The new opinion in Skinner is good news for opponents of the manner in which asbestos bankruptcies are currently conducted. Judge M. Bruce McCullough, a bankruptcy judge in the Western District of Pennsylvania, has issued a May 26, 2009, opinion finding the Skinner asbestos bankruptcy collusive and in bad faith. The order goes on to put the estate under the control of a court-appointed trustee, and converts the case to a Chapter 7 liquidation. The opinion is here.

The opinion is noteworthy for multiple reasons. For one, the opinion uses relatively harsh words regarding the lack of good faith in settlement of the underlying asbestos claims. Second, the Court concluded that the Chapter 11 plan and the underlying asbestos settlements were not in good faith. The Court pointed to various factors for this conclusion, and the opinion treats one of them as particularly telling. Specifically, the plan called for the debtor to receive 20% of insurance proceeds paid out to settle underlying claims, thus leaving the debtor with an incentive to settle claims instead of defending them, to the detriment of the insurers. The following text is taken directly from the opinion, but footnotes are omitted:

“The Asbestos Claims Settlement is not reasonable for several reasons. First, it is indisputable that no payment has ever been made by any of the Insurers on behalf of the Debtor to any of the Asbestos Claimants vis-a-vis the Asbestos Claims, notwithstanding that such claims have existed for roughly twenty (20) years. Such fact is strong evidence as to the futility of such claims, and it makes little, indeed no, sense to settle claims that have thus far been so overwhelmingly unsuccessful. Second, most, if not practically all, of the Asbestos Claims were administratively dismissed pre-petition by the U.S. District Court for the Eastern District of Pennsylvania, which court presides over such claims given that they were filed on such court’s Asbestos Products Liability Multi-District Litigation (MDL) docket. Such fact also serves to substantiate that such claims are not very strong, so that, once again, it makes little, if not any, sense for such claims to be settled. Finally, there is really no valid reason for the Debtor to even care if the Asbestos Claims get settled given that (a) the Debtor is defunct (i.e., out of business), (b) the Debtor will never again engage in business, (c) the Debtor is in bankruptcy, (d) no funds practically exist in the Debtor’s bankruptcy estate in any event to pay on any judgment that the Asbestos Claimants might obtain in excess of the Debtor’s insurance (hereafter referred to as an “excess judgment”), and (e) any excess judgment obtained would, therefore, be practically worthless. In light of the foregoing undisputed facts, it makes absolutely no sense for the Debtor to settle any of the Asbestos Claims absent the consent of the Insurers, and settlement without such consent (as is the case with respect to the Asbestos Claims Settlement), the Court holds, is thus per se unreasonable.”