Tort Claimants Slip and Fall Under Plain Reading of Bankruptcy Documents

The Bottom Line:

In In re Caribbean Petroleum Corp., et al., No. 13-4415 (3d Cir. Sept. 18, 2014), the Third Circuit affirmed that tort claimants did not have priority over other general unsecured creditors in the distribution of certain insurance proceeds, based on the plain language of the Bankruptcy Court’s order approving the buyback of an insurance policy and the related terms of a confirmed plan of liquidation which provided for pro rata distribution of the purchase/settlement proceeds to all holders of general unsecured claims (including tort claims who otherwise had direct action claims against the insurer). In its ruling, the Third Circuit overruled arguments by an alleged joint tortfeasor named as a co-defendant in lawsuits against the Debtors that tort claimants (including itself) had priority over insurance settlement proceeds because Puerto Rico provides tort victims a statutory right of direct action against the insurance company. In rejecting such arguments in favor of a plain reading of the plan and confirmation order, the Third Circuit also noted the arguments should have been raised previously, as an objection to the relevant Bankruptcy Court order and proposed plan, rather than a year and a half after confirmation.

What Happened:

Caribbean Petroleum operated a petroleum refinery business in Puerto Rico, and in 2009, a massive explosion occurred at its Bayamon facility. No one was killed in the explosion, but there were injuries and property damage. The company and its affiliates filed for bankruptcy after class action complaints were filed, with approximately 4,000 claimants seeking up to $500 million in damages.

Intertek USA, Inc. (“Intertek”), an alleged joint tortfeasor, was named as a co-defendant along with the Debtors. Chartis, the Debtors’ insurance company, was also named as a co-defendant because Puerto Rico law provides tort victims a right of direct action against the insured’s insurance company. In the Bankruptcy Case, Intertek filed proofs of claim against the Debtors for contribution and indemnity.

During the Bankruptcy Case, the Debtors reached a settlement with the Creditors’ Committee and Banco Popular, whereby Banco Popular agreed to allocate, pursuant to the plan, the proceeds of any settlements with the Debtors’ insurance companies.

Although Chartis disputed the extent of its obligations, the Debtors and Chartis reached a settlement in which Chartis agreed to buy back its policies from the Debtors for $24 million (the “Chartis Proceeds”). The Debtors filed a motion (the “Buyback Motion”) seeking the Bankruptcy Court’s approval of the settlement with Chartis. On the same day that the Bankruptcy Court approved the Buyback Motion (the “Buyback Order”) it also entered an order confirming the Debtors’ liquidation plan (the “Plan”).

The Buyback Motion explicitly stated that the proposed settlement would “guarantee the payment of approximately $24 million to the Debtors’ estates,” and would “fund distributions to the holders of allowed general unsecured claims, including Tort Claims.” “Tort Claim” was defined to include any claims for contribution and indemnity related to the explosion (i.e. encompassing Intertek’s claims). The Buyback Order further stated that the insurance proceeds “shall be distributed solely in accordance with the Plan,” and the Plan provided for pro rata distribution to all holders of general unsecured claims, including tort claims.

Although Intertek did not object to the Buyback Motion or the Plan, nor seek to be heard at the relevant hearings, Intertek filed a motion and adversary complaint in the Bankruptcy Court a year and a half after confirmation, asserting that the Buyback Order and Plan, by their terms, provided tort claimants with a priority interest over other unsecured creditors in the Chartis Proceeds. Intertek argued that the Buyback Order and Plan must be read in connection with Puerto Rico’s direct action statute. Given that tort victims had the right to bring claims directly against Chartis, Intertek argued that tort victims had a vested interest in the Chartis Proceeds at the time of the explosion (i.e. before the bankruptcy). Thus, such proceeds were not part of the bankruptcy estate and were unavailable for distribution to other general unsecured creditors until tort claimants had been satisfied.

The Bankruptcy Court denied Intertek’s motion, and the District Court affirmed on appeal. Intertek then appealed to the Third Circuit.

The Third Circuit focused on the plain language of the Buyback Motion, the Buyback Order and the Plan, rejecting Intertek’s “tortured reading” of the documents. The Buyback Order plainly provided that claims under the Chartis Policies were not extinguished but directed to the Chartis Proceeds, which would be distributed in accordance with the Plan; in turn, the Plan provided that all holders of general unsecured claims, including Tort Claims, are entitled to a pro rata distribution of the Chartis Proceeds. In addition, the Buyback Motion stated that the settlement guaranteed the payment of approximately $24 million to the Debtors’ estates (not to a separate fund). In short, none of the relevant documents contained language suggesting tort claimants would receive a different recovery.

The Third Circuit also rejected Intertek’s argument that the Bankruptcy Court lacked jurisdiction to interpret the Buyback Order and Plan to reach the insurance proceeds because such proceeds were non-debtor property, ruling that the time for Intertek to challenge the Bankruptcy Court’s jurisdiction had passed. Once a plan is confirmed, a jurisdictional defect will void a judgment only in the exceptional case where the court lacked even an ‘arguable basis’ for jurisdiction, and the Third Circuit explained that the Bankruptcy Court had more than an arguable basis for jurisdiction.

The Third Circuit also stated that Intertek’s arguments were made too late (as they should have been raised as an objection to the Buyback Motion or confirmation) or were waived because they were not raised in the Bankruptcy Court.

Why the Case is Interesting:

On a broad level, the case reinforces the power of a plain language reading of operative documents, with any party wishing to overcome such a reading facing an uphill climb. The case also highlights the necessity to timely raise issues and the consequences of delay – even if the claim might have had merit: “In sum, while sharing liability insurance proceeds with other unsecured creditors may be unpalatable for Tort Claim holders, and if timely raised, arguably implicated public policy concerns in light of Puerto Rico’s direct action statute, that is what the Buyback Order and Plan unambiguously provided.” (Emphasis added). Unrelatedly, the decision declines to address certain issues that were not raised below and thereby waived; notably, arguments that the Buyback Order and Plan improperly discharged third party (tort) direct claims against a non-debtor (the insurer). The structure used in Caribbean Petroleum is not uncommon to settle coverage disputes with insurers in tort cases – whereby insurance companies will seek to settle such coverage disputes by repurchasing their policies under section 363 “free and clear” of claims and obtaining plan discharges in exchange for the settlement payment. The facts of Caribbean Petroleum would have required considering that the third party claims being discharged are direct action claims and not derivative rights of the estate. Likewise waived by not being timely raised, these issues remain for another day.