by: Sally E. Edison 
McQuire Woods LLP; Pittsburgh
A recent decision by the Third Circuit Court of Appeals has preserved the right of a non-operating debtor with asbestos liability to confirm a liquidating plan of reorganization. See In re Am. Capital Equip. LLC, No. 07-2546, 07-2746, 296 Fed. Appx. 270 (3d Cir. (Pa.) Oct. 16, 2008). The Third Circuit overruled objections by insurance companies that a bankruptcy case of a non-operating debtor, Skinner Engine Company, could serve no legitimate bankruptcy purpose and should be dismissed.
Until the mid-1970s, Skinner manufactured ship engines and engine parts allegedly containing asbestos. Id. at 272. During the 1980s, Skinner began to be named as a defendant in many lawsuits filed by merchant mariners who alleged asbestos exposure. Id. By the time the company filed in 2001, Skinner sought chapter 11 bankruptcy protection as the company was financially underperforming and had more than 29,000 asbestos-related suits pending against it. Id. Substantially all of the asbestos claims pending against Skinner are Ohio Maritime Asbestos Litigation Docket (MARDOC) cases now administered as part of the asbestos-related multi-district litigation (MDL) pending before the District Court for the Eastern District of Pennsylvania. Id.
Skinner ceased operations in 2003 and sold substantially all of its assets to various purchasers. Id. Its insurance policies, with aggregate policy limits in excess of $140 million, are now the company's last valuable asset. Id. Skinner filed several plans of reorganization, all of which proposed to create a trust to pay asbestos claims in accordance with trust distribution procedures similar to those approved in other asbestos-related bankruptcies. Id. Because Skinner has no ongoing operations, it will be unable to confirm a plan with a §524(g) trust. Id.
Under the most recent proposed plan, Skinner would create a non-§524(g) trust that allows asbestos claimants to "opt-in" and have their valid claims paid by the trust, with payments subject to a 20 percent surcharge that would be used to pay nonasbestos creditors. Id. The plan also allows asbestos claimants to "opt out" of the trust and to continue to participate in the MDL or pursue any other rights they may have. Id.
Skinner believes that absent the confirmation of the pending plan and the collection of the surcharge from asbestos claimants with valid claims, Skinner will be unable to make a significant distribution to its creditors. Id. The pending plan presents the only reasonable means by which Skinner will be able to make any distributions to creditors on account of their claims.
In June 2005, more than four years after Skinner commenced its bankruptcy case and despite a pending plan, various insurance companies filed a motion to dismiss Skinner's bankruptcy case. Id. The insurance companies alleged that Skinner's case no longer served a valid bankruptcy purpose and that Skinner was no longer proceeding in good faith under 11 U.S.C. §1112(b). Id. at 273. The insurance companies argued that because Skinner ceased operations, its chapter 11 case could not preserve a going concern or maximize property available for distribution to creditors. Id. The insurance companies also argued that the plan was designed to create an improper litigation advantage over the insurers. Id. The bankruptcy court denied the motion, and the district court affirmed that denial, as did the Third Circuit. Id.
The Supreme Court "has identified two of the basic purposes of chapter 11 as (1) "preserving going concerns' and (2) "maximizing property available to satisfy creditors.'" In re Integrated Telecom Express Inc., 384 F.3d 108, 119 (3d Cir. 2004) (quoting Bank of Am. Nat'l Trust Sav. Ass'n v. 203 N. LaSalle P'ship, 526 U.S. 434, 453 (1999)). In application, "courts have focused on two inquiries that are particularly relevant to the question of good faith: (1) whether the petition serves a valid bankruptcy purpose, e.g., by preserving a going concern or maximizing the value of the debtor's estate, and (2) whether the petition is filed merely to obtain a tactical litigation advantage." Integrated Telecom, 384 F.3d at 119-120.
In affirming the lower courts, the Third Circuit held that the confirmation of Skinner's pending plan of liquidation represented the only means by which Skinner could make distributions to its trade and asbestos creditors, more than 30,000 of whom have sued Skinner for injuries from asbestos exposure, and "on this basis alone [Skinner] has satisfied [its] burden to show that [its] chapter 11 case" serves a valid bankruptcy purpose. Am. Capital Equip., 296 Fed. Appx. at 274.
The Third Circuit determined that Skinner's chapter 11 case did not exist solely to gain a tactical litigation advantage. Id. Skinner was legitimately distressed prior to filing its chapter 11 case, and there was no evidence that Skinner's pending plan was filed solely to gain a tactical litigation advantage over the insurance companies or that the plan would result in "an advantage over and above the advantages that a typical debtor may properly obtain by availing himself of the bankruptcy system." Id.
This verdict is an important ruling for non-operating companies with significant asbestos liabilities. Those companies now may file liquidating plans over the strong objections of their insurance companies. When confirmed, Skinner's plan could provide a template for non-operating debtors with significant asbestos liabilities to offer a distribution both to asbestos creditors and non-asbestos creditors.
1. Ms. Edison represents appellees American Capital Equipment LLC and Skinner Engine Company in this case.