In Re American Capital Equipment, LLC , 688 F.3d 145 ( 2012 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______
Nos. 10-2239 and 10-2240
______
In re: AMERICAN CAPITAL EQUIPMENT, LLC AND
SKINNER ENGINE COMPANIES, INC.,
Debtors – Appellants, No. 10-2239
______
In re: AMERICAN CAPITAL EQUIPMENT, LLC AND
SKINNER ENGINE COMPANIES, INC.,
Debtors
WILLARD E. BARTEL,
Appellant, No. 10-2240
______
On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. Nos. 2-09-cv-00886 and 2-09-cv-00887)
District Judge: Honorable Gary L. Lancaster
______
Argued October 25, 2011
Before: FISHER, VANASKIE and ROTH, Circuit Judges.
(Filed: July 25, 2012)
Robert M. Horkovich (Argued)
Anderson, Kill & Olick
1251 Avenue of the Americas, 42-154W
New York, NY 10020
Sally E. Edison
McGuireWoods
625 Liberty Avenue
23rd Floor, Dominion Tower
Pittsburgh, PA 15222
Counsel for American Capital
Equipment, LLC, and Skinner
Engine Companies, Inc.
Robert A. Arcovio
Kyle T. McGee
Margolis Edelstein
525 William Penn Place, Suite 3300
Pittsburgh, PA 15219
Michael A. Kotula
Lawrence A. Levy
Rivkin Radler
926 Rexcorp Plaza
Uniondale, NY 11556-0111
Counsel for Allianz Global Risks
John W. Burns
2
Dickie, McCamey & Chilcote
Two PPG Place, Suite 400
Pittsburgh, PA 15222
Leslie A. Davis
Leslie A. Epley
Mark D. Plevin
Crowell & Moring
1001 Pennsylvania Avenue, N.W.
Washington, DC 20004-2505
Counsel for Century Indemnity Co.
and Pacific Employers Ins. Co.
David C. Christian
Jason J. DeJonker
Seyfarth Shaw
131 South Dearborn Street, Suite 2400
Chicago, IL 60603
Cushing O. Condon
Andrew I. Mandelbaum
Ford, Marrin, Esposito, Witmeyer & Gleser
88 Pine Street
23rd Floor, Wall Street Plaza
New York, NY 10005
David K. Rudov
Rudov & Stein
100 First Avenue
First & Market Building, Suite 500
Pittsburgh, PA 15222
3
Counsel for Continental Casualty Co.
and Continental Insurance Co.
Erik Sobkiewicz
Campbell & Levine
330 Grant Street
1700 Grant Building
Pittsburgh, PA 15219
Zakarij O. Thomas
Buchanan Ingersoll & Rooney
301 Grant Street
One Oxford Centre, 20th Floor
Pittsburgh, PA 15219
Counsel for Fairchild Corp.
Peter B. Ackerman
Crowell & Moring
1001 Pennsylvania Avenue, N.W.
Washington, DC 20004-2505
Jeff D. Kahane
Russell W. Roten
Duane Morris
865 South Figueroa Street, Suite 3100
Los Angeles, CA 90017
Jeffrey W. Spear
Joel M. Walker
Duane Morris
600 Grant Street, Suite 5010
4
Pittsburgh, PA 15219
Counsel for Great American Ins. Co.
Steven Bennett
Craig Goldblatt
Caroline Rogus
Danielle M. Spinelli (Argued)
Wilmer Cutler Pickering Hale & Dorr
1875 Pennsylvania Avenue, N.W.
Washington, DC 20006
Timothy K. Lewis
Eric T. Smith
Paul H. Titus
Robert J. Williams
Schnader Harrison Segal & Lewis
120 Fifth Avenue
2700 Fifth Avenue Place
Pittsburgh, PA 15222
James P. Ruggeri
Shipman & Goodwin
1133 Connecticut Avenue, N.W.
3rd Floor, Suite A
Washington, DC 20036
Sambhav N. Sankar
United States Department of Justice
Environment & Natural Resources Division
P.O. Box 23795
L'Enfant Plaza Station
5
Washington, DC 20026
Counsel for Hartford Accident &
Indemnity Co. and First State Ins. Co.
Greg Bernhard
Michael S. Davis
Yoav M. Griver
Zeichner, Ellman & Krause
575 Lexington Avenue
New York, NY 10022
Beverly W. Manne
Tucker Arensberg
1500 One PPG Place
Pittsburgh, PA 15222
Michael A. Shiner
Tucker Arensberg
1500 One PPG Place
Pittsburgh, PA 15222
Counsel for National Union
Fire Ins. Co. of Pittsburgh, PA
Kimberly A. Coleman
John M. Steiner
Leech, Tishman, Fuscaldo & Lampl
525 William Penn Place
30th Floor, Citizens Bank Building
Pittsburgh, PA 15219
Counsel for the Official Committee
of Unsecured Creditors
6
Elisa Alcabes
Andrew S. Amer (Argued)
Katherine A. McLendon
Simpson, Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Joseph G. Gibbons
Amy E. Vulpio
White & Williams
Two Logan Square
12th Floor, 18th & Arch Streets
Philadelphia, PA 19103
Leonard P. Goldberger
WolfBlock
1650 Arch Street, 22nd Floor
Philadelphia, PA 19103
Mark A. Martini
Dennis J. Mulvihill
Robb, Leonard & Mulvihill
500 Grant Street
BNY Mellon Center, 23rd Floor
Pittsburgh, PA 15219
Counsel for Travelers Casualty
& Surety Co.
Robert A. Arcovio
Kyle T. McGee
7
Margolis Edelstein
525 William Penn Place, Suite 3300
Pittsburgh, PA 15219
Leslie A. Epley
Mark D. Plevin
Crowell & Moring
1001 Pennsylvania Avenue, N.W.
Washington, DC 20004-2505
Michael A. Kotula
Lawrence A. Levy
Rivkin Radler
926 Rexcorp Plaza
Uniondale, NY 11556-0111
Counsel for Firemans Fund Ins.
Co. of Ohio
Alan S. Miller
Picadio, Sneath, Miller & Norton
600 Grant Street
4710 U.S. Steel Tower
Pittsburgh, PA 15219
Robert B. Millner
SNR Denton US
233 South Wacker Drive
8000 Sears Tower
Chicago, IL 60606
Counsel for Liberty Mutual Ins. Co.
8
Douglas A. Campbell
Erik Sobkiewicz
Campbell & Levine
330 Grant Street
1700 Grant Building
Pittsburgh, PA 15219
Alan Kellman (Argued)
The Jaques Admiralty Law Firm
645 Griswold, Suite 1370
Detroit, MI 48226
Counsel for Willard E. Bartel
Craig Goldblatt
Danielle M. Spinelli (Argued)
Wilmer Cutler Pickering Hale & Dorr
1875 Pennsylvania Avenue, N.W.
Washington, DC 20006
Robert J. Williams
Schnader Harrison Segal & Lewis
120 Fifth Avenue
2700 Fifth Avenue Place
Pittsburgh, PA 15222
Counsel for Hartford Fire Ins. Co.
