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iii. Motor Vehicle Casualty Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 980 ((9th Cir. 2012)
Issue: Whether the bankruptcy court erred in confirming the debtor's section 524(g) plan of reorganization without permitting the non-settling insurers to challenge the plan.
Holding: The court reversed and remanded the decision of the district court. The court first addressed the Appellees' (the committee of unsecured creditors and the legal representative of future asbestos claimants) argument that the insurers' appeal was moot because they had been denied a stay pending appeal and the plan had been substantially consummated. The court first concluded that the appeal was not constitutionally moot because "we could reverse plan confirmation or require modification of the plan, thereby giving relief to Appellants." The court then addressed whether the appeal was equitably moot. The court noted that the insurers had been diligent in seeking, and stated that "[t]o say that a party's claims, although diligently pursued, are equitably moot because of the passage of time, before the party had a chance to present views on appeal, would alter the doctrine to be one of 'inequitable mootness.' ... If Appellants here have presented appellate claims that can be remedied by some reasonable means without totally dislodging the § 524(g) plan, it would be inequitable to dismiss their appeal on equitable mootness grounds merely because the reorganization has proceeded." The court then found that the plan had not been substantially consummated because "though distribution under the plan has commenced, all or substantially all of the property the plan proposes to transfer has not been transferred. The plan involves $600 million in settlement proceeds, and, per the current record, only $135 million has been transferred to the trust. Further, the trust has only distributed $44.7 million for pre-petition claims, claims submitted directly to the trust, the Business Loss Allocation, operating expenses, and contingent and professional fees-only $15 million of this has been to asbestos claimants." Next, the court found that modifying the plan here would not unduly prejudice the rights of third parties. The court noted that "[t]he Third Circuit has allowed changes to a 524(g) plan where the plan had already been approved by claimants" and further stating that "[w]hile the claimants agreed to the plan, they did not agree to a plan that promised no future changes." Finally, the court found that the bankruptcy court would be able to devise an equitable remedy on remand without completely upsetting the plan. Next, the court addressed the issue of standing. The court concluded that the insurers had both bankruptcy standing (standing to object to confirmation of the plan) and appellate standing to appeal the confirmation ruling. The court rejected the bankruptcy court's conclusion that the plan was insurance neutral and thus precluded the insurers' standing to object to it. The court found that "the plan allows direct actions against Appellants. It allows the trust to pay out claims according to the trust distribution plan and then to seek indemnification from Appellants. It terminates Appellants' ability to collect claims from settling insurers. It affects the nature of Appellants' contracts with Appellees. Though § 524(g) contemplates this kind of interference with insurers' contracts, there is no doubt that the vast changes to the insurance policies and relationships have the potential substantially to impact Appellants economically. The plan is therefore not insurance neutral, which provides the non- settling insurers with party in interest standing under § 1109(b)." The court then found that the insurers also had constitutional and prudential standing to object to confirmation of the debtor's plan. Next, the court addressed the district court's determination that the insurers' anti-assignment
©2014 William L. Norton III
