What Remains of CE-Style Insurance Neutrality After GIT?

Six years after CE, the Third Circuit revisited the issues of “insurance neutrality” and standing in the GIT case, this time focusing on the economic effect of plan provisions, rather than the “magic words” of CE. Given a number of possibly important differences between CE and GIT, as well as the somewhat conflicting signals to be found in the case law following GIT, it may be too soon to announce the death of CE-style insurance neutrality language as a legal matter. That said, any substantial doubt concerning whether such insurance neutrality language will be effective in eliminating insurer standing may result in its abandonment by policyholders and asbestos claimants as a practical matter.

CE and the 'Super-Preemptory' Clause

The debtor in CE had faced nearly four decades of asbestos litigation at the time it entered bankruptcy. Combustion Engineering and its parent company attempted to address the former's asbestos liabilities, as well as those of two non-debtor affiliates, through a post-confirmation trust established under Section 524(g) of the Bankruptcy Code. 391 F.3d 190 (3d Cir. 2005). Under what is known as a channeling injunction, all past and future asbestos claims were to be funneled into the trust for handling and payment. The pursuit of any claims outside of the trust was prohibited. The trust was to be funded by cash and other assets contributed by Combustion Engineering, its parent company, and the two affiliates. At the time of plan confirmation, no insurers had agreed to participate in the funding of the trust. Instead, the trust was given the right to pursue the proceeds of the insurers' policies, which were assigned to the trust. Under the terms of the trust, Combustion Engineering and the trust itself were given the exclusive right to determine whether to allow or deny a claim pursuant to the trust distribution procedures. Id. at 207. In other words, Combustion Engineering's insurers were excluded from the claims determination process. Id.

Combustion Engineering's primary and excess insurers objected to plan confirmation, arguing that their policies (or existing settlement agreements with Combustion Engineering) would be impaired under the bankruptcy plan. Acknowledging that a bankruptcy plan should not modify the contractual rights of non-debtors, the bankruptcy court inserted into the plan the following language in the confirmation order:

[N]otwithstanding anything to the contrary in this Order, the Plan or any of the Plan Documents, nothing in this Order, the Plan or any of the Plan documents (including any other provision that purports to be preemptory or supervening), shall in anyway [sic] operate to, or have the effect of, impairing the insurers' legal, equitable or contractual rights, if any, in any respect. The rights of insurers shall be determined under the Subject Insurance Policies or Subject Insurance Settlement Agreements as applicable.

Id. at 209. This language, termed the “super-preemptory” clause, was to “make clear that nothing impairs the insurers' rights.” Id. (emphasis in original) (internal citations and quotations omitted).

The Third Circuit approved the addition of the “super-preemptory” language. Before doing so, however, the appellate court considered whether the insurers had standing to challenge the plan confirmation. Standing to object to plan confirmation before the bankruptcy court is broad, open to any “party in interest.” 11 U.S.C. ' 1128(b). However, standing to appeal is more restrictive. 391 F.3d at 215. To be permitted their appeal, the objecting insurers in CE were obligated to show that they were “aggrieved” by the order, or whether their rights or interests were “directly and adversely affected pecuniarily.” Id. at 214 (internal citations and quotations omitted).

The bankruptcy court found, and the Third Circuit agreed, that the inserted “super-preemptory” provision rendered the plan insurance neutral. Id. at 209, 216-17. That is, the language of the provision “broadly preserve[d] insurers' pre-petition rights under the subject insurance policies and settlements.” Id. at 217. The Third Circuit held that the insurance neutrality of the plan left the “persons aggrieved” appellate standing test unsatisfied. As long as claims were paid consistent with the rights and conditions of the policies, the objecting insurers could not be considered “aggrieved.” The court noted that the trust distribution procedures did not provide for insurer participation in the evaluation or payment of claims; however, the insurers did not have this right pre-bankruptcy either. Id.

One difference between the insurers' rights before and after the policyholder filed for bankruptcy was the assignment of the insurers' policies to the trust. The Third Circuit agreed with the lower courts that any anti-assignment provisions in the policies would be preempted by federal bankruptcy law. Id. at 218-19. However, it devoted little time to the issue because it vacated plan confirmation on other grounds raised by a dissenting group of asbestos claimants (the Certain Cancer Claimants) who were found to have broad appellate standing. Id. at 219.

Thus, CE established the principle that insurance neutrality language, as the “super-preemptory” clause came to be known, both preserved the rights of insurers under the plan and deprived them of standing. A number of other plans adopted the CE language. Six years later, though, the continuing vitality of CE-type insurance neutrality language was called into question.

GIT 'Economic' Insurance Neutrality

GIT concerned another debtor with substantial and long-running asbestos litigation. The case also involved claims for silica-related personal injury. 645 F.3d 201, 204 (3d Cir. 2011). As part of the proposed plan of reorganization, GIT called for the entry of two channeling injunctions to funnel asbestos and silica claims into respective trusts. These trusts were to be funded by insurers, either through settlements with GIT or in the form of the assignment of coverage under the terms of the policies. Id. at 205.

