Bankruptcy Court Vigilant of Attempts to Divert Insurance Proceeds to Legal Fees United States District Court, W.D. Washington, August 20, 2018

WASHINGTON — On appeal from bankruptcy court, a federal district court denied Travelers’ motion to convert a debtor’s Chapter 11 reorganization into a Chapter 7 liquidation. In Travelers Indemnity Company v. Fraser’s Boiler Service, Inc. BHS (W.D. Wash. Aug. 20, 2018), the debtor, Fraser Boiler Service, Inc., was a former boiler repair company that operated for decades installing and maintaining equipment.  Fraser permanently ceased all operations and sold all of its business assets, leaving behind only insurance policies to pay the claims of asbestos plaintiffs.

Despite Fraser’s non-operative status and negative net worth, DJO Services, LLC acquired all of the equity in the company from the prior shareholders.  DJO offered certain insurers a bankruptcy release from all asbestos claims and from contribution claims from non-settling insurers like Travelers.  Under DJO’s proposed plan of reorganization for Fraser, the settling insurers would pay into a trust that would be used to pay claims against the bankruptcy estate.

Travelers filed a motion to convert the Chapter 11 bankruptcy into a Chapter 7.  Fraser had no assets and no operations; it could not be reorganized into a new going concern.  Moreover, DJO’s owner was to be the liquidating trustee who would appoint professionals to administer the trust.  The payments to claimants would be on a first-come, first-serve basis, and the professionals who would administer the trust would be the two lawyers who participated in negotiation of the settlement agreement with the insurers.  They would then be in a prime position to assure their clients were among the first to have claims allowed.  Thus, to Travelers, the plan of reorganization appeared to be nothing more than a scheme to extract professional fees from the trust and pay a small number of privileged claims.

The court rejected Travelers motion, holding that its arguments were more appropriately raised as objections to confirmation of the proposed Chapter 11 plan.  The court also noted that the bankruptcy court had indicated it was aware of the possibility of abuse of the bankruptcy process to extract professional fees and would be monitoring the case closely to ensure that did not happen.

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