Circuit Courts Split Over Insurer Standing in Bankruptcy Cases
Over the past several years, circuit courts have adopted divergent views on whether an insurer has the right to participate in a bankruptcy case filed by its insured. In many cases, the bankrupt insured, and other parties in interest, have employed standing challenges to deny insurers meaningful involvement in the proceedings. These standing objections are frequently based on the fact that the insurers are not formally “creditors” insofar as any premiums due under the policies were satisfied prior to the bankruptcy filing. Standing challenges are raised despite the fact that insurance policies are often the largest, if not the only, asset in the bankruptcy case and the insurers continue to face substantial coverage exposure under such policies.
Perhaps the most significant fact that can be gleaned from these cases is that an insurer’s right to appear and be heard in an insured’s bankruptcy may depend upon the venue in which the case was filed. Indeed, while some circuit courts have fully embraced insurer standing, an opinion issued earlier this year by the United States Court of Appeals for the Seventh Circuit, In re C.P. Hall, Co.,1 demonstrates that insurer standing is not sacrosanct.
Facts of CP Hall
CP Hall Company (the “Debtor”) was among the many asbestos manufacturers who were deluged by asbestos claims in the 1980s. Those claims were tendered to the Debtor’s primary carrier for defense and indemnity. The primary insurer denied coverage and a coverage dispute was being litigated in state court at the time the Debtor filed for bankruptcy protection. As of the bankruptcy filing, the Debtor alleged that it had $10 million remaining in insurance coverage from its primary insurer and $6 million in coverage under an excess policy. In light of the uncertainties in the state court coverage litigation, the Debtor and primary carrier entered into a settlement for approximately $4 million of the remaining $10 million in coverage under the primary policy.
The parties filed a motion for Bankruptcy Court approval of the settlement pursuant to the Federal Rules of Bankruptcy Procedure.2 The excess insurer, which provided coverage for asbestos liabilities above the primary policy, objected to the settlement on the grounds that the bankrupt insured should have litigated the coverage action against the primary carrier to judgment with the hope of securing the entire $10 million in coverage. By failing to do so, the excess carrier argued, the settlement increased the likelihood that the secondary carrier would be forced to honor its obligations under the excess policy.
The Bankruptcy Court refused to consider the excess insurer’s objection on the grounds that it lacked standing to object to the settlement. The District Court affirmed the Bankruptcy Court’s ruling and held that the excess carrier did not have a pecuniary interest that would be directly and adversely affected by the settlement. The excess carrier appealed the District Court’s decision to the Seventh Circuit.
Seventh Circuit’s Analysis
The tenor of the Seventh Circuit’s opinion, and how it characterized the excess insurer’s interests in the case, was telling. At the outset of the decision, the Court identified the secondary insurer as a “non-party” and later observed that the insurer was not a creditor.3 The Court also suggested that the excess insurer was attempting to “butt into a settlement negotiation between two other parties.”4
Having classified the secondary insurer on such remote terms, the CP Hall Court then proceeded to examine the nature of the secondary insurer’s financial interests and how such interests would be impacted if the settlement were approved. The secondary insurer complained that the settlement posed an imminent threat to its financial assets. The Court characterized those financial concerns as “probabilistic” insofar as the secondary insurer could not establish, with certainty, that rejection of the settlement would benefit the excess insurer.5
At bottom, the Court examined whether the bankruptcy standing provision, codified at section 1109(b) of the Bankruptcy Code, conferred a right to be heard on the excess carrier. Section 1109(b) provides:
(b) A party in interest, including the debtor, the trustee….a creditor…may raise and may appear and be heard on any issue in a case under this chapter.6
The CP Hall Court affirmed the District Court and held that, notwithstanding the breadth of section 1109(b), the secondary insurer could not object to the settlement. The Court reasoned that to qualify as a party in interest with standing to appear in the bankruptcy case, the party must have a legally recognized interest in the debtor’s assets.7 Because the secondary insurer was not a creditor or the debtor, the CP Hall Court concluded that it was not a “party in interest” under section 1109(b) of the Bankruptcy Code and hence lacked standing to object to the settlement.8 Rather, the excess carrier was “just a firm that may suffer collateral damage from a ruling in a bankruptcy proceeding.”
