In re American Capital Equipment, Inc.

• Decision Date: 26 May 2009
• Docket Number: 01-23988-MBM.,No. 01-23987-MBM.,01-23987-MBM.
• Citation: 405 B.R. 415
• Parties: In re AMERICAN CAPITAL EQUIPMENT, INC., and Skinner Engine Company, Inc., Debtors.
• Court: U.S. Bankruptcy Court — Western District of Pennsylvania

405 B.R. 415

In re AMERICAN CAPITAL EQUIPMENT, INC., and Skinner Engine Company, Inc., Debtors.

No. 01-23987-MBM.

01-23988-MBM.

United States Bankruptcy Court, W.D. Pennsylvania.

May 26, 2009.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Michael Kaminski, Robert G. Sable, Sally E. Edison, McGuire Woods LLP, Pittsburgh, PA, Nicholas A. Pasciullo, White and Williams, Pittsburgh, PA, for Debtors.

MEMORANDUM

M. BRUCE McCULLOUGH, Bankruptcy Judge.

AND NOW, this 26th day of May, 2009, upon consideration of (a) the most recently proposed Chapter 11 plan — i.e., what has been characterized as the modified Fifth Plan (hereafter "the Fifth Plan") — of Skinner Engine Company, Inc., one of the above-captioned debtors acting as a Chapter 11 debtor-in-possession (hereafter "the Debtor"), as well as the disclosure statement that accompanies the Fifth Plan (hereafter "the Disclosure Statement"), (b) the various briefs that have been submitted by the Debtor and its co-proponents of the Fifth Plan (hereafter "the Co-Proponents"), both in support of the Disclosure Statement and in response to four discrete questions relative to the approval of the Disclosure Statement that were posed by the Court at a February 4, 2009 hearing, and (c) the various briefs that have been submitted by the various insurance companies that insured the Debtor pre-petition against asbestos liability, which insurance companies (hereafter "the Insurers") oppose the approval of the Disclosure Statement;

and in light of the motion that the Court itself raised in its April 9, 2009 Order of Court to the effect that, if the Court should reject the Disclosure Statement (on the ground that it describes a facially unconfirmable plan), then the instant Chapter 11 bankruptcy case(s) shall be converted to Chapter 7;

and subsequent to a hearing held on May 7, 2009, to consider all of the above matters,

it is hereby determined that the Court shall issue an order to the effect that (a) the Fifth Plan is unconfirmable for at least several reasons, (b) the Disclosure Statement, in describing the Fifth Plan, describes not only an unconfirmable plan but one that is also facially unconfirmable, (c) the Disclosure Statement consequently cannot be approved, that is it shall be rejected, (d) the Debtor and the Co-Proponents have been, and are, unable to effectuate a confirmable plan within a reasonable period of time, and (e) the instant Chapter 11 bankruptcy case(s) consequently shall be converted to Chapter 7.

The rationale for the Court's decision is set forth below.

I.

At the outset, the Court notes that the Fifth Plan embodies a settlement — at least what is purported to be a settlement — of disputed, unliquidated, pre-petition asbestos liability claims that exist against the Debtor and the Insurers (both are named as defendants with regard to such claims, which claims are hereafter referred to as "the Asbestos Claims"), which settlement (hereafter "the Asbestos Claims Settlement") has been entered into between the asbestos claimants (hereafter "the Asbestos Claimants"), on the one hand, and the Debtor and the Co-Proponents, on the other hand, without the consent, and over the objection, of the Insurers. The Insurers — at least Travelers Casualty and Surety Company (hereafter "Travelers"), one of the Insurers and a primary insurer of the Debtor — contend, and the Debtor and the Co-Proponents have not disputed, that the Insurers, by virtue of terms contained in the insurance policies to which they and the Debtor are parties (hereafter "the Insurance Policies"), possess a contractual right to defend the Debtor (as the insured) with respect to, and to settle as they deem expedient, any of the Asbestos Claims; the policy clauses setting forth such rights are hereafter referred to as "the Right to Defend and Settle Clauses." See May 1, 2006 Travelers' Objection to Modified Disclosure Statement, App. A, ¶ 11, at pp. 4-5 (Doc. No. 1042). Also not disputed is that the Insurance Policies contain clauses the substance of which is that the Debtor (as the insured) shall (a) not, except at its own cost, voluntarily make any payment, assume any obligation, or incur any expense (hereafter "the Voluntary Payment Clauses"), and (b) cooperate with the Insurers (hereafter "the Cooperation Clauses"). See Id. As the Court understands it, the Debtor and the Co-Proponents contend that, pursuant to Pennsylvania law, they may enter into the Asbestos Claims Settlement and thereby settle the Asbestos Claims without the consent of the Insurers notwithstanding the Insurers' rights that emanate from the foregoing insurance policy clauses (hereafter referred to as "the Insurers' Right to Control the Asbestos Litigation"), simply provided that the Asbestos Claims Settlement is reasonable and entered into in good faith. The Insurers dispute that Pennsylvania law allows the Debtor and the Co-Proponents to so settle. If Pennsylvania law does not allow for such a settlement, then, as a threshold matter, the Court could not approve the Asbestos Claims Settlement, in which case (a) the Fifth Plan is unconfirmable, (b) the Disclosure Statement describes a facially unconfirmable plan, and (c) the Disclosure Statement must be rejected.

