Opinion ID: 805173
Heading Depth: 4
Heading Rank: 2

Heading: The Fifth Plan

Text: A plan is proposed in good faith only if it will “fairly achieve a result consistent with the objectives and purposes of the Bankruptcy Code.” In re Combustion Eng’g, 391 F.3d at 33 247 (emphasis added); see also Young v. United States, 535 U.S. 43, 50 (2002) (“[B]ankruptcy courts . . . are courts of equity and „appl[y] the principles and rules of equity jurisprudence.‟” (quoting Pepper v. Litton, 308 U.S. 295, 304 (1939)). The Bankruptcy and District Courts found that the Fifth Plan was not proposed in good faith because it was collusive. In re Am. Capital Equip., Inc., 405 B.R. at 422-23; Skinner Engine Co., No. 09-0886, 2010 WL 1337222, at . We agree that collusive plans are not in good faith and do not meet the good faith requirement of § 1129(a)(3). See In re PWS Holding Corp., 228 F.3d at 242-43 (proceeding with a good faith analysis under § 1129(a)(3) where collusion was the only alleged basis for arguing that the plan was not proposed in good faith). However, we are not convinced the Fifth Plan is collusive because insurers have not pointed to any evidence of an agreement to defraud insurers. Cf. Black‟s Law Dictionary (9th ed. 2009) (Collusion is “[a]n agreement to defraud another or to do or obtain something forbidden by law.”); Lincoln Printing Co. v. Middle W. Utils. Co., 74 F.2d 779, 784 (7th Cir. 1935) (“Collusion is . . . an agreement between two or more persons to defraud a person of his rights by the forms of law, or to obtain any object forbidden by law[.]”) (internal quotation marks and citation omitted). The Bankruptcy Court, in fact, noted that “collusion” might not be the proper term for the Fifth Plan‟s good faith problem. In re Am. Capital Equip., Inc., 405 B.R. at 423. Nonetheless, we agree that the Fifth Plan will not fairly achieve the Bankruptcy Code‟s objectives because it establishes an inherent conflict of interest under 34 circumstances that are especially concerning. Cf. Coram Healthcare, 271 B.R. 228, 234-35 (Bankr. D. Del 2001) (finding § 1129(a)(3) good faith violation where debtor‟s CEO had an interest in one of Debtors‟ largest creditors). First, as the Bankruptcy Court stated, the Fifth Plan sets up a system in which Skinner would be “financially incentivized to sabotage its own defense.” In re Am. Capital Equip., Inc., 405 B.R. at 423. Skinner is a defunct business without so much as a single employee remaining. It has no assets to distribute to creditors or attorneys, and Skinner admits that the only way that creditors and attorneys can possibly be paid is if asbestos litigants win settlements against it (and pay the Surcharge). Although settlements will be controlled by a Plan Trustee with no financial interest in the outcome of the proceedings, it is not as if Skinner can entirely remove itself from the process. Rather, these settlements will likely require Skinner‟s involvement in both defense and discovery because the question of asbestos claimants‟ exposure to Skinner products is still at issue. Thus, the Fifth Plan creates an inherent conflict of interest: Skinner is required to cooperate in its defense, but will be incentivized to do otherwise. Second, we are troubled by the fact that the CADP system creates this inherent conflict, while at the same time severely limiting or eliminating Insurers‟ ability to take discovery, submit evidence, contest causation, or appeal a decision, and all without the protective channeling injunction of § 524(g). Appellants argue that similar provisions reducing insurers‟ procedural rights have been confirmed under other plans, but fail to cite to any plans that 35 simultaneously employed a similar surcharge. In fact, Appellants do not cite to any examples of confirmed bankruptcy plans that sought to pay creditors using insurance dollars intended to compensate Asbestos Claimants for their personal injuries. Finally, we are unconvinced by Appellants‟ attempts to compare the Fifth Plan with a § 524(g) trust, because the structure and objectives of a § 524(g) trust are inconsistent with the trust created under the Fifth Plan. Although like a § 524(g) trust, the Fifth Plan sets up a process for Asbestos Claimants to settle claims out of court, the similarities end there. A § 524(g) trust is “funded in whole or in part by the securities of [one] or more debtors . . . and by the obligation of such debtor or debtors to make future payments, including dividends[.]” 11 U.S.C. § 524(g)(2)(B)(i)(II). The trust fund is then used to pay Asbestos Claimants. § 524(g)(2)(B)(i)(I), (IV). The trust maximizes the value of the debtor‟s estate for creditors by allowing a debtor to channel all asbestos claims into the trust, so that the debtor and its affiliates or parent companies are not burdened by the asbestos claims. § 524(g)(1)(A), (4)(A)(ii); see also Eric D. Green, James L. Patton, Jr., & Edwin J. Harron, Future Claimant Trusts and “Channeling Injunctions” to Resolve Mass Tort Environmental Liability in Bankruptcy: The Met-Coil Model, 22 Emory Bankr. Dev. J. 157, 160-64 (2005) (explaining that the § 524(g) channeling injunction increases investor confidence, and thus better enables the reorganized enterprise to meet creditor obligations and provide for future claimants). Ideally: 36 “[T]he [bankrupt] company remains viable. . . . [and] continues