One of the major issues for carriers in these asbestos bankruptcies is the potential for radical acceleration of their obligation to pay. Whether in a pre-pack or in a traditional bankruptcy, the asbestos claims are funneled into a trust, which thenceforth makes payment. An important issue from the perspective of insurance companies is that some courts have held, following a Seventh Circuit decision, UNR Indus. Inc. v. Continental Cas. Co., 942 F.2d 1101 (7th Cir. 1991), that upon the creation of the trust the obligations of the insurance companies become due immediately. But cf. Amatex Corp. v. Aetna Cas. & Sur. Co., 97 B.R. 220 (Bankr. E.D. Pa.), aff’d, 102 B.R. 411 (E.D. Pa.), aff’d, 908 F.2d 961 (3d Cir.). So, if the policyholder-debtor anticipates $250 million of claims in the future, once the trust is created the carriers have a present obligation to perform and pay the $250 million, even though the trust itself won’t make immediate payment to individual claimants. For example, a carrier who sits above $200 million in underlying coverage could expect that given an asbestos claim burden of say $25 million a year, it would not be called upon to pay until another decade passes. However, under the Seventh Circuit’s theory, because the insured’s obligation to the creditor class of tort claimants is satisfied and extinguished upon the creation of the trust, that excess carrier’s obligation to pay becomes immediately due.

Because the stakes for insurers in these asbestos bankruptcies are so high, it is in the insurers’ interest to object to the plan and to engage in various tactics designed to gum up the works, including recently challenging whether insurance counsel for the insured can properly represent it.

The Third Circuit in a recent case, In Re Congoleum (3d Cir. Oct. 13, 2005), held that a lawfirm would not be able to continue to serve as counsel, holding that (i) it was important to allow early appellate review of such questions because after a plan was confirmed it would not be likely that the proceeding would be sent back to square one due to the improper selection of counsel and (ii) counsel for the insurance companies had adequate standing to raise questions of conflict of interest of the policyholder’s counsel, due to their independent duty to the court and as members of the bar. The court did not find it necessary to reach the question whether the insurance companies themselves had standing to object to counsel selected by the debtor/policyholder and approved by the principal creditors (the tort claimants).

In the particular case, the lawfirm had been involved in negotiating the claims resolutions and claim-value matrix pre-petition and worked ultimately as co-counsel with the asbestos-plaintiffs’ counsel, due to the shared objective of wringing the maximum amount of money out of the insurance program. Nevertheless, because the settlement permitted the tort claimants to renew their claims against the debtor in the event that insurance money was unavailable and the close ties between the debtor's coverage counsel and the plaintiffs’ lawyers led the court to conclude that counsel had a conflict of interest.

The lawfirm had sought to disclose its differing relationships in its retention letter, but the court questioned whether the disclosures were adequate and whether it had received appropriate and knowing waivers from all concerned. Moreover, the court found that given counsel’s broad-ranging role the conflicts questions could not necessarily be resolved by private waivers, due to the bankruptcy code’s requirement that counsel be disinterested (an objective standard policed by the courts).

The court did not reach the question whether counsel’s fees would need to be disgorged, but noted that in other bankruptcies the same counsel had been found to be ineligible to collect its agreed-upon fees. While it is clear in the circumstances that the debtor and the asbestos-claimant creditors were seeking a resolution that was efficient and that would bring maximal value to the estate, the Third Circuit plainly was concerned with the appearances of integrity, professionalism, and disinterestedness by those involved, especially because in a pre-pack the parties negotiate the “reorganization” in private and seek to clothe their private deal with the blessing of the court. The Third Circuit found it more pressing in those circumstances to be mindful of the appearance of conflicts, and so it ruled that the firm could not serve as debtor’s counsel.

Of course, this detour does not change the business reality of the company's having only limited assets and a large stream of asbestos claims – and the insurance assets being the sole realistic vehicle for resolving the asbestos claims. But since most companies that enter bankruptcy in these circumstances seek to establish a ringfence around their liabilities in part to assure investors of their being in control of their finances, it undermines the goal of establishing certainty to allow these detours and fights over counsel. But given the success insurers have had in challenging counsel the best strategy for debtors is to reduce the likelihood that insurers will be in a position to question the selection of counsel in the first place.