Robert S. Bernstein
Bernstein Law Firm
707 Grant Street
Suite 2200, Gulf Tower
Pittsburgh, PA 15219
9
Counsel for Legal Representative for
Future Asbestos Claimants
Erik Sobkiewicz
Campbell & Levine
330 Grant Street
1700 Grant Building
Pittsburgh, PA 15219
Counsel for Maritime Asbestosis
Legal Clinic
Joseph M. Fornari, Jr.
United States Department of Justice
Office of the Trustee
1001 Liberty Avenue
970 Liberty Center
Pittsburgh, PA 15222
Counsel for U.S. Trustee
Jeffrey J. Sikirica
121 Northbrook Drive
Gibsonia, PA 15044
Counsel for Interim Chapter 7
Trustee and Jeffrey J. Sikirica
Laura A. Foggan
Wiley Rein
1776 K Street, N.W.
Washington, DC 20006
Counsel for Complex Insurance
Claims Litigation Association
10
______
OPINION OF THE COURT
______
FISHER, Circuit Judge.
American Capital Equipment, Inc. and Skinner Engine
Company (collectively, “Skinner”), the debtors in this case,
appeal from the District Court‟s order affirming the
Bankruptcy Court‟s order, which converted Skinner‟s Chapter
11 bankruptcy case to a Chapter 7 on the basis that its plan is
patently unconfirmable. Joining its appeal is Willard Bartel
(“Bartel”), representative for the estate of an asbestos
claimant. Appellees are insurers (Travelers Casualty and
Surety Company, Allianz Global Risks, Century Indemnity
Co., Pacific Employers Insurance Co., Continental Casualty
Co., Cont. Ins. Co., Fairchild Corp., Great American Ins. Co.,
Hartford Accident & Indemnity Co., First State Ins. Co., Nat‟l
Union Fire Ins. Co. of Pittsburgh, Pa., Official Committee of
Unsecured Creditors, Firemans Fund Ins. Co. of OH, Liberty
Mut‟l Ins. Co., Hartford Fire Ins. Co.) (collectively,
“Insurers”), the legal representative for future asbestos
claimants, the Maritime Asbestosis Legal Clinic, and the
Interim Chapter 7 Trustee, Jeffrey J. Sikirica.
The issue before us is whether a bankruptcy court can
determine at the disclosure statement stage that a Chapter 11
plan is unconfirmable without first holding a confirmation
hearing. We hold that a bankruptcy court has the authority to
do so if it is obvious that the plan is patently unconfirmable,
such that no dispute of material fact remains and defects
11
cannot be cured by creditor voting. Additionally, we find that
the plan in this case was patently unconfirmable, and that the
Bankruptcy Court did not err in converting the case to
Chapter 7. Accordingly, we will affirm.
I.
Skinner was founded in 1868 as a manufacturer of
steam engines for merchant ships. From the 1930s through
the 1970s, Skinner manufactured ship engines and parts
allegedly containing asbestos. In 1998, American Capital
Equipment, LLC acquired all of Skinner‟s common stock,
and secured a lien on Skinner‟s assets from PNC Bank to
finance the purchase. Based on Skinner‟s lack of cash flow to
maintain operations or service its secured debt, Skinner and
American Capital each filed petitions for bankruptcy relief
under Chapter 11 in 2001.
The Asbestos Claims
At the time that Skinner and American Capital filed for
bankruptcy, over 29,000 asbestos claims were pending
against Skinner. Merchant mariners began bringing personal
injury claims against Skinner in the 1980s. The claims fell
within federal admiralty jurisdiction, so they were assigned to
a special maritime docket entitled “MARDOC.” In 1991, the
MARDOC cases were consolidated with cases from 87 other
judicial districts by the Judicial Panel on Multidistrict
Litigation in the Eastern District of Pennsylvania (the “MDL
Court”). In re Asbestos Prods. Liab. Litig. (No. VI), 771 F.
Supp. 415, 416-17 (J.P.M.L. 1991). In May 1996, the MDL
Court administratively dismissed the remaining MARDOC
12
claims without prejudice, noting that the claimants had
“provide[d] no real medical or exposure history,” and had
been unable to do so for months. In re Asbestos Prods. Liab.
Litig. (No. VI), No. 2 MDL 875, 1996 WL 239863, at *1-2
(E.D. Pa. May 2, 1996). It also ordered that these
“asymptomatic cases” could be activated if the respective
plaintiffs began to suffer from an impairment and could show
(1) “satisfactory evidence [of] an asbestos-related personal
injury compensable under the law”; and (2) “probative
evidence of exposure” to defendant‟s products. Id. at *5. In
2002, the MDL Court ordered that administratively dismissed
cases remain active for certain purposes (e.g., entertaining
settlement motions and orders, motions for amendment to the
pleadings, etc.), and in 2003, clarified that the administrative
dismissals were “not intended to provide a basis for excluding
the MARDOC claimants from participating in settlement
programs or prepackaged bankruptcy programs[.]” In re Am.
Capital Equip., 296 F. App‟x 270, 272 (3d Cir. 2008)
(quoting In re Asbestos Prods. Liab. Litig. (No. VI), Order
Granting Relief to MARDOC Claimants with Regard to
Combustion Eng’g, Inc., No. 2 MDL 875 (E.D. Pa. Feb.19,
2003)).
Since the administrative dismissals, only a few dozen
of the thousands of MARDOC asbestos claims against
Skinner have met the criteria for reinstatement. Appellants
do not dispute that none of those claims have resulted in a
judgment or settlement against Skinner. See In re Am.
Capital Equip., Inc., 405 B.R. 415, 421-22 (Bankr. W.D. Pa.
2009).
13
Skinner’s Insurance
Skinner claims entitlement to insurance coverage
under primary comprehensive general liability insurance
policies, as well as various excess policies, provided by
Insurers. The policies contain standard clauses obligating the
insured to cooperate in the defense of claims against it and
prohibiting it from settling claims without the Insurers‟
consent. For example, Travelers‟ Insurance primary policies
state:
“[Travelers] shall have the right and duty to
defend any suit against the insured seeking
damages on account of such bodily injury or
property damage, even if any of the allegations
of the suit are groundless, false or fraudulent,
and may make such investigation and settlement
of any claim or suit as it deems expedient . . . .”
Travelers‟ excess policies contain a similar statement.1 An
additional clause in all Travelers‟ policies states that:
“The Insured shall cooperate with [Travelers]
and, upon [Travelers‟] request, assist in making
settlements, in the conduct of suits . . . and the
insured shall attend hearings and trials and
1
“[Travelers] shall defend any suit . . . [and] may
make such investigation of settlement of any claim or suit as
it deems expedient.”
14
assist in securing and giving evidence and
obtaining the attendance of witnesses.”
Prior to the bankruptcy petition filing, Skinner‟s
primary insurers defended the asbestos claims against
Skinner. The parties entered into a defense cost-sharing
agreement under which the primary insurers and Skinner each
agreed to pay a portion of the costs.
