CA Bankruptcy Ct. Applies Illinois “All Sums” Law

Approves 100% Allocation to Non-Settling Insurer and Denies Equitable Contribution against Settling Insurers

The Bankruptcy Court for the Northern District of California, applying Illinois law, denied an insurer’s motion for summary judgment finding the insurer’s interpretation of the bankruptcy plan incorrect.  The court held that an “allocated percentage” of 100% is a valid allocation and that there was no basis to require an equitable contribution analysis before the Trust could allocate to the only primary insurer that did not settle prior to the debtors entering the bankruptcy plan. The Trustee and Debtors were represented by FrankGecker LLP, Chicago.

The Trustee for  CFB/WFB Liquidating Trust (the “Trust”) filed a complaint against Continental Casualty Company (“Continental”) seeking damages for breach of contract and declaratory relief regarding the interpretation of the Joint Chapter 11 Plan of debtors CFB Liquidating Corporation and WFB Liquidating Corporation (the “Plan” and “Debtors”).   Continental answered and filed a counterclaim and ultimately filed a partial motion for summary judgment seeking declaratory relief regarding the interpretation of the Plan.

The Debtors manufactured and distributed refractory products allegedly containing asbestos.  The Debtors were defendants in numerous personal injury and wrongful death lawsuits and had purchased third party liability insurance policies from a number of insurers.   When the Debtors filed for bankruptcy in 2001, they had not yet exhausted their primary and excess insurance policies for the relevant coverage periods.  During the course of the bankruptcy procedures, the Debtors negotiated “buyback” settlements with three of their primary insurance carriers for approximately $11.5 million.  The Debtors did not reach a “buyback” settlement with Continental, their only other primary insurance carrier.

Continental sold the Debtors three primary-level comprehensive general liability insurance policies with $1 million in coverage each for the time period of January 1, 1985 to January 1, 1988.  The policies are missing pages and are, in part, illegible, but are believed to contain “all sums” language.  At least one of the policies includes an “other insurance” provision.  The Plan incorporates the settlements with the insurers, the trust distribution procedures, and the treatment of Continental’s insurance obligations (“§8.3”).  Under §8.3, the Trust is to give Continental a proposal for the payment of the “allocated percentage” of the liquidated value of the claims the Trust contends Continental is responsible.  The Trust is also to provide the structure and deadlines for Continental to accept or reject any such proposals.

In 2015, the Trust submitted proposals to Continental regarding the payment of Allowed Claims that triggered Continental’s policies.  In each of the proposals, the Trust contended that Continental’s allocated percentage of the liquidated value of each claim was 100% – covering 1,133 Allowed Claims with a liquidated value of $7.9 million.   Continental filed its motion for summary judgment in opposition to the proposals and argued that by proposing an “allocated percentage” of 100% of the liquidated value of the claims, the Trust is trying to hold Continental liable for more than its fair share of each claim.  Continental contends that the phrase “allocated percentage” must be given a technical, insurance – specific meaning which necessarily excludes an allocated percentage of 100%.  Continental further argues that the Trust must assign to Continental only that portion of each claim for which Continental would have financial responsibility under a post hoc equitable contribution action.  The Trust contends that the Plan is clear and simply provides that the Trust is to make a proposal to Continental regarding the allocated percentage of the liquidated value of the claims for which Continental is responsible.  The Trust also asserts that the $7.9 million in claims fully exhausts the $2.56 million available under Continental’s policies under any conceivable allocation method and, thus, there is no basis for equitable contribution.

The Bankruptcy Court agreed with the Trust, finding Continental’s interpretation to be “contrary to the plain and obvious meaning of the language in §8.3.”  First, the court found that “allocate” is a word with a commonly understood meaning – to assign.  Second, according to the court giving “allocate” an insurance – specific meaning would not render the definition as Continental argued.  Continental urged the court find that an allocated percentage could not be 100%; however, the court looked to Illinois law regarding “all sums allocation.” The court stated: “an ‘allocated percentage of 100%’ of the liquidated value of an Allowed Claim is no different than an ‘all sums allocation.’”  Therefore, the court found that the Trust’s interpretation of §8.3 was the correct interpretation:  “An ‘allocated percentage of 100%’ is an allocation.”

Moreover, the court held that the Plan does not require the Trust to perform an equitable contribution analysis based on the other settling policies and the facts of each claim in advance of making a proposal for payment of the claims.  Under Illinois law, “the right to contribution is an equitable principle arising among co-insurers which permits one who was paid the entire loss to receive reimbursement form another insurer liability for the loss.”   According to Continental, the Trust was required to perform an equitable contribution analysis for Continental’s benefit because the Trust is holding the Insurance Fund created by the sale of the settling insurance policies, and in effect, stands in their shoes.  The court rejected Continental’s argument that the Trust was theoretically the other insurer and found that neither §8.3 or the “other insurance” clause imposed the burden on the Trust to conduct an equitable contribution analysis.  The court also noted that Continental was aware of the terms of the other primary insurer settlements and their potential effect on Continental’s equitable contribution rights and could have insisted on language in the Plan to require the Trust to conduct such an equitable contribution analysis.

The court also disagreed with Continental’s argument that the use of an allocated percentage of 100% creates unjust enrichment.  According to the court, Continental is not being asked to pay more than its fair share and “[t]here is no threat of unjust enrichment to the Trust, the Settling Insurers, or the holders of the Allocated Claims.”  In re CFB Liquidating Corporation, f/k/a Chicago Fire Brick Co., No. 01-45483 (Bankr. N.D. Cal. Nov. 21, 2016).

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