Evaluating strategies for permanently resolving asbestos litigation now
A recent bankruptcy case offers a cautionary tale to asbestos defendants who are watching their insurance assets dwindle as claims continue to be filed.
Although decades have passed since asbestos was ubiquitous at industrial sites and operations around the United States, litigation over bodily injuries allegedly caused by historic exposures to asbestos continues in a significant way across the country. Many defendants find themselves in the position of relying on limited, decades-old insurance assets to fund the defense and resolution of asbestos claims, hoping that the insurance assets can somehow outlast the claims in the tort system.
Yet, absent careful planning about what an ultimate end-strategy should look like, a defendant can find itself facing a host of problems beyond the asbestos cases themselves once those insurance assets have been exhausted. A situation that developed recently in a Chapter 7 bankruptcy case illustrates some of those potential problems, and offers a cautionary tale to asbestos defendants who are watching their insurance assets dwindle as claims continue to be filed.
On Oct. 19, 2021, The Nash Engineering Co. filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the District of Connecticut (Case No. 21-50644). Founded in 1905, Nash was a manufacturer of compressors, blowers and vacuum pumps. Its use of asbestos in its products during the mid-20th century led it to become a defendant in thousands of asbestos-related bodily injury cases in the tort system. To defend and resolve those cases, Nash called on historic liability insurance policies that provided coverage for (among other things) asbestos-related liabilities. Over time, Nash executed settlements with its insurers, which released the insurers of obligations for paying future costs in exchange for cash payments.
By 2020, Nash had ceased all active operations, and remained in existence only to coordinate the defense and resolution of the asbestos claims against it. But those claims proved to outlast the proceeds of Nash’s insurance recoveries. As of the time of its bankruptcy filing, Nash faced an estimated 1,600 pending asbestos claims, and reported that it owned no property it could liquidate to pay creditors. As a result, Nash sought to liquidate under Chapter 7 of the Bankruptcy Code.
In taking this step, Nash may have expected that the Chapter 7 proceeding would be a fairly simple one. It may have envisioned a scenario in which a Chapter 7 trustee would marshal any remaining insurance monies, devise a method for distributing those proceeds equitably among the claimants, and then promptly terminate Nash’s corporate existence — all without cost to the company’s owners, directors, or officers. The reality, however, was not nearly as neat and simple as that. Instead, the trustee took a hard look at Nash’s insurance settlement agreements and concluded that Nash settled its policies for far less than it should. In the trustee’s view, the responsibility for that lied with Nash’s directors and officers. Thus, in April 2022, the trustee filed suit against Nash’s directors and officers, seeking $63.65 million in damages from them for breach of fiduciary duties and for failing to maximize the value of Nash’s settled insurance policies.
The trustee’s lawsuit not only derailed the prospects for a quick and simple end to Nash’s corporate existence (and its asbestos liability issues); it also created a new set of issues for Nash’s directors and officers, who now faced significant litigation risk of their own. To address the lawsuit, the directors and officers sought coverage under a directors’ and officers’ liability policy (the D&O policy) that Nash purchased prior to its bankruptcy filing. The D&O policy provided coverage to both Nash and the company’s directors and officers, and because of the company-side coverage it offered, the policy could be characterized as property of the bankruptcy estate under Section 541 of the Bankruptcy Code. Accordingly, the directors and officers filed a motion asking the Bankruptcy Court to lift the Bankruptcy Code’s automatic stay provisions (which protect property of the estate from pursuit by nondebtor third parties), so that the directors and officers could access coverage under the D&O policy to fund their defense of the trustee’s lawsuit.
The immediate result of the motion to lift stay was more litigation. The trustee opposed the directors’ and officers’ lift-stay motion because the D&O policy’s limits operated in a way that reduced the coverage available to Nash for every dollar paid out to the directors and officers. Although no claims had been asserted in the bankruptcy case against Nash that could have triggered coverage for Nash under the D&O policy, the trustee contended that Nash should be able to preserve that coverage in the event that such a claim might be asserted. At a hearing on the motion, the trustee abandoned that argument, but asserted that the directors’ and officers’ access to the D&O policy’s coverage should be subject to limitations or court oversight, to protect Nash’s potential interests in the policy. Ultimately, the Bankruptcy Court granted the directors’ and officers’ motion, finding that the policy favored the directors’ and officers’ access to coverage, and determining that nothing in the policy or applicable law required the estate’s contingent interests in the policy’s coverage to be protected in the manner the trustee sought. But the fight took a toll on all involved.
