In Re: C.P. Hall Company v. Apl of: Columbia Casualty Co.
Filing
Filed opinion of the court by Judge Posner. AFFIRMED. Richard A. Posner, Circuit Judge; Joel M. Flaum, Circuit Judge and Ilana Diamond Rovner, Circuit Judge. [6570800-1] [6570800] [13-1306]
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In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 13‐1306
IN RE: C.P. HALL COMPANY,
Debtor,
APPEAL OF: COLUMBIA CASUALTY COMPANY,
Objector‐Appellant.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 12 C 2978 — John W. Darrah, Judge.
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ARGUED APRIL 3, 2014 — DECIDED APRIL 24, 2014
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Before POSNER, FLAUM, and ROVNER, Circuit Judges.
POSNER, Circuit Judge. The question presented by this ap‐
peal is whether a nonparty to a bankruptcy proceeding
should be entitled to intervene in the proceeding. Hall, the
debtor in bankruptcy, is a former distributor of asbestos and
asbestos products. It quit that imperiled business in the mid‐
1980s but continued in corporate existence as a litigation
shell. Tens of thousands of separate asbestos claims were
filed against it. It sought to shift as much of the cost as pos‐
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sible to its liability insurers; and not until 2011 was it forced
to declare bankruptcy, initially under Chapter 11 but the
bankruptcy proceeding was later converted to Chapter 7 and
a trustee was appointed.
Hall had $10 million remaining in insurance coverage
from one of its insurers, itself bankrupt, called Integrity. But
there was a question whether Integrity’s policy actually cov‐
ered the loss for which Hall was seeking indemnity under
the policy. The parties agreed to settle for $4.125 million, and
the bankruptcy judge, whose approval was necessary for the
settlement to be valid, approved it.
Enter Columbia Casualty Company, the appellant. Co‐
lumbia is not a creditor of Hall, but rather an excess insurer
of Hall’s asbestos liabilities, with maximum coverage of $6
million. It worries that Hall, by virtue of having settled its
insurance claim against Integrity rather than persisting in
the litigation in the hope of obtaining indemnity of the full
$10 million, has increased the likelihood of Columbia’s hav‐
ing to honor its secondary‐coverage obligation. It therefore
filed an objection to the settlement. The bankruptcy judge
refused to consider the objection, on the ground that Colum‐
bia had no right to object. Columbia appealed and the dis‐
trict judge affirmed, precipitating Columbia’s further appeal
to this court.
The parties call the issue presented by the appeal “bank‐
ruptcy standing.” That is a misnomer. Article III of the fed‐
eral Constitution has been interpreted to confine the right to
sue in a federal court (“standing to sue”) to a person or firm
or other entity that has suffered some tangible loss for
which, if the defendant’s liability is established, the court
could provide a remedy. See, e.g., Lexmark Int’l, Inc. v. Static
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Control Components, Inc., 134 S. Ct. 1377, 1386 (2014). The rule
thus excludes suits concerning what John Stuart Mill in On
Liberty (1859) called “self‐regarding acts,” to distinguish
them from “other‐regarding acts,” that is, acts that harm
other people. He gave as an illustration of a self‐regarding
act the practice of polygamy in Utah, thousands of miles
from England and hence harmless to the English. The Eng‐
lish were “others” to the polygamous activity in Utah de‐
spite the indignation that the English people felt toward that
activity. Mill thought in other words that the English had no
“standing” to object to distant polygamy, because it inflicted
no tangible harm on them.
Columbia’s objection to Hall’s settlement with Integrity
is not of that character. Columbia is complaining about an
imminent threat to its financial assets, a threat that is trace‐
able to the settlement and could have been eliminated by the
bankruptcy court’s enjoining the settlement. The loss it fears
is only probabilistic. For there can be no certainty that it
would benefit from rejection of the settlement. Had Hall liti‐
gated its claim against Integrity to final judgment, which
might have been a consequence of Hall’s demanding more
than $4.125 million, it might well have ended up with noth‐
ing, since Integrity had a strong defense on the merits. But
often a probabilistic harm suffices for Article III standing
even when the probability that the harm will actually occur
is small. See, e.g., Massachusetts v. EPA, 549 U.S. 497, 525–26
(2007); Mountain States Legal Foundation v. Glickman, 92 F.3d
1228, 1234–35 (D.C. Cir. 1996); Village of Elk Grove Village v.