The Chapter 11 Bankruptcy Plans
Skinner has proposed five bankruptcy plans since
filing for bankruptcy. Only the Fifth Plan is at issue here,
although its relationship to several other plans – particularly
the Third Plan – has some relevance.
Appellants filed the Disclosure Statement and Joint
Plan of Reorganization for their First Plan on June 6, 2001.
The plan proposed a sale of Skinner‟s assets to the president
of American Capital‟s parent corporation. The plan provided
that asbestos claimants would be paid from any insurance
proceeds available at the time of a final judgment. Numerous
objections from creditors (though not from asbestos
claimants) led Skinner to amend the plan.
Appellants filed the Second Plan on September 12,
2001. The plan proposed a sale of Skinner‟s assets to the
highest bidder. It also included future asbestos claimants in
the asbestos claimants‟ class (“Asbestos Claimants”) by
providing for a trust funded through insurance proceeds. The
Bankruptcy Court approved the disclosure statement and
scheduled a confirmation hearing for October 25, 2001.
15
However, before the confirmation hearing could occur, the
voting creditors rejected the Second Plan.
On October 29, 2002, the Bankruptcy Court approved
a sale of Skinner‟s assets, and it sold all of its assets for
$1,165,000, which went to PNC Bank in satisfaction of its
secured lien. PNC Bank agreed to set aside $35,000 towards
the costs of processing asbestos claims. Travelers agreed to
not oppose the sale, provided that Skinner would not
immediately seek conversion or dismissal, but give creditors
and interested parties 180 days “to negotiate a consensual
plan of reorganization[.]” Neither Travelers nor creditors or
other interested parties ever proposed such a plan. In March
2003, after the sale of Skinner‟s assets, the Committee of
Unsecured Creditors moved to convert the case to Chapter 7.
The motion was then continued several times so the parties
could attempt to negotiate a workable plan with Skinner.
On February 24, 2004, Appellants filed the Third Plan,
proposing creation of a § 524(g) asbestos trust pursuant to the
Bankruptcy Code. The trust would be funded by the
insurance recoveries, the $35,000 from PNC Bank, and the
common stock of “Reorganized Skinner,” and would provide
for all present and future Asbestos Claimants. The plan
proposed to adopt a claims submission standard (known as
the Johns-Manville Personal Injury Standard), which required
each Asbestos Claimant to meet two criteria: (1) show a
medically diagnosed asbestos-related injury, and (2) show
exposure to Skinner‟s asbestos-containing products. The plan
also provided for a surcharge, which would give Skinner the
right to ten percent of cash from insurance actions and
policies to pay creditors through a Plan Payment Fund.
16
On February 2, 2005, the Bankruptcy Court approved
the disclosure statement and set a confirmation hearing for
March 10, 2005. Skinner‟s creditors voted to accept the
Third Plan.
On February 22, 2005, Travelers commenced a breach
of contract action against Skinner (“Insurance Coverage
Action”), claiming that the Third Plan breached its right to
settle and defend claims and seeking a declaratory judgment
that the alleged breach relieved Travelers of its coverage
obligations under the policies. Skinner then counterclaimed
and filed a third-party complaint naming the other Insurers,
and seeking a declaratory judgment in its favor. On May 2,
2005, the Bankruptcy Court filed orders denying Insurers‟
motions to withdraw reference of the adversary proceeding
and other objections they had previously raised. In re Am.
Capital Equip., 325 B.R. 372 (Bankr. W.D. Pa. 2005); In re
Am. Capital Equip., 324 B.R. 570 (Bankr. W.D. Pa. 2005).
The declaratory judgment action never advanced beyond the
pleadings stage, but rather, was dismissed without prejudice
after the Bankruptcy Court converted the case to Chapter 7.
Order of June 3, 2009, In re Am. Capital Equip., Adv. No. 05-
2253 (Bankr. W.D. Pa. June 3, 2009).
In June 2005, Insurers filed a Motion to Dismiss
(“American Capital I”), arguing pursuant to 11 U.S.C.
§ 1112(b) that the plan was no longer proceeding in good
faith, and no longer served a legitimate Chapter 11 purpose.
At the hearing on August 15, 2005, the Bankruptcy Court
noted that Skinner did not have a going concern, and stated
that without a going concern, it could not approve a trust
17
pursuant to § 524(g).2 Skinner moved to stay further
proceedings in order to modify the plan, and the Bankruptcy
Court granted the motion.
After conducting hearings, the Bankruptcy Court
denied Insurer‟s motion to dismiss, and the District Court
affirmed, finding that the case served a legitimate bankruptcy
purpose in that it maximized value to creditors, and that
Skinner was not seeking a litigation advantage through the
bankruptcy process. In re Am. Capital Equip., LLC, No. 06-
0891 (W.D. Pa. May 11, 2007). We affirmed, and remanded
the case to the Bankruptcy Court for further proceedings. See
In re Am. Capital Equip., 296 F. App‟x at 270.
During the pendency of the motion to dismiss
proceedings, Skinner filed its Fourth Plan. The plan again
provided for a surcharge, which would give Skinner the right
to twenty percent of cash from insurance actions and policies
to pay creditors through the Plan Payment Fund. However,
this time the plan did not use a § 524(g) trust, but rather
provided that a trustee would use criteria similar to those in
the Third Plan to allow or disallow asbestos claims. Asbestos
Claimants who did not want to use the system could use the
tort system, but any judgment would be subject to a
temporary injunction until all bankruptcy-allowed claims had
been paid. In order to cover the plan‟s administrative costs
until the surcharge provided sufficient revenue, the plan
would be partly funded by a loan from a law firm
2
The Bankruptcy Court‟s determination in this regard
is not now before us.
18
representing the Asbestos Claimants. The Bankruptcy Court
rejected the injunction and questioned the surcharge, giving
Skinner further time to amend its plan.
Skinner filed a Fifth Plan, removing the temporary
injunction against judgments for Asbestos Claimants who
chose to pursue traditional tort remedies. It still included a
twenty percent surcharge for Asbestos Claimants who
decided to opt in to the plan‟s settlement process. The
Surcharge would be used to pay creditors through the Plan
Payment Fund, and fund the claims resolution process called
the “Court Approved Distribution Procedures” (“CADP”).
Specifically, the CADP provides that:
“[e]ach Asbestos Claimant shall maintain full
and complete ownership of his or her Asbestos
Claim, including, without limitation, the right to
prosecute or settle any Asbestos Claim, but
upon the Asbestos Claimant submitting his or
her claim to the CADP, he or she shall thereby
have agreed to pay the Surcharge Cash from
any amounts paid on account of the Asbestos
Claim under and through the CADP.”
