Cont'l Ins. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.)
| Decision Date | 30 January 2012 |
| Docket Number | No. 10–55744.,10–55744. |
| Parties | In the Matter of THORPE INSULATION CO., Debtor.Continental Insurance Company, as successor in interest to certain policies issued by Harbor Insurance Company, Appellant, v. Thorpe Insulation Company, Appellee,andOfficial Creditors' Committee of Thorpe Insulation Company and Pacific Insulation Company, Movant,Future Claims Representative, Real-party-in-interest. |
| Court | U.S. Court of Appeals — Ninth Circuit |
OPINION TEXT STARTS HERE
Robert Binion, Rodney Eshelman, and Alan Palmer Jacobus, Carroll, Burdick & McDonough, LLP, San Francisco, CA; David C. Christian II and Jason J. DeJonker, Seyfarth Shaw, LLP, Chicago, IL; Todd C. Jacobs, Matthew A. Bills, and John E. Bucheit, Grippo & Elden LLC, Chicago, IL; and James M. Harris, Seyfarth Shaw, LLP, Los Angeles, CA, for the appellant.
Daniel J. Bussel, David M. Guess, Kenneth N. Klee, and Thomas E. Patterson, Klee, Tuchin, Bogdanoff & Stern LLP, Los Angeles, CA; Richard W. Esterkin, Michel Y. Horton, and Charles J. Malaret, Morgan, Lewis & Bockius LLP, Los Angeles, CA; Scotta E. McFarland and
Jeremy V. Richards, Pachulski, Stang, Ziehl, Young, & Jones LLP, Los Angeles, CA; Thomas M. Peterson and Jeffrey S. Raskin, Morgan, Lewis & Bockius LLP, San Francisco, CA, for the debtor-appellee.
Peter J. Benvenutti and Michaeline H. Correa, Jones Day, San Francisco, CA; Peter Lockwood and Ronald E. Reinsel, Caplin & Drysdale, Washington, DC, for the movant.Gary Fergus, Fergus, A Law Office, San Francisco, CA, for the real-party-in-interest.Appeal from the United States District Court for the Central District of California, Dale S. Fischer, District Judge, Presiding. D.C. No. 2:08–cv–07862–DSF.Before: MARY M. SCHROEDER and RONALD M. GOULD, Circuit Judges, and RICHARD SEEBORG, District Judge.*
This appeal involves Continental Insurance Company's (“Continental”) pursuit of a breach of contract claim against Thorpe Insulation Company (“Thorpe”) in Thorpe's Chapter 11 bankruptcy proceeding. The district court affirmed the bankruptcy court's orders denying Continental's motion to compel arbitration and disallowing its claim. We now affirm.
Thorpe distributed and installed asbestos-containing products from 1948 to 1972. About 12,000 claims for asbestos-related injuries or deaths have been brought against Thorpe. Thorpe's insurers, including Continental, have paid more than $180 million defending and indemnifying Thorpe for these claims. In 1985, Continental and Thorpe entered into the Wellington Agreement, an omnibus insurance coverage and claims handling agreement between asbestos producers and their insurers. The Wellington Agreement provides for binding arbitration of coverage disputes.
In 1998, Continental told Thorpe that Thorpe had exhausted its coverage under Continental's insurance policies and ceased indemnifying Thorpe. Thorpe then sought, for the first time, “non-products” coverage under Continental's policies, asserting that such “non-products” coverage was not subject to the policies' liability limits. Continental disputed Thorpe's coverage claim and initiated arbitration under the Wellington Agreement. The arbitrator rejected Thorpe's claim and found that Thorpe had no remaining coverage rights under Continental's policies. Thorpe appealed, and the parties agreed to settle.
The parties executed an integrated Settlement Agreement and Release (“Settlement Agreement”) in April of 2003. Whether there has been a breach of this agreement and whether that should be determined by an arbitrator or by the bankruptcy court are the issues presented by this litigation.
The Settlement Agreement provides for mutual releases, and states in relevant part:
[Thorpe] fully releases and forever discharges [Continental] ... of and from any and all claims, actions, causes of action, rights, liabilities, obligations and demands of every kind and nature, known and unknown, suspected or unsuspected, past, present, and future, arising out of, related to, or in any way connected with, in whole or in part, any claim of any kind under the Policies or relating to the [arbitration]
....
The Settlement Agreement also contains two warranties that are central to this case. First, the “Assignment Warranty” provides:
The parties to this Agreement each represent and warrant that they have not and will not in any manner assign, transfer, convey or sell, or purport to assign, transfer, convey or sell to any entity or person any cause of action, chose in action, or part thereof, arising out of or connected with the matters released herein, and that they are the only persons or entities entitled to recover for damages under such claims, causes of action, actions, and rights.