The proposed plan in the case contained insurance neutrality language that was identical to that in CE, except for the addition of a carve-out: there was no impairment of insurer rights under their policies, “other than the enforcement of any 'anti-assignment' provision(s) in such policies.” Id. at 217 (Nygaard, J., dissenting). Several insurers objected on the ground that the plan did impair their rights, arguing that the establishment of the Silica Trust accelerated litigation and forced them to defend claims that might not have even existed outside of bankruptcy, while eliminating a defense to coverage under the anti-assignment policy provisions. Hartford Acc. & Indem. Co. v. Global Indus. Techs., Inc., Civil Action No. 07'1749, Bankr. Case No. 02'21626 (JKF), 2008 WL 6838582, at *3 (W.D. Pa. July 25, 2008). The bankruptcy court ruled that “[a]ll coverage defenses and contractual rights of insurers” were preserved by way of the insurance neutrality provision in the plan and that, as a result, the objecting answers lacked standing. Id. at *2-3 (internal citations and quotations omitted).

The Third Circuit reversed, in an en banc opinion, holding that the insurers had standing to object to plan confirmation despite the plan's use of CE-type insurance neutrality. The court in GIT noted that the CE plan, “through its 'neutrality' provision neither increased the insurers' pre-petition obligations nor impaired their pre-petition contractual rights under the subject insurance policies.” 645 F.3d at 212. The court went on, however, to state that CE-type “[i]nsurance neutrality is a meaningful concept where, as in Combustion Engineering, a plan does not materially alter the quantum of liability that the insurers would be called to absorb.” Id.

In CE, for example, the GIT court observed that the trust was set up to handle liabilities which, after nearly 40 years of asbestos litigation, were known quantities. By contrast, establishment of the Silica Trust immediately increased pre-petition liability by a factor of 27. The Third Circuit could not find that the plan was insurance neutral given such a staggering increase in exposure for the insurers by way of the assignment of their policies to the trust. Id.

Another difference between CE and GIT is that the question in CE was whether the objecting insurers satisfied “the more stringent standard for bankruptcy appellate standing” rather than “the more relaxed standard for bankruptcy standing.” Id. at 209 n.23. It is difficult to see, however, that this difference operates to limit the scope of the GIT decision, since the court essentially held that a party denied standing to object to plan confirmation will always have standing on appeal to contest that ruling.

The GIT court also cited as additional factors favoring recognition of insurer standing the “suspect circumstances surrounding the creation of the ' Silica Trust and the questionable provenance of the silica-related claims.” Id. at 214. The court noted that there were “non-
frivolous allegations” that GIT “sold out” its insurers “by setting up a system in which they would pay for newly ginned-up silica claims in exchange for the asbestos claimants casting their votes in favor of the GIT Plan.” Id. Citing the Congoleum case, the GIT court noted that such allegations of fraudulent conduct could support even more restrictive appellate standing. Id. (citing In re: Congoleum Corp., et al., 426 F.3d 675, 685 (3d Cir. 2005)).

It is apparent that the GIT case featured a number of unique aspects, any one of which may have contributed to the outcome. As noted, GIT featured a non-524(g) plan in which a silica trust was established, in addition to an asbestos trust. Relatedly, allegations of fraud and collusion plagued the GIT plan and were clearly of significance to the court. See, e.g., 645 F.3d at 214. Nonetheless, the court's “bottom line” seemed to be that “when 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 ' at least have bankruptcy standing.” Id. at 204. This approach to standing, with its focus on the economic impact of the plan, appeared to represent a significant shift from the CE insurance neutrality approach.

Subsequent Cases

In In the Matter of Thorpe Insulation Co., 677 F.3d 869 (9th Cir. 2012), the parties agreed that there was appellate standing on the issue of whether the bankruptcy court had correctly denied the objecting insurers bankruptcy standing. Thorpe heavily relied on GIT, focusing on the bankruptcy plan's “substantial economic impact” on non-settling insurers to find standing despite the presence of insurance neutrality language. Id. at 885. The court looked to “real-world impacts of the plan to see if it increase[d] insurance exposure and likely liabilities.” Id. In determining that there was such increased exposure, the court noted that non-settling insurers “may be bound by the Trust's determination of an amount of liability.” Id. (emphasis in original). In addition, the court observed that non-settling insurers “must indemnify payments made by the trust pursuant to settlements.” Id. at 886.

Dismissing arguments that the insurers lacked standing because of the inclusion of insurance neutrality language, the Thorpe court noted that CE is not controlling in the Ninth Circuit and, in any event, CE was distinguishable in several
respects: 1) CE was decided under the “person aggrieved” standard for appellate standing; 2) the CE plan was “vastly different”; and 3) there were a number of differences between the insurance neutrality provision in Thorpe and the CE provision, including the inclusion of several exceptions to insurance neutrality and the lack of “super-preemptory” language.

