(Article from Insurance Law Alert, April 2019)
For more information, please visit the Insurance Law Alert Resource Center.
A Washington district court ruled that a federal bankruptcy court erred in approving a plan that commuted certain insurance policies while enjoining non-settling insurers from pursuing claims against the repurchasing insurers. In re Fraser’s Boiler Serv., Inc., 2019 WL 1099713 (W.D. Wash. Mar. 8, 2019).
Fraser’s Boiler Service (“FBS”), a former manufacturer of asbestos-containing products, became insolvent. A receiver took over its assets for the sole purpose of paying asbestos claims. FBS was not eligible for an asbestos trust under § 524(g) of the Bankruptcy Code because it had no ongoing business. FBS proposed a reorganization plan in which FBS would sell back general liability policies to certain insurers for $11.66 million in exchange for mutual releases. The settlement was styled as a § 363 sale free and clear of claims related to the repurchased policies. The plan also enjoined non-settling insurers from asserting contribution or indemnity claims against the commuting insurers. A bankruptcy court approved the plan over the non-settling insurers’ objections. The district court reversed.
The district court ruled that the bankruptcy court lacked jurisdiction to issue a final judgment and that Ninth Circuit precedent prohibited a sale free and clear of third-party claims. Although the district court ruled that the bankruptcy court did not have “core” jurisdiction to enjoin the non-settling insurers’ claims, it concluded that the bankruptcy court had “non-core” jurisdiction over the sale and injunction based on the “undeniable relationship” between the inter-insurer claims and FBS’s ability to sell back its policies. The district court also ruled that the bankruptcy court did not have authority to issue an injunction in light of § 524(e) which mandates that “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.” In rejecting the injunction, the court emphasized that Ninth Circuit precedent unequivocally precludes bankruptcy courts from discharging the liabilities of non-debtors. The court noted that some bankruptcy courts have distinguished that precedent and allowed such injunctions under certain circumstances, but deemed those decisions erroneous. The court noted that even if it were to recognize an exception so as to allow an injunction of inter-insurer claims, the injunction at issue would still be impermissible as overly broad.
Finally, the court held that the bankruptcy court lacked power to approve the sale of the policies free and clear of the non-settling insurers’ claims under § 363. The court explained that the inter-insurer claims were not “an interest in [FBS’s] property,” as required by § 363(f), and that the sale did not comply with § 363(f)(1), which requires non-bankruptcy law to permit the sale of such property free and clear. As to the latter issue, the court noted that Ninth Circuit precedent did not permit the sale and that in any event, the settlement did not adequately protect the interests of the non-settling insurers.