Second, the “Establishment Warranty” provides:
The parties to this Agreement each further represent and warrant that they will not in any way voluntarily assist any other person or entity in the establishment of any claim, cause of action, action, or right against the other party to this Agreement arising out of, resulting from or in any way relating to the matters released.
Thorpe and Continental agreed to arbitrate disputes regarding the Settlement Agreement and its terms.
The Settlement Agreement released only Thorpe's claims against Continental. It does not refer to the direct action rights of individual asbestos claimants 1 or to the contribution, indemnity, or subrogation rights of other insurers. As such, direct action claims and other insurers' claims against Continental were not released under the terms of the Settlement Agreement.
After the 2003 Settlement Agreement, as Thorpe's coverage under other insurers' policies neared its limits, coverage actions commenced in California state court. Thorpe and the insurers began settlement discussions that contemplated Thorpe's filing for bankruptcy. Thorpe's goal was to confirm a plan of reorganization pursuant to section 524(g) of the Bankruptcy Code.
Section 524(g) is unique to the asbestos context. It provides a mechanism for consolidating asbestos-related assets and liabilities of a debtor into a single trust for the benefit of present and future asbestos claimants. See H.R. Rep. 103–835, at 46–48 (1994). Section 524(g) authorizes the bankruptcy court to enter a “channeling injunction”—channeling claims to the trust—to prevent claimants from suing the debtor. 4 Collier on Bankruptcy ¶ 524.07 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.2011). The injunction may also bar actions against third parties, such as insurers, that are based on asbestos-related claims against the debtor, if the third parties contribute to the trust in amounts that are commensurate with their likely liability. Id. One requirement for a § 524(g) injunction is that, “as part of the process of seeking approval of the plan of reorganization,” a class of claimants be established and vote, by at least 75 percent of those voting, to approve the plan. 11 U.S.C. § 524(g)(2)(B)(ii)(IV)(bb).
In preparation for the bankruptcy and to achieve settlement in the state court actions, Thorpe negotiated with insurers other than Continental. Certain insurers agreed to fund the § 524(g) trust in consideration of Thorpe's filing for bankruptcy and seeking a § 524(g) injunction that would protect the insurers against asbestos-related claims arising out of policies issued to Thorpe. These insurers (the “Settling Insurers”) agreed to assign their contribution, indemnity, and subrogation rights against Thorpe's other insurers, including Continental, to Thorpe and the trust to be established under § 524(g). Before filing for bankruptcy, Thorpe also collaborated with asbestos claimants to begin structuring a § 524(g) plan, as § 524(g) requires 75 percent of such claimants to consent to the plan as one requirement for it to be confirmed.
Continental contends that the above actions violated the Assignment Warranty and the Establishment Warranty of the 2003 Settlement Agreement. Continental also alleges that Thorpe encouraged and assisted the filing of three direct action lawsuits against Continental in September of 2007, in violation of the Establishment Warranty. Continental tried to arbitrate its claim that Thorpe's actions breached the Settlement Agreement. In a letter requesting arbitration, Continental made clear its concern over “a bankruptcy filing and/or any actions related thereto.” 2 The arbitrator scheduled a hearing for October 16, 2007.
On October 15, 2007, Thorpe filed for Chapter 11 bankruptcy. This stayed arbitration pursuant to 11 U.S.C. § 362. Continental filed a proof of claim in the bankruptcy court on February 11, 2008. Thorpe objected to the claim. Continental filed an amended proof of claim and moved to compel arbitration. The amended claim alleged the following to be violations of the Settlement Agreement: (1) Thorpe's prepetition acquisition of the Settling Insurers' contribution, indemnity, and subrogation rights against Continental; 3 (2) Thorpe's post-petition assignment of such rights to the trust created pursuant to the § 524(g) plan; (3) Thorpe's prepetition encouragement of direct action claims against Continental; and (4) “Thorpe's cooperation and participation as a ‘Plan Proponent’ in drafting, proposing, and seeking confirmation of a Plan designed to assist asbestos claimants in bringing direct action claims against ... Continental.”
The bankruptcy court set a hearing on the motion to compel arbitration and the claim objection for October 16, 2008; it told the parties that it would decide the motion to compel arbitration first and that it would then resolve legal but not factual issues relating to the claim objection. Continental did not conduct any discovery before the October 16 hearing.4
At the October 16 hearing, the bankruptcy court denied Continental's motion to compel arbitration and disallowed its...
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