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Acands, Inc. v. Travelers Casualty and Surety Co.

January 19, 2006; as amended January 31, 2006

ACANDS, INC., APPELLANT
v.
TRAVELERS CASUALTY AND SURETY COMPANY



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA District Court Judge: Honorable Petrese B. Tucker (D.C. Nos. 00-cv-04633 & 03-mc-00222).

The opinion of the court was delivered by: Alito, Circuit Judge

PRECEDENTIAL

Argued: July 11, 2005

Before: ALITO and BECKER, Circuit Judges, SHADUR District Judge*fn1

OPINION OF THE COURT

This case involves the applicability of the Bankruptcy Code's automatic stay provision, 11 U.S.C. § 362(a), to an arbitration panel's resolution of an insurance coverage dispute. We hold that the arbitration proceeding became subject to the automatic stay after Travelers Casualty ("Travelers") submitted arguments supporting an award against the debtor ACandS, and that the panel's award granting Travelers affirmative relief violated the automatic stay by diminishing the bankruptcy estate. We therefore reverse the order of the District Court.

I.

For decades, ACandS, formerly Armstrong Contracting and Supply and now a subsidiary of Irex Corporation, was one of the nation's largest installers of asbestos insulation. Since the early 1970's, the company has been embroiled in asbestos litigation. On September 16, 2002, after selling many of its assets to Irex, ACandS filed for bankruptcy and began to devote its full attention and resources to the issues surrounding the asbestos claims and related insurance matters. See In re ACandS, Inc., 311 B.R. 36 (Bankr. D. Del. 2004). This appeal combines two related disputes arising out of the same set of insurance policies issued to ACandS between 1976 and 1979 by Travelers' predecessor, the Aetna Casualty & Surety Co.

Each of the four identical policies provides two types of coverage: broad coverage for operations claims and more limited coverage for products claims. The products coverage in each policy was capped by a $1 million per occurrence limit and a $1 million aggregate limit. ACandS does not dispute that the coverage provided for products claims has been exhausted. The operations coverage is limited by a $1 million per occurrence limit but has no aggregate cap, meaning that Travelers' exposure to asbestos claims arising from ACandS's operations during the years 1976-79 was potentially unlimited. The present dispute turns on the classification of products versus operations claims and a disagreement over whether all of ACandS's asbestos operations can be considered a single occurrence.

In 1988, seeking to avoid the cost and difficulty of classifying large pools of claims, the parties reached an agreement (the "Letter Agreement") allocating set percentages of asbestos claims to either products or operations. The Letter Agreement initially allocated 55% of the claims to products and the remaining 45% to operations. Because of the aggregate limit on products coverage, Travelers remained liable only for the 45% of claims allocated to operations after the company paid the first $1 million of products claims under each policy. The Letter Agreement also established a three-step process for changing the allocation. First, after two years had passed and at any time thereafter, either party could make a demand on the other for a change in the allocation. Upon the making of the demand, both parties were to conduct a "claims study" in order to determine the proper allocation of claims. If the parties failed to reach agreement on a new allocation, the parties were to submit to non-binding dispute resolution overseen by a neutral mediator. Finally, if the mediation failed, the parties agreed to submit to binding arbitration. In the arbitration, the party seeking the adjustment of the allocation bore the burden of establishing that the existing allocation should be changed.

Both parties quickly explored ways of modifying the bargain. In 2000, Travelers sought to limit its exposure to operations claims by informing ACandS that it would treat all of the operations claims as arising out of the same occurrence (ACandS's use of asbestos), thereby subjecting the claims to the $1 million per occurrence limit. ACandS filed a motion for declaratory judgment in the District Court for the Eastern District of Pennsylvania seeking to have each claim recognized as a separate occurrence ("Number of Occurrences Action"). See JA6-1438 (Complaint, filed September 12, 2000). On November 8, 2000, the District Court granted a joint motion for a stay pending mediation and arbitration. JA6-1455 (Order, filed November 8, 2000). It is this action that the District Court dismissed as moot in the order now on appeal.

Following a different track, ACandS sought to increase its potential recovery under the policies by submitting a demand seeking an increase in the allocation of claims to operations. On January, 31, 2001, the company filed a formal demand pursuant to the 1988 Letter Agreement. Although the demand did not specify the desired reallocation, it stated that the allocation to operations should approach 100%, and acknowledged Travelers' position "that all of the asbestos bodily injury claims pending against ACandS are [products] claims." Although the Letter Agreement contemplates a collaborative approach to reallocation, ACandS did not invite Travelers to participate in the claims study it conducted in 2000.*fn2 No agreement was reached regarding reallocation, and a mediation was held in August 2001 under the direction of Professor James J. White. After mediation failed to resolve the dispute, the parties proceeded to arbitration. The panel instructed both parties to submit statements of their position. See JA2-467 (Statement of Position of ACandS, Inc., submitted July 31, 2002); JA2-505 (Travelers Casualty and Surety Company's Statement of the Case, submitted August 6, 2002). ACandS's statement largely tracks its demand letter. Travelers' statement says that it would "demonstrate during this proceeding [that] the correct allocation . . . would allocate no claim payments to non-products coverage." JA2-506.

In arguments submitted to the panel, the parties presented conflicting definitions of "operations claims." The arbitration panel agreed with Travelers' interpretation that operations claims encompassed only those claims arising from asbestos exposure during the policy period. JA2-531 (Arbitration Award, filed July 31, 2003). The panel found, as a matter of fact, that ACandS had ceased manufacturing and installing asbestos in 1974.*fn3 The Panel concluded that any claim arising during the policy period was necessarily a products claim and therefore allocated 100% of the claims to the products coverage.

After the arbitration panel was constituted, but before the award was issued, ACandS settled a raft of asbestos claims, totaling more than $2.6 billion. Shortly thereafter, the company filed for Chapter 11 bankruptcy in the District of Delaware. JA4-1050 (Bankruptcy filing, September 16, 2002). The Bankruptcy Court refused to confirm the reorganization plan because it treated similarly situated claimants differently based on the order in which they filed their claims. In re ACandS, 311 ...


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