Judge Goldblatt Issues Sweeping Opinion Confirming Avon Plan but Says ‘Gatekeeper’ Provision Must Go in First Written Opinion on Issue in Third Circuit

Relevant Document:
Opinion

Judge Craig Goldblatt issued a 98-page opinion today confirming the Avon debtors’ liquidation plan, largely overruling objections raised by insurers that the plan’s talc distribution procedures, or TDP, would unfairly foist additional exposure on them. The judge also sustains the U.S. Trustee’s objection to the plan’s “gatekeeper” provision, finds that the plan’s payment of note trustee postpetition fees was permissible, and holds that a class was deemed to accept the plan when its single voting creditor abstained from voting.

Judge Goldblatt’s holding striking the plan’s gatekeeper provision is a notable departure from the Fifth Circuit’s recent Highland II decision, and the judge states that his opinion is the first of its kind in the Third Circuit.

Avon’s gatekeeper provision would have required any party with a potential claim or cause of action “that could reasonably be characterized” as a claim or cause of action released under the plan, to seek a determination from the bankruptcy court before litigating the claim in another court, the opinion explains.

Judge Goldblatt writes that Highland II allows gatekeeper provisions if they are narrowly tailored to apply to “estate fiduciaries.” However, the judge says that “even as narrowed, … this Court does not believe there is a basis for imposing a ‘gatekeeping’ role.” Judge Goldblatt underscores, “[T]his Court does not believe that either the Bankruptcy Code or the Barton doctrine provides any substantive authority for the bankruptcy court to do anything like this” (emphasis added).

Judge Goldblatt’s written opinion follows a protracted fight between the insurers and the debtors that culminated in a two-day confirmation trial in July. At the end of the trial, Judge Goldblatt previewed that he would confirm the plan, albeit with minor tweaks, stating that “there is a form of confirmable plan here.”

Under the Avon plan, general unsecured creditors and talc claimants would recover from a liquidation trust. The trust’s primary assets, besides initial funding and a cash pot for electing GUCs, will be the debtors’ insurance policies. The plan designates a retired bankruptcy judge to serve as the trustee, whose primary duties will be to reconcile talc claims and pursue recoveries against the insurers in what Judge Goldblatt calls “high stakes and complex” insurance coverage litigation.

The insurers painted the plan as a bad-faith deal between the debtors – who had no funded debt, sold off all of their operating assets and had little cash on hand – and the official committee of unsecured creditors, whose constituency consisted significantly of talc claimants. According to the insurers, under the TDP, the trustee would have little incentive to minimize talc claims and would be able to pursue recoveries from them under policies stripped of meaningful provisions designed to mitigate their exposure.

Judge Goldblatt writes that the “plan was proposed in good faith” and “generally seeks to achieve ends that are within the contemplation of the bankruptcy laws.” He states that as “far as the insurers are concerned, the trust distribution procedures established in the plan should be viewed as a voluntary settlement, between the talc claimants and the debtor/trust, of talc claims.”

“The principal point this Court intends to make is that the respective rights of the trust (which is to be created under this plan) and the company’s insurers should be essentially the same as they would be had this occurred out of bankruptcy,” the opinion states (emphasis added).

In line with that principle, the judge says he will require changes to the plan to ensure that the insurance policies’ “terms and conditions” cannot be stripped in the process of transferring the policies to the trust. The judge reaches this conclusion despite finding the policies were not executory contracts, rejecting one of the insurers’ objections.

“Courts have uniformly rejected the contention that an insurance policy covering a period in the past, for which all premiums have been paid, is an executory contract within the meaning of § 365,” Judge Goldblatt reasons.

Judge Goldblatt also says that he will require the plan and confirmation order to be “silent” about the preclusive effect the confirmation order could have in subsequent insurance coverage litigation. “In this Memorandum Opinion, the Court is undertaking to describe as clearly and carefully as it can the matters that it is deciding, and those that remain undecided.”

Judge Golblatt rejects several other arguments raised by the insurers, including that the trustee – who had previously represented talc claimants in private practice – be “neutral.” “This argument reflects a misapprehension of the role of the liquidating trustee,” Judge Goldblatt writes. “[T]he job of the trustee is to recover as much as the trustee can for the trust’s beneficiaries.”

Similarly, the judge dispenses with an argument that the plan is unconfirmable because it would allow general unsecured creditors to benefit from insurance assets designed for talc claimants. Central to the judge’s reasoning is that 100% of talc claimants voted in favor of the plan.

“Even accepting that the proceeds of insurance are an asset in which the talc claimants have an interest, there is nothing in the Bankruptcy Code that prohibits them from consenting to the sharing with other unsecured creditors in the manner provided for in the plan,” the judge states.

The opinion considers several other insurer objections that were not related to insurance. While Judge Goldblatt reasons there is an “interesting” question as to whether the insurers had standing to assert those objections, he writes that it is a moot point because each of the objections fail.

One objection raised by the insurers is that because debtor MIH’s single impaired creditor abstained from voting, the debtor lacks an impaired accepting class of creditors necessary for confirmation. Judge Goldblatt is satisfied, however, that the solicitation order clearly explained that such an outcome would occur when it stated, “‘Any Class that contains Claims entitled to vote but for which no valid votes are returned shall be deemed to have accepted the Proposed Plan.’”

Judge Goldblatt also rejects the insurers’ argument that the plan must comply with section 524(g) of the Bankruptcy Code. Judge Goldblatt writes that the plan does not contemplate, as section 524(g) does, a reorganizing debtor channeling asbestos claims to a trust.

The judge also rejects an argument from the insurers that the debtors must liquidate all claims before confirmation. “It is now unexceptional for a bankruptcy court to confirm a chapter 11 plan that leaves the liquidation of estate assets (not just the causes of action contemplated by § 1123(b)(3)(B)), and the resolution of claims against the estate, to a post-confirmation trust,” Judge Goldblatt writes.

In addition to the gatekeeper provision, the UST took aim at the debtors’ agreement to pay up to $850,000 of a bond trustee’s fees under the plan, arguing that Judge Goldblatt should instead require the trustee to file a “substantial contribution” motion for payment. The judge disagrees, relying again on the plan’s overwhelming creditor consensus. He states, “[T]he payment of the bond trustee’s fees was appropriately disclosed in the disclosure statement and no party in interest took issue.”