In the Third Circuit's decision in In re Federal-Mogul Global, Inc., 684 F.3d 355 (3d Cir. 2012), the major issue was assignment of policy rights, rather than standing. There was agreed-upon insurance neutrality language granting insurers the right to assert against the trust any defense against coverage available under the policies with the exception of the defense that the assignment to the trust violated the policies' anti-assignment provisions. Id. at 363. Nonetheless, Federal-Mogul may provide some insight into the reach of the GIT decision, particularly given that the author of the GIT en banc decision, Judge Kent A. Jordan, was one of the members of the Federal-Mogul panel.

Rejecting insurer arguments that an assignment to the trust would materially alter the insurers' risk, the court in Federal-Mogul pointed out that GIT had questioned whether such a transfer “in the asbestos context” would change “the risk an insurer agreed to cover.” Id. at 379.

Similarly, the court contrasted “the exceptional and well-documented increase in risk ' in Global Industrial Technologies” with the “ bare assertions” of an increase in liability in Federal-Mogul. Id. at 379 n.37. In addition, the Federal-Mogul court noted that GIT had involved “substantial evidence of collusion.” Id. Federal-Mogul also characterized GIT's holding on bankruptcy standing as being that “insurers have standing to participate in bankruptcy proceedings when the creation of a trust 'staggeringly increase[s]' insurers' risk and exposure.” Id. at 381 (quoting GIT, 645 F.3d at 212). Thus, Federal-Mogul may represent a relatively narrow reading of GIT within the Third Circuit.

“Insurance neutrality” was an important aspect of the Western District of Pennsylvania bankruptcy court's recent decision confirming the Pittsburgh Corning plan of reorganization. After two previous decisions denying confirmation to proposed bankruptcy plans, In re Pittsburgh Corning Corp., 453 B.R. 580 (Bankr. W.D. Pa. 2011); In re Pittsburgh Corning Corp., 417 B.R. 289 (Bankr. W.D. Pa. 2006), the court determined that a revised plan was confirmable. In re Pittsburgh Corning Corp., Case No. 00-22876-JKF, 2013 WL 2299620 (Bankr. W.D. Pa. May 24, 2013) (“Pittsburgh Corning III“). In overruling the objections of the last remaining insurer objectors, Mt. McKinley Insurance Company and Everest Reinsurance Company (together, “Mt. McKinley”), the court found that “the Plan is 'insurance neutral' and preserves any and all coverage issues for resolution in a non-bankruptcy proceeding, using applicable non-bankruptcy law.” Id. at *1.

“Because none of the rights, obligations, defenses, claims or issues concerning coverage are before this Court, and because the Plan and Plan Documents preserve them for resolution elsewhere,” the bankruptcy court overruled Mt. McKinley's objections “for lack of standing.” Id.; see also id. at *73. However, the court also went on to find that “the record demonstrates that the objections lack merit” and held that “they are overruled on that basis as well.” Id. at *1.

The court relied, in part, on an “insurance neutrality” provision largely mirroring that used in CE. Id. at *45. However, “[w]ithout eroding the import and significance” of the language that was “approved by the Court of Appeals in Combustion Engineering,” id. at *74, the court also noted a number of additional “specific factors” that “protect Mt. McKinley.” Id. These included two additional Plan provisions relating to insurance neutrality. Id. at *45, *74. One of these provisions states that policies issued by both settling and non-settling insurers, as well as any related insurance settlement agreements, “are binding upon the parties thereto” and have such effect as to non-parties “as provided by applicable non-bankruptcy law.” Id. at *45. The second enjoins the use in coverage litigation of a variety of findings adopted by the court in confirming the plan, including the introduction of the findings into evidence “as binding in any way (including as a basis for res judicata, collateral estoppel, issue preclusion or claim preclusion)” or “as constituting an adjudication for coverage purposes, or as otherwise being probative of the truth of any matter asserted therein ' .” Id. at *45.

Also significant to the court's decision in Pittsburgh Corning III that the Plan was “insurance neutral” was the fact that the Mt. McKinley's policy obligations had not been “resolved by the Plan” nor “assigned to the Asbestos PI Trust.” Id. at *73. Thus, the trust would be unable “to pursue Mt. McKinley because Mt. McKinley's insurance policies and proceeds are not being contributed to the trust so any actions against Mr. McKinley are left solely to their policy holders and/or others who may have those actions pursuant to applicable nonbankruptcy law'” Id. at *74. In addition, the court relied on a judgment reduction provision providing Mt. McKinley with “adequate protection of any
contribution or subrogation claims.” Id. at *46; see also id. at *74. The court noted that “although Mt. McKinley initially objected to the Plan on the ground that the Plan failed to provide adequate protection for its potential claims against other settling insurers,” Mt. McKinley withdrew its objection to the judgment reduction provision “after numerous modifications to that section” that would have the effect of preserving “Mt. McKinley's right to be made whole, in the event that it ever has contribution, indemnification, subrogation or similar claim[s].” Id. at *74.

