Bankruptcy Stay Applies to Direct Actions against Insurers in “Limited Circumstances” where Numerous Asbestos Claims are Pending

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U.S. District Court, Middle District of Louisiana, October 19, 2022

The plaintiffs brought a wrongful death and survival action for damages related to the death of their decedent in 2019. Decedent had a forty-five year career as a welder in the marine industry which was alleged to have resulted in his exposure to asbestos. The plaintiffs sought damages from numerous defendants, including Decedents former employers, owners of work sites, asbestos manufacturers and distributors who were alleged to have provided products to decedents worksites, and insurers. Included in the plaintiffs’ numerous claims was a direct action under the Louisiana Direct Action Statute against two insurers, Employers Insurance Company of Wausau (“Wausau”) and Liberty Mutual, which insured a now-bankrupt non-party Reilly-Benton Company, Inc. (“Reilly-Benton”). Reilly-Benton’s bankruptcy was ongoing and involved potentially thousands of asbestos exposure claims

Wausau and Liberty Mutual moved to dismiss or stay the claims against them on the basis that the automatic bankruptcy stay provision in 11 U.S.C. § 362(a) applied. In the Fifth Circuit, it has been held that under “limited circumstances,” including instances where numerous tort claims “threaten a debtor’s estate over and above the policy limits,” the policy proceeds are property of the estate. Because insurance proceeds in these “limited circumstances” are property of the debtor’s estate, direct actions against insurers for these proceeds are subject to the automatic stay provision in the Bankruptcy Code. The Court, in accord with a another recent decision by the Eastern District of Louisiana, held that the Bankruptcy Court was the best forum to decide whether the the plaintiffs’ claims should be pursued through the Reilly-Benton bankruptcy proceedings or otherwise, and stayed the direct action claims against Wausau and Liberty Mutual.

Read the full decision here