Skinner acknowledged at least twice that the Plan would not
work without the Surcharge.3
3
At a hearing on January 10, 2006, the Bankruptcy
Court inquired, “[C]an you do this without doing the 20
percent?” Skinner‟s counsel replied, “No.” Again, on May 7,
2009, the Bankruptcy Court asked:
19
The CADP “provide[s] a basis for the Plan Trustee to
evaluate Asbestos Claims[,]” and would implement claims
allowance criteria similar to those in the Third and Fourth
Plans. If Insurers disagree with the Trustee‟s determination,
the CADP would permit them to elect a Court Determination
by the Bankruptcy Court. Court Determinations would
require the Bankruptcy Court to decide “solely on the basis of
the documentation in the Asbestos Claim file when the
Asbestos Claim was categorized, whether the Asbestos Claim
THE COURT: . . . is there any way you propose
this plan without the 20 percent surcharge?
[Skinner‟s counsel]: Your Honor, the 20 percent
surcharge is to be used to pay all the other creditors
and non-asbestos creditors in the case. So without the
20 percent surcharge or some surcharge, unsecured
creditors will receive nothing.
THE COURT: So the answer is no, you
wouldn‟t do it without the 20 percent.
[Skinner‟s counsel]: Do it with a ten percent
surcharge. We could do it with five.
THE COURT: No, you‟re going to need a
surcharge of some kind.
[Skinner‟s counsel]: We need a surcharge of
some kind so that we have a distribution to the rest of
the creditors in the case.
20
should be categorized as a Scheduled Disease.” In making
this determination, the Bankruptcy Court would employ
“baseball arbitration procedures,” meaning that it “may select
either the amount proposed by the Plan Trustee or the
counteroffer of the Asbestos Insurance Company. The
Bankruptcy Court may not select another amount as part of
the Court Determination.” The Bankruptcy Court‟s decision
would be binding on the Insurers and not appealable. The
CADP does not state whether Asbestos Claimants would be
permitted to appeal a decision that favors Insurers.
The Present Appeal
The Bankruptcy Court held hearings on the Fifth
Plan‟s disclosure statement. In May 2009, it issued an
opinion finding that the plan was facially unconfirmable,
because it was not proposed in good faith and was forbidden
by law in contravention of 11 U.S.C. § 1129(a)(3), and was
not feasible pursuant to 11 U.S.C. § 1129(a)(11). In re Am.
Capital Equip., Inc., 405 B.R. 415, 423-24 (Bankr. W.D. Pa.
2009). Finding that Skinner would be unable to propose a
confirmable plan, the Bankruptcy Court converted the case to
a Chapter 7 pursuant to 11 U.S.C. § 1112(b). Id. at 426-27.
Skinner and Bartel appealed the Bankruptcy Court
order to the District Court, which consolidated the appeals
and affirmed the Bankruptcy Court‟s order in Skinner Engine
Co. v. Allianz Global Risk U.S. Ins. Co., No. 09-0886, 2010
WL 1337222 (W.D. Pa. March 29, 2010). Skinner and Bartel
each appealed the District Court decision, and on May 12,
2010, we consolidated both appeals.
21
II.
The District Court had jurisdiction over this
bankruptcy case under 28 U.S.C. §1334(a), and referred the
cases to the Bankruptcy Court pursuant to 28 U.S.C. § 157(a).
Pursuant to 28 U.S.C. § 158(a), the District Court had
jurisdiction over the Bankruptcy Court‟s order converting the
case to Chapter 7. We have jurisdiction to hear the appeal
from the District Court under 28 U.S.C. §§ 158(d)(2004)4 and
1291. See In re Krystal Cadillac Oldsmobile GMC Truck,
Inc., 142 F.3d 631, 635 (3d Cir. 1998). On appeal, “we „stand
in the shoes‟ of the District Court and review the Bankruptcy
Court‟s decision. . . . review[ing] the Bankruptcy Court‟s
legal conclusions de novo and its factual findings for clear
error.” In re Global Indus. Techs., Inc., 645 F.3d 201, 209
(3d Cir. 2011) (en banc) (internal citations omitted).
4
Pursuant to a 2005 amendment, the statute now lists
28 U.S.C. § 158(d) as 28 U.S.C. § 158(d)(1). However, this
case was filed in 2001, prior to the effective date of the 2005
amendment, so as relevant, references to the Bankruptcy
Code throughout this opinion refer to the previous version of
the Code. See In re Am. Capital Equip., LLC, 296 F. App‟x
270, 276 n.5 (3d Cir. 2008) (discussing the applicability of
the pre-2005 statute in the present set of cases pursuant to the
Bankruptcy Abuse Prevention and Consumer Protection Act
of 2005, Pub.L. No. 109-8, § 1501, 119 Stat. 23 (2005)); see
also In re Krebs, 527 F.3d 82, 84 (3d Cir. 2008) (Bankruptcy
Code‟s 2005 amendment not applicable to Chapter 11 case
filed prior to amendment‟s effective date).
22
III.
Appellants raise three primary issues on appeal. First,
they challenge the Bankruptcy Court‟s procedure, claiming
that the Bankruptcy Court erred in finding the Fifth Plan to be
unconfirmable without first holding a confirmation hearing.
Second, they argue that the Bankruptcy Court substantively
erred in finding that the Fifth Plan was patently, or facially,
unconfirmable. Finally, they argue that the Bankruptcy Court
abused its discretion in converting its case from Chapter 11 to
Chapter 7. We will discuss each of these issues in turn.
A.
Appellants argue that the Bankruptcy Court erred in
deeming its plan to be unconfirmable without first holding a
confirmation hearing. We disagree.
Federal Rule of Bankruptcy Procedure 3020(b)(2)
states that “[t]he court shall rule on confirmation of the plan
after notice and hearing[.]” Based on the plain language of
this Rule, our Sister Circuits have held that a bankruptcy
court “must hold an evidentiary hearing in ruling on
confirmation.” In re Acequia, Inc., 787 F.2d 1352, 1358 (9th
Cir. 1986); accord In re Williams, 850 F.2d 250, 253 (5th Cir.
1988). The purpose of the hearing is for the bankruptcy court
to “consider[] . . . objections raised by creditors, . . . [and] to
determine whether the plan has met all of the requirements
necessary for confirmation.” In re Williams, 850 F.2d at 253.
Although the “hearing on the disclosure statement may
be combined with the hearing on confirmation of a plan[,]” 11
23
U.S.C. § 1125(f)(3)(2004),5 the Bankruptcy Court did not
formally schedule the hearing as a confirmation hearing, but
as a hearing to consider disclosure statement issues. We must
thus consider whether the Bankruptcy Court erred in making
a confirmability determination based on the hearing.
“Ordinarily, confirmation issues are reserved for the
confirmation hearing, and not addressed at the disclosure
statement stage.” In re Larsen, No. 09-02630, 2011 WL
1671538, at *2 n.7 (Bankr. D. Idaho May 3, 2011). Courts
have recognized that “if it appears there is a defect that makes
a plan inherently or patently unconfirmable, the Court may
consider and resolve that issue at the disclosure stage before
requiring the parties to proceed with solicitation of
acceptances and rejections and a contested confirmation
hearing.” Id. (citations omitted); see also In re Main St. AC,
Inc., 234 B.R. 771, 775 (Bankr. N.D. Cal. 1999) (“It is now
well accepted that a court may disapprove of a disclosure
statement . . . if the plan could not possibly be confirmed.”);
accord In re Miller, No. 96-81663, 2008 WL 191256, at *3
(Bankr. W.D. La. Jan. 22, 2008); In re El Comandante Mgmt.