The court in Pittsburgh Corning III expressly rejected Mt. McKinley's attempt to rely on the Third Circuit's GIT decision, first on the grounds that the Pittsburgh Corning bankruptcy, unlike GIT, “does not involve silica at all,” and second, because “the number of asbestos claims against the Debtor has not 'exploded' post-petition.” Id. at *73. Because “the volume of claims against Debtor was known and moving claims resolution out of the tort system into a trust does not increase Mt. McKinley's exposure,” Mt. McKinley's reliance on the GIT decision was “misplaced.” Id. (citing GIT, 645 F.3d at 212 (citing CE, 391 F.3d at 200-01)) (internal citation in the original). The court also rejected Mt. McKinley's argument that the plan in CE “was insurance neutral only because the pre- and postpetition claims handling procedures were the same.” Id. at *73.

Noting that because Mt. McKinley's excess policies had not been attached, “there was no prepetition claims handling/resolution process as to its policies,” the court concluded that, in any event, the Third Circuit's “reference to claims handling procedures in Combustion Engineering was not the basis for its finding that the Plan was insurance neutral.” Id.

What Remains of Combustion Engineering?

GIT and a number of subsequent cases have largely focused on the “real-world” economic effects of a plan of reorganization, rather than plan language alone. The dissent in GIT pointed out that the Plan included essentially identical insurance neutrality language to CE, which was held to be an insurance-neutral plan on the basis of the provision in question. 645 F.3d at 218 (Nygaard, J., dissenting). As stated explicitly in the plan, the insurers maintained “the same full range of contractual rights to protect their interests for which they bargained at the inception of the insurance contracts pre-petition.” Id. The fact that the insurers' rights under their policies were unchanged by the very terms of the plan of reorganization was, to the dissent, dispositive. Id.

To the extent that CE suggested that certain language in a plan could serve as a silver “neutrality” bullet, GIT cast significant doubt on that approach. What is less clear is how much the “quantum of liability” facing insurers must be increased for insurers to have standing despite the inclusion of insurance neutrality language. Federal-Mogul might suggest that the increase must be “staggering” and is unlikely to occur in the context of a traditional asbestos (rather than asbestos plus silica) bankruptcy. Also unclear is the importance of evidence of collusion. Although an aspect of the court's decision in GIT, concerns about collusion also featured in CE. Indeed, the Federal-Mogul court noted both CE and GIT involved indications of collusion that the court in each case found troubling. 684 F.3d at 362.

The very recent bankruptcy court decision in Pittsburgh Corning III held the proposed plan was insurance neutral based in part on CE-type language, Pittsburgh Corning III, 2013 WL2299620, at *45, but carefully noted a number of other factors protecting the sole objecting insurer post-confirmation. See, e.g., id. at *74. These included the absence of any assignment of insurance policies or proceeds, id. at *73, *74, and a heavily negotiated judgment reduction provision as to which all objections had been resolved, id. at *74. The court in Pittsburgh Corning III also distinguished GIT on the basis that the “quantum of liability” had not been “affected, much less materially so” because “the volume of claims” against Pittsburgh Corning had been “known” at the time of its bankruptcy filing and the number of ballots cast with respect to the proposed plan did not indicate that the insurers' exposure had been increased. Id. at *73.

Although likely correct with respect to Pittsburgh Corning, one of the traditional “first tier” asbestos defendants, this aspect of the court's decision may provide little guidance as to the impact of GIT on the insurance neutrality concept in cases involving newer or more peripheral asbestos defendants.

Conclusion

Ultimately, whatever may be said of the continuing legal vitality of CE-type insurance neutrality may be beside the point from a practical perspective. It is likely that counsel for policyholders and asbestos claimants have agreed to the inclusion of insurance neutrality language in the past in significant measure because such language would have the effect of eliminating insurer standing. To the extent that there is now at least a significant doubt whether insurance neutrality language will actually have this effect, the incentive for policyholders and claimants to consent to such language is greatly diminished.

Robert D. Goodman is a partner in the New York office of Debevoise & Plimpton LLP, where he co-chairs the firm's Insurance Litigation Practice Group. Miranda H. Turner is an associate in the firm.

Among the most hard-fought battles involving insurers, policyholders, and asbestos claimants are those that have played out in bankruptcy courts, district courts and courts of appeals called upon to review orders confirming plans of reorganization in asbestos bankruptcies. In several instances, appellate courts have overturned such orders. See, e.g., In re Global Indus. Techs., Inc., 645 F.3d 201 (3d Cir. 2011) (GIT); In the Matter of Thorpe Insulation Co., 677 F.3d 869 (9th Cir. 2012); In re Combustion Eng'g, Inc., 391 F.3d 190 (3d Cir. 2005) (“CE“).

A characteristic feature of these asbestos bankruptcies is the creation of asbestos personal injury trusts to pay the claims previously brought against the bankrupt asbestos defendant. As of May 2011, there were 56 asbestos trusts in operation, with several more in process. In re Fed.-Mogul Global Inc., 684 F.3d 355, 360 (3d Cir. 2012). A major source of the funding for these trusts has been insurance settlements. Id. Because of the importance of insurance assets to asbestos bankruptcies, the objections of insurers ' as well as question of whether insurers even have standing to object ' have become central issues in these bankruptcies.

