Articles

2008 Digest of Selected Mass Tort Bankruptcy Opinions

Debra L. Innocenti

ABI Committee News

A number of key opinions were issued this year, converging around the jurisdictional reach of a §524(g) injunction, preemption of insurance policy anti-assignment provisions, and the limitations of the power of Rule 9019 to override statutory requirements of the Bankruptcy Code.

Classification
In re Congoleum Corporation et al., United States Bankruptcy Court, District of New Jersey, Case No. 03-51524 (June 5, 2008) (J. Kathryn C. Ferguson)

The bankruptcy court held that the creation and differing treatment of two subclasses of asbestos claimants in the debtors’ joint plan of reorganization violated §§1129 and 524(g) of the Bankruptcy Code. One subclass consisted of all asbestos claimants who gave up in an omnibus settlement agreement (or never had) rights under certain pre-petition settlement agreements. In contrast, the other subclass claimants had the option to have their rights to payment determined through a continued adversary proceeding that would, in effect, entitle them to a chance for greater recovery. The bankruptcy court held that in addition to complying with the classification provisions of the Bankruptcy Code, the plan must also comply with the overlay of §524(g), which required that the plan value all present and future similar claims in substantially the same manner. The only proper criterion for differing between the pre-judgment claims was disease level. Moreover, the bankruptcy court held that an omnibus settlement agreement with the asbestos constituents that could meet “the very low threshold of Rule 9019” did not permit non-compliance with §§524(g) and 1129.

Impairment
Ad Hoc Committee of Asbestos Personal Injury Claimants and Jose Angel Valdez v. Dana Corp. (In re Dana Corp.), Civil Action No. 08-1037, 08-1038, Bankr. Case No. 06-10354 (S.D.N.Y. Sept. 30, 2008)

The district court affirmed the bankruptcy court’s holding that asbestos claims reinstated against one reorganized debtor with limited assets did not impair such claims where the asbestos claimants had no pre-petition rights against the other affiliated debtors.

Insurer Standing
Hartford Accident & Indemnity Co. v. Global Indus. Tech. Inc., Civil Action No. 07-1749, Bankr. Case No. 02-21626 (W.D. Pa. Jul 25, 2008); Hartford Accident & Indemnity Co. v. North Am. Refractories Cos. et al., Civ. Action No. 07-1750, Bankr. Case No. 02-20198 (W.D. Pa. July 25, 2008)

See Rhonda D. Orin, Denials of Insurance Company Standing: Two More Cases Join the Lengthening List, ABI Committee News: Mass Torts Committee, Vol 6: No. 4 (November 5, 2008).

In re Quigley Company Inc., 391 B.R. 695 (Bankr. S.D.N.Y. 2008) (J. Stuart M. Bernstein)

In an attempt to assist the parties resolving confirmation discovery disputes, the bankruptcy court issued a memorandum decision outlining the considerations governing the asbestos insurers’ standing to participate in confirmation. The bankruptcy court stated that the insurers were parties in interest and had the right to challenge the parts of the plan that directly implicated their rights and interests. The insurers could not, however, object to the plan based on how it affects the rights of third parties, even if those objections might provide grounds to defeat confirmation. The insurers’ discovery demands had to reflect such limitations.

Non-Debtor Section 362(a) Injunctions
W.R. Grace & Co., et al. v. Chakarian et al. (In re W.R. Grace & Co., et al.), 386 B.R. 17 (Bankr. D. Del. 2008) (J. Judith K. Fitzgerald)

The bankruptcy court held that it had the subject matter jurisdiction to consider whether to expand a preliminary injunction to include actions against railroad companies for exposure to the debtors’ former vermiculite mining operations. The bankruptcy court also held that the debtors met the requirements under §105(a) to expand the automatic stay to protect the non-debtor parties. The railroad company had asserted three avenues of indemnification that would directly impact the debtors’ estates if the tort actions were allowed to proceed, including contractual indemnification as well as insurance indemnification and separate insurance paid for by the debtors. Such indemnification went beyond the indirect common law theories that had missed the jurisdictional threshold in Pacor Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984). In Pacor, the intervention of another lawsuit was required before the defendants would have indemnity claims against the debtor.

The debtor also met both factors of the “unusual circumstances” test under §105(a). First, the debtors’ indemnification agreements with the railroad company caused them to share “an identity of interest such that a suit against the nondebtor is essentially a suit against the debtor.” The agreements also posed an adverse impact on the debtors’ estates, as the railroad company could assert in excess of 1,000 indemnification claims against the debtors. Additionally, allowing the tort actions to proceed would require the debtors to defend the railroad company while, at the same time, defend their own products and business operations, in essence, the very claims the debtors filed bankruptcy to stop. These same reasons also established the traditional, non-bankruptcy standards for injunctive relief.

