In re U.S. Brass Corp.

• Decision Date: 31 July 2002
• Docket Number: No. 01-40341.,01-40341.
• Parties: In the Matter of U.S. BRASS CORPORATION, Debtor. U.S. Brass Corporation; Eljer Plumbingware, Inc., formerly known as Eljer Manufacturing, Inc.; Eljer Industries, Inc.; Shell Oil Company; CNA Holdings, Inc., formerly known as Hoechst Celanese Corporation, Appellants, v. Travelers Insurance Group, Inc., et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

301 F.3d 296

In the Matter of U.S. BRASS CORPORATION, Debtor.

U.S. Brass Corporation; Eljer Plumbingware, Inc., formerly known as Eljer Manufacturing, Inc.; Eljer Industries, Inc.; Shell Oil Company; CNA Holdings, Inc., formerly known as Hoechst Celanese Corporation, Appellants, v. Travelers Insurance Group, Inc., et al., Appellees.

No. 01-40341.

United States Court of Appeals, Fifth Circuit.

July 31, 2002.

COPYRIGHT MATERIAL OMITTED

Jarrel D. McDaniel (argued), Akin, Gump, Strauss, Hauer & Feld, John E West, Gwendolyn Johnson Samora, Vinson & Elkins, Houston, TX, for Shell Oil Co.

Paul M. O'Connor (argued), Kasowitz, Benson, Torres & Friedman, New York City, James W. Bartlett, Jr., Kasowitz, Benson, Torres & Friedman, Houston, TX, for CNA Holdings, Inc.

Robert B. Millner (argued), Robert C. Johnson, Sonnenschein, Nath & Rosenthal, Chicago, IL, Judith Elkin, Haynes & Boone, Dallas, TX, for Travelers Ins. Group, Inc. and Travelers Cas. & Sur. Co.

Mark D. Plevin, Paul Alp, Crowell & Moring, Washington, DC, for Century Indem. Co. and International Ins. Co.

Warren Howard Smith, Warren Smith & Associates, Dallas, TX, for Century Indem. Co.

David W. Parham, Strasburger & Price, Dallas, TX, for Employers Mut. Cas. Co., Gibraltar Ins. Co., Granite State Ins. Co., National Union Fire Ins. Co. of Pittsburgh, PA, Hartford Acc. & Indem. Co., Old Republic Ins. Co., First State Ins. Co., Stonewall Ins. Co., Allstate Ins. Co., Reliance Ins. Co., Zurich Ins. Co., North River Ins. Co., Lexington Ins. Co., Royal Ins. Co., National Surety Corp., International Ins. Co. and Continental Ins. Co.

James A. Smith, Aronberg, Goldgehn, Davis & Garmisa, Chicago, IL, for Allstate Ins. Co.

Oscar R. Cantu, Weil, Gotshal & Manges, Miami, FL, for Eljer Plumbingware, Inc. and Eljer Industries, Inc.

Michael Richard Rochelle (argued), Stephen T. Hutcheson, Rochelle, Elrod & Hutcheson, Dallas, TX, for U. S. Brass Corp.

Appeals from the United States District Court for the Eastern District of Texas.

Before DUHÉ, BARKSDALE and DENNIS, Circuit Judges.

DENNIS, Circuit Judge:

A confirmed plan of reorganization provided that certain claims against the Chapter 11 debtor and its non-debtor affiliates would be resolved in a court of competent jurisdiction and determined by settlement or final judgment. The debtor, its affiliates, and the claimants later requested the bankruptcy court's approval of a proposed agreement to liquidate the claims through binding arbitration. The bankruptcy court denied the request, and the district court affirmed that judgment. This appeal presents a subject matter jurisdiction challenge and the substantive issue of whether the proposed agreement constitutes an impermissible attempt to modify a substantially consummated plan of reorganization. We find that the bankruptcy court had jurisdiction over this matter and agree with its determination that the proposed agreement would modify the plan in violation of the Bankruptcy Code. Accordingly, we AFFIRM.

I. BACKGROUND

Between 1975 and 1990, United States Brass Corporation manufactured and marketed a polybutylene plumbing system for residential and commercial construction, repair, and remodeling. U.S. Brass produced the pipe and fittings used in the plumbing system from raw materials supplied by Shell Oil Company and CNA Holdings, Inc. (formerly Hoechst Celanese Corporation). The system turned out to be defective, and, as a consequence, numerous homeowners, homeowners associations, developers, builders, and plumbing contractors sued U.S. Brass, U.S. Brass's parent corporations,¹ Shell, and CNA (collectively "the Appellants"). According to U.S. Brass, its insurers' unwillingness to defend or provide coverage for the lawsuits caused the company to file for bankruptcy protection in the Eastern District of Texas on May 23, 1994.

Shell and CNA filed a joint claim in the U.S. Brass Chapter 11 case for $1,012,732,856.00, representing the companies' actual and estimated expenditures in connection with the defective plumbing system and the resulting litigation. Shell also filed a separate proof of claim in the amount of $53,331,738.00 for funds it expended in settlement of homeowners' claims involving U.S. Brass products.