Insurers in these cases have frequently argued that bankruptcy plans impaired their rights under their policies. The bankruptcy court in CE inserted certain language into a plan of reorganization providing that insurer rights were not impaired, notwithstanding any other provision in the plan that might be to the contrary. The Third Circuit approved the bankruptcy court's wording, which has become known as “insurance neutrality” language, and held that as a result, the insurers did not have standing with respect to most issues on appeal. The language has been used in a number of subsequent bankruptcy plans, having been advocated by some insurers as a mechanism to preserve insurers' policy rights, but also embraced by some policyholder and asbestos claimants' counsel as a
device by which insurers might be deprived of standing to object to plan confirmation.

Six years after CE, the Third Circuit revisited the issues of “insurance neutrality” and standing in the GIT case, this time focusing on the economic effect of plan provisions, rather than the “magic words” of CE. Given a number of possibly important differences between CE and GIT, as well as the somewhat conflicting signals to be found in the case law following GIT, it may be too soon to announce the death of CE-style insurance neutrality language as a legal matter. That said, any substantial doubt concerning whether such insurance neutrality language will be effective in eliminating insurer standing may result in its abandonment by policyholders and asbestos claimants as a practical matter.

CE and the 'Super-Preemptory' Clause

The debtor in CE had faced nearly four decades of asbestos litigation at the time it entered bankruptcy. Combustion Engineering and its parent company attempted to address the former's asbestos liabilities, as well as those of two non-debtor affiliates, through a post-confirmation trust established under Section 524(g) of the Bankruptcy Code. 391 F.3d 190 (3d Cir. 2005). Under what is known as a channeling injunction, all past and future asbestos claims were to be funneled into the trust for handling and payment. The pursuit of any claims outside of the trust was prohibited. The trust was to be funded by cash and other assets contributed by Combustion Engineering, its parent company, and the two affiliates. At the time of plan confirmation, no insurers had agreed to participate in the funding of the trust. Instead, the trust was given the right to pursue the proceeds of the insurers' policies, which were assigned to the trust. Under the terms of the trust, Combustion Engineering and the trust itself were given the exclusive right to determine whether to allow or deny a claim pursuant to the trust distribution procedures. Id. at 207. In other words, Combustion Engineering's insurers were excluded from the claims determination process. Id.

Combustion Engineering's primary and excess insurers objected to plan confirmation, arguing that their policies (or existing settlement agreements with Combustion Engineering) would be impaired under the bankruptcy plan. Acknowledging that a bankruptcy plan should not modify the contractual rights of non-debtors, the bankruptcy court inserted into the plan the following language in the confirmation order:

[N]otwithstanding anything to the contrary in this Order, the Plan or any of the Plan Documents, nothing in this Order, the Plan or any of the Plan documents (including any other provision that purports to be preemptory or supervening), shall in anyway [sic] operate to, or have the effect of, impairing the insurers' legal, equitable or contractual rights, if any, in any respect. The rights of insurers shall be determined under the Subject Insurance Policies or Subject Insurance Settlement Agreements as applicable.

Id. at 209. This language, termed the “super-preemptory” clause, was to “make clear that nothing impairs the insurers' rights.” Id. (emphasis in original) (internal citations and quotations omitted).

The Third Circuit approved the addition of the “super-preemptory” language. Before doing so, however, the appellate court considered whether the insurers had standing to challenge the plan confirmation. Standing to object to plan confirmation before the bankruptcy court is broad, open to any “party in interest.” 11 U.S.C. ' 1128(b). However, standing to appeal is more restrictive. 391 F.3d at 215. To be permitted their appeal, the objecting insurers in CE were obligated to show that they were “aggrieved” by the order, or whether their rights or interests were “directly and adversely affected pecuniarily.” Id. at 214 (internal citations and quotations omitted).

The bankruptcy court found, and the Third Circuit agreed, that the inserted “super-preemptory” provision rendered the plan insurance neutral. Id. at 209, 216-17. That is, the language of the provision “broadly preserve[d] insurers' pre-petition rights under the subject insurance policies and settlements.” Id. at 217. The Third Circuit held that the insurance neutrality of the plan left the “persons aggrieved” appellate standing test unsatisfied. As long as claims were paid consistent with the rights and conditions of the policies, the objecting insurers could not be considered “aggrieved.” The court noted that the trust distribution procedures did not provide for insurer participation in the evaluation or payment of claims; however, the insurers did not have this right pre-bankruptcy either. Id.

One difference between the insurers' rights before and after the policyholder filed for bankruptcy was the assignment of the insurers' policies to the trust. The Third Circuit agreed with the lower courts that any anti-assignment provisions in the policies would be preempted by federal bankruptcy law. Id. at 218-19. However, it devoted little time to the issue because it vacated plan confirmation on other grounds raised by a dissenting group of asbestos claimants (the Certain Cancer Claimants) who were found to have broad appellate standing. Id. at 219.