Co., 359 B.R. 410, 415 (Bankr. D.P.R. 2006); In re Mahoney
Hawkes, LLP, 289 B.R. 285, 294 (Bankr. D. Mass. 2002); In
re Phoenix Petroleum Co., 278 B.R. 385, 394 (Bankr. E.D.
Pa. 2001); In re Silberkraus, 253 B.R. 890, 899 (Bankr. C.D.
5
This text was moved to 11 U.S.C. § 1125(f)(3)(C)
following the 2005 amendments to the Bankruptcy Code. See
Bankruptcy Abuse Prevention and Consumer Protection Act
of 2005, Tit. IV, § 431, Pub. L. No. 109-8, 119 Stat. 23(2005).
24
Cal. 2000); In re Brass Corp., 194 B.R. 420, 422 (Bankr.
E.D. Tex. 1996); In re Felicity Assocs., Inc., 197 B.R. 12, 14
(Bankr. D.R.I. 1996); In re Cardinal Congregate I, 121 B.R.
760, 764 (Bankr. S.D. Ohio 1990); In re Dakota Rail, Inc.,
104 B.R. 138, 143 (Bankr. D. Minn. 1989); In re Unichem
Corp., 72 B.R. 95, 100 (Bankr. N.D. Ill. 1987); In re Monroe
Well Serv., Inc., 80 B.R. 324, 333 (Bankr. E.D. Pa. 1987).
The rationale is that the court‟s equitable powers under
11 U.S.C. § 105 “surely enable it to control its own docket”
and thus, a “[c]ourt [should] not proceed with the time-
consuming and expensive proposition of hearings on a
disclosure statement and plan when the plan may not be
confirmable because it does not comply with [confirmation
requirements].” In re Kehn Ranch, Inc., 41 B.R. 832, 832-33
(Bankr. S.D. 1984); see also In re Dakota Rail, Inc., 104 B.R.
at 143 (“Only where the disclosure statement on its face
relates to a plan that cannot be confirmed does the court have
an obligation not to subject the estate to the expense of
soliciting votes and seeking confirmation of the plan;
otherwise, confirmation issues are left for later
consideration.”). Commentators agree that “[i]t appears to be
within the discretion of the bankruptcy court to withhold
approval of a disclosure statement if the accompanying plan
is unconfirmable[.]” The Disclosure Statement Hearing, 6
Norton Bankr. L. Prac. § 110:15 (3d ed. 2012); accord
Barbara J. Houser, et al, Disclosure Statements: Confirmation
and Cramdown of Chapter 11 Plans, ST005 A.L.I.-A.B.A.
2177 (2011) (“[N]umerous courts have heard objections to
the disclosure statement based upon contentions that the
accompanying plan of reorganization is nonconfirmable -- in
25
other words, if a plan is not confirmable on its face as a
matter of law, then the court will withhold approval of the
disclosure statement.”); 9C Am. Jur. 2d Bankr. § 2900 (“The
bankruptcy court may consider objections and refuse to
approve a disclosure statement when it is apparent that the
accompanying plan is not confirmable.”).
We find the reasoning of these many courts to be
persuasive, and hold that a bankruptcy court may address the
issue of plan confirmation where it is obvious at the
disclosure statement stage that a later confirmation hearing
would be futile because the plan described by the disclosure
statement is patently unconfirmable.6 A plan is patently
unconfirmable where (1) confirmation “defects [cannot] be
overcome by creditor voting results” and (2) those defects
6
We caution, however, that bankruptcy courts must
“[e]nsure that due process concerns are protected” by, inter
alia, providing sufficient notice to plan proponents, and
taking care to not prematurely convert a disclosure statement
hearing into a confirmation hearing. In re Monroe Well Serv.,
Inc., 80 B.R. 324, 333 & n.10 (Bankr. E.D. Pa. 1987); see
also In re Larsen, No. 09-02630, 2011 WL 1671538, at *2
(Bankr. D. Idaho May 3, 2011); In re U.S. Brass Corp., 194
B.R. 420, 422 (Bankr. E.D. Tex. 1996). This case raises no
such due process concerns; the Bankruptcy Court‟s hearings
on the issues were lengthy and thorough, and its April 9, 2009
order, which was served on plan proponents Skinner and
Bartel, gave sufficient notice that confirmability issues would
likely be considered at the May 7, 2009 disclosure statement
hearing.
26
“concern matters upon which all material facts are not in
dispute or have been fully developed at the disclosure
statement hearing.” In re Monroe Well Serv., 80 B.R. at 333.
If no dispute of material fact remains and if defects cannot be
cured by creditor voting or otherwise, then there is “nothing
in either the language or logic of the Code requiring the court
or parties to „grind the same corn a second time,‟ and we will
not read into the Code the requirement of redundancy.” In re
Acequia, Inc., 787 F.2d at 1358-1359 (citation omitted)
(noting that although confirmation requires an evidentiary
hearing, courts need not ignore evidence already submitted).
As we will discuss below, there was no error in the
Bankruptcy Court‟s determination that the Fifth Plan was not
confirmable, and that the confirmation defects cannot be
cured and involve no material facts in dispute.
B.
Appellants argue that even if a Bankruptcy Court is
permitted to make a confirmability determination at the
disclosure statement stage, it erred in doing so here, because
the plan is confirmable. We disagree.
A court shall confirm a plan only if, inter alia, it “has
been proposed in good faith and not by any means forbidden
by law[,]” and if it is feasible. 11 U.S.C. §§ 1129(a)(3), (11);
In re Combustion Eng’g, Inc., 391 F.3d 190, 243 n.59 (3d Cir.
2004) (interpreting 11 U.S.C. § 1129(a)(11)). The debtor has
the burden of proving that a disclosure statement is adequate,
including showing that the plan is confirmable or that defects
might be cured or involve material facts in dispute. Accord In
re Curtis Ctr. Ltd. P’ship, 195 B.R. 631, 638 (Bankr. E.D. Pa.
27
1996); In re R & G Props., Inc., No. 08-10876, 2009 WL
2043873, at *5 (Bankr. D. Vt. July 6, 2009).
The Bankruptcy and District Courts found that the
Fifth Plan did not meet the § 1129 requirements for
confirmation. In re Am. Capital Equip., Inc., 405 B.R. at
423-24; Skinner Engine Co., No. 09-0886, 2010 WL
1337222, at *2. We agree that the Fifth Plan is not
confirmable on two separate and independently sufficient
bases under § 1129(a): (1) it is not feasible, and (2) it has not
been proposed in good faith.7 We address each basis below,
and find that the plan is patently unconfirmable.