to generate assets to pay claims today and into the future. In essence, the reorganized company becomes the goose that lays the golden egg by remaining a viable operation and maximizing the trust‟s assets to pay claims.” In re Combustion Eng’g, 391 F.3d at 248 n.69 (quoting 140 Cong. Rec. S4521-01, S4523 (Apr. 20, 1994) (statement of Senator Brown)); see also id. at 248 (The bankrupt company continues “to make future payments into the trust to provide an „evergreen‟ funding source for future asbestos claimants.”); but cf. Sander L. Esserman & David J. Parsons, The Case for Broad Access to 11 U.S.C. 524(g) in Light of the Third Circuit’s Ongoing Business Requirement Dicta in Combustion Engineering, 62 N.Y.U. Ann. Surv. Am. L. 187 (2006) (arguing that future payments are not always necessary and that in some cases, a present contribution of securities may be sufficient under § 524(g)). Essentially, the § 524(g) trust “recognizes the inherent equitable power of the bankruptcy courts to provide for equitable treatment of all of a debtor‟s creditors, including those having claims arising out of asbestos products.” 140 Cong. Rec. S4521-01, S4523 (Apr. 20, 1994) (statement of Senator Graham); see also In re. Federal-Mogul Global Inc., Nos. 09-2230 & 09-2231, 2012 WL 1511773, at -3, 14-16 (3d Cir. May 1, 2012). In contrast, the CADP system does not create a trust funded by Skinner‟s securities to pay future Asbestos Claimants, but rather, it creates a Plan Payment Fund funded by Asbestos Claimants to pay attorneys and other creditors. 37 There is no channeling injunction to protect the debtor or insurers from future claimants, and the debtor makes no contribution whatsoever to the trust, but rather plans to pull money from it. Indeed, the only alleged benefit the CADP provides to Asbestos Claimants appears to be the ability to pursue claims through the CADP rather than through the court system. We recognize that at times, a bankruptcy court‟s equitable powers under § 105(a) might allow it to confirm an asbestos trust not provided for by § 524(g), but its “general grant of equitable power . . . must be exercised within the parameters of the Code itself,” In re Combustion Eng’g, 391 F.3d at 236, and for the purpose of “achiev[ing] fairness and justice in the reorganization process.” Id. at 235 (internal quotation omitted); see also In re Kaiser Aluminum Corp., 456 F.3d at 340 (Equity allows courts to “craft flexible remedies that, while not expressly authorized by the [Bankruptcy] Code, effect the result the Code was designed to obtain[.]” (quoting Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 568 (3d Cir. 2003))). However, we fail to see how the Bankruptcy Code‟s equitable purposes would be achieved by the Fifth Plan. We do not here define the parameters of a bankruptcy court‟s equitable powers, nor determine that surcharges, or alternative forms of asbestos trusts, or other individual provisions of the Fifth Plan, are never permissible under § 1129(a)(3). However, under the circumstances of this plan, where: (1) the debtor‟s bankruptcy is unrelated to asbestos litigation, (2) the debtor will not contribute to the Plan 38 Payment Fund but merely pull from it, (3) Asbestos Claimants provide the sole source of funding to the Plan Payment Fund through the Surcharge, (4) the Plan Payment Fund exists solely to pay off creditors and insurers rather than to pay future asbestos litigants or generate profits to do so, and where (5) the Surcharge creates an inherent conflict of interest while (6) the CADP process simultaneously strips Insurers of certain procedural and substantive rights without the protections of § 524(g), we find a lack of good faith as required for confirmation under § 1129(a)(3). The mere provision of an alternative settlement process cannot outweigh our concerns.8 8 Appellants respond with several non sequiturs. They argue that they sought Insurers‟ help to develop a consensual plan, but that does not mean that the plan eventually proposed fairly achieved the objectives and purposes of the Bankruptcy Code. They also argue that the surcharge is not problematic because it is an arms-length transaction and fully disclosed, but neither issue is dispositive as to whether a conflict-ofinterest or collusive type of system exists. See, e.g., Moody v. Sec. Pacific Bus. Credit, Inc., 971 F.2d 1056, 1065 (3d Cir. 1992) (noting that unfair influence may exist regardless of whether a transaction appears to be at arms-length); In re ACandS, Inc., 311 B.R. 36, 39-43 (Bankr. D. Del. 2004) (finding a plan to be not in good faith despite the fact that Asbestos Claimants‟ control over the debtor was disclosed). Finally, Appellants argue that their plan is not in bad faith because it fulfills a purpose of the Bankruptcy Code (namely, maximizing value to creditors). (Skinner Reply Br. at 2-4; 39 Appellants fail to meet their burden of showing that the plan might be confirmable after further discovery or creditor voting. No dispute of material fact remains that could affect this plan‟s good faith standing, and although creditor voting could potentially address certain concerns, such as CADP procedures, it cannot address the majority of the concerns and certainly cannot cure the inherent conflict of interest. Thus, the lack of good faith pursuant to § 1129(a)(3) makes the Fifth Plan patently unconfirmable.