Denials of Insurance Company Standing: Two More Cases Join the Lengthening List
by Rhonda D. Orin
Anderson Kill & Olick LLP; Washington, D.C.
Two decisions this summer from the U.S. District Court for the Western District of Pennsylvania joined the increasingly long list of cases holding that insurance companies lack standing to object to confirmation of bankruptcy plans.
The district court affirmed bankruptcy court determinations of no standing in Hartford Accident & Indemnity Co. v. Global Indus. Tech. Inc., Civil Action No. 07-1749, Bankr. Case No. 02-21626 (JFK) (W.D. Pa. Jul 25, 2008) (GIT) and Hartford Accident & Indemnity Co. v. North Am. Refractories Cos. et al., Civ. Action No. 07-1750, Bankr. Case No. 02-20198 (JFK) (W.D. Pa. Jul. 25, 2008) (NARCO).
In GIT, the district court rejected the insurance companies' claim to standing on a number of grounds. As a threshold matter, the court found no merit to the argument that the plan caused potential harm to the insurance companies, through either inflating and accelerating their indemnification obligations, or precluding them from asserting coverage defenses, or both. The court noted the absence of "any controlling precedent granting an insurer standing to participate in plan confirmation proceedings under [similar] facts." Dec. at 7.
The court then found that the insurance companies erred in relying upon its prior decision in Hartford Accident & Indemnity Corp. v. Am. Capital Equipment, Bankr. Case No. 06-0891 (W.D. Pa. 2006) (Skinner). While the court had allowed insurance companies to participate in plan confirmation proceedings in that case, its decision "was based on the unique facts of that case." Dec. at 8. The court made clear in GIT that the Skinner decision "did not establish a general rule that the type of alleged injuries asserted by the Objecting Insurers in this case are sufficient to confer standing." Id.
Further, the court relied upon the existence in the plan of insurance neutrality provisions. The court found that these provisions allow the insurance companies to pursue their coverage defenses in separate proceedings and, accordingly, "those defenses to coverage do not confer standing to participate in plan confirmation proceedings." Dec. at 9.
The Western District of Pennsylvania employed similar reasoning in NARCO, when it affirmed a different decision that an insurance company lacked standing to object to a plan of reorganization. In that case, the court so determined because the plan "was in no way dependent on" the insurance proceeds at issue and "made no determinations regarding" that insurance company's coverage obligations or liability.
In reaching that decision, based on de novo review, the court first reviewed the basic elements of standing to challenge confirmation of a bankruptcy plan. It held that, to establish a right to participate, "a person must demonstrate Constitutional and prudential standing, as well as "party in interest' status." Dec. at 4. The court then held that these elements were not met under the facts of that case. Dec. at 7.
In both cases, the court also was called upon to address whether insurance companies had standing to appeal bankruptcy court decisions.
In NARCO, the court found that the insurance company lacked standing to appeal a bankruptcy court's confirmation order, as it had failed to present evidence of a sufficient injury from the plan or of "party-in-interest" status. Dec. at 7.
In GIT, the question of appellate standing pertained to orders of the bankruptcy court other than the final confirmation order. But that question became moot as a practical matter because the appellate standing of one insurance company was unchallenged. Since the appeal had to be decided based on that insurance company's appeal, there was no need to decide whether two other insurance companies that had appealed on the same grounds also had standing. Dec. at 6.
Considering the importance of insurance policies, and the complexities often associated with them, it is no surprise to see legal battles arise between debtors and insurance companies regarding what role, if any, should be played by the latter in bankruptcy confirmation proceedings.
As shown by these recent decisions, however, the judicial trend is becoming increasingly clear. Many courts agree with the Western District of Pennsylvania and the bankruptcy court in that district, that when bankruptcy proceedings are insurance-neutral, insurance companies lack standing to participate in them. Their message is the same as the statement made by the bankruptcy court to the moving insurance company in NARCO: "You simply don't belong in this court." Dec. at 7.