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Aiu Insurance Co. v. Philips Electronics North America Corp.

Court of Chancery of Delaware

June 4, 2015

AIU INSURANCE COMPANY, AMERICAN HOME ASSURANCE COMPANY, BIRMINGHAM FIRE INSURANCE COMPANY OF PENNSYLVANIA, GRANITE STATE INSURANCE COMPANY, LEXINGTON INSURANCE COMPANY, and NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Plaintiffs,
v.
PHILIPS ELECTRONICS NORTH AMERICA CORPORATION, T H AGRICULTURE & NUTRITION L.L.C., and THE T H AGRICULTURE & NUTRITION L.L.C. ASBESTOS PERSONAL INJURY TRUST, Defendants.

Submitted: February 19, 2015

Marc S. Casarino, Esquire of White and Williams LLP, Wilmington, Delaware, and John S. Favate, Esquire and Henry T. M. LeFevre-Snee, Esquire of Hardin Kundla McKeon & Poletto P.A., Springfield, New Jersey, Attorneys for Plaintiffs.

David J. Baldwin, Esquire, Jennifer C. Wasson, Esquire, and Andrew H. Sauder, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware, and Kenneth H. Frenchman, Esquire, and Alana S. Klein, Esquire of Kasowitz, Benson, Torres & Friedman LLP, New York, New York, Attorneys for Defendants Philips Electronics North America Corporation and T H Agriculture & Nutrition L.L.C.

Daniel K. Hogan, Esquire and Garvan F. McDaniel, Esquire of The Hogan Firm, Wilmington, Delaware, and Sander L. Esserman, Esquire, Steven A. Felsenthal, Esquire, and David A. Klingler, Esquire of Stutzman, Bromberg, Esserman & Plifka, A Professional Corporation, Dallas, Texas, Attorneys for Defendant The T H Agriculture & Nutrition, L.L.C. Asbestos Personal Injury Trust.

MEMORANDUM OPINION

NOBLE, VICE CHANCELLOR

In 2009, Plaintiff insurance companies entered into a settlement agreement with Defendants T H Agriculture & Nutrition, L.L.C. ("THAN") and Philips Electronics North America Corporation ("PENAC") to resolve then-pending insurance coverage litigation. Because Plaintiffs' settlement payments would be based on future disbursements by Defendant T H Agriculture & Nutrition L.L.C. Asbestos Personal Injury Trust (the "Trust, " and with THAN and PENAC, "Defendants"), Plaintiffs negotiated for a prospective right to audit those payments and distributions.

The current litigation is focused on the parties' differing interpretations of the nature of Plaintiffs' audit right. Plaintiffs believe that Defendants have violated their rights by barring an audit unless they consent to certain limitations. Defendants argue that because Plaintiffs' audit right is limited, it has not been impaired.

Both sides have moved for summary judgment regarding the extent of Plaintiffs' audit rights. Related breach of contract and tortious interference counts are also subject to various motions to dismiss or motions for summary judgment.

I. BACKGROUND

A. THAN's Bankruptcy Proceeding

On November 24, 2008, facing substantial asbestos-related liability, THAN commenced Chapter 11 bankruptcy proceedings before the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court").[1] THAN sought to confirm a prepackaged plan of reorganization pursuant to Section 524(g) of the Bankruptcy Code.[2] Section 524(g) allows a debtor facing significant asbestos liabilities to channel current and future claims to a trust created specifically to assume them. After a channeling injunction is entered by a federal district court, the debtor company is relieved of its asbestos liabilities.

THAN initiated the bankruptcy case while it and its parent, PENAC, were engaged in insurance coverage litigation with some of THAN's insurers, collectively "AIG."[3] In April 2009, while the bankruptcy proceedings were pending, the parties to the coverage litigation agreed to a Settlement Agreement and Mutual Release (the "Settlement Agreement"), which the Bankruptcy Court approved on May 6, 2009.[4] The Settlement Agreement was "contingent upon the Bankruptcy Court confirming a Plan and entering a Confirmation Order that includes a 524(g) Channeling Injunction pursuant to such section in favor of [AIG] . . ."[5]

Less than one week later, THAN filed a Notice of Filing Plan and Plan Supplement, which included a draft of the Asbestos Records Cooperation Agreement (the "Cooperation Agreement") as an exhibit. On May 29, 2009, the Bankruptcy Court confirmed the First Amended Plan of Reorganization of THAN under Chapter 11 of the Bankruptcy Code (the "Plan")[6] and certain Plan-related documents, including the Cooperation Agreement.[7] Subsequently, in October 2009, the Bankruptcy Court entered an order approving some non-material modifications to the Plan, and the United States District Court for the Southern

District of New York affirmed the Bankruptcy Court's confirmation of the Plan.[8]The Plan became effective on November 30, 2009, at which time the Trust was formed in accordance with Section 524(g) of the Bankruptcy Code.

Upon formation, the Trust entered into the Cooperation Agreement with THAN and PENAC.[9] According to AIG, the Cooperation Agreement is incompatible with the Settlement Agreement and the Plan because it purports to limit AIG's ability to exercise an audit right it negotiated for under the Settlement Agreement. AIG was apparently unaware of the Cooperation Agreement's terms until it sought to conduct its audit. The pending motions revolve around the proper interpretations of the Plan, the Settlement Agreement, and the Cooperation Agreement, and how those documents relate to each other.[10]

1. The Settlement Agreement

AIG entered into the Settlement Agreement with THAN and PENAC to "resolve[] all of the insurance coverage matters at issue [between the sides] and to have th[e] Settlement Agreement operate as and constitute a complete release of THAN's and PENAC's claims for coverage for Asbestos-Related Claims and Bad Faith Claims against [AIG] . . . ."[11] As noted, the agreement was contingent on the Bankruptcy Court's confirmation of the Plan and establishment of the Trust. The Settlement Agreement provided AIG with a "full and complete settlement of any and all known or unknown, past, present or future Released Claims under [AIG's] Policies and . . . [it] absolve[ed], discharge[ed] and terminat[ed] any and all duties or responsibilities of [AIG] to THAN and PENAC with regard to the Released Claims . . . ."[12]

As consideration, AIG agreed to pay PENAC in installments, based on payments and distributions that the to-be-created Trust would make to asbestos claimants. The Settlement Agreement allows AIG, pursuant to Section 2.3,

to audit payments and distributions made by the Trust at [its] own expense, no more than once per year. Before conducting any audit, AIG shall agree to keep all information confidential and shall further agree not to utilize any information for anything other than to assess whether the Trust in fact made payments to the claimants as set forth in the quarterly reports.[13]
Section 2.4 provides that AIG cannot
challenge or question the payments or distributions of the Trust, nor shall [it] be entitled to challenge or to question [its] obligations to make payments pursuant to the terms and conditions of th[e] Settlement Agreement, or to offset, take credit against or otherwise withhold any such payments based on any claim that the Trust or its trustee(s) . . . did not properly incur expenses or did ...

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