate occurrence ("Number of Occurrences Action"). See JA6-1438 (Complaint, filed September 12, 2000). On November 8, 2000, the District Court granted a joint motion for a stay pending mediation and arbitration. JA6-1455 (Order, filed November 8, 2000). It is this action that the District Court dismissed as moot in the order now on appeal.

Following a different track, ACandS sought to increase its potential recovery under the policies by submitting a demand seeking an increase in the allocation of claims to operations. On January, 31, 2001, the company filed a formal demand pursuant to the 1988 Letter Agreement. Although the demand did not specify the desired reallocation, it stated that the allocation to operations should approach 100%, and acknowledged Travelers' position "that all of the asbestos bodily injury claims pending against ACandS are [products] claims." Although the Letter Agreement contemplates a collaborative approach to reallocation, ACandS did not invite Travelers to participate in the claims study it conducted in 2000.¹ No agreement was reached regarding reallocation, and a mediation was held in August 2001 under the direction of Professor James J. White. After mediation failed to resolve the dispute, the parties proceeded to arbitration. The panel instructed both parties to submit statements of their position. See JA2-467 (Statement of Position of ACandS, Inc., submitted July 31, 2002); JA2-505 (Travelers Casualty and Surety Company's Statement of the Case, submitted August 6, 2002). ACandS's statement largely tracks its demand letter. Travelers' statement says that it would "demonstrate during this proceeding [that] the correct allocation ... would allocate no claim payments to non-products coverage." JA2-506.

In arguments submitted to the panel, the parties presented conflicting definitions of "operations claims." The arbitration panel agreed with Travelers' interpretation that operations claims encompassed only those claims arising from asbestos exposure during the policy period. JA2-531 (Arbitration Award, filed July 31, 2003). The panel found, as a matter of fact, that ACandS had ceased manufacturing and installing asbestos in 1974.² The Panel concluded that any claim arising during the policy period was necessarily a products claim and therefore allocated 100% of the claims to the products coverage.

After the arbitration panel was constituted, but before the award was issued, ACandS settled a raft of asbestos claims, totaling more than $2.6 billion. Shortly thereafter, the company filed for Chapter 11 bankruptcy in the District of Delaware. JA4-1050 (Bankruptcy filing, September 16, 2002). The Bankruptcy Court refused to confirm the reorganization plan because it treated similarly situated claimants differently based on the order in which they filed their claims. In re ACandS, 311 B.R. at 43. As a result, the company remains in receivership, and the bulk of the settled claims persist in a state of limbo.

ACandS filed a motion in the District Court for the Eastern District of Pennsylvania, seeking to have the arbitration award vacated. The District Court denied the motion and affirmed the arbitration award. The District Court also dismissed the Number of Occurrences Action on the ground that the award's finding that no claims arose from operations rendered the question presented moot. The two matters were joined for the purposes of this appeal.

II.

ACandS's challenge to the validity of the arbitration award raises three issues related to the panel's decision to grant Travelers affirmative relief by revising the allocation of operations claims to zero: (1) whether the panel exceeded its authority by granting Travelers affirmative relief despite Travelers' failure to file a formal demand, (2) whether the relief granted Travelers violated the Bankruptcy Code's automatic stay provision in 11 U.S.C. § 362, and (3) whether ACandS was prejudiced by inadequate notice regarding Travelers' intent to seek affirmative relief in the arbitration proceeding. Because we hold that the proceeding and award violated the automatic stay, it is unnecessary to address the remaining issues. Because the award must be vacated, the allocation of claims under the Letter Agreement remains at 45% operations and 55% products. Accordingly, ACandS's action seeking a declaratory judgment regarding the number of occurrences is not moot.

A.

The District Court's determination that the award did not violate the Bankruptcy Code's automatic stay provision is a purely legal question subject to plenary review. In reviewing a District Court decision concerning the validity of an arbitration award, our assessment of the arbitration panel's actions is governed by the same standard that governed the District Court's review. Metromedia Energy, Inc. v. Enserch Energy Servs., Inc., 409 F.3d 574, 578 (3d Cir.2005). An arbitration award will be enforced if its form can be rationally derived from either the agreement between the parties or the parties' submissions to the arbitrators and the terms of the arbitral award are not completely irrational. Mut. Fire, Marine & Inland Ins. Co. v. Norad Reins. Co., 868 F.2d 52, 56 (3d Cir.1989); see also Swift Indus., Inc. v. Botany Indus., Inc., 466...