Thus, CE established the principle that insurance neutrality language, as the “super-preemptory” clause came to be known, both preserved the rights of insurers under the plan and deprived them of standing. A number of other plans adopted the CE language. Six years later, though, the continuing vitality of CE-type insurance neutrality language was called into question.

GIT 'Economic' Insurance Neutrality

GIT concerned another debtor with substantial and long-running asbestos litigation. The case also involved claims for silica-related personal injury. 645 F.3d 201, 204 (3d Cir. 2011). As part of the proposed plan of reorganization, GIT called for the entry of two channeling injunctions to funnel asbestos and silica claims into respective trusts. These trusts were to be funded by insurers, either through settlements with GIT or in the form of the assignment of coverage under the terms of the policies. Id. at 205.

The proposed plan in the case contained insurance neutrality language that was identical to that in CE, except for the addition of a carve-out: there was no impairment of insurer rights under their policies, “other than the enforcement of any 'anti-assignment' provision(s) in such policies.” Id. at 217 (Nygaard, J., dissenting). Several insurers objected on the ground that the plan did impair their rights, arguing that the establishment of the Silica Trust accelerated litigation and forced them to defend claims that might not have even existed outside of bankruptcy, while eliminating a defense to coverage under the anti-assignment policy provisions. Hartford Acc. & Indem. Co. v. Global Indus. Techs., Inc., Civil Action No. 07'1749, Bankr. Case No. 02'21626 (JKF), 2008 WL 6838582, at *3 (W.D. Pa. July 25, 2008). The bankruptcy court ruled that “[a]ll coverage defenses and contractual rights of insurers” were preserved by way of the insurance neutrality provision in the plan and that, as a result, the objecting answers lacked standing. Id. at *2-3 (internal citations and quotations omitted).

The Third Circuit reversed, in an en banc opinion, holding that the insurers had standing to object to plan confirmation despite the plan's use of CE-type insurance neutrality. The court in GIT noted that the CE plan, “through its 'neutrality' provision neither increased the insurers' pre-petition obligations nor impaired their pre-petition contractual rights under the subject insurance policies.” 645 F.3d at 212. The court went on, however, to state that CE-type “[i]nsurance neutrality is a meaningful concept where, as in Combustion Engineering, a plan does not materially alter the quantum of liability that the insurers would be called to absorb.” Id.

In CE, for example, the GIT court observed that the trust was set up to handle liabilities which, after nearly 40 years of asbestos litigation, were known quantities. By contrast, establishment of the Silica Trust immediately increased pre-petition liability by a factor of 27. The Third Circuit could not find that the plan was insurance neutral given such a staggering increase in exposure for the insurers by way of the assignment of their policies to the trust. Id.

Another difference between CE and GIT is that the question in CE was whether the objecting insurers satisfied “the more stringent standard for bankruptcy appellate standing” rather than “the more relaxed standard for bankruptcy standing.” Id. at 209 n.23. It is difficult to see, however, that this difference operates to limit the scope of the GIT decision, since the court essentially held that a party denied standing to object to plan confirmation will always have standing on appeal to contest that ruling.

The GIT court also cited as additional factors favoring recognition of insurer standing the “suspect circumstances surrounding the creation of the ' Silica Trust and the questionable provenance of the silica-related claims.” Id. at 214. The court noted that there were “non-
frivolous allegations” that GIT “sold out” its insurers “by setting up a system in which they would pay for newly ginned-up silica claims in exchange for the asbestos claimants casting their votes in favor of the GIT Plan.” Id. Citing the Congoleum case, the GIT court noted that such allegations of fraudulent conduct could support even more restrictive appellate standing. Id. (citing In re: Congoleum Corp., et al., 426 F.3d 675, 685 (3d Cir. 2005)).

It is apparent that the GIT case featured a number of unique aspects, any one of which may have contributed to the outcome. As noted, GIT featured a non-524(g) plan in which a silica trust was established, in addition to an asbestos trust. Relatedly, allegations of fraud and collusion plagued the GIT plan and were clearly of significance to the court. See, e.g., 645 F.3d at 214. Nonetheless, the court's “bottom line” seemed to be that “when 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 ' at least have bankruptcy standing.” Id. at 204. This approach to standing, with its focus on the economic impact of the plan, appeared to represent a significant shift from the CE insurance neutrality approach.

Subsequent Cases

In In the Matter of Thorpe Insulation Co., 677 F.3d 869 (9th Cir. 2012), the parties agreed that there was appellate standing on the issue of whether the bankruptcy court had correctly denied the objecting insurers bankruptcy standing. Thorpe heavily relied on GIT, focusing on the bankruptcy plan's “substantial economic impact” on non-settling insurers to find standing despite the presence of insurance neutrality language. Id. at 885. The court looked to “real-world impacts of the plan to see if it increase[d] insurance exposure and likely liabilities.” Id. In determining that there was such increased exposure, the court noted that non-settling insurers “may be bound by the Trust's determination of an amount of liability.” Id. (emphasis in original). In addition, the court observed that non-settling insurers “must indemnify payments made by the trust pursuant to settlements.” Id. at 886.

