Fourth Circuit upholds asbestos plan as made in good faith

The district court did not err when it held that a Chapter 11 reorganization plan by asbestos manufacturing debtors was proposed in good faith and satisfied the various requirements for approval, the 4th U.S. Circuit Court of Appeals held in a published opinion.

The liability insurance provider for the debtors objected to their plan on several grounds. The Fourth Circuit rejected each of the objections and agreed with the district court’s rationale that the plan’s unique circumstances mitigated fraud concerns.

“We, like the bankruptcy court, are ‘not inclined to [so] indict [our] colleagues on the state benches,’ nor do we believe that the measures Truck seeks are inherently ‘necessary to protect state courts from fraud,’” U.S. Circuit Judge G. Steven Agee wrote for the panel.

Joined by Judge Robert B. King, Agee affirmed the Western District of North Carolina’s holding in In Re: Kaiser Gypsum Company Inc. (VLW 025-2-157)

In a concurring opinion, Judge A. Marvin Quattlebaum expressed that the debtors’ arguments made him “a bit queasy.”

“The fact that neither Kaiser nor the claimants will relent makes me wonder if there is not something to Truck’s argument,” Quattlebaum wrote.

None of the attorneys involved with this matter responded to a request for comment.

On remand

Truck Insurance Exchange objected to the Chapter 11 reorganization plan proposed by the debtors, Kaiser Gypsum and Hanson Permanente Cement. Both are defendants in thousands of asbestos lawsuits. The plan had unanimous support from all claimants and other parties.

The U.S. Supreme Court ultimately reversed the district court and Fourth Circuit holdings that Truck was not a party in interest to the plan and remanded the case to determine whether the district court erred in finding that the plan was proposed in good faith and complied with the law.

Good faith

Truck first contended that the reorganization plan was not proposed in good faith, as required by 11 U.S.C. § 1129(a)(3).

Although what constitutes “good faith” here was undefined by statute and Fourth Circuit case law, Agee said “our sister circuits have held that a plan is proposed in good faith where it ‘fairly achieve[s] a result consistent with the objectives and purposes of the Bankruptcy Code.’”

“The two ‘recognized’ objectives of the Code, in turn, are ‘preserving going concerns and maximizing property available to satisfy creditors,’” the judge explained, looking to the U.S. Supreme Court’s opinion in Bank of Am. Nat’l Tr. & Sav. Ass’n v. 203 N. LaSalle St. P’Ship.

And while the panel did not go so far as to say compliance with those objectives conclusively established good faith, Agee said “we agree it provides strong evidence of that standard being met,” adding that courts must still consider the totality of the circumstances.

Here, the district court did not clearly err in concluding that the plan was proposed in good faith, beginning with a careful examination of the totality of the circumstances surrounding the formulation of the plan.

“Consequently, it observed that the plan was the ‘product of extensive arms’-length negotiations among [interested parties], reflect[ed] a consensual resolution of the Debtors’… liabilities[,] and maximize[d] the value of assets available to satisfy claims,’” Agee wrote.

“In other words, the court found as a factual matter that the plan comports with the objectives of the Bankruptcy Code,” the judge said. “These factual findings — which remain unchallenged — led the district court to conclude that the plan satisfies § 1129(a)(3)’s good faith requirement.”

The panel discerned no clear error in the court’s conclusion that the plan would “fairly achieve a result consistent with the objectives and purposes of the Bankruptcy Code.”

Seeking to avoid that conclusion, Truck bristled at the fact that insured asbestos claims — but not uninsured asbestos claims—were to be litigated in the tort system under the plan.

“But a desire to maximize the relevant asset (here, the Debtors’ non-eroding asbestos insurance provided through Truck) does not constitute bad faith,” Agee responded. “To the contrary — bankruptcy courts routinely allow claimants to pursue insured claims through the tort system.”

Anti-fraud measures

The panel was unpersuaded that the Debtors’ refusal to add anti-fraud measures for the insured claims in the tort system, without more, signified bad faith.