Non-Debtor Section 524(g) Injunctions
Johns-Manville Corporation et al. v. Chubb Indemnity Insurance Company, et al. (In re Johns-Manville Corporation), 517 F.3d 52 (2nd Cir. Feb. 15, 2008)

The Second Circuit Court of Appeals held that the bankruptcy court was without subject matter jurisdiction to enjoin claims against certain insurers that were not limited by the terms and scope of the debtor’s insurance coverage, did not seek recovery from the debtor’s insurance proceeds, and alleged independent misconduct by the insurers.

The debtor reached a settlement with its primary insurers, which was predicated upon the bankruptcy court issuing an injunction that barred asbestos-related suits against the debtor’s settling insurers and channeled such claims to the asbestos trust. The 1986 order confirming the debtor’s plan provided for such an injunction. Subsequently, various plaintiffs sued the settling insurers under statutory and common law theories, both of which centered on allegations that the insurers suppressed information about asbestos hazards and propagated fraudulent defenses to frustrate asbestos claimants’ rights. The settling insurers moved the bankruptcy court to enjoin those actions, and during mediation reached a series of settlement agreements providing for entry of an order clarifying that 1986 confirmation order prohibited such suits and for the insurers to contribute additional funds to the asbestos trust. The bankruptcy court approved the settlement agreements and entered the clarifying order, finding that the insurers learned virtually everything they knew about asbestos from their relationship with the debtor and that the claims against the insurers were based on actions or omissions that necessarily “arise out of” and were “related to” the debtor’s insurance policies. The district court in large part agreed.

The Second Circuit Court of Appeals disagreed. It held that a bankruptcy court only has subject matter jurisdiction to enjoin third-party, non-debtor claims that directly affect the res of the bankruptcy estate. Here, the plaintiffs sought recoveries separate and apart from the debtor’s insurance proceeds. The bankruptcy court’s factual determinations—that the insurers learned virtually everything they knew about asbestos from the debtors and that the lawsuits against the insurers “inescapably” related to the insurers’ relationship with the debtor—were only part of the liability equation. If the debtor owes a duty to the plaintiffs independent of its contractual obligations to indemnify those injured by the tortuous conduct of the debtors, then the fact that it arises from a common nucleus of operative facts is of little significance. The claims then are not derivative, have no effect on the res, and, therefore, are outside the limits of the bankruptcy court’s jurisdiction.

In re Congoleum Corporation et al., Case No. 03-51524 (Bankr. D.N.J. June 5, 2008) (J. Kathryn C. Ferguson)

The bankruptcy court held that an omnibus settlement agreement could not cure the bankruptcy court’s lack of subject matter jurisdiction to issue non-debtor releases in the debtors’ joint plan. The provisions in question exculpated the debtors’ officers and directors and issued §524(g) injunctions for the benefit of non-debtor parties, including the future claims representative, members of the asbestos committee, and the bondholder committee. The court found the exculpation provisions were not appropriate for summary judgment (which was how the objections were considered), as the plan proponents would have to lay a factual foundation to justify the relief required. The bankruptcy court also noted that the fact that the parties worked hard to craft a consensual plan was not in itself enough justification. The bankruptcy court found the non-debtor §524(g) injunctions outside the scope of In re Combustion Engineering, Inc., 391 F.3d 190 (3d Cir. 2004), which made the plan unconfirmable as a matter of law.

In re Federal-Mogul Global, Inc., T&N Limted et al., 2008 WL 4493519 (Bankr. D. Del. Sept. 30, 2008) (J. Judith K. Fitzgerald)

The debtors, asbestos committee, and future claims representative negotiated a comprehensive settlement of certain non-debtor parties’ claims and plan objections, which consisted of two alternative arrangements. The first arrangement contemplated the non-debtor parties contributing $756 million to the asbestos trust, withdrawing their claims against the debtors, and receiving a §524(g) injunction, and the second arrangement contemplated the non-debtor parties making a smaller $140 million contribution without receiving an injunction.

The plan proponents argued that the requirements of §524(g) were met, as one non-debtor party’s liability arose by reason of ownership and management of a predecessor-in-interest and involvement in a transaction changing the corporate structure of a predecessor-in-interest of the debtors.

The bankruptcy court disagreed, holding that the alleged predecessor was an unincorporated division whose derivative liabilities now ran to the non-debtor party by reason of a contractual indemnity agreement contained in an asset purchase agreement. The non-debtor party did not own or manage a predecessor in interest of the Debtors and was not party to a transaction that changed the predecessor’s corporate structure. The bankruptcy court held that the plan proponents also failed to satisfy §524(g)’s requirement that the non-debtor party’s liability was alleged to arise “by reason of” the relationship. Instead, the bankruptcy court found that it was alleged to be liable by reason of its own conduct. Similarly, the second non-debtor party failed to overcome §524(g)’s hurdles, as its liabilities arose from contractual obligations to the first non-debtor party.