1. Feasibility under § 1129(a)(11)
A plan is confirmable only if it is feasible, In re
Combustion Engineering, 391 F.3d at 243 n.59, that is, if
“[c]onfirmation of the plan is not likely to be followed by the
liquidation, or the need for further financial reorganization, of
the debtor or any successor to the debtor under the plan,
unless such liquidation or reorganization is proposed in the
plan.” 11 U.S.C. § 1129(a)(11). Even a planned liquidation
“must be feasible.” Accord In re Calvanese, 169 B.R. 104,
107 (Bankr. E.D. Pa. 1994). The Bankruptcy and District
7
The Bankruptcy and District Courts also found the
plan to be unconfirmable on the basis that it is forbidden by
law, but because a full analysis of the matter takes us into
uncharted waters surrounding issues of state law, we decline
to address whether such a third basis also renders the plan
unconfirmable.
28
Courts found that the Fifth Plan was not feasible, and we
agree.
Although § 1129(a)(11) does not require a plan‟s
success to be guaranteed, see In re Applied Safety, Inc., 200
B.R. 576, 584 (Bankr. E.D. Pa. 1996), the plan must
nevertheless propose “a realistic and workable framework[.]”
Hurricane Memphis, 405 B.R. 616, 624 (Bankr. W.D. Tenn.
2009) (quoting In re Brice Road Devs., 392 B.R. 274, 283
(B.A.P. 6th Cir. 2008)). In other words, the plan must be
“reasonably likely [to] succeed[] on its own terms without a
need for further reorganization on the debtor‟s part.” In re
Applied Safety, 200 B.R. at 584; see also In re Quigley Co.,
Inc., 437 B.R. 102, 142 (Bankr. S.D.N.Y. 2010) (plan was not
feasible where funding source was “speculative at best and
visionary at worst”).
In considering feasibility, “a bankruptcy court must
evaluate the possible impact of the debtor‟s ongoing civil
litigation[.]” In re Harbin, 486 F.3d 510, 519 (9th Cir. 2007).
A plan will not be feasible if its success hinges on future
litigation that is uncertain and speculative, because success in
such cases is only possible, not reasonably likely. Accord In
re DCNC N.C. I, LLC, 407 B.R. 651, 667 (Bankr. E.D. Pa.
2009); In re Thompson, No. 92-7461, 1995 WL 358135, at
*3-4 (Bankr. E.D. Pa. 1995); In re Cherry, 84 B.R. 134, 139
(Bankr. N.D. Ill. 1988); In re Rey, Nos. 04-B-35040, 04-B-
22548, 06-B-4487, 2006 WL 2457435, at *7 (Bankr. N.D. Ill.
Aug. 21, 2006).
Critically, in this case, the Fifth Plan‟s sole source of
funding is the Surcharge, which would be obtained from
29
wholly speculative litigation proceeds. The Fifth Plan also
depends on the assumption that Asbestos Claimants will
choose to use the CADP rather than the court system, and
even then, the Plan will succeed only if enough Asbestos
Claimants who use the CADP win recoveries and contribute
sufficient Surcharge funds to the Plan Payment Fund. This
Plan is highly speculative, to say the least, not only because it
is contingent on potential litigation winnings, but also
because most of the claims have been administratively
dismissed and have “thus far been . . . overwhelmingly
unsuccessful.” In re Am. Cap. Equip., LLC, 405 B.R. at 422.
The Fifth Plan is simply not reasonably likely to succeed and
therefore, is not feasible. Furthermore, the feasibility issue
cannot be cured, and no dispute of material fact remains,
because Appellants admit that no plan will work without a
Surcharge. Thus, the feasibility issue renders the Plan to be
patently unconfirmable pursuant to § 1129(a)(11).
2. Good Faith under § 1129(a)(3)
A plan is confirmable only if it is proposed in good
faith. 11 U.S.C. § 1129(a)(3). The Bankruptcy and District
Courts found that the Fifth Plan did not meet the § 1129(a)(3)
good faith requirement. We agree.
In analyzing whether a plan has been proposed in good
faith under § 1129(a)(3), “the important point of inquiry is the
plan itself and whether such a plan will fairly achieve a result
consistent with the objectives and purposes of the Bankruptcy
Code.” In re Combustion Eng’g, 391 F.3d at 247 (quoting In
re PWS Holding Corp., 228 F.3d 224, 242 (3d Cir. 2000)).
Specifically, under Chapter 11, the two “recognized” policies,
30
or objectives, are “preserving going concerns and maximizing
property available to satisfy creditors[.]” Bank of Am. Nat.’l
Trust and Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S.
434, 453 (1999) (citing Toibb v. Radloff, 501 U.S. 157, 163,
(1991)). More generally, the Bankruptcy Code‟s objectives
include: “giving debtors a fresh start in life,” Walters v. U.S.
National Bank of Johnstown, 879 F.2d 95, 98 (3d Cir. 1989),
“discourag[ing] debtor misconduct,” id., “the expeditious
liquidation and distribution of the bankruptcy estate to its
creditors,” Integrated Solutions, Inc. v. Service Support
Specialties, 124 F.3d 487, 489 (3d Cir. 1997), and achieving
fundamental fairness and justice. In re Kaiser Aluminum
Corp., 456 F.3d 328, 339-43 (3d Cir. 2006).
a. American Capital I
When we last reviewed Skinner‟s bankruptcy
proceedings in American Capital I, we analyzed whether the
case was “proceeding in bad faith,” In re Am. Capital Equip.,
LLC, 296 F. App‟x at 274, or, as the District Court stated,
whether the Third Plan “reflected a bad faith use of the
bankruptcy process.” In re Am. Capital Equip., No. 06-0891,
at *9. In so doing, we considered the objectives underlying
Chapter 11, and determined based on the record before us at
the time that Skinner‟s bankruptcy case was proceeding in
good faith because the Third Plan‟s surcharge attempted to
maximize the property available to satisfy creditors. In re
Am. Capital Equip., LLC, 296 F. App‟x at 274-75. Skinner
argues that our initial good faith determination and reasoning
circumscribes our good faith determination here. We
disagree.
31
A prior determination that a bankruptcy petition was
filed or proceeded in good faith does not necessarily preclude
a later inquiry into whether a plan under that petition is
proposed in good faith for purposes of confirmation. The
question of whether a Chapter 11 bankruptcy petition is filed
in good faith is a judicial doctrine, distinct from the statutory
good faith requirement for confirmation pursuant to
§ 1129(a)(3). In re Combustion Eng’g, 391 F.3d at 247 n.67;
6 Norton Bankr. L. & Prac. § 112:10 (3d ed. 2012). The
judicial doctrine inquires into the motivation for proceeding
in bankruptcy, see In re Integrated Telecom Express, Inc.,
384 F.3d 108, 121 (3d Cir. 2004), and “requires an
examination of all of the facts and circumstances and depends
upon an amalgam of factors, none of which is dispositive.” 6
Norton Bankr. L. & Prac., supra, § 112:10. In contrast, “the
good-faith confirmation requirement is narrower and focuses
primarily on the plan itself,” id., and on “whether such a plan
will fairly achieve a result consistent with the objectives and
purposes of the Bankruptcy Code.” In re Combustion Eng’g,
391 F.3d at 247. It might be that a bankruptcy case which is
filed and proceeds in good faith nevertheless results in a plan
that does not fairly achieve a result consistent with the
objectives and purposes of the Bankruptcy Code.
