Columbia Casualty Company v. C P Hall Company

Filing 38

MEMORANDUM Opinion and Order Signed by the Honorable John W. Darrah on 1/10/2013. (ph, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
In re:
C.P. HALL CO.,
Debtor.
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COLUMBIA CASUALTY COMPANY,
Appellant,
v.

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Case No. 12 C 2978
Judge John W. Darrah

C.P. HALL CO.,
Appellee.
MEMORANDUM OPINION AND ORDER
Appellant Columbia Casualty Company (“Columbia”) brings this appeal from an
order of the Bankruptcy Court, granting Debtor/Appellee C.P. Hall Co.’s (“Debtor”)
motion to approve a settlement agreement between the Debtor and Integrity Insurance
(“Integrity”) under Federal Rule of Bankruptcy Procedure 9019.
BACKGROUND
Relevant Facts
The Debtor was a former distributor of Johns Manville raw asbestos. (R. at 1.)
The Debtor terminated its operations in 1986. (R. at 4.) Since the late 1980s, the Debtor
has been named as a defendant in thousands of underlying asbestos claims in Illinois and
elsewhere. (R. at 15.) The Debtor had primary and excess liability coverage that paid for
its defense and indemnity of these claims. (Id.) Columbia issued the Debtor a single
second-layer excess liability insurance policy in effect from October 1, 1984 to

October 1, 1985. (R. at 4.) The Columbia insurance policy has aggregate limits of $6
million, which remains unpaid, in excess of two underlying policies with limits of at least
$5 million. (Id.)
Since 2005, the Debtor has submitted asbestos claims to Integrity, an insurance
company in liquidation in New Jersey. (R. at 1.) The Debtor has received over
$25 million in payments from Integrity for covered claims and alleges that it has proven
up and identified approximately $10 million in remaining coverage under the Integrity
policy. (Id.) But the recovery of the $10 million in claims is possible if the Debtor is
successful on its appeal in New Jersey state court, contending that the liquidator for the
Integrity Estate should have applied state law other than New Jersey in allocating
asbestos claims. (R. at 18.) Other policyholders that are further along in the appeals
process have not been successful with this argument. (Id.) In light of the uncertainty of
litigation, the Debtor negotiated a settlement with Integrity for $4.125 million.
Procedural Posture
On June 24, 2011, the Debtor filed a voluntary petition for relief under chapter 11
of title 11 of the United States Code, 11 U.S.C. § 101, et seq. (the “Bankruptcy Code”).
On January 5, 2011, the Debtor filed its Motion to Enter into Settlement with the
Integrity Insurance estate (the “Settlement Motion”), in which it sought Bankruptcy
Court approval to settle a potential $10 million claim for approximately $4.1 million. (R.
at 5, 11-19.) On January 26, 2012, Columbia filed its Omnibus Objection to the
Settlement Motion. (R. at 5.) Columbia argued that the settlement might have the effect
of increasing Columbia’s own liability to the Debtor and its creditors. (R. at 41-47.)
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On February 27, 2012, the Bankruptcy Court held a hearing on the Settlement
Motion. (R. at 121-32.) In an oral ruling, the Bankruptcy Court held that Columbia
lacked standing, overruled Columbia’s objection, and granted the Settlement Motion (the
“Integrity Settlement”). (R. at 123-25.)
The issues presented on appeal are as follows:
(1) Did the Bankruptcy Court err in applying the “direct pecuniary interest
standard” rather than the “party in interest standard” in determining whether
Columbia has standing to object to the Integrity Settlement?
(2) Did the Bankruptcy Court err in holding that Columbia lacked a direct
pecuniary interest sufficient to confer standing on Columbia to object to the
Integrity Settlement?
(3) Did the Bankruptcy Court err in granting the Debtor’s Settlement Motion?

