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IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA

SKINNER ENGINE COMPANY tET AL. t Appel lan ts Civ i l Action No. 09-0886v.

ALLIANZ GLOBAL RISK U.S. Bankruptcy No. 01-23987INSURANCE CO. ET AL.,Appellees .

MEMORANDUM

Gary L. Lancaster , March 29, 2010Chief Judge.The pa r t i e s are f ami l ia r wi th the genera l background of

t h i s case and it need not be de ta i l ed here . We need only notet h a t the appe l lan t s have appealed from an orde r of the bankruptcycour t , dated May 26 t 2009, in which the bankruptcy cour t : (1)found t ha t the Disclosure Statement fo r the Fi f th Plan descr ibeda f a c i a l l y unconfirmable plani and (2) conver ted the case, f i l edunder Chapter 11t to a Chapter 7 bankruptcy case . This appealfo l lowed.

Th e s tandard of review on appeal from a bankruptcycour t o rde r i s t ha t conc lus ions of law a re sub jec t toreview, while f indings of fac t may not be se t as ide unless theyare c lea r ly erroneous. Mellon Bank, N.A. v. MetroCommunications, Inc . , 945 F.2d 635, 641-42 (3d Cir . 1991). Abankruptcy cour t ' s determinat ion whether a Chapter 11 Plan i sf eas ib le i s "subjec t to the c lea r ly erroneous standard ofreview. /I CoreSta tes Bank, N. A. v . Uni ted Chemical Technologies,

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Inc . , 202 B.R. 33, 45 (B.D. Pa. 1996) (c i t ing cases) . We reviewthe bankruptcy cour t ' s dec is ion to convert a Chapter 11 case toa Chapter 7 case fo r an abuse of disc re t ion . In re SGL CarbonCorp. , 200 F.3d 154, 159 (3d. Cir . 1999); In re Mazzocone, 180B.R. 782, 785 (B.D. Pa. 1995) (c i t ing cases) .

Under no s tandard of review would t h i s cour t reversethe bankruptcy cour t ' s d i spos i t ion of t h i s case. We f ind noe r ror , l e t alone a c lea r e r ror , in the bankruptcy cour t ' sdeterminat ion tha t the Fi f th Plan was not feas ib le . And we f indno abuse of disc re t ion in the bankruptcy cour t ' s decis ion toconver t t h i s case to a Chapter 7 l i qu ida t ion .

As an i n i t i a l matter , we conclude t ha t the bankruptcycour t , which has pres ided over the Debtor ' s bankruptcy case fo rnear ly nine years , as well as the re la ted insurance coverageadversary ac t ion , was in possess ion of su f f i c i en t evidence , andhad afforded the par t i e s ample oppor tuni ty to present t he i rarguments in orde r to make the necessary determinat ions on eachi s sue decided in the May 26, 2009 memorandum. Therefore, wer e j ec t ou t r igh t any chal lenge to the bankruptcy cour t ' s orderfrom a procedura l s tandpoint .

In i t s May 26, 2009 order , the bankruptcy cour t foundtha t the Disclosure Statement fo r the Fi f th Plan descr ibed afac ia l ly unconfirmable plan fo r several reasons . Among thesereasons were t ha t the plan re f lec ted in the d isc losure s tatement :

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(1) i f confi rmed, would operate to breach the insurance p o l i c i e s ;(2) was not a reasonable and good fa i th se t t lement underPennsylvania law; and (3) was the r e s u l t of co l lus ion betweenDebtor and the asbes tos c la imants . Although not necessary to i t sdec is ion , the bankruptcy cour t also i de n t i f i e d two add i t iona ldefec t s : (1) t ha t the 20% surcharge cons t i tu t ed an unlawfulass ignment ; and (2) t h a t the bankruptcy cour t lackedj u r i s d i c t i ona l au thor i ty to f i na l ly l i qu ida te asbes tos cla ims.We f ind no c lea r e r ror in any of these decis ions , and would reachthe same ul t imate conclus ion.

