Opinion
Bankruptcy Case No. 03-51524.
March 24, 2005
MEMORANDUM OPINION Document #1987 2029
On March 21, 2005, the court heard oral argument on two motions: 1) Debtors' motion to limit standing of the Insurers to raise objection and be heard with respect to confirmation of Debtors' Fourth Modified Plan of Reorganization; and 2) Certain Insurers' motion to compel Joseph F. Rice, Esq. and Motley Rice LLC to comply with this court's orders and outstanding discovery requests. The standing motion is supported by the Official Unsecured Asbestos Creditors Committee and opposed by numerous Insurers. Mt. McKinley Insurance Company "joins" the motion to compel which is opposed by Joseph Rice and Motley Rice as well as the Debtors. At the conclusion of oral argument the court closed the record and accordingly did not consider papers filed thereafter.
Opposition and/or joinder was received from St. Paul Fire Marine Insurance Co., et al.; First State Insurance Co., et al.; Continental Casualty Co., et al.; OneBeacon America Insurance Co., et al.; Mt. McKinley Insurance Co.; American Centennial Insurance Co.; and AIU Insurance Co., et al.
Standing motion
This court has twice previously ruled on the Insurers' standing. In April 2004, the court ruled on the Debtors' motions to determine the Insurers standing with regard to the Disclosure Statement and Plan. The court found that the Insurers had standing as to the latter only. In June 2004, the Debtors brought a motion to determine the Insurers standing with respect to its Second Modified Plan. Once again this court found that the Insurers had standing. The current motion is based on the Debtors' Fourth Modified Plan.
Debtors filed a Fourth Modified Plan on November 12, 2004 and then on December 15, 2004 filed another Fourth Modified Plan that contained "technical modifications". It is the December 15, 2004 version of the Plan that is at issue.
Debtors assert that since the second standing hearing, the Debtors have made substantial modifications to the Plan in an effort to make it "insurance neutral" and thus it is appropriate to revisit the standing issue. They also argue that the Third Circuit's ruling in In re Combustion Engineering, Inc., 391 F.3d 190 (3d Cir. 2004) invites a reexamination of the standing issue.
Preliminarily, the court notes that the holdings regarding standing in Combustion Engineering are not directly on point, since that case dealt with appellate standing as opposed to bankruptcy court standing. The Court of Appeals itself makes that distinction, noting that the "restrictive approach to bankruptcy appellate standing contrasts with the broad right of participation in the early stages of a bankruptcy proceeding."Id. at 214 n. 21.
The court also does not agree that Combustion Engineering enhances the Debtors' position on the question of the Insurers standing. The plan at issue in Combustion Engineering contained a "super-preemptory provision" that provided that nothing in the Plan would impair the insurers' pre-petition rights under subject insurance policies and settlements. The purpose of the provision, as expressed by the bankruptcy court, was to "make clear that nothing impairs [the insurers] rights." In re Combustion Engineering, 295 B.R. 459, 474 (Bankr.D.Del. 2003) (emphasis in original). The District Court expressly relied on that provision in concluding that the insurers lacked standing both to appeal and to object to confirmation. At the behest of the Official Committee of Unsecured Creditors and Future Claimants' Representatives, the District Court added language to the super-preemptory provision, constricting the scope from "rights" to "rights in respect of any claims (as defined by section 101(5) of the Bankruptcy Code)." The Third Circuit found that additional language was enough to confer standing on the insurers with regard to that issue because the term "claim" is narrower than the term "right". The Third Circuit made clear that it was not concerned about whether a claim of the insurers was impaired, but whether the insurers rights and obligations were potentially affected. The court's holding was based on the more stringent appellate standing test, suggesting that the Third Circuit's inclination is to grant standing whenever there is the "possibility" that a plan could affect a parties rights. Id. at 218 (the change "exposed the Objecting Insurers and the London Market Insurers to the possibility that other Plan provisions could affect aspects of subject policies and settlement agreements"). The Fourth Amended Plan at issue here does not contain anything nearly as broad as the super-preemptory provision at issue in Combustion, so the Debtors have an even more difficult task in convincing the court that their most recent plan is "insurance neutral".
A point that is significant because of the frequent refrain that the Insurers have no standing because they are not creditors. The Code's definition of creditor is simply "an entity that has a claim. . . ." 11 U.S.C. § 101(10)(A). As the Third Circuit has now made clear, it is the impairment of rights and not claims that is significant for standing purposes.Combustion, 391 F.3d at 218.
