The Delaware Court of Chancery recently took a rare foray into the world of asbestos litigation after it was asked to appoint a receiver to distribute the remaining reserves from casualty insurance policies issued to Krafft-Murphy Company, Inc. (“Krafft-Murphy”) to plaintiffs who allege injury from asbestos-containing products used by Krafft-Murphy. The Chancery Court, in an opinion dated February 4, 2013 (pdf download available here), concluded that Krafft-Murphy was no longer amendable to suit, as it had been dissolved in 1999. Consequently, there was no need to appoint a receiver because there were no assets to distribute, as the insurance reserves were not assets of the corporation. A more detailed summary of the case background and opinion are below.
Krafft-Murphy was incorporated in Delaware in 1952, and performed plastering and insulating services in Maryland, Virginia, and Washington, D.C. It is alleged that Krafft-Murphy workers used Sprayed Limpet Asbestos as part of their insulating work. Krafft-Murphy was first a defendant in asbestos personal injury lawsuits in approximately 1989. Three years later, Krafft-Murphy ceased operations and, in 1999, the company filed a certificate of dissolution, but did not formally adopt a plan of dissolution. Notwithstanding the fact that Krafft-Murphy has been dissolved, it allegedly still has insurance reserves that could provide payment in the event of a judgment against Krafft-Murphy.
The Petition for a Receiver
In July 2010, Krafft-Murphy moved to dismiss asbestos personal injury cases pending against it in Maryland on the grounds that it was no longer a legal person pursuant to Delaware law, and, therefore, not amenable to suit. In response, counsel for plaintiffs in those cases petitioned the Delaware Court of Chancery to appoint a receiver for the purpose of distributing Krafft-Murphy’s unpaid insurance reserves to the current and future claimants against Krafft-Murphy. The petitioners asserted that the remaining insurance reserves were undistributed assets of Krafft-Murphy and argued that the Delaware Code empowered the Court of Chancery to appoint a receiver for the purpose of distributing those assets.
Krafft-Murphy opposed the petition on the grounds that unpaid insurance reserves are only an asset of an insured once there has been a judgment against the insured. Due to the fact that Krafft-Murphy was dissolved and is no longer amendable to suit, there can be no judgment against Krafft-Murphy. Thus, the insurance reserves are not an asset of the company.
The Chancery Court’s Opinion
The Court agreed with Krafft-Murphy that insurance reserves become an asset of the insured only if and when that insured becomes liable to a third party. The Court further concluded that Krafft-Murphy was not subject to liability for claims which arose more than 10 years after its dissolution. As such, the insurance policies do not represent an asset to the corporation with respect to those claims. Pursuant to Delaware law, the Court held that a dissolved corporation’s liability for claims extends up to 10 years from the date of dissolution. The Court’s conclusion was based on sections of the Delaware Code that provide for a corporation’s plan of dissolution to account for claims that it anticipates may arise within the following 10 years. Based on the representations of counsel for Krafft-Murphy that the company did not seek to dismiss any claims filed less than 10 years after dissolution, the Court denied the motion to appoint a receiver.
As more defendants have sought protection from asbestos suits through bankruptcy, plaintiffs have been forced to find new parties against whom to bring these suits. In just the past five years, hundreds of new defendants have been brought into the asbestos litigation. As the Krafft-Murphy matter demonstrates, it is critical for these new defendants, at the outset, to diligently research whether they have legal defenses to suit which may extricate them from the litigation and save the company from the same fate too many other asbestos defendants have endured.