Evans, 997 F.2d 328, 329 (7th Cir. 1993). A 10 percent prob‐
ability of obtaining $1,000 is $100; this is called an “expected
value” and is real even though not certain.
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But to become a party to the bankruptcy proceeding Co‐
lumbia had to show not merely standing but that “a legisla‐
tively conferred cause of action encompasses” its claim. Lex‐
mark Int’l, Inc. v. Static Control Components, Inc., supra, 134 S.
Ct. at 1387. Specifically it had to show that the Bankruptcy
Code conferred the right that it sought—the right to butt into
a settlement negotiation between other parties. Its desire to
butt in is understandable. Agreements settling lawsuits often
have third‐party effects. A company might pay so much in
settlement of a suit that it could no longer afford to honor its
contract to buy some input from a third party; the third
party would be harmed. The logic of Columbia’s claim to be
entitled to object to Hall’s settlement with Integrity is that
Hall received so little in the settlement that it is bound to
come after Columbia for the difference. The claim is weak.
Columbia’s lawyer would have to agree that by this logic an
employee whom the lawyer’s client had laid off because it
foresaw having to make a big payout to Hall could challenge
the settlement. That way madness lies—settlements made
impossible by crowds of objectors.
The question we need to answer is whether the Bank‐
ruptcy Code, in providing that “a party in interest, including
the debtor, the trustee, a creditors’ committee, an equity
security holders’ committee, a creditor, an equity security
holder, or any indenture trustee, may raise and may appear
and be heard on any issue in a case [arising] under” the
Code, 11 U.S.C. § 1109(b), confers a right to be heard on a
debtor’s insurer. The list of “parties in interest” is not
exhaustive, but does suggest that such a party is someone
who has a legally recognized interest in the debtor’s assets,
namely the debtor (or the trustee in bankruptcy, if as in this
case there is a trustee) and the creditors. In re James Wilson
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Associates, 965 F.2d 160, 169 (7th Cir. 1992), says that
“everyone with a claim to the res [the debtor’s assets] has a
right to be heard before the res is disposed of since that
disposition will extinguish all such claims.” Later we said
that the U.S. Trustee can be a “party in interest” too because
of his watchdog role in bankruptcy cases. In re South Beach
Securities, Inc., 606 F.3d 366, 370–71 (7th Cir. 2010).
Even so enlarged, the list of persons having a right to
appear and be heard in a bankruptcy case can’t include
Columbia. It is not a creditor of Hall’s estate in bankruptcy,
is not the debtor, and, unlike the U.S. Trustee, is not a
guardian of conduct in bankruptcy proceedings. It is just a
firm that may suffer collateral damage from a ruling in a
bankruptcy proceeding, in this case the ruling approving the
settlement between Hall and Integrity.
A number of decisions support our conclusion that the
interest of an entity in Columbia’s position is too remote to
entitle the entity to intervene in a bankruptcy case. See In re
Teligent, Inc., 640 F.3d 53, 60–61 (2d Cir. 2011); In re Refco Inc.,
505 F.3d 109, 117–19 (2d Cir. 2007); In re Alpex Computer
Corp., 71 F.3d 353, 356–57 (10th Cir. 1995); In re Kaiser Steel
Corp., 998 F.2d 783, 788 (10th Cir. 1993); cf. In re Piper Aircraft
Corp., 244 F.3d 1289, 1303 n. 11 (11th Cir. 2001). But Colum‐
bia asks us to reject all of them on the authority of two recent
decisions by the Third and Ninth Circuits—In re Global In‐
dustrial Technologies, Inc., 645 F.3d 201 (3d Cir. 2011) (en
banc), and In re Thorpe Insulation Co., 677 F.3d 869 (9th Cir.
2012).
Global adopted our construal of “party in interest” in the
James Wilson case, 645 F.3d at 210–11, yet concluded that in‐
surers of the debtor were entitled to object to a settlement. Id.
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at 215. The debtor in Global had proposed a plan that would
have channeled claims against it to a trust to which the
debtor’s liability insurance policies would be assigned. The
insurers alleged that to obtain the claimants’ approval of the
plan the debtor had agreed to a large increase in the number
of claims because the cost of the additional claims would be
borne to a great extent by the insurers. 645 F.3d at 206, 214.