Dismissing arguments that the insurers lacked standing because of the inclusion of insurance neutrality language, the Thorpe court noted that CE is not controlling in the Ninth Circuit and, in any event, CE was distinguishable in several
respects: 1) CE was decided under the “person aggrieved” standard for appellate standing; 2) the CE plan was “vastly different”; and 3) there were a number of differences between the insurance neutrality provision in Thorpe and the CE provision, including the inclusion of several exceptions to insurance neutrality and the lack of “super-preemptory” language.

In the Third Circuit's decision in In re Federal-Mogul Global, Inc., 684 F.3d 355 (3d Cir. 2012), the major issue was assignment of policy rights, rather than standing. There was agreed-upon insurance neutrality language granting insurers the right to assert against the trust any defense against coverage available under the policies with the exception of the defense that the assignment to the trust violated the policies' anti-assignment provisions. Id. at 363. Nonetheless, Federal-Mogul may provide some insight into the reach of the GIT decision, particularly given that the author of the GIT en banc decision, Judge Kent A. Jordan, was one of the members of the Federal-Mogul panel.

Rejecting insurer arguments that an assignment to the trust would materially alter the insurers' risk, the court in Federal-Mogul pointed out that GIT had questioned whether such a transfer “in the asbestos context” would change “the risk an insurer agreed to cover.” Id. at 379.

Similarly, the court contrasted “the exceptional and well-documented increase in risk ' in Global Industrial Technologies” with the “ bare assertions” of an increase in liability in Federal-Mogul. Id. at 379 n.37. In addition, the Federal-Mogul court noted that GIT had involved “substantial evidence of collusion.” Id. Federal-Mogul also characterized GIT's holding on bankruptcy standing as being that “insurers have standing to participate in bankruptcy proceedings when the creation of a trust 'staggeringly increase[s]' insurers' risk and exposure.” Id. at 381 (quoting GIT, 645 F.3d at 212). Thus, Federal-Mogul may represent a relatively narrow reading of GIT within the Third Circuit.

“Insurance neutrality” was an important aspect of the Western District of Pennsylvania bankruptcy court's recent decision confirming the Pittsburgh Corning plan of reorganization. After two previous decisions denying confirmation to proposed bankruptcy plans, In re Pittsburgh Corning Corp., 453 B.R. 580 (Bankr. W.D. Pa. 2011); In re Pittsburgh Corning Corp., 417 B.R. 289 (Bankr. W.D. Pa. 2006), the court determined that a revised plan was confirmable. In re Pittsburgh Corning Corp., Case No. 00-22876-JKF, 2013 WL 2299620 (Bankr. W.D. Pa. May 24, 2013) (“Pittsburgh Corning III“). In overruling the objections of the last remaining insurer objectors, Mt. McKinley Insurance Company and Everest Reinsurance Company (together, “Mt. McKinley”), the court found that “the Plan is 'insurance neutral' and preserves any and all coverage issues for resolution in a non-bankruptcy proceeding, using applicable non-bankruptcy law.” Id. at *1.

“Because none of the rights, obligations, defenses, claims or issues concerning coverage are before this Court, and because the Plan and Plan Documents preserve them for resolution elsewhere,” the bankruptcy court overruled Mt. McKinley's objections “for lack of standing.” Id.; see also id. at *73. However, the court also went on to find that “the record demonstrates that the objections lack merit” and held that “they are overruled on that basis as well.” Id. at *1.

The court relied, in part, on an “insurance neutrality” provision largely mirroring that used in CE. Id. at *45. However, “[w]ithout eroding the import and significance” of the language that was “approved by the Court of Appeals in Combustion Engineering,” id. at *74, the court also noted a number of additional “specific factors” that “protect Mt. McKinley.” Id. These included two additional Plan provisions relating to insurance neutrality. Id. at *45, *74. One of these provisions states that policies issued by both settling and non-settling insurers, as well as any related insurance settlement agreements, “are binding upon the parties thereto” and have such effect as to non-parties “as provided by applicable non-bankruptcy law.” Id. at *45. The second enjoins the use in coverage litigation of a variety of findings adopted by the court in confirming the plan, including the introduction of the findings into evidence “as binding in any way (including as a basis for res judicata, collateral estoppel, issue preclusion or claim preclusion)” or “as constituting an adjudication for coverage purposes, or as otherwise being probative of the truth of any matter asserted therein ' .” Id. at *45.