Debtors' brief attaches a chart of all of the provisions in the Fourth Amended Plan that the Debtors assert render the Plan insurance neutral. Exhibit A to Debtors' Memorandum of Law. However, the court need go no further than the definition of "asbestos insurer coverage defenses" to find that the Fourth Amended Plan is not "insurance neutral." Plan § 1.2. It is true that the definition purports to preserve all of the Insurers defenses at law or equity under non-bankruptcy law, but what the definition gives with one hand it takes away with the other. The definition contains an exception for, inter alia,:
any defense that the drafting, proposing, confirmation, or consummation of a plan of reorganization and the discharge and/or release of the Debtors and the Reorganized Debtors from liability for Asbestos Personal Injury Claims pursuant to the Plan operates to or otherwise results in the elimination of or the reduction in any obligation such insurers may have under such assigned Asbestos In-Place Insurance Coverage.
At oral argument, Debtors' counsel contended that the purpose of that exception in the definition was simply to ensure that no one could deny that the plan was confirmed and that legal obligations arose as a result. If that was the only purpose of the exception, there are less restrictive ways to accomplish that. The court also finds it telling that the November 12, 2004 version of the Plan contained an exception to the exception which allowed defenses based on "the terms, operation, effect or unreasonableness of any of the Plan or the Plan Documents." If the Debtors had a true desire to make this Plan "insurance neutral" they would not have struck that language from the final version of the Plan.
The practical effect of the exceptions in the definition of "asbestos insurer coverage defenses" is that it leaves open the possibility that the Insurers are giving up defenses that they would have in the coverage litigation. As previously noted, the court in Combustion found that the possibility of affecting rights was enough to confer standing. The Debtors argue in their reply brief that the "second carve-out seeks only to prohibit the Insurers from later arguing that confirmation of the plan has no legal consequences and is not binding upon them." Debtors' reply to opposition at 11. As this court found in its first standing ruling, "[i]t is offensive to basic notions of due process to suggest that parties may be bound by a court's ruling but have no opportunity to be heard regarding it. It certainly does not comport with the notion of fair play that the Third Circuit has remarked underlies § 1109. Par-Mor, Inc. v. Coopers Lybrand, 22 F.3d 1228 (3d Cir. 1994)." Transcript of April 19, 2004 hearing. Given the court's finding, it is not necessary to address the other specific objections that have been raised as the definition of "asbestos insurer coverage defenses" is implicated in most of the allegedly "insurance neutral" provisions.
In issuing its first standing ruling, this court noted that in the bankruptcy context, standing may sometimes have to be determined on a matter by matter basis. In re Public Service of New Hampshire, 88 B.R. 546 (Bankr. D.N.H. 1988). In the present motion, the Debtors goes even further and argue that standing must be determined on an issue by issue basis, an approach they maintain is required after Combustion. The court disagrees. As has been previously noted, Combustion was decided in the appellate context and the case itself acknowledged that bankruptcy standing is broader. See also, In re PWS Holdings Corp., 228 F.3d 224, 249 (3d Cir. 2000) (section 1109(b) "confers broad standing at the trial level"). Moreover, an issue by issue analysis would be ineffectual when it has been found that the plan itself is not "insurance neutral", unlike the plan in Combustion. As Judge Chesler noted, "[t]hat the Insurers' stake in plan confirmation includes a stake in the fundamental fairness of the Plan cannot be seriously challenged. . . ."Baron Bud, et al. v. Congoleum Corp., ___ B.R. ___, 2005 WL 435207 (D.N.J. Feb. 25, 2005) A determination of fundamental fairness cannot be tied to discrete sections of 1129. As the Supreme Court noted many years ago, the necessity of finding that a plan is fair and equitable before confirming it "is not dependent on express statutory provisions" but is inherent in the very nature of bankruptcy jurisdiction. American United Mutual Life Insurance Co. v. City of Avon Park, 311 U.S. 138 (1940); see also, In re ACandS, Inc., 311 B.R. 36, 43 (Bankr. D. Del.) (every plan confirmed by the court must be "imbued with fundamental fairness.") It is nearly impossible to view the sections of 1129 in insolation and an attempt to do so would produce an artificial picture of the case. As the court held inIn re Greate Bay Hotel Casino, Inc., 251 B.R. 213 (Bankr. D.N.J. 2000), "the classification and treatment of classes of claims is always subject to the good faith requirements under § 1129(a)(3)." Id. at 240. The court declines the invitation to address standing on a Code section by Code section basis, but is confident that if it did, it would find that the inter-relatedness of the confirmation requirements under § 1129 and the inter-relatedness of the Plan provisions themselves would establish a direct impact on the Insurers.
Nonetheless, Debtors maintain that a finding that the Insurers are parties in interest does not accord them plenary standing to object to any and all aspects of the Plan. That argument is directly contrary to the language of § 1109 which provides that a party in interest "may appear and be heard on any issue. . . ." 11 U.S.C. § 1109(b) (emphasis added). While the court recognizes that as a matter of necessity bankruptcy courts have sometimes imposed limitations on parties' right to be heard on all confirmation issues, those limitations were imposed only when it was viewed that the party was tangential or that certain plan provision did not affect that party's interest. See, e.g., In re Public Service Co., 88 B.R. 546, 554 (Bankr. D.N.H. 1988) (cautioning that tangential parties should not be allowed to bog down the reorganization process); In re Wonder Corp. of America, 70 B.R. 1018, 1023 (Bankr. D. Conn. 1987). As this court has tried to make clear, it finds that this Plan directly affects the Insurers interests, so they are neither tangential nor unaffected. Thus, prudential limitations on standing have no application here.