Furthermore, information affecting the good faith
determination might be added to the record throughout the
process leading up to confirmation.
We found in American Capital I that the use of a
surcharge maximizes property available to satisfy creditors,
and that Skinner‟s case was therefore attempting to achieve a
valid bankruptcy goal. However, a company may pursue a
32
valid bankruptcy goal, yet in the end, propose a plan that is
otherwise inconsistent with the Bankruptcy Code. Thus, the
fact that Skinner‟s case proceeded in good faith with a valid
bankruptcy purpose, is not sufficient to assure us at the
confirmation stage that the plan itself otherwise comports
with the objectives of the Bankruptcy Code.
In American Capital I, we did not deal with the same
concerns that are now before us; we did not address
confirmation, the Fifth Plan, or questions involving fairness,
collusion, or conflict of interest. See generally, In re Am.
Capital Equip., LLC, 296 F. App‟x at 273-75; see also In re
Am. Capital Equip., LLC, No. 06-0891, at *10 (JA1380) (“the
issue before us is not . . . confirma[tion]”); id. at *14 (“We
understand that the Insurers viewed this [Third] Plan as an
insurance scam. The Insurers might be right. However, these
are all issues that will be explored in the adversary
proceeding, and, possibly, during plan confirmation
proceedings regarding the now viable Fifth Plan.”). Thus, our
limited discussion in American Capital I, regarding whether
Skinner was proceeding for purposes of achieving a valid
bankruptcy purpose, does not now preclude us from
considering whether the Fifth Plan will fairly achieve its
purposes, and whether it is otherwise consistent with the
objectives and purposes of the Bankruptcy Code. We turn
now to these questions.
b. The Fifth Plan
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 *1.
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 *1-3, 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-of-
interest 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.
C.
Finally, Appellants claim that the Bankruptcy Court
abused its discretion by converting the Chapter 11 case to a
Chapter 7. We disagree. After providing “notice and a
hearing,” a bankruptcy court “may convert a case under
[Chapter 11] to a case under Chapter 7 of this title or may
dismiss a case under [Chapter 11], whichever is in the best
Bartel‟s Br. at 37-38; Skinner‟s Br. at 26-27.) However, the
fact that there is at least one valid purpose to the Plan is not
dispositive as the Plan could fulfill one specific purpose of
the Code and yet be inconsistent with other overarching
principles, or with the requirement that objectives and
purposes of the Code must be fairly achieved.
40
interest of creditors and the estate, for cause.” 11 U.S.C.
§ 1112(b) (2004).9
Section 1112(b) requires a two-step process in which
the court first determines whether there is “cause” to convert
or dismiss, and next chooses between conversion and
dismissal based on “the best interest of creditors and the
estate.” § 1112(b); In re SGL Carbon Corp., 200 F.3d 154,
159 n.8 (3d Cir. 1999). We review the decision to convert a
case pursuant to § 1112(b) for abuse of discretion. See id. at
159 (reviewing for abuse of discretion the decision to dismiss
a case pursuant to § 1112(b)); see also In re Albany Partners,
Ltd., 749 F.2d 670, 674 (11th Cir. 1984) (“[T]he
determination of cause under § 1112(b) is subject to judicial
discretion under the circumstances of each case.” (internal
quotation marks and citation omitted)).
As a threshold matter, the hearing on May 7, 2009 met
§ 1112(b)‟s preliminary requirement for “notice and a
hearing.” The April 9, 2009 Order scheduling the May 7
hearing stated that the issue of conversion would be
considered. Furthermore, the hearing provided parties with
an opportunity to present their arguments regarding
conversion. Cf. In re Blumenberg, 263 B.R. 704, 716-17
9
The 2005 and 2010 amendments to the statute require
that in given circumstances “the court shall” convert or
dismiss a case. 11 U.S.C. § 1112 (2005) (emphasis added);
11 U.S.C. § 1112 (2011) (emphasis added). See Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005,
Pub.L. No. 109-8, § 1501, 119 Stat. 23, 216 (2005).
41
(Bankr. E.D.N.Y. 2001) (Even though a formal hearing was
not held, the court found the “notice and hearing”
requirement to be met because the debtor was provided with
“ample opportunities through both extended oral argument
and formal motion practice to explain why his bankruptcy
case should not be dismissed.”).
Turning next to the two-step analysis under § 1112(b),
we agree with the District Court that the Bankruptcy Court
did not abuse its discretion in finding cause to convert the
case to Chapter 7. Section 1112(b) provides a non-exhaustive
list of grounds for finding “cause” to convert or dismiss. 11
U.S.C. § 1112(b)(1)-(10)(2004); In re SGL Carbon Corp.,
200 F.3d at 160 (finding that the list is not exhaustive). The
list of examples includes “inability to effectuate a plan[.]” 11
U.S.C. § 1112(b)(2) (2004).10 A court may also find cause
where there is not “a reasonable possibility of a successful
reorganization within a reasonable period of time.” In re
Brown, 951 F.2d 564, 572 (3d Cir. 1991). The amount of
time that is considered reasonable varies. See, e.g., DCNC
N.C. I, L.L.C. v. Wachovia Bank, Nos. 09-3775, 09-3776,
2009 WL 3209728, at *2-3 (E.D. Pa. Oct. 5, 2009) (four
months); In re Camden Ordnance Mfg. Co. of Ark., Inc., 245
10
Although the statute no longer lists this as an
example of “cause,” the amended statute does not apply in
this case, and even if it did, the “„[i]nability to effectuate a
plan‟ remains a viable basis for dismissal because the listed
examples of cause are not exhaustive.” DCNC N.C. I, L.L.C.
v. Wachovia Bank, Nos. 09-3775, 09-3776, 2009 WL
3209728, at *5 (E.D. Pa. Oct. 5, 2009).
42
B.R. 794, 797 (E.D. Pa. 2000) (three months); In re
Halvajian, 216 B.R. 502, 513 (D.N.J. 1998) (22 months),
aff’d, 168 F.3d 478 (3d Cir. 1998).
We find that the Bankruptcy Court did not abuse its
discretion in determining that there was cause to convert on
the basis that Appellants have been unable to propose a
confirmable plan, and will be unable to do so in the future.
See In re Am. Cap. Equip., LLC, 405 B.R. at 426-27. The
Fifth Plan is not feasible, and Appellants have been unable to
create a plan that is not contingent on future litigation with an
uncertain and speculative outcome. Additionally, Appellants
concede that the plan cannot be successful without a
Surcharge, which, in this case, creates an inherent conflict of
interest.
Appellants argue that they did not have reasonable
time to effectuate a plan, given delays by Insurers, and the
“complexities of mass-tort bankruptcy cases.” However,
Insurers were not the only cause for delay; Skinner sought to
stay proceedings, missed filing deadlines, sought multiple
extensions, and filed five Chapter 11 plans. Furthermore, this
case is not truly a “mass-tort bankruptcy case” despite
Skinner‟s attempts to frame it as such. Skinner‟s bankruptcy
was not caused even in part by mass-tort personal injury
claims, and Skinner seeks a settlement of the asbestos claims
only in an attempt to access injured third parties‟ insurance
recoveries. Regardless, Skinner does not explain why even a
complex case should be kept alive once it is clear that any
plan will be futile.