In so concluding, we have taken note of the uniquecircumstances of t h i s case, which inc lude , among o th e r t h ings ,t ha t : (1) t h i s case has been pending fo r nine years ; (2) theDebtor sold i t s asse t s more than seven years ago to a t h i rdpar ty , which received a re lease from any successor l i a b i l i t y ; (3)the Debtor w i l l not cont inue in business as a going concern, andi t s board of d i rec to rs would be comprised of one d i r e c t o r , whowas to be appointed a t the Confi rmat ion Hearing; (4) a judgmentin excess of insurance l imi t s posed no r i sk to the Debtor ' se s t a t e o r a reorganized debtor under the ci rcumstances ; (5) apar tfrom approximately $70,000 in cash, the Debtor had no asse t s ,save insurance pol ic ie s and l ega l ac t ions ; (6) the only way fo rthe Debtor ' s es ta te to acquire any add i t iona l funds was toconver t insurance pol ic ie s to Surcharge Cash through the re laxed

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s tandards of the CAPDi (7) asbes tos - re l a t ed l i t i g a t i o n was notl i s t e d as a f ac to r leading the Debtor to seek bankruptcypro tec t ion i and (8) no c la imant had ever succes s fu l ly prosecutedan asbes tos claim aga ins t Debtor.

We f ind , as did the bankruptcy cour t , t h a t the Debtordid no t , and w i l l never be able to , propose a f eas ib le plan ingood f a i t h in accordance with the requirements se t fo r th in th eBankruptcy Code. 11 U.S .C. 1129 (a ) (3 ) and (a ) (11) . Thisr e s u l t obta ins rega rd le s s o f how the d i spu ted insurance coveragei s sues a re decided. A un i l a t e r a l se t t lement must be reasonab leeven under th e l ega l s tandards proposed by appe l lan t s . No suchse t t lement of the asbes tos claims could qua l i fy as reasonab leunder the f a c t s of t h i s case s e t fo r th above. As such, no planbased upon t ha t se t t lement could ev e r be feas ib le o r proposed ingood f a i t h .

The May 26, 2009 orde r so conver ted th e Debtor ' s caseto a Chapter 7 case . According to the bankruptcy cour t , becauseth e Debtor would be unable t o e f fec tua te a confirmable plan underth e c i rcumstances o f t h i s case convers ion was proper . We f ind noabuse o f d i sc re t ion in the bankruptcy c our t ' s dec ion . Theasbes tos c la imant ob jec t s to sa id convers ion on the ground t ha tthe cour t fa i l ed to consider the i n t e r e s t o f th e c re d i t o r s . Inan omission t h a t speaks volumes, th e Debtor d id not objec t toconvers ion in i t s opening b r i e f . However, rega rd le s s of when and

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by whom th e objec t ion was r a i s ed , we f ind it to be withou t mer i tbecause th e bankruptcy cour t d id consider th e i n t e r e s t of thec re d i t o r s . The bankruptcy co u r t e x p l i c i t l y discussed theunreso lvab le t ens ion between the i nab i l i t y o f cred i to rs to obta inany recovery in the absence of a surcharge paid by th e asbes tosc la imants and th e fundamental f laws in th e Debtor co l l ec t ing anysuch surcharge [doc. no. 1, a t t achment #5, a t 20] .

Regard less , upon independent review, we f ind convers ionto be in th e i n t e r e s t o f th e c re d i t o r s . Apar t from p r i o r i t y andpr i o r i t y tax claims, which t o t a l $41,000, and asbes tos c la ims ,unsecured c re d i t o r s hold th e l a rg e s t cla im a g a i n s t the Deb tor ' se s t a t e . T h e i r cla ims t o t a l $5.7 mil l ion . However, as a r e s u l to f t h i s bankruptcy case , th e unsecured c re d i t o r s a re now in l i nebehind $2 mil l ion in super -p r io r i ty admin i s t ra t ive c la ims. Thatca tegory o f cla ims w i l l only inc rease as th e bankruptcy caseproceeds . Given t h a t the Debtor has no a s se t s , n or any i n t e n t toacqu i re any as s e t s in th e fu tu re , and t h a t no plan which f inancesth e Debtor ' s e s t a t e with insurance surcharges w i l l be f ea s ib l e o rmeet the good f a i t h requi rement , it i s in th e c re d i to r s ' i n t e r e s tto conver t t h i s case to a Chapter 7 l i q u id a t i o n .

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For the foregoing reasons, we aff i rm the bankruptcycour t / s May 26, 2009 order . The cour t wil l f i l e an appropr ia teorder in accordance with t h i s ru l ing .

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IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA

SKINNER ENGINE COMPANY,ET AL., Appel lant s , Civ i l Action No. 09-0886v.

ALLIANZINSURANCE

GLOBALCO.,A pp

RISK U.S.ET AL.,el lees.

Bankruptcy No. 01 23987

AND NOW, th i s 29 th ORDERday of March, 2010, IT IS HEREBYORDERED t h a t the orde r of the bankruptcy cour t , da ted May 26,2009, i s AFFIRMED.

BY THE COURT:

__________________________ , C.J.

cc: The Honorable M. Bruce McCullough,United States Bankruptcy JudgeA ll Par t i e s of Record

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