To the extent that the Debtors are of the opinion that this court has held that the Insurers have plenary standing to object to confirmation solely because the Plan Trust will be funded with insurance proceeds they misunderstand the court's position. Debtors' Reply to Opposition at 5-6. If the court found that the plan was truly "insurance neutral" because it does not "diminish [the Insurers] property, increase their burdens, or impair their rights", In re PWS Holdings Corp., 228 F.3d at 249, then the court would not find that the Insurers had standing simply because insurance proceeds are funding the plan.
The Debtors also take issue with the court's finding in its second standing ruling that certain sections, including § 7.2, 4.1(j) and 11.6 of the Second Modified Plan, gave the Insurers standing. The Debtors suggest that such a finding is incorrect because those sections are necessary for the implementation of the Plan and the § 524(d) trust and the Bankruptcy Code mandates preemption. It is beyond cavil that § 524(g) of the Code envisions creating a trust to liquidate asbestos claims; however, the Debtors' argument is self-defeating. Assuming it is true that the foregoing sections are needed to create a § 524(g) trust, that is strong evidence that the Insurers have standing with regard to § 524(g) issues, because that section might preempt some of their contractual rights.
Accordingly, the court finds that the Insurers have a practical stake in the fundamental fairness of the Plan as a whole, including the interrelated issues of good faith, classification, § 524(g), and feasibility. The motion to limit standing will be denied with the standard order.
Motion to compel
Certain Insurers's motion requests two forms of relief: compelling compliance with this court's orders and compelling compliance with outstanding discovery requests. In fairness, the court believes the portion of the motion that seeks compliance with the outstanding discovery requests must be considered in conjunction with the motion to quash. The motion to quash, which was filed in the Bankruptcy Court for the District of South Carolina, has been transferred to this court but the court is still waiting for the parties to file their papers in this court in order that the motion may be properly docketed. So, the second portion of this motion will be continued to the date the motion to quash is scheduled.
On September 2, 2004, this court entered an order that required Mr. Rice and Motley Rice (collectively "Rice") to produce "a list and a detailed explanation of any type of co-counsel, consultant or fee-sharing relationships and arrangements whatsoever." ("2019 order") Rice requested a stay pending appeal of the 2019 order which the court denied. Despite that, Rice did not comply with the 2019 order. Judge Chesler affirmed the 2019 order on appeal and Judge Chesler denied a stay of his order. Yet inexplicably, Rice has not complied with the 2019 order.
In response, Rice claims that the order the court entered on December 30, 2004 presented them with an "election" — comply with the 2019 order or forfeit your right to use a Master Ballot. That understanding of the December 30, 2004 order is incorrect. That order merely clarified which firms would be permitted to vote by Master Ballot, it did not vitiate the ongoing requirement to comply with Rule 2019. Even if Rice's understanding were correct, it does not explain why Rice had not complied with the 2019 order prior to December. The court issued its ruling on Rule 2019 from the bench on July 26, 2004, and it was reduced to an order on September 2, 2004, so Rice was aware of its obligation to make 2019 disclosures for 5 months prior to the December 30 order and blithely chose to ignore it. It is astounding that Rice attempts to justify its failure to comply by relying on a later order.
Rice also contends they relied on this court's order of November 12, 2004. Such reliance is disingenuous at best. That order deleted a paragraph of the September 2 order dealing with Mr. Rice's deposition, it most assuredly did not delete the portion of the September 2 order that required "a list and a detailed explanation of any type of co-counsel, consultant or fee-sharing relationships and arrangements whatsoever." That portion of the order remains in effect, and as previously noted has been upheld on appeal and is not stayed. Rice should comply with the 2019 order within 5 days. Dunmore v. U.S., 358 F.3d 1107 (9th Cir. 2004) (bankruptcy court has inherent authority to enforce its own order).
The portion of the motion that requests as a sanction that this court draw negative inferences as to the good faith and fairness of the plan and its classification system will be denied. While courts have broad discretion to craft remedies for failure to comply with discovery, the court also must ensure that the remedy is narrowly drawn to address the violation at issue. The broad remedy suggested by the movants would hurt the Debtor and creditors far more than it would the offending lawyer and law firm. Appropriate sanctions for non-compliance will be considered when and if necessary. Poulis v. State Farm Fire and Cas. Co, 747 F.2d 863 (3d Cir. 1984)
The Certain Insurers's counsel shall submit a new form of order on its motion that comports with the terms of this opinion.