2006 Insurance Coverage Litigation Committee CLE Seminar

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					The Demise of Fuller-Austin

       Implications for
    Asbestos Bankruptcies

       Steve Vaccaro
           Fuller-Austin: Overview
•   Fuller-Austin, 2002 WL 31005090, became the centerpiece
    of project to transfer billions in assets from insurers of
    asbestos defendants to personal injury trusts
      – Liability for present and future claims established by
         consent
      – No litigation of coverage defenses
      – Accelerate coverage for future claims into immediate
         payment obligations
•   Numerous recent asbestos reorganizations are funded
    primarily by coverage a la Fuller-Austin
•   Fuller-Austin reversed on appeal January 19, 2006, 135
    Cal. App. 4th 958



                                2
    Fuller-Austin: The Bankruptcy Case

•   Fuller-Austin installed insulation, was an “operations” defendant
     – Coverage not aggregated under the products hazard
     – Excellent pre-pack candidate: minimal cash, huge coverage
         asset
•   Policyholder initiated negotiations with asbestos plaintiffs’ bar
     – Excess insurers could participate in “appropriate manner”
     – Policyholder offered to terminate discussions if excess
         insurers would unconditionally acknowledge coverage
     – Policyholder did not give excess insurers opportunity to
         approve terms of deal eventually reached




                                   3
    Fuller-Austin: The Bankruptcy Case

•   Agreement reached on pre-packaged reorganization plan:
     – Fuller-Austin and parent Dyncorp channel liabilities to a
        524(g) trust
     – Trust pays claims on an administrative basis
     – Fuller-Austin and Dyncorp contribute $14 million, rights to
        coverage under shared insurance
         – “Provision of Insurance” a basis for non-debtor relief
           under 11 U.S.C. § 524(g)(4)(A)(ii)
         – Shared insurance may provide only viable basis for “bolt-
           on” of non-debtor non-derivative liabilities




                                   4
    Fuller-Austin: The Bankruptcy Case

•   Treatment of insurance assets in bankruptcy
      – Plan initially provided that confirmation would be an
        “adjudication of liability” triggering coverage
      – Insurers intervene
      – Amend plan to include “insurance neutrality clause”:
          – “All rights of the Asbestos Insurance Companies
            under the Asbestos Insurance Policies shall remain
            unaffected by the Plan and the Confirmation Order”
•   Amendment moots insurers standing to intervene/object
•   Confirmation hearing consisted of debtor’s one-hour
    presentation



                                5
    Fuller-Austin: The Coverage Suit
•   Coverage Suit--Phase I:
•   Trust changes course, repudiates insurance neutrality
      – Court credits this position and holds that “Fuller-Austin’s
         confirmed bankruptcy plan is a binding federal court
         judgment” that establishes “legal obligation to pay damages
         to all pending and future asbestos claimants.”
•   Alternatively, pre-pack was a “settlement”
      – Insurers must accept settlement because it was reasonable
         and they declined to defend policyholder . . .
      – Even though insurers had no duty to defend (?)
      – Insurers obligated to pay the full allowed amount of each
         asbestos claim approved by trust . . .
      – Even if actual payments were less than allowed amount (?)



                                   6
    Fuller-Austin: The Coverage Suit
•   Coverage Suit--Phase II:
      – Court instructed jury that confirmation of reorganization plan
         established Fuller-Austin’s asbestos liability;
      – That the “harm was within coverage”;
      – That insurers has duty to accept a reasonable settlement of
         covered claims . . .
      – Even though no insurer had breached duties (?)
•   Jury found:
      – Insurers had not breached duties pre-confirmation
      – Pre-pack plan not fraudulent or collusive
      – Value of pending asbestos claims $216M, future claims $750M
•   Judgment against insurers for $966M, immediately payable . . .
      – Even though future asbestos liabilities have been held non-
         justiciable in virtually every context (?)



                                      7
             Fuller-Austin: Impact

•   Insurers had no opportunity to litigate
       – policyholder’s liability
       – coverage defenses
       – The reasonableness of the settlement embodied in the
         pre-packaged reorganization
•   Coverage obligation in respect of future claims was
    accelerated into present obligation
•   Insurers required to indemnify policyholder for more than
    its actual liability




                                8
              Fuller-Austin: Impact

•   Fuller-Austin a powerful settlement hammer for plaintiffs
•   Pre-pack used repeatedly in 2002 - 2005
     – JT Thorpe, Mid-Valley, API, Congoleum, Shook &
        Fletcher, Combustion Engineering
     – Coverage issues generally “deferred” in bankruptcy
     – Insurers invariably settle rather than litigate coverage
        issues to avoid “Fuller-Austin result,” which expands
        and accelerates coverage obligation




                                 9
    Fuller-Austin: Pushing the Limits
•   JT Thorpe: $2.3M contribution to bankruptcy trust, remainder of
    funding from insurance assets
•   Combustion Engineering
      – Two-trust structure
      – Assignment of policies to post-petition trust
      – “insurance neutrality” = no standing for insurers
      – Bolt-on of Lummus and Basic non-derivative liabilities with
         assignment of their insurance as well
•   Ultimately reversed on appeal by insurers and CCC
      – Not “insurance-neutral” enough
      – No jurisdiction for bolt-on liabilities
      – Unequal treatment of present and future claimants



                                   10
         Fuller-Austin: The Demise

•   California Court of Appeals reversed trial court in most
    respects:
      – Bankruptcy confirmation did not adjudicate liability
      – Jury instructions precluded coverage defenses
      – Insurers’ coverage for future claims could not be
        accelerated under indemnity language in excess
        polices
      – Coverage limited to amount policyholder was required
        to pay, not larger “allowed” value
      – UNR Industries distinguished




                               11
         Fuller-Austin: The Demise
•   Court of Appeals did find that the pre-packaged plan of
    reorganization was a “settlement”
      – Insurers could not avoid settlement on consent
        defense alone
      – Insurers could challenge settlement because they had
        not breached duty to defend
      – On remand, insurers could challenge on ground of
          – Unreasonableness
          – Fraud or collusion
          – “Fairness”
•   Status quo ante trial court decision essentially restored



                                12
Fuller-Austin: What Path Forward?
•   Along with Fuller-Austin, other recent developments impact
    coverage litigation in asbestos bankruptcies:
      – Failure of national trust fund legislation
      – Potential for new interest in “bolt-on” of non-debtor
        liabilities following Pittsburgh-Corning
      – Setbacks for asbestos plaintiffs’ bar
          – Ascendancy of the CCC
          – State tort reform
          – Judicial criticism in CE, ACandS, Kensington
          – Mixed results in estimation disputes: Babcock &
            Wilcox, Lippe, OC, Federal-Mogul



                                13
Fuller-Austin: What Path Forward?


•   New wave of asbestos bankruptcies?
•   Acquiescence in or challenge to Fuller-Austin?
•   Intensification or abandonment of pre-packs?
•   Place at the table for insurers or business as usual?
•   Post-bankruptcy vs. in-bankruptcy coverage litigation?
•   Role for insurers in post-petition claim processing?




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