United States District Court, N.D. California, San Francisco Division
ORDER DENYING APPEAL FROM CONFIRMATION OF REVSIED PLAN OF REORGANIZATION
RICHARD SEEBORG, District Judge.
This appeal marks the latest chapter in the reorganization of Plant Insulation Company, a Chapter 11 debtor formerly involved in the sale, installation, repair, and distribution of products containing asbestos. The Ninth Circuit rejected Plant's prior reorganization plan (the "Original Plan"), holding the plan failed to comply with 11 U.S.C. § 524(g)(2)(B)(i)(III), a Bankruptcy Code provision that seeks to ensure a reorganized debtor's future operations are controlled by an asbestos trust formed under § 524(g). The Plan Proponents then formulated and lodged an amended plan (the "Revised Plan"), which was subsequently confirmed by the bankruptcy court. A contingent of Plant's insurers lodged this appeal of the confirmation order, arguing the Revised Plan still violates § 524(g)(2)(B)(i)(III). For the following reasons, the appeal is denied.
The factual background of Plant's bankruptcy and Bayside's formation is set out in the prior order confirming the Original Plan. See In re Plant Insulation Co. , 485 B.R. 203 (N.D. Cal. 2012) (" Plant II ") aff'd , 544 F.App'x 669 (9th Cir. 2013) and rev'd , 734 F.3d 900 (9th Cir. 2013) cert. denied , 134 S.Ct. 1901 (U.S. 2014). That history need not be repeated here.
A. Plan Mechanics
Before addressing the new features of the Revised Plan, which is substantially similar to the Original Plan, a general summary of the Plans' structure is warranted. The Plan provides two avenues for compensating existing and future asbestos injury claimants: (1) from a trust established under § 524(g) ("the Trust"), and (2) by preserving claimants' right to file tort actions against Plant and insurers that refuse to settle such claims (the "Non-Settling Insurers") by making cash contributions to the Trust. The § 524(g) injunction operates to create strong incentives for Plant's remaining insurers to settle their potential liabilities by making cash contributions to the Trust, or else continue to defend asbestos injury claims without any possibility of receiving reimbursement from Plant if its underlying liability policies are ultimately determined to be exhausted. In exchange for such settlement payments, the injunction completely releases so-called Settling Insurers from all claims brought by all parties, including tort claims asserted by asbestos injury claimants, and claims for equitable contribution that might otherwise be brought by Non-Settling Insurers.
The Plan further provides partial payment for general unsecured creditors, including insurers' claims for reimbursement, by setting aside ten percent of all available funds (e.g., insurance settlement proceeds) to the Unsecured Claims Reserve. All other available cash proceeds are transferred to the Trust for reimbursement to asbestos injury claimants. Distributions to those claimants will be made according to established "Trust Distribution Procedures, " which enable the Trust's administrators to determine the amount of compensable damages for each claimant as well as the proportion of the Trust's funds that may be paid out to each claimant without depleting payments to future claimants.
Alternatively, under the Plan, asbestos injury claimants retain their right to pursue Plant and Non-Settling Insurers by filing a tort action, subject to several conditions. First, a determination by the Trust as to the validity or sum of compensable claims cannot provide a basis for liability in the courts. Second, if a claimant obtains a judgment against Plant, he or she may file suit (or Direct Action) against the Non-Settling Insurers to determine whether the claim is covered by insurance. Claimants are enjoined from enforcing any such judgment against the Settling Insurers, (reorganized) Bayside, or the officers, directors, or shareholders of either Plant or Bayside. In addition, any such judgment against a Non-Settling Insurer obtained by an asbestos injury claimant must be reduced by the amount previously recovered by the claimant from the Trust. By the same token, a claimant who is fully compensated in such a Direct Action against a Non-Settling Insurer may not seek to recover from the Fund. Finally, a claimant may not proceed with a Direct Action unless he or she agrees in writing that the Non-Settling Insurer may offset from any recovery otherwise available in a final judgment, the amount of equitable contributions (including for defense costs) that would be available to the Non-Settling Insurer from other Settling Insurers, collection of which is enjoined under the Plan. The foregoing deductions to Direct Action judgments are only applicable if the Action goes to trial and leads to a final judgment. In other words, those deductions are not available to the Non-Settling Insurers in asbestos-related cases that are dismissed without any payment to the claimant or settled before judgment.
The Plan also requires the merger of Plant and Bayside, under the latter's name. As part of that transaction, the Trust will invest $2 million in the reorganized Bayside and receive 40 percent of the common stock of the company in exchange, as well as a warrant to purchase an additional 11 percent of shares (thus totaling 51 percent of voting shares). Reorganized Bayside is to assume Plant's responsibilities to its insurers under the latter's liability policies, post-merger.
B. The Ninth Circuit Opinion
A contingent of Non-Settling Insurers appealed this court's order affirming the Original Plan, challenging various of its aspects as violating the U.S. Constitution, the Bankruptcy Code, California law, and rules of equity. While rejecting most of the Insurers' arguments, the Ninth Circuit concluded that the Original Plan had one fatal flaw: it failed to comply with § 524(g)(2)(B)(i)(III), which specifies that the trust must "own, or by the exercise of rights granted under such plan would be entitled to own if specified contingencies occur, a majority of the voting shares" of the reorganized debtor. The parties refer to this provision as the "control requirement."
The Original Plan provided that the Trust could gain 51% ownership of Bayside in two different ways. First, the Trust could invoke its outstanding warrant to purchase an additional 11% of the shares of Bayside, bringing its ownership to 51%. Importantly, the warrant was tied to the pro rata share price of the Trust's initial $2 million investment in 40% of the company. Accordingly, to exercise its warrant under the Original Plan, the Trust would have been required to pay an additional $1, 122, 559. Second, the Original Plan required Bayside to provide the Trust with a $250, 000 promissory note secured by additional shares in the company. If Bayside defaulted on the note, the Trust would receive enough additional shares to bring the Trust into majority ownership of the company.
The parties disputed whether either contingency satisfied the requirement that the Trust be entitled to own, "if specified contingencies occur, " a majority of the voting shares of Bayside. See 11 § 524(g)(2)(B)(i)(III). Because the statute does not explicitly limit the sort or nature of the contingencies that would satisfy the control requirement, the prior confirmation order concluded that any contingency suffices, so long as some circumstances are provided in the plan that would, through the exercise of rights granted therein, allow the trust to gain majority control of the reorganized debtor. See Plant II , 485 B.R. at 226-27. The Ninth Circuit disagreed, finding that such an interpretation would allow for scenarios where the trust would retain merely an illusory form of prospective "control" of the reorganized debtor:
If "specified contingencies" could include any contingency-such as a meteor hitting the Empire State Building-then the subsection has no content because the plan drafters could write it out of existence at will.
In re Plant Insulation Co. , 734 F.3d 900, 915 (9th Cir. 2013) (" Plant III ") cert. denied, 134 S.Ct. 1901 (U.S. 2014).
The Ninth Circuit's interpretation of the control requirement grew out of several observations about § 524(g)'s text, design, and history. First, the court emphasized that the language of § 524(g)(2)(B)(i)(III) uses the "key phrase voting shares.'" Id. "This is significant, " the court noted, "because it signals that this section is about control over the reorganized ...