LEGAL STANDARD
The Bankruptcy Court's determinations of law are reviewed de novo, while its
findings of fact are reviewed for clear error. See Wiese v. Cmty. Bank of Cent. Wis., 552
F.3d 584, 588 (7th Cir. 2009) (Wiese) (citing In re ABC-Naco, Inc., 483 F.3d 470, 472
(7th Cir. 2007)). However, where the Bankruptcy Code commits a decision to the
discretion of the bankruptcy court, that decision is only reviewed for an abuse of that
discretion. See Wiese, 522 F.3d at 588 (citing In re Fortney, 36 F.3d 701, 707 (7th Cir.
1994)).
Consequently, whether the Bankruptcy Court properly applied the “direct
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pecuniary interest standard” rather than the “party in interest standard” is a question of
law subject to de novo review. Whether the Bankruptcy Court erred in finding that
Columbia lacked a direct pecuniary interest is a question of fact subject to a clear errorreview. Whether the Bankruptcy Court erred in granting the Settlement Motion is
subject to an abuse-of-discretion standard.
ANALYSIS
As a preliminary issue, the Debtor argues that this appeal is moot because
Columbia did not seek a stay of the Bankruptcy Court’s order and the Debtor and
Integrity have consummated the Integrity Settlement. Columbia does not address why it
did not seek a stay of the Bankruptcy Court’s order. Instead, Columbia argues that the
Court could fashion an equitable remedy or unwind the settlement.
This case does not concern section 363(m) of the Bankruptcy Code, which
requires that when a trustee sells estate property to a good faith purchaser, a party
challenging the sale order must obtain a stay pending appeal or the appeal becomes moot
once the sale is made. 11 U.S.C. § 363(m); In re GCI Indus., Inc., 27 F.3d 296 (7th Cir.
1994); In re Sax, 796 F.2d 994 (7th Cir. 1986).
Some courts have held that the failure to obtain a stay of a settlement order moots
the appeal, particularly where the settlement agreement has been substantially honored.
See In re Mega-C Power Corp., 295 Fed.Appx. 242, 244 (9th Cir. 2008) (holding that
“failure of the Shareholders to obtain a stay allowed the settlement plan to be
‘substantially consummated’” and “it would be ‘inequitable to consider the merits of the
appeal.’”) (internal citation omitted); Rev Op Group v. ML Manager, LLC, No. 104