Quigley Co. Inc. v. Coleman et al. (In re Quigley), 2008 WL 2097016 (Bankr. S.D.N.Y. May 15, 2008) (J. Stuart M. Bernstein)

The bankruptcy court held that a §524(g) injunction was broad enough to enjoin asbestos claimants from bringing certain direct claims against the debtor’s parent, a non-debtor party. The bankruptcy court had entered a preliminary injunction on the petition date enjoining all asbestos-related litigation against the debtor’s parent, and the injunction was later amended to provide the narrower relief of a §524(g) injunction. Certain asbestos claimants sought to sue the parent for its direct liability under Restatement (Second) of Torts §400, which imposes a manufacturer’s liability on an entity that places its name on a product manufactured by another. The claimants argued that the third requirement of §524(g)—whether the parent’s liability arose “by reason of” its ownership or management of the debtor—could not be met. Specifically, they contended that third-party protection is limited to derivative claims that arise from the debtor’s conduct and the third party’s connection to or affiliation with the debtor. Conversely, where the third-party’s liability is based on its own conduct, §524(g) does not apply. The bankruptcy court disagreed, reasoning that the use of the parent’s name and logo paled in comparison to the wrongful conduct required to impose alter-ego liability, but that the claimants’ interpretation of §524(g) would exclude manufacturer’s liability and include veil piercing claims—a result that did not make sense. Instead, the bankruptcy court found that the parent’s name and logo would not have been used by the debtor but for the parent’s affiliation. Accordingly, the third requirement of §524(g) was met.


Preemption of Insurance Policy Anti-Assignment Provisions
In re Federal-Mogul Global, Inc., T&N Limted et al., 385 B.R. 560 (Bankr. D. Del. March 19, 2008) (J. Judith K. Fitzgerald)

Plan proponents and certain objecting insurers filed a joint motion for the bankruptcy court to determine whether assignment of asbestos insurance policies to a §524(g) trust is valid and enforceable, notwithstanding anti-assignment or consent-to-assignment provisions in the policies or applicable state law. The bankruptcy court held that the insurance policies were property of the estate within the meaning of §541, even if the policy had not matured, had no cash value, or was otherwise contingent. In turn, §1123(a) expressly preempted any non-bankruptcy rights that would interfere with the implementation of a chapter 11 plan. The bankruptcy court also held that the anti-assignment provisions only applied to assignments before liability; once an event occurred that gave rise to the insurer’s liability under the policy, the policy itself could be assigned.

The bankruptcy court disagreed with the insurers’ alternative argument that the asbestos policies were executory contracts and thus subject to §365. The bankruptcy court held that although the terms and conditions of the policies might still be in effect for the periods covered by the policies, the executory period ended when the last effective date of the policies had passed.

(This opinion was appealed by the objecting insurers to the district court and is set to be argued on November 12, 2008.)

In re Congoleum Corporation, et al., 2008 WL 4186899 (Bankr. D.N.J. Sept. 2, 2008) (J. Kathryn C. Ferguson)

The bankruptcy court held in favor of the plan proponents that the anti-assignment provisions in the debtors’ insurance policies were preempted by federal bankruptcy law and that the plan did not impermissibly alter the insurers’ rights under the policies. The joint plan proposed to transfer all asbestos insurance policies to the plan trust. The insurers whose policies contained an anti-assignment clause objected to that treatment, arguing that In re Combustion Engineering, Inc., 391 F.3d 190 (3d Cir. 2004) was not controlling on the preemption issue, as it focused on the inclusion of the policies in the bankruptcy estate under §541 and not the transfer of policies to a plan trust. The bankruptcy court held that such argument miscast the holding of Combustion Engineering, as the plan at issue provided for the policies to be transferred to an asbestos trust, which could be accomplished through §1123(a)(5) and not merely §541. Moreover, the bankruptcy court found that general preemption principals and the express language of §1123(a) (“[n]otwithstanding any other applicable nonbankruptcy law”) provides for preemption of state law restrictions on transferring the policies.

The bankruptcy court also held that the insurers’ various rights (e.g., to cooperation from the Debtors, to control defense of claims, to object to asbestos claims) were not impermissibly altered. The insurers argued that the joint plan violated their rights by giving the plan trustee the sole authority to litigate and settle claims against the plan trust. The bankruptcy court, however, agreed with the plan proponents that the plan trust would be bound by the cooperation clause and consent-to-settle provisions of the insurance contracts to the same extent as the debtors, and that it was the province of the state court in any coverage action to determine if the plan trust failed to fulfill those obligations and thus provided the insurers with a defense to coverage.

The bankruptcy court held that certain rights of the insurers such as controlling the defense of and objecting to asbestos claims were necessarily curtailed by §524(g), which requires a uniform system of claims valuation and similar treatment of similar present and future claims. Additionally, the bankruptcy court’s jurisdictional limitations would prohibit the insurer’s ability to object to the asbestos tort claims under §502.

(This opinion was appealed by the objecting insurers to the district court and is set to be argued on December 12, 2008.)

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Debra L. Innocenti is an Associate in the Creditors' Rights & Bankruptcy practice of Oppenheimer, Blend, Harrison and Tate, Inc. She has been recognized as a Texas Rising Star and one of San Antonio's Best Lawyers. Debra can be reached at 210.224.2000 or dinnocenti@obht.com

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