The insurers were thus alleging that they were targets of a
scheme between the debtor and its creditors, rather than ac‐
cidental victims of a scheme directed against others. There is
nothing like that in this case. Hall by settling was just trying
to minimize the risk of coming up empty‐handed in its suit
against Integrity.
Thorpe was, like the present case, an asbestos case in
which debtor and creditors had created a trust that would
administer insurance claims; like Global it cites our opinion
in James Wilson with approval. 677 F.3d at 884. The insurers’
objection was not that the creation of the trust was a quid
pro quo for increasing the number of claims against the
debtor, as in Global, but rather that the plan that had created,
defined, and empowered the trust had altered the terms of
the contracts between the insurance companies and the
debtor. See id. at 885–87. Of course taking away someone’s
contractual rights in a bankruptcy proceeding is an injury to
which the victim should be allowed to object in the proceed‐
ing.
Our case doesn’t involve a threat to Columbia’s rights,
though at oral argument there were some dark hints from
Columbia’s lawyer that there was hanky‐panky involved in
Hall’s settlement with Integrity. The hints are absent from
Columbia’s briefs. All we learn there is that Columbia would
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have liked an opportunity to prove that Hall should have
been more aggressive in the settlement negotiations, because
had it been it might have gotten a larger settlement and if so
it would have a smaller potential claim against Columbia, its
back‐up insurer. That’s just like our hypothetical case of the
employee of Columbia who objects to the settlement on the
ground that it may cost him his job by increasing his em‐
ployer’s potential liabilities.
It’s not as if, unless Columbia can sue, no secondary in‐
surer (whether an excess insurer, as in this case, or a rein‐
surer) can protect itself against its insureds’ making settle‐
ments with their primary insurers that disadvantage the sec‐
ondary insurer. An excess insurer can write a policy that
does not require it to pay until the coverage limit of the pri‐
mary policy, $10 million in this case, has been reached. Or
the excess policy could provide that its coverage limit would
drop down if the primary insurer proved to be insolvent, as
Integrity proved to be. This would give the excess insurer a
concrete stake in the bankruptcy, thus enabling it to file an
objection to an attempt by the bankruptcy judge to disregard
the provision in the excess policy in order to maximize the
assets of the debtor available for distribution to the creditors.
It is better to leave matters to private contracting where
that is feasible than to permit parties, especially sophisti‐
cated parties like Columbia, to ask a court to ride to its res‐
cue from an oversight.
As an aside we note that if, contrary to what we’ve said,
Global and Thorpe are inconsistent with James Wilson and the
cases following James Wilson, it would not follow, as Colum‐
bia rather impertinently argues in its reply brief, that unless
we overruled James Wilson the Seventh Circuit would be
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“decid[ing] to split with its sister circuits on the proper rule
for bankruptcy court standing.” The implication is that if an‐
other court disagrees with one of our decisions, we shall be
guilty of “splitting” if we fail to overrule our decision. If
Global and Thorpe unconsciously (for remember that both
purport to adopt our approach in James Wilson) rejected our
decision, it would be the Third and Ninth Circuits that had
“split” with us, not us with them.
Columbia further argues that James Wilson was overruled
by a decision of ours, In re Cult Awareness Network, Inc., 151
F.3d 605 (7th Cir. 1998). The court in that case did not say it
was doing that (it did not even mention James Wilson); nor
could it have overruled that decision without circulating its
opinion in advance of issuance to the full court, 7th Cir. R.
40(e), which it did not do. Nor are the two decisions incon‐
sistent. The debtor in the Cult Awareness case objected to the
trustee’s sale of its trade name, on the ground that the pur‐
chaser would use it to promote cults. The court noted that
“occasionally a debtor might be able to satisfy all debts with
the assets from the estate and be left with some amount re‐
maining. If the debtor can show a reasonable possibility of a
surplus after satisfying all debts, then the debtor has shown
a pecuniary interest and has standing to object to a bank‐
ruptcy order.” Id. at 608. Because Cult Awareness had not
shown such an interest, it could not object to the sale of its
trade name by the trustee. There is nothing in the opinion to
suggest that non‐debtor, non‐creditor Columbia Casualty
Company has the kind of pecuniary interest in the Hall bank‐
ruptcy that would entitle it to intervene in the
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bankruptcy proceeding. Pecuniary interest is a necessary
rather than a sufficient condition of such a right.
AFFIRMED.
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