1665, 2011 WL 334292, at *7 (D. Ariz. Jan. 31, 2011) (“holding that with regard to the
Grace Entities settlements, the appeal is moot because the appellants failed to obtain a
stay of the bankruptcy order and because the transactions that have transpired as a result
cannot be unraveled.”).
Neither party has cited persuasive case law for their position, nor does there
appear to be controlling case law from the Seventh Circuit regarding this issue. In any
event, even if the appeal were not moot, the Bankruptcy Court’s order would be affirmed
on other grounds.1
Pecuniary Interest Standard
Columbia argues that the Bankruptcy Court incorrectly applied the “direct
pecuniary interest standard,” which it argues applies only to “appellate standing.”
(Appeal at 7.) Columbia argues that the Bankruptcy Court should have used the “party in
interest standard,” embodied in Section 1109(b).2 (Id. at 7.) Specifically, Columbia
argues that the Bankruptcy Court relied on Seventh Circuit opinions that conflate the two
standards.
Columbia in effect asks the Court to disregard the firmly established precedent of
this Circuit. As the Seventh Circuit recently held, “To have standing to challenge a
bankruptcy order, the challenger must be a ‘person aggrieved’ by that order; in other
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Debtor also asserts that Columbia’s appeal must fail because it waived the
arguments for reversal of the Bankruptcy Order because they were not properly raised
before the Bankruptcy Court and not fully developed before this Court. (Resp. at 10.)
This argument is not addressed for the same reason.
2
Section 1109(b) provides that: “A party in interest, including the debtor, the
trustee, a creditors' committee, an equity security holders' committee, a creditor, an
equity security holder, or any indenture trustee, may raise and may appear and be heard
on any issue in a case under this chapter.” 11 U.S.C. § 1109(b).
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words, he must demonstrate that he has ‘a pecuniary interest in the outcome of the
bankruptcy proceedings.’” In re Holly Marine Towing, Inc., 669 F.3d 796, 800 (7th Cir.
2012) (In re Holly Marine Towing) (internal citations omitted). “The pecuniary interest
rule is certainly the rule of this Circuit.” In re Cult Awareness Network, Inc., 151 F.3d
605, 608 (7th Cir. 1998). Furthermore, the Seventh Circuit held that Section 1109(b)
“was intended to waive other limitations on standing.” Matter of James Wilson
Associates, 965 F.2d 160, 169 (7th Cir. 1992); In re Rimsat, 193 B.R. 499, 503 (Bankr.
N.D. Ind. 1996) (“the right to appear and be heard is not the same as standing and
§ 1109(b) does not necessarily mean that every party in interest can seek relief on every
issue.”).
Next, whether the Bankruptcy Court properly held that Columbia lacked a
pecuniary interest sufficient to confer standing is a question of fact that is reviewed for
clear error. In re Holly Marine Towing, 669 F.3d at 800. The Bankruptcy Court held the
following:
Only parties with a pecuniary interest in a dispute have
standing. And there is a further qualification that's
pertinent here. The pecuniary interest must be one that is
directly and adversely affected. In this situation, I think
Columbia Casualty has identified a pecuniary interest
certainly, but it's not one that is directly affected by the
motion that the debtor has brought.
What Columbia Casualty says on page four of its objection
is that it is at least possible that funds not paid by Integrity
will increase Columbia's indemnity obligations. So that’s
an indirect effect, it’s not a direct one.
(2/27/12 Hr’g Tr. at 4.)
There is no clear error in the Bankruptcy Court’s ruling. Columbia has no direct
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interest in the Integrity Settlement. Columbia’s sole interest with respect to the Debtor is
its potential liability to the Debtor as an insurer.
Granting of Settlement Motion
The Bankruptcy Court’s approval of the Settlement Agreement is reviewed for
abuse of discretion. Depoister v. Mary M. Holloway Foundation, 36 F.3d 582, 586-87
(7th Cir. 1994). “If the decision demonstrates a command of the case, [the Court] will
not engage in second-guessing; the bankruptcy court is in a better position ‘to consider
the equities and reasonableness of a particular compromise.’” In re Doctors Hosp. of
Hyde Park, Inc., 474 F.3d 421, 426 (7th Cir. 2007) (quoting In re Am. Reserve Corp., 841
F.2d 159, 162 (7th Cir.1987)). An abuse of discretion occurs when a court’s decision “is
premised on an incorrect legal principle or a clearly erroneous factual finding, or when
the record contains no evidence on which the court rationally could have relied.” In re
Airadigm Comm., Inc., 616 F.3d 642, 652 (7th Cir. 2010).
Columbia argues that the Bankruptcy Court erred in granting the Debtor’s
Settlement Motion because it held that Columbia did not have standing to object to the
Integrity Settlement and the Debtor did not establish a sufficient record. The first
argument is rendered moot by the Court’s ruling above. As to the second argument, the
Debtor set forth a sufficient factual record to warrant approval of the settlement. Not
only did the Debtor identify sufficient facts in its brief, the Debtor submitted the
Declaration of Stephen Hoke, the Debtor’s special insurance counsel. Hoke’s declaration
provided additional evidence that the proposed settlement with Integrity was within the
reasonable range of litigation outcomes and was in the best interests of the estate. In re
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Doctors Hosp. of Hyde Park, Inc., 474 F.3d 421, 426 (7th Cir. 2007) (“Bankruptcy courts
may approve adversary litigation settlements that are in the best interests of the estate.”).
Therefore, the Bankruptcy’s Court’s determination was not an abuse of discretion.
CONCLUSION
For the foregoing reasons, the Bankruptcy Court’s approval of the Integrity
Settlement is affirmed.

Date: 1/10/13

______________________________
JOHN W. DARRAH
United States District Court Judge

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