“To begin, given Truck’s non-eroding insurance coverage, which applies to even fraudulent claims, the Debtors had little need to include such anti-fraud measures,” Agee wrote.

“That the Debtors wanted to ensure the Plan’s passage by remaining committed to the originally negotiated deal with all parties is a far cry from Truck’s assertion that the Debtors colluded with future claimants and their representatives to purposefully facilitate fraudulent claims,” he pointed out.

In this case, the Debtors were merely utilizing the contractual insurance rights to which they were entitled.

“Truck’s dissatisfaction with this state of affairs does not give it a cognizable basis to rewrite the policy it freely entered under the guise of the Debtors’ purported ‘bad faith,’” Agee noted, adding that Truck’s argument implied that courts were helpless to guard against fraud.

“Yet the evidence it has presented simply does not support that claim — a claim that not only ignores the ability of courts and legislatures to promulgate rules and procedures to prevent perceived risks but also underestimates the ability of courts to effectively supervise their cases and ‘protect the integrity of the judicial process,’” Agee said.

Agreeing with the bankruptcy court that “Truck’s arguments [] hinge [] on speculation as to future events, such as what would happen in state courts,” Agee said much of Truck’s evidence came from the Western District of North Carolina’s In re Garlock Sealing Techs., LLC.

“But the fact that there was fraud in that case does not lead to the conclusion that there will be fraud in this one,” Agee wrote.

Truck also speculated that courts were unequipped to shield it against fraudulent claims.

“Unless and until Tuck provides concrete evidence to support its position, its concerns will remain purely speculative and thus cannot support its bad faith argument,” the panel concluded.

But the panel cautioned that failing to include such fraud protections would not always be permissible – the necessity of such measures would vary on the facts of the case.

Recognizing that Truck had an equitable argument, insofar as the Debtors were not statutorily prohibited from including such measures in the plan, Agee said “nothing in the Bankruptcy Code that legally requires them to do so.”

Nothing in the record suggested that the Debtors’ decision in that regard “was rooted in anything remotely resembling bad faith.”

“Quite the opposite — the record reflects that their decision was driven by pragmatic concerns and an understanding that they were clearly entitled to the full scope of coverage Truck had agreed to decades ago,” Agee wrote.

Statutory requirements

Truck maintained that the plan failed to satisfy four of the statutory requirements in 11 U.S.C. § 524(g), the first being that the trust must “assume the liabilities of a debtor” for current and future asbestos-related claims. The panel disagreed.

“In short, the Trust effectively assumes the Debtors’ liabilities, either by directly resolving uninsured claims through the Trust’s administrative process, or by indirectly resolving insured claims through a combination of tort system litigation, coverage under the Truck policy, and the Trust’s other assets,” Agee pointed out.

The Trust also plainly comported with both prongs of the requirement that it must “be funded in whole or in part by the securities of [one] or more [involved] debtors . . . and by the obligation of such debtor or debtors to make future payments, including dividends.”

“It is funded in part by the Debtors’ security: the $1 million note,” Agee said. “And by its very nature, that $1 million note obliges the Debtors to make a future payment(s).” None of Truck’s arguments to the contrary compelled a different conclusion.

And because the Trust was entitled to own the reorganized Debtors if a specified contingency occurs – here, the Debtors defaulting on the $1 million note – Agee said the plan plainly satisfied the third requirement of § 524(g).

Finally, the panel agreed with the district court’s rationale that the Debtors “demonstrated a genuine risk that their assets would be consumed by uninsured punitive damages awards, which would impact both current and future claimants’ ability to collect on their claims.”

Truck’s emphasis on its unlimited insurance policies ignored “the fact that, without Chapter 11 relief, the Debtors would still face uninsured judgments and claims, including punitive damages awards,” Agee wrote.

Whereas the district court made the requisite findings and concluded that the Trust satisfied § 524(g), the panel found no error and affirmed its judgment.