Alert: Ninth Circuit Expands the Limits of Post-Confirmation Injunctions and Non-Debtor Releases Under A Chapter 11 Plan

by Cooley LLP

For years, it has been the rule in the Ninth Circuit that a chapter 11 plan cannot discharge or otherwise affect the obligation of a non-debtor owed to a third party. This view interprets section 524(e) of the Bankruptcy Code, which provides that “the discharge of a debt of the debtor does not affect the liability of any other third entity on, or the property of any other entity for such debt,” to specifically prohibit the permanent release, discharge, or injunction of non-debtors. See In re Lowenschuss, 67 F.3d 1394, 1401 (9th Cir. 1995); In re Western Real Estate Fund, Inc., 922 F.2d 592, 600 (10th Cir. 1990).  In Fireman’s Fund Insurance Company v. Plant Insulation Co. (In re Plant Insulation Co.), 734 F.3d 900 (9th Cir. 2013), the Ninth Circuit seems to dilute that principle as it applies to mass tort claims.

In Plant Insulation, the debtor was a former seller and installer of asbestos-containing insulation.  During its chapter 11 case, an ad hoc committee formed of the asbestos tort claimants sought confirmation of a plan providing for the establishment of an asbestos trust under section 524(g) of the Bankruptcy Code, which empowers a debtor to use a plan of reorganization to channel asbestos tort claims into a trust and to enjoin claims against third parties that may be directly or indirectly liable for the claims asserted against the debtors.  A substantial portion funding for the proposed plan came from settlements entered into by the ad hoc committee and some of the debtor’s insurance carriers.  The plan provided that suits against the debtor were to continue, and that the costs of defending the suits and indemnifying the estates for any losses would be the obligation of the insurance carriers that had not settled with the debtor.  Although the non-settling insurers were entitled to assert claims for equitable contribution against the settling insurers under state law for defense costs and indemnification, the plan sought to protect the settling insurers by enjoining the non-settling insurers from pursuing contribution claims from those insurers that agreed to fund the trust for costs associated with any claims that were either settled or dismissed.

The bankruptcy court confirmed the plan over the objections of non-settling insurers, and the district court affirmed.  On further appeal, the non-settling insurers focused on the plain language of section 524(g), which authorizes channeling injunctions only “with respect to any claim or demand” that is “to be paid in whole or in part by a trust” under the plan.  The non-settling insurers argued that because their contribution claims were against the other insurance companies and not the trust itself, they did not fall within the language of the statute.  The Ninth Circuit disagreed, construing the phrase “with respect to” to be synonymous with “related to,” and concluding that the enjoined contribution claims were sufficiently related to the claims against the trust to warrant the treatment proposed by the plan.  Importantly, the Ninth Circuit rejected the non-settling insurer’s contention that the bankruptcy court lacked the power to enjoin their claims without requiring the settling insurers to provide the non-settling insurers with some consideration in exchange for the release.  The court observed that section 524(g) only required that the injunction be fair and equitable with respect to future claimants, and that no consideration of the fairness or equity of the injunction to the non-settling insurers was required.

The injunction permitted in Plant Insulation is noteworthy in light of the firm stance that the Ninth Circuit has previously taken against plan injunctions issued for the benefit of non-debtors.  While other circuits have required some nexus between the third party claims proposed to be enjoined and the bankruptcy estate, none have gone as far as the Ninth Circuit did in Plant Insulation and granted injunctions for claims that merely “relate” to the estate.  For example, the Second Circuit, which is generally more permissive of non-debtor releases under a plan (see e.g., In re Metromedia Fiber Network, Inc., 416 F.3d 136 (2nd Cir. 2005)), takes a much narrower view of the bankruptcy court’s power under section 524(g).  See, e.g., In re Quigley Co., 676 F.3d 45 (2d Cir. 2012) (ruling that injunctions under section 524(g) were appropriate only for suits against non-debtors that have a “direct impact” on a bankruptcy estate).

Whether the Ninth Circuit’s ruling in Plant Insulation, indicates that the Ninth Circuit may be willing to depart from the bright-line rule against injunctions or releases favoring non-debtors outside the context of section 524(g) and mass torts remains to be seen.  Regardless, the Ninth Circuit’s willingness to broadly construe the Bankruptcy Code to effectively annul the non-settling insurer’s state law rights in order to allow the Plant Insulation plan to be confirmed is significant in and of itself.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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