Also significant to the court's decision in Pittsburgh Corning III that the Plan was “insurance neutral” was the fact that the Mt. McKinley's policy obligations had not been “resolved by the Plan” nor “assigned to the Asbestos PI Trust.” Id. at *73. Thus, the trust would be unable “to pursue Mt. McKinley because Mt. McKinley's insurance policies and proceeds are not being contributed to the trust so any actions against Mr. McKinley are left solely to their policy holders and/or others who may have those actions pursuant to applicable nonbankruptcy law'” Id. at *74. In addition, the court relied on a judgment reduction provision providing Mt. McKinley with “adequate protection of any
contribution or subrogation claims.” Id. at *46; see also id. at *74. The court noted that “although Mt. McKinley initially objected to the Plan on the ground that the Plan failed to provide adequate protection for its potential claims against other settling insurers,” Mt. McKinley withdrew its objection to the judgment reduction provision “after numerous modifications to that section” that would have the effect of preserving “Mt. McKinley's right to be made whole, in the event that it ever has contribution, indemnification, subrogation or similar claim[s].” Id. at *74.

The court in Pittsburgh Corning III expressly rejected Mt. McKinley's attempt to rely on the Third Circuit's GIT decision, first on the grounds that the Pittsburgh Corning bankruptcy, unlike GIT, “does not involve silica at all,” and second, because “the number of asbestos claims against the Debtor has not 'exploded' post-petition.” Id. at *73. Because “the volume of claims against Debtor was known and moving claims resolution out of the tort system into a trust does not increase Mt. McKinley's exposure,” Mt. McKinley's reliance on the GIT decision was “misplaced.” Id. (citing GIT, 645 F.3d at 212 (citing CE, 391 F.3d at 200-01)) (internal citation in the original). The court also rejected Mt. McKinley's argument that the plan in CE “was insurance neutral only because the pre- and postpetition claims handling procedures were the same.” Id. at *73.

Noting that because Mt. McKinley's excess policies had not been attached, “there was no prepetition claims handling/resolution process as to its policies,” the court concluded that, in any event, the Third Circuit's “reference to claims handling procedures in Combustion Engineering was not the basis for its finding that the Plan was insurance neutral.” Id.

What Remains of Combustion Engineering?

GIT and a number of subsequent cases have largely focused on the “real-world” economic effects of a plan of reorganization, rather than plan language alone. The dissent in GIT pointed out that the Plan included essentially identical insurance neutrality language to CE, which was held to be an insurance-neutral plan on the basis of the provision in question. 645 F.3d at 218 (Nygaard, J., dissenting). As stated explicitly in the plan, the insurers maintained “the same full range of contractual rights to protect their interests for which they bargained at the inception of the insurance contracts pre-petition.” Id. The fact that the insurers' rights under their policies were unchanged by the very terms of the plan of reorganization was, to the dissent, dispositive. Id.

To the extent that CE suggested that certain language in a plan could serve as a silver “neutrality” bullet, GIT cast significant doubt on that approach. What is less clear is how much the “quantum of liability” facing insurers must be increased for insurers to have standing despite the inclusion of insurance neutrality language. Federal-Mogul might suggest that the increase must be “staggering” and is unlikely to occur in the context of a traditional asbestos (rather than asbestos plus silica) bankruptcy. Also unclear is the importance of evidence of collusion. Although an aspect of the court's decision in GIT, concerns about collusion also featured in CE. Indeed, the Federal-Mogul court noted both CE and GIT involved indications of collusion that the court in each case found troubling. 684 F.3d at 362.

The very recent bankruptcy court decision in Pittsburgh Corning III held the proposed plan was insurance neutral based in part on CE-type language, Pittsburgh Corning III, 2013 WL2299620, at *45, but carefully noted a number of other factors protecting the sole objecting insurer post-confirmation. See, e.g., id. at *74. These included the absence of any assignment of insurance policies or proceeds, id. at *73, *74, and a heavily negotiated judgment reduction provision as to which all objections had been resolved, id. at *74. The court in Pittsburgh Corning III also distinguished GIT on the basis that the “quantum of liability” had not been “affected, much less materially so” because “the volume of claims” against Pittsburgh Corning had been “known” at the time of its bankruptcy filing and the number of ballots cast with respect to the proposed plan did not indicate that the insurers' exposure had been increased. Id. at *73.

Although likely correct with respect to Pittsburgh Corning, one of the traditional “first tier” asbestos defendants, this aspect of the court's decision may provide little guidance as to the impact of GIT on the insurance neutrality concept in cases involving newer or more peripheral asbestos defendants.

Conclusion

Ultimately, whatever may be said of the continuing legal vitality of CE-type insurance neutrality may be beside the point from a practical perspective. It is likely that counsel for policyholders and asbestos claimants have agreed to the inclusion of insurance neutrality language in the past in significant measure because such language would have the effect of eliminating insurer standing. To the extent that there is now at least a significant doubt whether insurance neutrality language will actually have this effect, the incentive for policyholders and claimants to consent to such language is greatly diminished.

Robert D. Goodman is a partner in the New York office of Debevoise & Plimpton LLP, where he co-chairs the firm's Insurance Litigation Practice Group. Miranda H. Turner is an associate in the firm.