Third and Ninth Circuit Standing Decisions
While factual distinctions make it difficult to draw direct comparisons between CP Hall and standing opinions issued by the Third and Ninth Circuits, it is fair to conclude that the Seventh Circuit has adopted a more restrictive approach to insurer standing in bankruptcy cases. This conclusion is supported by the Third Circuit’s analysis in In re Global Technologies, Inc.,9 where the Court reaffirmed its well-established recognition of an insurer’s right to participate in an insured’s bankruptcy case.10 In GIT, the Court held that section 1109(b) conferred upon insurers standing to object to confirmation of a plan of reorganization that provided for the assignment of their insurance policies to a post-confirmation trust.11 The Court reached this conclusion even though that the plan included “insurance neutrality” language that preserved the insurers’ coverage defenses and rights under their policies.12
Like the plan of reorganization in GIT, the plan at issue in In the Matter of Thorpe Insulation Co.13 also provided for the assignment of insurance policies to a trust and included an “insurance neutrality” provision which purported to preserve the objecting insurers’ coverage defenses with some important exceptions. Significantly, in holding that the insurers had standing to object to the plan, the Ninth Circuit reasoned:
If the insurer’s rights are affected in any way, the insurer will have standing to object to the alteration of its rights.14
While the space limitations of this Client Alert do not allow for an in-depth analysis of these decisions, several critical points should be highlighted. First, debtors and other parties are increasingly utilizing standing as a procedural mechanism to deprive insurers of their day in court. Accordingly, insurers should be prepared to present a complete factual record detailing how the underlying action would have a direct and material impact on the carrier or otherwise impair its contractual rights. Lastly, insurance companies should be mindful of the different standing standards that have been applied by various circuit and lower courts. Indeed, while the CP Hall Court adopted a creditor-centric approach to standing – focusing on whether the insurer has a direct, non-contingent financial stake in the proceeding – other circuits examine whether an insurer’s interests would be impaired in the underlying proceeding.
For More Information
If you have any questions regarding this Client Alert, please contact John C. Kilgannon at 215.751.1943 or the Stevens & Lee attorney with whom you normally consult for bankruptcy matters.
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.
1 750 F.3d 659 (7th Cir. 2014).
2 Under Federal Rule of Bankruptcy Procedure 9019, a Bankruptcy Court may approve a settlement between the debtor and a third party if the terms of the settlement do not fall below the lowest point in the range of reasonableness. In re Petters Co., Inc., 455 B.R. 166, 168 (8th Cir. BAP 2011)(settlement need not be the best result possible; bankruptcy court must only determine whether it falls below the lowest point in the range of reasonableness).
3 Presumably, the excess carrier was not a creditor because the subject policy was issued prior to the bankruptcy proceeding and all premiums and other obligations were paid in full.
4 750 F.3d at 661.
6 11 U.S.C. §1109(b).
9 645 F.3d 201 (3d Cir. 2011)
10 Prior to the GIT opinion, the Third Circuit laid the foundation for a broad right of insurer participation in Chapter 11 cases. In re Combustion Engineering, 391 F.3d 190, 214 n. 21 (3d Cir. 2004)(“section 1109(b) has been construed to create a broad right of participation in Chapter 11 cases”); In re Amatex Corp., 755 F.2d 1034, 1042 (3d Cir. 1985)(noting that section 1109(b) intended to promote greater participation in bankruptcy cases).
11 Id. at 215.
12 Notably, at the outset of the decision, the Third Circuit declared its position on insurer standing as follows: [W]hen a federal court gives its approval to a plan that allows a party to put its hands into other people’s pockets, the ones with the pockets are entitled to be fully heard and to have their legitimate objections addressed.
13 677 F.3d 869 (9th Cir. 2012).
14 677 F.3d at 386 (citations omitted).