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Bankruptcy Court Finds No Jurisdiction over Asbestos Trusts' Requests for Relief from Discovery

The Insurance Coverage Law Bulletin Volume 10, Number 5
June 2011

Judge Judith K. Fitzgerald of the U.S. Bankruptcy Court for the District of Delaware has dismissed five actions initiated by asbestos-related trust funds seeking a declaration on the limitation of discovery obtainable by insurers in other asbestos-related actions, holding that no subject matter jurisdiction existed in the bankruptcy court because the matters neither arose from nor were closely related to the bankruptcies. The court did, however, find that one bankruptcy plan may by its terms convey jurisdiction on the bankruptcy court over discovery issues related to a single trust and three insurers. ACandS Asbestos Settlement Trust, et al. v. Hartford Accident Indem. Co., et al., Nos. 10-53719, 10-53702, 10-53721, 10-53720, 10-53712 (Bankr. D. Del. Feb. 22, 2011).

The plaintiffs are statutory trusts and committees created pursuant to trust agreements in each plaintiff 's respective bankruptcy case that were designed to benefit asbestos claimants. The trusts filed suit in bankruptcy court seeking a declaration related to discovery limitations on defendant insurers in ongoing asbestos litigation pending in other forums throughout the country. According to the complaints filed by the trusts, declaratory and injunctive relief was necessary to obtain an interpretation of the respective plans of reorganization and corresponding trust distribution procedures, and to bar the insurers from seeking discovery from the trusts in excess of what was permitted by their plans under several subpoenas that were issued in various jurisdictions. The insurers filed motions to dismiss the complaints for lack of subject matter jurisdiction.

The court held that it was without subject matter jurisdiction to consider the complaints filed by the trusts. As an initial matter, the court explained that the jurisdiction of a bankruptcy court is limited, and encompasses only four specified types of cases arising under Title 11. In rejecting the trusts' contention that the court had "arising in" jurisdiction, the court predicted that the Third Circuit would not utilize the "but for" analysis applied in other jurisdictions. Instead the court concluded that the Third Circuit would ask whether the proceeding "by its nature, could arise only in the context of the bankruptcy case." As such, the court determined that the genesis of the current actions was several discovery disputes that routinely occur in any type of litigation and thus would not arise only in the bankruptcy context. Moreover, the court rejected the trusts' argument that jurisdiction was conferred to the court because the current action was "related to" the bankruptcies. The court noted that while the doctrine of "related to" jurisdiction typically confers jurisdiction if the outcome of the proceeding could conceivably have an effect on the estate being administered in bankruptcy, it is limited in instances where the bankruptcy plan has already been confirmed. Thus, according to the court, when the bankruptcy plan has been confirmed, as it was here, jurisdiction must be strictly confined and is only found when a "close nexus" exists between the action and the bankruptcy plan. According to the court, "related to" jurisdiction was not conferred because the discovery dispute "does not involve the interpretation or effectuation of " the bankruptcy plans. The court concluded that the discovery disputes are best suited for resolution in the respective forums in which they originate.

The court did, however, conclude that one bankruptcy plan between a single trust and three named insurers may provide the bankruptcy court with jurisdiction to address certain discovery matters. According to the court, the three insurers are "Protected Parties" under the bankruptcy plan and, as such, agreed and consented to the terms and conditions of the plan prior to confirmation. The court noted that the bankruptcy plan contained a provision providing that subpoenas for claimant submission materials must issue from the bankruptcy court. The court concluded that this provision may function as a forum-selection clause that binds the specified insurers and trust. Accordingly, the court ordered a scheduling conference with the respective parties to address the nature of the clause in the bankruptcy plan and its application.

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Reprinted with permission from the "June 2011" edition of the "Insurance Coverage Law Bulletin" © 2011 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.