• Third Circuit
  • D66292

THIRD CIRCUIT

In Re Caribbean Petroleum Corp., DeFAX Case No. D66292 (3d Cir. May 6, 2014) Vanaskie, J. (11 pages).

Disallowance of contingent claims against debtor in bankruptcy proceeding was proper under §502(e)(1)(B) of the bankruptcy code. Affirmed.

Debtors in this bankruptcy matter operated petroleum products businesses in Puerto Rico. In October 2009, massive explosions at debtors' facilities resulted in the termination of their business activities. Multiple claims alleging injuries and property damage arising out of the explosions were filed against debtors and Intertek. Those actions were consolidated.

Debtors commenced chapter 11 bankruptcy proceedings in August 2010. Due to the severity of the damage caused by the explosions and debtors' substantial liability exposure, debtors sought approval of a plan of liquidation.

In May 2011, the bankruptcy court entered an order confirming debtors' joint plan of liquidation. Intertek was served with notice of the plan and did not object. Under the plan, the debtors' entities were dissolved and the Caribbean Petroleum Trust was established. Intertek was not a beneficiary of the trust.

Debtors' liability insurer paid $24 million into the trust in exchange for debtors selling back the insurance policies free and clear of any liens, encumbrances, claims or other interests. Intertek was provided with notice of the settlement with the insurer and did not object to debtors' motion for approval of the settlement.

Intertek filed three proofs of claim against debtors in September 2011, asserting that in the event any court found Intertek laible for any damages in the consolidated actions, Intertek would be entitled to contribution or indemnity from debtors. Intertek stated that the amount of each claim was unliquidated and unknown.

The liquidation trustee objected to Intertek's claims under 11 U.S.C. §502(e)(1)(B), which provided for disallowance of contingent claims for reimbursement or contribution. If the claims were not disallowed, the trustee would have been required to reserve such a large portion of the trust assets that any interim distribution for allowed claims would have been minimal. Intertek opposed the motion, arguing that granting the trustee's objection was premature and inequitable.

On appeal, Intertek argued that §502(e)(1)(B) was not applicable in the context of a post-confirmation liquidation hearing. The court rejected that argument because nothing in the statute itself suggested it did not apply in that situation. Furthermore, the court found such a restriction was particularly inappropriate in this case, where the plan and the claims administration procedure both allowed the trustee to file objections following plan confirmation. Intertek had been served with notice of both the plan and the claims administration procedure and had failed to object to either prior to the bankruptcy court's approval.

All of the criteria of §502(e)(1)(B) were satisfied in this case. Intertek's own attachments to its proofs of claim demonstrated that the claims were contingent, and Intertek acknowledged the amount was unliquidated or unknown. The claims were for reimbursement or contribution, as specified in the statute, and debtors as well as Intertek were potentially co-liable. The mandatory language of the statute required the court to disallow the claims where all of the factors were satisfied. The circuit court found that the bankruptcy court properly disallowed Intertek's claims.

Intertek also argued the trust violated Delaware trust law because disallowance of the claims was inconsistent with the trust's purpose. That objection was waived because it was not properly raised before the bankruptcy court.

Disallowance of Intertek's claims did not constitute a deprivation of a property interest in the settlement funds without due process. Intertek received notice of the joint plan of liquidation and the claims procedure and had an opportunity to object in bankruptcy court, but did not do so. Additionally, Intertek was given notice of the terms of debtors' settlement buyback agreement with the insurer and had the opportunity to object, but did not. These procedures all ensured that Intertek's due process rights were honored.

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