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Court Allows Nonconsensual Releases of Third-Party Claims to Be Included In Settlement Agreement
An interesting and challenging aspect of legal practice is adapting to statutory and decisional law changes. While many bankruptcy issues reach the U.S. Supreme Court that do not result in significant changes to bankruptcy law practice, over the past 30 years, several have had a massive impact, or at least the potential to do so. One such case was the much-anticipated decision in Harrington v. Purdue Pharma, 603 U.S. 204 (2024), where a divided Supreme Court held that Chapter 11 plans of reorganization could not impose releases of claims against third-party nondebtors without the consent of affected claim holders.
The bankruptcy bar and courts are now attempting to determine the breadth and depth of the Purdue ruling both as to what constitutes consent under a plan of reorganization and whether Purdue applies to other bankruptcy proceedings, including a sale of assets under section 363 of the Bankruptcy Code, free and clear of claims, and approval of settlements under Federal Rule of Bankruptcy Procedure 9019, which approvals often contain injunctions in favor of third party purchasers of assets.
The U.S. Bankruptcy Court for the Eastern District of Virginia recently faced these issues in In re Hopeman Brothers, (Case No. 24-32428-KLP). In an opinion issued on Jan. 24, 2025, on a motion for a stay pending appeal of the court’s decision that a Bankruptcy Code Section 363 sale by an insured debtor of certain insurance policies in connection with a settlement agreement between the debtor and insurers could include nonconsensual releases of third-party claims against the insurers, the court denied a motion for a stay pending appeal, holding that there was not a likelihood of success on the merits of the appeal of the court’s decision.
As Part of the Settlement, the Debtor Sought to Purchase Its Insurance Policies Back from the Insurers
According to the opinion, before the debtor ceased operations back in the 1980s, it contracted with shipbuilders to outfit the interiors of ships. For decades after terminating this business, the debtor continued its corporate existence to address personal injury, asbestos-related claims. As of June 2024, 2,700 such claims remained unresolved. As is usually the case, the debtor carried insurance policies that it maintained provided coverage for the claims. While the coverage periods had ended in 1984, the insurers continued partially to reimburse the debtor for its defense costs and liability payments made to asbestos claimants to resolve the claims.
In July 2024, the debtor filed a motion that requested Bankruptcy Court approval of a settlement agreement with some but not all of its insurers. As is typically the case in asbestos bankruptcy cases, pursuant to the agreement, the insurers would pay the debtor a set sum and the debtor would establish a trust to distribute the funds to holders of asbestos claims. Once the insurers made the payment, they would be released and discharged from all claims related to the policies and the asbestos claimants would be enjoined from asserting claims against the insurers. As part of the settlement, the policies would be deemed “sold” back to the debtor pursuant to Section 363 of the Bankruptcy Code, free and clear of claims, and then terminated by the debtors, the practical effect being it was as if the policies had never been issued.
The motion to approve the settlement agreement was opposed by the Office of the U.S. Trustee, certain individuals, and Huntington Ingalls Industries, Inc. (HII). According to the opinion, HII may have held future potential contribution claims against the Debtor under state law related to the asbestos claims. After an evidentiary hearing, the court overruled the objections and approved the settlement agreement. HII appealed the ruling and filed a separate motion for a stay pending the appeal. The opinion sets forth the court’s decision denying the requested stay.
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