In the Matter of Krafft-Murphy Co., Inc., C.A. No. 6049-VCP (Del. Ch. Feb. 4, 2013) (Parsons, V.C.)
In this opinion, the Court of Chancery denied a motion for judgment on the pleadings by certain asbestos claimants (the “Claimants”) seeking appointment of a receiver under 8 Del. C. § 279, holding that the dissolved corporation was not amenable to suits commenced more than ten years after its dissolution and, therefore, the insurance liability contracts held by the dissolved corporation were valueless, rendering appointment of a receiver unnecessary. The Court also granted an opposing motion for summary judgment on behalf of the dissolved corporation.
Krafft-Murphy Company, Inc. (“KMC” or the “Company”) is a dissolved Delaware corporation that “has been the subject of hundreds of asbestos-related personal injury lawsuits over the last two decades.” Based on the potential tort liability, KMC ceased operations in 1991 and filed its certificate of dissolution in 1999. At the time of its dissolution, KMC possessed liability insurance contracts with several insurance companies (the “Insurers”) that covered its asbestos-related tort liability. Under the direction of the Insurers, KMC continued to defend, litigate, and settle asbestos-related claims for ten years following its dissolution; thereafter, KMC began moving to dismiss new claims on grounds that it was no longer subject to suit.
In earlier proceedings of this case, Vice Chancellor Parsons denied a motion filed by KMC to dismiss the Claimants’ petition for the appointment of a receiver under 8 Del. C. § 279. The Vice Chancellor held that the Claimants might “conceivably” demonstrate entitlement to appointment of a receiver because KMC might possess active insurance contracts, and those contracts could represent undistributed assets of the Company sufficient for the appointment of a receiver. In ruling on the motion to dismiss, the Court also concluded that the insurance contracts might represent an “informal plan of dissolution” under which the Insurers would continue to represent KMC in “pending and expected future asbestos-related litigation until the Company exhausted its coverage.”
The opposing motions for summary judgment and judgment on the pleadings before the Court did not argue that there was any issue of material fact. Thus, the Court viewed the situation as “analogous to cross motions for summary judgment for which Rule 56(h) authorizes the Court to ‘deem the motions to be the equivalent of a stipulation for decision on the merits based on the record submitted with the motions.’”
KMC’s principal argument was that the liability insurance contracts would be an asset only if KMC were amenable to suits brought after ten years. KMC argued that Delaware’s statutory scheme of dissolution contemplates that dissolved corporations lose the ability to sue and be sued after three years pursuant to 8 Del. C. § 278 unless the Court of Chancery, in its discretion and based on an application within the three-year period, specifies a longer period. The Claimants, however, argued that appointment of a receiver was warranted based on (1) the plain language of 8 Del. C. § 279, which authorizes the appointment of a receiver “at any time”; and (2) the Supreme Court’s decision in In re Texas Eastern Overseas, Inc. (“TEO”), which authorized appointment of a receiver more than seven years after the company’s dissolution.
The Court noted that while the literal language of Section 279 allows the Court to appoint a receiver “at any time,” the appointment must be for some statutory purpose, including “for the benefit of shareholders and creditors where assets remain undisposed after dissolution.” Because the Claimants provided no other justification for appointment of a receiver, the Court examined whether KMC’s liability insurance contracts were “undistributed assets.” Noting that an item qualifies as an asset only if it is owned and “has value,” the Court stated that liability insurance contracts do not have “value” unless the company that holds the policy is capable of being held liable to a third party.
Thus, to determine whether KMC held undistributed assets, the Court had to determine first whether KMC was amenable to suits brought more than ten years after its dissolution. Based on the language of Sections 278 and 280-282, the Court found that the legislature recognized the potential for corporate liability to extend at least three years and, possibly, up to ten years following dissolution. The Court, however, found no statutory authority to support the Claimants’ contention that corporate liability in Delaware should extend beyond ten years. Therefore, the Court held that KMC could not be liable for asbestos-related tort suits brought more than ten years after dissolution and the insurance contracts at issue in this case were not, as a matter of law, undistributed assets of the Company that would warrant appointment of a receiver.
Going further, the Court also distinguished the present case from TEO on two grounds. First, in TEO, the Delaware Supreme Court did not address the question of whether an insurance contract is an undistributed asset. Second, unlike the Claimants’ lawsuit, the suit in TEO was filed less than ten years after the Company’s dissolution.