43
By the time this case was dismissed, Skinner had been
given more than five years to propose a confirmable plan, and
had been unable to do so. In re Am. Capital Equip., 405 B.R.
at 427. A court “is not bound to clog its docket with
visionary or impracticable schemes for resuscitation.” In re
Brown, 951 F.2d at 572 (quoting Tenn. Publ’g Co. v. Am.
Nat’l Bank, 299 U.S. 18, 22 (1936)). A court may permit a
debtor to modify and resubmit its plan under § 1127(a), but is
not necessarily required to do so, especially where
modification would be futile. See, e.g., In re Brauer, 80 B.R.
903, 911 (N.D. Ill. 1987) (where bankruptcy court dismissed
Chapter 11 case “without first resorting to lesser sanctions[,]”
such “„omissions‟ were not an abuse of discretion”). We
agree with the reasoning that where “repeatedly unsuccessful
attempts at confirmation are likely to generate enormous
administrative costs, often without increasing the likelihood
of success, § 1112(b) recognizes the court‟s ability to curtail
the process through the ultimate conversion or dismissal of
the case[,]” and to make sure the plan “does not outlive the
likelihood of its usefulness.” In re Rand, No. AZ-10-1160,
No. 07-06801, 2010 WL 6259960, at *5 (9th Cir. B.A.P. Dec.
7, 2010) (citing 3 Collier Bankr. Manual ¶ 1112.04[4][l] (3d
ed. rev. 2010)). Under the circumstances, the Bankruptcy
Court gave Skinner ample time to develop a plan given that
Skinner did not demonstrate “a reasonable possibility” of
developing a confirmable Chapter 11 plan “within a
reasonable period of time.” In re Brown, 951 F.2d at 572.
Finally, once cause has been established, “the court
may convert . . . or may dismiss a case under [Chapter 11],
whichever is in the best interest of creditors and the estate[.]”
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11 U.S.C. § 1112(b) (2004). A bankruptcy court has “wide
discretion” to “use its equitable powers” to “make an
appropriate disposition of the case[.]” In re Camden
Ordnance, 245 B.R. at 803 (citing the legislative history of
§ 1112(b)).
Here, the Bankruptcy Court did not address the best
interest of creditors and the estate directly, but it is clear that
it determined that no future plan would be able to be
effectuated under Chapter 11. The obvious result is that
under the Bankruptcy Court‟s reasoning, neither creditors nor
the estate could conceivably benefit if a Chapter 11 plan
could never be effectuated. Generally, bankruptcy courts
should explicitly address the best interest of creditors and the
estate under § 1112(b), but we find that the Bankruptcy Court
did not abuse its discretion under the circumstances.
Prolonging this case will only burden the estate with
mounting attorney and administrative fees. Cf. Matter of
Taxman Clothing Co., 49 F.3d 310, 315 (7th Cir.1995)
(“[N]either the trustee in bankruptcy nor the trustee‟s lawyer
has a duty to collect an asset of the debtor‟s estate if the cost
of collection would exceed the value of the asset. His duty is
to endeavor to maximize the value of the estate, which is to
say the net assets. The performance of this duty will
sometimes require him to forbear attempting to collect a
particular asset, because the costs of collection would exceed
the asset‟s value.” (internal quotation marks and citations
omitted)). A Chapter 7 bankruptcy can be accomplished
more efficiently, thus halting the mounting liabilities against
the estate. Moreover, Skinner will not be discharged of its
liabilities under Chapter 7, 11 U.S.C. § 727(a)(1), and
45
Chapter 7 trustees have the ability to settle an estate‟s claims,
including claims regarding insurance coverage. See, e.g.,
Northview Motors, Inc. v. Chrysler Motors Corp., 186 F.3d
346, 347-48 (3d Cir. 1999) (discussing settlement of a lawsuit
by a Chapter 7 trustee); In re Turner, 274 B.R. 675, 681-82
(Bankr. W.D. Pa. 2002) (approving settlement agreed to when
insurer‟s liability was unclear); Order Approving Settlement
Agreement By and Between the Trustee and the Hartford
Insurers, In re Peanut Corp. of Am., No. 09-bk-60452 (Bankr.
W.D. Va. Oct. 2, 2009) (settlement for insurance coverage for
mass-tort claims). Creditors may be unlikely to be paid under
Chapter 7, but the status quo is no better, because Skinner
cannot propose a confirmable plan under Chapter 11.
Furthermore, Asbestos Claimants‟ compensation in
this case is not contingent on confirmation of a Chapter 11
plan. Asbestos Claimants‟ recovery will be unaffected by the
type of bankruptcy that is approved. Skinner‟s estate is
defunct, and regardless of whether a Chapter 7 or Chapter 11
is approved, any asbestos-related personal injury recovery to
be had will come from Insurers, who will not be released
from liability due to Skinner‟s bankruptcy. See 40 Pa. Cons.
Stat. § 117; Ohio Rev. Code Ann. § 3929.05; H.K. Porter
Co., Inc. v. Pa. Ins. Guar. Ass’n, 75 F.3d 137, 142 (3d Cir.
1996) (“[U]nder Pennsylvania‟s „direct action‟ statute, [40 Pa.
Cons. Stat. § 117,] tort victims may sue an insurer directly if
the insured has gone bankrupt or become insolvent.”); Phila.
Forrest Hills Corp. v. Bituminous Cas. Corp., 222 A.2d 493,
494 (Pa. Super. Ct. 1966) (“40 [Pa. Cons. Stat.] § 117,
authorizes direct actions against an insurance liability carrier
in the event of the insolvency or bankruptcy of the insured.”);
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Fisher v. Lewis, 567 N.E. 2d 276, 278 (Ohio Ct. App. 1988)
(“[A]n insurance company can be held liable under its
contract for a judgment against its insured notwithstanding
the discharge in bankruptcy of the insured.”). Thus, contrary
to Appellants‟ argument, Insurers will not receive a windfall
under Chapter 7. We find no abuse of discretion in the
Bankruptcy Court‟s decision to convert this case to a Chapter
7.
IV.
In sum, we find that the Bankruptcy Court did not err
in determining based on the disclosure statement hearing that
the Fifth Plan was patently unconfirmable under § 1129(a)(3)
because its success is entirely contingent on speculative
future litigation, and because the Plan asks third-party
Asbestos Claimants, who were not a cause of the bankruptcy,
to serve as the sole funding source for attorneys and other
creditors, under circumstances involving an inherent conflict
of interest and inequitable procedural provisions. The Fifth
Plan is simply not confirmable, and given the apparent futility
in Skinner‟s pursuit of a plan under Chapter 11, as well as the
mounting liabilities against the estate, the Bankruptcy Court
did not abuse its discretion by converting the case to Chapter
7.
For the foregoing reasons, we will affirm.
47