Nash’s directors and officers may have had a good faith belief that Nash’s best course was to “ride out the storm” of asbestos claims in the tort system for as long as it had insurance proceeds available to it, and then to place the entity in a Chapter 7 proceeding once those proceeds were consumed. But the introduction of the Chapter 7 trustee to the case constituted an element of uncertainty that ultimately exposed the directors and officers to significant personal risks. On top of that, the directors and officers faced the possibility of having to use their own funds to litigate over their access to insurance coverage for the trustee’s claims against them. Moreover, it’s conceivable that the D&O policy may not afford enough coverage to pay the directors’ and officers’ full costs of defending and resolving the trustee’s claims, which the trustee asserts are worth over $60 million. Thus, despite the best intentions of Nash’s directors and officers, neither they nor Nash can be particularly satisfied with the way the situation has developed.
Things didn’t necessarily have to turn out this way. Instead of following the “ride out the storm in the tort system” approach that culminated in its Chapter 7 filing once no assets were left, Nash could have examined the possibility of filing a Chapter 11 proceeding while it still had some assets — including non-settled insurance policies — available to it. And given Nash’s desire to terminate its corporate existence, Nash could have pursued an alternative strategy to the variety of Chapter 11 proceeding governed by Section 524(g) of the Bankruptcy Code, which provides specific protections for reorganizing asbestos defendants and certain related parties.
Rather, the aim of a Chapter 11 case for Nash could have been a more orderly liquidation, through a plan that provided for the creation of a liquidating trust (funded by Nash’s remaining assets) to resolve all asbestos claims filed against it, as well as a defined path to Nash’s corporate dissolution. Such a strategy would have allowed Nash to remain in control of its affairs through the course of the Chapter 11 proceeding as a “debtor-in-possession,” thereby eliminating the uncertainties that arise from the involvement of a Chapter 7 trustee. And had Nash’s insurers reached buy-back settlements with Nash as part of the Chapter 11 case, rather than outside of it, they would have been eligible to obtain injunctive protection as good-faith purchasers of the debtor’s assets pursuant to Section 363 of the Bankruptcy Code — protection that generally is not available in settlements outside of bankruptcy. Indeed, the insurers themselves may have been willing to help fund the administrative costs of the Chapter 11 case in view of those potential benefits. Even Nash’s directors and officers might have been able to obtain releases for certain types of potential claims as part of a liquidating Chapter 11 plan, as has been the case in other liquidating Chapter 11 cases involving mass tort claims.
Of course, no legal proceeding is without risks or costs, and it’s impossible to say that a liquidating Chapter 11 process would have unfolded without any turbulence for Nash or its directors and officers. Nonetheless, a liquidating Chapter 11 case could have offered Nash more control over both the process and the outcome it desired to achieve, and could have limited or eliminated risks and uncertainties that actually developed along the way in its Chapter 7 proceeding. It also could have yielded tangential benefits to other interested parties — particularly Nash’s insurers and its directors and officers — that appear to be out of reach in its Chapter 7 case.
Asbestos defendants like Nash should not presume that their best (or only) option in the face of unrelenting asbestos claims filings is to survive in the tort system for as long as insurance assets will allow, and then hope that claimants will simply walk away when no assets are left. Neither should they casually gamble that their insurance assets will outlast the asbestos claims against them. Though some defendants may have won that gamble in the past, Nash’s experience teaches that the costs of losing that wager can be high. Hard circumstances often lead to limited choices with unappealing outcomes. To avoid that, asbestos defendants are better served to begin analyzing their options well before acute distress sets in, so that an optimal strategy can be developed and pursued in the most efficient and efficacious manner possible.
Andrew J. Muha is a member of the Reed Smith’s insurance recovery group. He represents clients seeking a final resolution for various types of mass tort and long-tail liabilities. Luke A. Sizemore is a partner with the firm. His practice focuses on representing corporate debtors, indenture trustees, financial institutions, and other secured and unsecured creditors in bankruptcy cases and Emily C. Costantinou is an associate in the Pittsburgh office and focuses her practice on litigation matters.
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