Does Pennsylvania law allow for such a settlement, that is a settlement of the Asbestos Claims without the consent of the Insurers notwithstanding the Insurers' Right to Control the Asbestos Litigation, simply provided that the Asbestos Claims Settlement is reasonable and entered into in good faith? The Court holds that such a settlement is not permissible under Pennsylvania law. The Court so holds for the following reasons. First, the law in Pennsylvania, stated broadly, is that an insured is not free to enter into a settlement of a claim absent an insurer's consent — no matter how reasonable such settlement is, even if such settlement has been entered into in good faith, and even if such insurer has not been prejudiced by such settlement — if such insurer (a) is possessed of insurance contract rights similar to the Insurers' Right to Control the Asbestos Litigation, (b) has undertaken to defend, and is defending, such insured with respect to such claim, and (c) does not act in bad faith or unreasonably in refusing to settle such claim. See Fisher v. USAA Casualty Insurance Co., 973 F.2d 1103, 1106-1107 (3rd Cir.1992); see also Epstein v. Erie Indemnity Co., 39 Pa.D. & C. 117, 126 (Pa.Com.Pl.1940) ("After the insurer has assumed control of the defense, the insured has no right to settle the claim"); 14A Summ.Pa.Jur.2d Insurance § 18:26 (West 2008) (citing Epstein decision); 14 Couch on Insurance § 203:38 (West 2008) ("Liability policies typically contain conditions which require the consent of the insurer with regard to any settlement, often referred to as the `consent-to-settle' clause or `voluntary payment' provision. Pursuant to such provisions, an insured that enters into a settlement without the insurer's consent breaches the terms of the policy, thereby voiding any coverage for the settlement."; "citing Fisher to the effect that a showing of prejudice is not required in relation to an application of the voluntary payment provision").¹ Second, the Court must find that the Insurers have undertaken to defend, and are defending, the Debtor with respect to the Asbestos Claims. With respect to the issue of defense of the Debtor, the Debtor and the Co-Proponents argue that such defense has been lacking only because the Insurers have apparently (a) attempted to impose some percentage of previous defense costs upon the Debtor, and (b) conducted their defense under a reservation of rights as to the issue of whether the Asbestos Claims are covered under the Insurance Policies. Such arguments are unavailing, however, because (a) what would arguably be relevant to the Court's analysis is not whether an attempt was made to impose certain of the aforesaid defense costs upon the Debtor but rather whether the Debtor has actually ever paid any portion of such defense costs, (b) the Debtor and the Co-Proponents represent to the Court that the Debtor, in fact, has been unable to pay any of such defense costs,² see Feb. 25, 2009 Debtor's Brief, at p. 12 (Docket No. 1302); Aug. 5, 2005 Debtor's Brief, at p. 5 (Docket No. 872), and (c) the law in Pennsylvania allows for the Insurers to defend under a reservation of rights, see 14A Summ.Pa.Jur.2d Insurance § 18:29 (West 2008) (citing Pennsylvania cases to that effect, as well as stating, in particular, that "[a]n insurer's participation in defending the insured does not affect its ability to later assert that the insured is not entitled to compensation from the insurer simply because it is not covered under the policy").³

Third, the Court holds that the Insurers have not acted in bad faith or unreasonably in refusing to settle the Asbestos Claims via the Asbestos Claims Settlement or on terms remotely similar to such settlement. The basis for such holding by the Court is that which supports the Court's holding, set forth below, that the Asbestos Claims Settlement is neither reasonable nor one that was entered into in good faith. Because of the foregoing, and given the Insurers' Right to Control the Asbestos Litigation, the Debtor may not enter into the Asbestos Claims Settlement without the consent of the Insurers, no matter (a) how reasonable such settlement is, (b) if such settlement has been entered into in good faith, and (c) if the Insurers are not prejudiced by such settlement. Because the Insurers have withheld their consent to the Asbestos Claims Settlement, such settlement is impermissible under Pennsylvania law.

However, even accepting arguendo that Pennsylvania law is as the Debtor and the Co-Proponents contend, they still may only settle the Asbestos Claims without the Insurers' consent, according to their statement of the law, if the Asbestos Claims Settlement is reasonable and entered into in good faith....