Fireman's Fund Ins. Co. v. Plant Insulation Co. (In re Plant Insulation Co.), C 12–01887 RS.

• Decision Date: 01 November 2012
• Docket Number: No. C 12–01887 RS.,Bankruptcy No. 09–31347 TC.,C 12–01887 RS.
• Citation: 485 B.R. 203
• Parties: In re PLANT INSULATION COMPANY, Debtor. Fireman's Fund Ins. Co., et al., Appellants, v. Plant Insulation Co., et al., Appellees.
• Court: U.S. District Court — Eastern District of California

485 B.R. 203

In re PLANT INSULATION COMPANY, Debtor.Fireman's Fund Ins. Co., et al., Appellants,

v.Plant Insulation Co., et al., Appellees.

No. C 12–01887 RS.

Bankruptcy No. 09–31347 TC.

United States District Court,

N.D. California,

San Francisco Division.

Oct. 9, 2012.

Order Denying Stay Nov. 1, 2012.

Cynthia L. Kendrick, Leslie A. Davis, Tacie H. Yoon, Crowell & Moring LLP, Washington, DC, Lynn H. Murray, Grippo & Elden LLC, Chicago, IL, Mark Plevin, Martha Kay Martin Crowell & Moring LLP, Joel Thomas Muchmore, Paul E.B. Glad, SNR Denton U.S. LLP, Chad A. Westfall, Musick Peeler & Garrett LLP, Philip Richard Matthews, Paul Joseph Killion, Ray L. Wong, Duane Morris LLP, San Francisco, CA, Philip Aloysius O'Connell, Jr., SNR Denton U.S. LLP, Boston, MA, Robert Millner, SNR Denton U.S. LLP Clinton Earl Cameron, Troutman Sanders LLP, Chicago, IL, Andrew T. Frankel, Craig S. Waldman, Simpson Thacher & Bartlett LLP, Kathrine A. McLendon, Mark J. Thompson, Tancred V. Schiavoni, Abby F. Rudzin, O'Melveny Myers LLP, Michael S. Davis, Zeichner Ellman & Krause LLP, New York, NY, Deborah Lynn Stein, Simpson Thacher & Bartlett LLP, Lawrence Allen Tabb, Musick Peeler & Garrett LLP, Jaclyn Ann Blankenship, Richard Blair Goetz, O'Melveny and Myers LLP, David Keane Morrison, R. Jeff Carlisle, Randall James Peters, Rosemary H. Do, Lynberg & Watkins, Eugenie Gifford Baumann, Valerie Ann Moore, Haight Brown & Bonesteel LLP, Los Angeles, CA, JonathanCharles Sanders Simpson Thacher Bartlett LLP, Palo Alto, CA, Alan S. Berman, The Berman Law Group, Woodland Hills, CA, Patricia Hsue, O'Melveny & Myers LLP, San Francisco, DC, for Appellants.

Michael H. Ahrens, Michael Magayne Lauter, Steven Benjamin Sacks, Sheppard Mullin Richter & Hampton LLP, San Francisco, CA, for Appellees.

ORDER DENYING APPEAL FROM CONFIRMATION OF RESTATED SECOND AMENDED PLAN OF REORGANIZATION

RICHARD SEEBORG, District Judge.

I. INTRODUCTION

This case confronts the legal, financial, and logistical challenges posed by reorganization of a debtor under Chapter 11 of the Bankruptcy Code, when its liabilities include the claims of future victims of asbestos. The debtor in this matter, Plant Insulation Company, sold, installed, and repaired asbestos-containing insulation and fireproofing materials in Northern California starting in 1937, and for many years acted as the exclusive distributer for asbestos producer Fibreboard Company. In the late 1970s, thousands of individuals began to file suit against Plant, claiming they had incurred injuries as a result of inhaling asbestos fibers from materials sold, installed, or repaired by the company. Until 1989, Plant was indemnified by Fibreboard, and thereafter, by its own insurers. By 2001, however, all of Plant's insurers had declared their policies to be exhausted and proceeded to defend much of the ongoing litigation under a reservation of rights only to avoid incurring default judgments. In that same year, Plant ceased operations under its own name, and transferred its installation and repair business to Bayside Insulation and Construction, Inc., a newly-formed corporation owned entirely by a principal Plant shareholder and manager. This transfer, it turns out, is the source of many of the challenges to the Reorganization Plan at issue in this case.

In 2007, representatives of Plant's asbestos injury claimants convened an informal organizing committee, the Informal Asbestos Creditors' Committee of Plant Insulation Company (the Pre–Petition Committee). The Committee eventually discovered the Bayside transaction and threatened Bayside with suit on a successor liability theory, unless Bayside agreed to merge with Plant in order to satisfy certain requirements of the Bankruptcy Code. Bayside initially refused, and was named as a defendant in several suits (and later dismissed). While negotiations between Bayside and the Pre–Petition Committee continued, Plant filed for bankruptcy under Chapter 11 in May 2009. Thereafter, the United States Trustee appointed a five-member Official Committee of Unsecured Creditors (the Committee), and a Futures Representative, acting in a fiduciary capacity to safeguard the interests of claimants who have not yet developed injuries. After further negotiations, Bayside eventually agreed to the proposed merger, and in November 2010, Plant, the Committee, and the Futures Representative (collectively, Appellees or the Plan Proponents) filed a Chapter 11 plan which entailed, among other things, the merger, and issuance of injunctive relief facilitating resolution of asbestos injury claims pursuant to 11 U.S.C. § 524(g).

