In re Nash Engineering (D. Conn.)

The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:

SUMMARY

The United States District Court for the District of Connecticut recently reversed a Bankruptcy Court order dismissing the chapter 7 case of a former manufacturing company that had ceased operations in 2004 and sold its assets in 2008 but faced thousands of asbestos lawsuits arising from its operations. The remaining assets of the company were insurance policies with potential coverage for the asbestos claims. The Bankruptcy Court had dismissed the case because it did not have the power to liquidate or estimate personal injury tort claims and could perceive no legitimate bankruptcy purpose for the filing. The District Court disagreed, concluding an equitable distribution of the available assets could be achieved through the bankruptcy process. In re Nash Engineering Co., 2022 WL 3139543 (D. Conn. August 5, 2022).

To view the opinion, click here. 

FACTS

Debtor Nash Engineering Co. (the “Debtor”) was a manufacturing company that made ring vacuum pumps. During the 1990’s, Nash became aware of asbestos liabilities connected to its pumps. It ceased operations in 2004 and sold all of its tangible assets in 2008, but retained its rights under insurance policies with Hartford Accident & Indemnity Company which could provide coverage for the asbestos claims. It negotiated two settlements with Hartford which provided significant sums to indemnify losses, but these sums paled in comparison to the alleged damages of claimants. Facing over 1600 asbestos-related cases, on October 19, 2021, it filed a chapter 7 petition in the Connecticut Bankruptcy Court. The appointed chapter 7 trustee (“Trustee”) estimated that the debtor faced tort claims exceeding $180 million and filed a Notice of Assets described as “potential insurance policy recoveries.”

The Bankruptcy Court issued an Order to Show Cause re Dismissal (OSC), expressing a concern that because it had no power to liquidate or estimate personal injury tort claims under 28 U.S. C. § 157(b)(2)(B), it lacked jurisdiction to exercise a legitimate bankruptcy purpose in administering the case. The Debtor, Trustee and other parties filed responses to the OSC, which did not satisfy the Bankruptcy Court’s concerns, so it dismissed the case for cause under the provisions of 11 U.S.C. § 707(a) on May 25, 2022.

The Trustee appealed to the District Court (“the Court”), which granted a stay pending appeal and then reversed the dismissal order and remanded for further proceedings.

REASONING

The Court first reviewed the Bankruptcy Court’s two causes for dismissal: “(1) because under 28 U.S.C. § 157(b)(2)(B) ‘contingent or unliquidated personal injury tort claims cannot be liquidated or estimated for purposes of distribution in a chapter 7 case,’… and (2) the case ‘lacks a legitimate bankruptcy purpose.’” Although it agreed that the Bankruptcy Court itself could not liquidate the tort claims, that liquidation could occur under the statute in district court proceedings, and the Bankruptcy Court could administer the process of claim liquidation. Moreover, the Bankruptcy Court’s reasoning that the tort claimants could assert claims against the insurance coverage on their own without bankruptcy oversight was flawed because only the Trustee, standing in the Debtor’s shoes, had the right to make such indemnity claims. The Court noted a significant number of bankruptcy cases where the courts had administered the orderly liquidation of mass tort claims as well as distribution of available assets to pay those claims pro rata.

Addressing the second cause for dismissal – the lack of legitimate bankruptcy purpose – the Court concluded the authorities relied on by the Bankruptcy Court were not binding and were factually distinguishable. A key distinction was that here there were potential assets in available insurance coverage which could result in the estate receiving millions of dollars to distribute to creditors. The ability to tap those assets and then use them to provide an equitable distribution to the creditor body, all of which had equivalent rights to be paid, clearly served a legitimate bankruptcy purpose. It cited with approval a Second Circuit case, In re Tronox Inc., 855 F. 3d 84, 106 (2nd Cir. 2017) for its conclusion that “[t]he whole point of channeling claims through bankruptcy is to avoid creditors getting ahead of others in line of preference and to promote equitable distribution of debtor assets.”

In sum, the Court ruled that the jurisdictional statute did not compel dismissal just because the tort claims needed to be liquidated elsewhere and the potential for a fair distribution of money to the creditor body served a legitimate bankruptcy purpose. Its remand order directed the Bankruptcy Court to provide oversight to assure that the bankruptcy estate was not unnecessarily depleted by inappropriate actions by the Trustee.

AUTHOR’S COMMENTS

Although the factual timelines of this case are extreme and the hesitancy of the Bankruptcy Court to oversee such a potentially attenuated process is understandable, the District Court’s reasoning to keep the case alive is sound. Only the Debtor had the right to assert indemnification claims against the available remaining insurance, a right vested in the Trustee upon the filing. The tort claimants could not directly pursue those claims. Even more significant, the bankruptcy oversight was necessary to assure all legitimate injured parties had an equal, pro-rated right to recovery.

Although I never had a mass tort claim bankruptcy among my Riverside, California caseload, I did have a case of an out-of-business construction company with multiple construction defect lawsuits pending when it filed. When motions for stay relief to proceed in state court to liquidate claims in pending cases with potential insurance coverage were filed in my court, I sensed that this race to the courthouse was problematic. Instead, I noticed a mass status conference, inviting attorneys for all claimants and for all insurance coverage to attend. The attorneys were relieved to participate and we mapped out a mediation process which assured the equitable distribution of available coverage among the claimants, which ultimately assured fair treatment of all. The District Court’s decision in this case would allow for a similar outcome.

This review is written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.