Feeling Left Out: The Debate over Insurer Participation in Prepackaged Bankruptcy Plans

In a typical prepackaged bankruptcy case, a company facing asbestos liabilities and the law firms representing the asbestos claimants engage in extensive negotiations regarding the potential resolution of the company's liabilities, in which insurers are not permitted to participate. These negotiations ultimately result in a settlement of the company's current and future asbestos liabilities that is memorialized in a prepackaged bankruptcy plan. Prior to filing the bankruptcy case, the company seeks and obtains support for the proposed plan from its creditors. Once the requisite creditor support is attained, the company files its prepackaged bankruptcy case seeking to significantly streamline the normal Chapter 11 bankruptcy process.

Companies that have filed prepackaged bankruptcy cases in the asbestos context maintain that by filing for bankruptcy and availing themselves of channeling injunctions under Section 524(g), they are able to provide reasonable compensation to hundreds of thousands of injured individuals in an orderly and expedited claim process, while minimizing litigation and transactional costs. Prepackaged bankruptcy filings, however, can also be an attempt by policyholders to fix and accelerate their insurance recoveries at arbitrary and inflated amounts without permitting insurer participation in the negotiation of the settlement or the prepackaged bankruptcy plan. The exclusion of insurers seeking to participate in a policyholder's bankruptcy proceedings from the plan negotiation and approval process may abrogate their contractual rights. In several recent cases, insurers have attempted to participate in prepackaged bankruptcy cases to protect their interests with mixed results. Two recent bankruptcy cases demonstrate the insurance-related issues that arise when a policyholder files a prepackaged bankruptcy case: the Combustion Engineering and the Halliburton Co. Subsidiaries bankruptcy cases.