Resolving the Shell/CNA plumbing claims was a principal object in drafting a plan of reorganization for U.S. Brass. And it became clear early in the drafting process that the debtor and its affiliates were relying heavily on insurance proceeds to satisfy those claims. Consequently, the Appellees ("Insurers"), who issued insurance policies to U.S. Brass and Eljer covering the period of the plumbing system's manufacture and installation in buildings throughout the country, were active in the reorganization. In particular, the Insurers objected to the September 24, 1997 version of the reorganization plan because they feared it would invite collusive behavior among the debtor, Eljer, Shell, and CNA in the liquidation of the Shell/CNA claims. The Insurers were also concerned that the proposed plan would prevent them from asserting coverage defenses arising from violations of the "cooperation" and "no action" provisions of their policies. According to the Insurers, those provisions require U.S. Brass and Eljer to cooperate with them in defending plumbing claims and relieve the Insurers of their indemnity obligations unless the claims are fully and fairly adjudicated or settled with the Insurers' approval.

The Insurers eventually withdrew their objections to confirmation, but only after the plan was amended to preserve their coverage defenses for later adjudication in ongoing coverage litigation.² Through the amendment, the parties also formalized a method for resolving the Shell/CNA claims by adding plan sections 8.20(b) and 8.21. Section 8.20(b) requires that the claims be asserted "by institution of litigation in a court of competent jurisdiction," with recovery to be "determined by settlement or final judgment"; section 8.21 sets forth a time limit for such litigation to be commenced or continued.³

Even before the amendment, however, the parties understood that the Shell/CNA claims would be litigated. Both the September 1997 and final versions of the plan included section 4.1(e)(i), which mandates an alternative dispute resolution procedure for the liquidation of other outstanding plumbing claims, primarily those of homeowners. That procedure permits binding arbitration proceedings if agreed to by the parties. But section 4.1(e)(iv) exempts the Shell/CNA claims from the ADR mechanism.⁴ Thus, the ADR provisions do not conflict with or undermine the later-added litigation requirement for the Shell/CNA claims.

The bankruptcy court confirmed the amended plan on February 24, 1998, and incorporated into its Confirmation Order the Stipulation Between the Debtor and Certain Named Insurers. The stipulation provided that U.S. Brass and Eljer would defend the Shell/CNA claims in good faith and not seek to end that litigation through collusive trial or settlement with the claimants.

On March 19, 1998, the plan became effective, and, as prescribed by its initial funding provisions, U.S. Brass and Eljer made a cash payment to the Brass Trust, the entity created to receive and distribute funds to plumbing claimants and other creditors. Pursuant to a settlement agreement included in the plan, Shell and CNA received $2,500,000.00 on their claims. The plan provides that the remainder of the Shell/CNA claims, still exceeding one billion dollars in the companies' estimate, could be recovered only from insurance proceeds. Furthermore, the plan requires any proceeds recovered on the Shell/CNA claims to be paid over to the Brass Trust. Eighty percent of those proceeds would then be distributed to the claimants in the Cox class action,⁵ thereby reducing Shell and CNA's payment obligations to the class.⁶ The remaining twenty percent would be available for other plumbing claimants.

In accordance with the plan, Shell and CNA instituted litigation against Eljer in the courts of New Jersey and filed suit against U.S. Brass in Collin County, Texas. On March 12, 1999, this court dismissed as moot an appeal from the bankruptcy court's Confirmation Order.⁷ We found that "the transactions that have taken place to date, the exchange of mutual releases, the disbursements already made, and the general implementation of the plan by all the involved parties evidence substantial consummation of the plan."⁸

On October 18, 1999, the Appellants filed a "Motion for Order in Aid of Consummation of Plan and for Approval of Settlement of Plumbing Claims of Shell Oil Company and Hoechst Celanese Corporation" with the bankruptcy court. The motion requested the court's approval of a proposed settlement agreement among U.S. Brass, Eljer, Shell, and CNA. Under the agreement, the Shell/CNA claims would be liquidated by submission to final and binding arbitration. In addition, the pending lawsuits in New Jersey and Texas would be dismissed, but the limitations period of plan section 8.21 would be tolled so that those suits could be reinstituted if necessary.

The Insurers filed objections to the motion, contending that arbitration of the claims without their consent would alter their rights under the plan and constitute a breach of the "cooperation" and "no action" clauses of the U.S. Brass/Eljer polices. After a full evidentiary hearing, the bankruptcy court denied the motion on two bases. First, the court found that the proposed agreement "fails to settle any matter before the courts":

[T]he testimony offered at the hearing on the Motion made it abundantly clear to this Court that the proposed agreement will not end, expedite or curtail litigation of the Shell/[CNA] claims. It is no settlement at all. No arms length bargaining has occurred. No value has changed hands. No claims have been released or reduced. The Motion simply seeks to substitute an arbitration process for the resolution of...