The Plan seeks to balance the interests of scores of existing and anticipated future asbestos injury claims, as well as Plant's many insurers. Both sides assert very significant interests. No less than 6,244 asbestos injury claimants have asserted claims against Plant in connection with these proceedings, totaling $1.35 billion. Likewise, a subset of Plant's insurers that have defended or settled the personal injury actions on Plant's behalf assert rights to equitable contributions from Plant's other insurers, amounting to $95.3 million. After a multiday trial, upon an extensive factual record, and in a comprehensive and well reasoned opinion, the U.S. Bankruptcy Court confirmed the Second Amended Plan of Reorganization (the Plan) of Plant Insulation Company (Plant or debtor). Appellants, consisting of insurers who did not settle outstanding coverage disputes with the debtor, appeal the decision, on the grounds that: (1) the Plan does not meet the Bankruptcy Code's requirements under 11 U.S.C. §§ 524(g), 1129(a), and (2) confirmation of the Plan would violate Appellants' rights under state and federal law. Appellants raise a number of credible objections to confirmation, owing largely to the Plan's unique features, which they contend are unfair to nonsettling insurers. While their arguments are significant, for the reasons set forth below, this Court perceives no error in the Bankruptcy Court's opinion and therefore affirms.

II. BACKGROUND

A. Facts¹

For many decades, the debtor, Plant, was a major supplier of asbestos-containing products in Northern California. Like other businesses dealing in the asbestos industry, starting in approximately 1978, it began to draw thousands of lawsuits from individuals claiming serious, and in many cases fatal, injuries from inhalation of asbestos fibers.² Up until around 1989, Plant was defended and indemnified by Fibreboard, the asbestos manufacturer with which it had a longstanding business relationship. Thereafter, between 1987 and 2001, Plant was defended by its own, numerous insurers. Although Plant's insurers spent more than $125 million defending and indemnifying the company from litigation, those actions which proceeded to trial predominantly resulted in favorable verdicts for plaintiffs. As a result, between 1991 and 2001, Plant's insurers successively declared their various policies' limits to be exhausted. Upon the exhaustion of the last such policy in 2001, approximately 1,500 asbestos related claims remained pending against Plant.

In February of 2001, Shahram Ameli, a 49 percent shareholder, officer, and director of Plant, decided to begin his own insulation contracting business, Bayside.³ Plant ceased operations under its own name, and transferred its installation and repair business, including all outstanding installation and repair contracts and the related job files, rights to collect outstanding accounts receivable, certain software, and $150,000 in cash, to Bayside. Plant also agreed not to file for bankruptcy for 18 months and to limit future operations. Bayside, in turn, committed to remitting 65 percent of the funds collected on outstanding accounts receivable to Plant, and to indemnify Plant for liabilities arising from those projects. A few months later, Plant sold its remaining assets to another, unrelated insulation company.

In the years that followed, between 2001 and 2006, approximately 4,000 additional asbestos-related lawsuits were filed against Plant. Because the company had ceased operation, and with its insurance exhausted, Plant entered into informal “standstill” agreements to delay litigation of these claims, while plaintiffs pursued other possible defendants with recoverable assets. In 2001, Plant sought assistance from the California Insurance Guarantee Corporation (CIGA), as some of its insurers had themselves become insolvent. Ultimately, CIGA agreed to make $35 million available to asbestos injury claimants, 4,000 of whom applied for relief. Of those, approximately 1,100 received payment from the administrators of the CIGA fund. Plant also filed an action in San Francisco Superior Court against its insurers, seeking a judicial declaration that the aggregate limits of its liability insurance policies had not been exhausted (the Coverage Action).⁴ In those proceedings, Plant contends that the policy limits apply to claims arising from “products” and “completed operations,” not other “operations.” The Bankruptcy Court granted relief from the stay entered in this matter to permit that litigation including crossclaims to proceed. The Coverage Action, though nearing completion at the trial level, has not yet been finally resolved. Simultaneous with filing the Coverage Action, Plant also tendered all pending asbestos injury claims against it—roughly 3,800 claims—to its primary insurers. To avoid incurring default judgments, Plant's primary insurers agreed to defend them under a reservation of rights, prompting CIGA to cease issuing payments. Thus, between 2006 and May of 2009, when Plant filed for bankruptcy, its insurers (including Appellants in this action, as well as some others which have since settled) have incurred approximately $93 million defending and indemnifying Plant, which they contend should be reimbursed, on the premise that Plant's policy limits were already exhausted.

In September...