Companies faced with substantial numbers of asbestos personal injury claims have turned increasingly to the U.S. Bankruptcy Code—and §524(g)1 in particular—in an effort to cabin their exposure and to eliminate the risk of uncertain potential future liability. Section 524(g) can provide protection not only to debtors but also to certain third-party entities that could have exposure to asbestos-related claims based on products or actions of the debtor. Such entities may include parent companies, affiliates and insurers. The precise contours of this third-party injunction remain the subject of litigation in some cases. In addressing the provisions of the injunction, some courts have focused on the nature of the legal relationship between the debtor and the third party, and others on the product that allegedly caused injury. Courts in both the Second and Third circuits have issued decisions in the past several years that address both the types of entities and claims that might be enjoined by an injunction issued under §524(g). The decisions arise in vastly different factual circumstances and appear to focus on different considerations and different theories. An examination of these decisions is important for any entity that may be involved in a §524(g) bankruptcy.

What Is §524(g)?

Section 524(g) was enacted in the context of the Manville bankruptcy, driven by a desire on the part of a broad coalition of interested entities to enable the development of trusts, like that established in the Manville plan, to facilitate compensation for claims that were expected to arise in the future. Section 524(g) authorizes the use of a “channeling injunction” that will bar certain claims against certain third-party non-debtor entities. Section 524(g)(4)(A)(ii) provides, inter alia, that:

an injunction may bar any action directed against a third party who is identifiable from the terms of such injunction (by name or as part of an identifiable group) and is alleged to be directly or indirectly liable for the conduct of, claims against, or demands on the debtor to the extent such alleged liability of such third party arises by reason of—

(I) the third party’s ownership of a financial interest in the debtor, a past or present affiliate of the debtor, or a predecessor in interest of the debtor;

(II) the third party’s involvement in the management of the debtor or a predecessor in interest of the debtor, or service as an officer, director or employee of the debtor or a related party;

(III) the third party’s provision of insurance to the debtor or a related party; or

(IV) the third party’s involvement in a transaction changing the corporate structure, or in a loan or other financial transaction affecting the financial condition, of the debtor or a related party, including but not limited to—

(aa) involvement in providing financing (debt or equity), or advice to an entity involved in such a transaction; or

(bb) acquiring or selling a financial interest in an entity as part of such a transaction.

The statute also requires that the bankruptcy plan be approved by a supermajority of asbestos claims and contains various requirements with respect to the establishment of a trust, which must operate with mechanisms intended to assure that the trust will be able to pay present claims and future demands in substantially the same manner.

Scope of Injunction in §524(g) Cases

While §524(g) defines the parameters of a channeling injunction that protects certain third-party entities, each case presents arguably different factual situations and corporate relationships, which in turn lead courts to focus on different aspects of the Code’s requirements.

Combustion Engineering decision: The Third Circuit’s decision in In re Combustion Engineering, 391 F.3d 190 (3d Cir. 2004), is widely cited for the proposition that the third party channeling injunction can enjoin only “derivative” claims. The Combustion Engineering case involved an effort to extend the injunction via §105(a) of the Bankruptcy Code to two entities that did not have any direct corporate affiliation with the debtor but that were owned (along with the debtor) by a common entity. The Third Circuit’s opinion is focused, to a large extent, on the issue of subject matter jurisdiction. The court concluded that there was no basis to find that the bankruptcy court had “related to” jurisdiction in a situation where the claims asserted against the non-debtor entities arose “from different products, involved different asbestos-containing materials, and were sold to different markets” and where “a review of the [claims] reveals little evidence of derivative liability.”2 The Combustion Engineering court did not attempt to define the meaning of “derivative” liability.

Manville bankruptcy decisions: In a series of decisions issued over the last several years, the Second Circuit has addressed the issue of the permissible scope of the third-party injunction from the perspective of jurisdiction and the “type” of claim. Two separate decisions arising out of the Manville bankruptcy plan concerned disputes regarding a 1984 agreement between Manville and a group of its insurers, under which settling insurers, including Travelers, would be relieved of all obligations related to disputed policies and would be protected from claims based on such obligations by orders of the bankruptcy court. The final confirmation order in the Manville bankruptcy incorporated by reference the injunction embodied in the insurance settlement order, and challenges to the 1986 orders were rejected by the Second Circuit on direct appeal.3

Subsequently, asbestos claimants filed actions (Direct Actions) against Travelers and other insurers alleging violation of duties to disclose information they had learned as insurers of the asbestos industry. Travelers then settled the actions conditioned upon the entry of a “Clarifying Order” that would state that these Direct Actions are prohibited by the 1986 Orders.4

Chubb, an insurer that was not a party to the original settlement, objected to any injunctive order that would bar its contribution or indemnity claims against Travelers for any joint liability in the Direct Actions. Chubb argued that (i) the bankruptcy court lacked subject matter jurisdiction to enjoin non-derivative claims against Travelers, and (ii) Travelers was seeking injunctive relief that could not “‘constitutionally be applied’” to Chubb because of insufficient notice.5

In 2004, the bankruptcy court found that the original injunction applied to the Direct Actions and that they were barred, reasoning that “‘Travelers learned virtually everything it knew about asbestos from its relationship with Manville.’”6 The district court largely affirmed, but the Second Circuit reversed, concluding that the bankruptcy court never had subject matter jurisdiction to enjoin claims that “‘aim to pursue the assets of Travelers’” and “‘make no claim against an asset of the bankruptcy estate.’”7 Instead, the court held that “‘a bankruptcy court only has jurisdiction to enjoin third-party non-debtor claims that directly affect the res of the bankruptcy estate.’”8

The U.S. Supreme Court reversed, but on the ground that the jurisdictional argument was an impermissible collateral attack on the 1986 Orders, the plain terms of which it found unambiguously barred the Direct Actions.9 The court found that the 1986 Orders had become final on direct review over two decades ago and that the later clarifying order was a proper exercise of the bankruptcy court’s authority to interpret its own order. The Supreme Court made clear that it had not addressed the question of whether a bankruptcy court “‘could properly enjoin claims against nondebtor insurers that are not derivative of the debtor’s wrongdoing.’”10 The Supreme Court also refrained from determining whether any particular party was bound by the 1986 Orders, and thus remanded the case to the Second Circuit to address whether due process “absolves” Chubb from following the 1986 Orders.11

On remand, the Second Circuit found that Chubb did not receive constitutionally adequate notice of the 1986 Orders and also reaffirmed its earlier ruling that a bankruptcy court’s in rem jurisdiction over property of the estate does not permit it to bar claims against a non-debtor that are not derivative of the debtor’s own tort liabilities. The court stated that it found it “telling[]” that:

although Congress codified a version of the bankruptcy court’s 1986 channeling injunction at [§524(g)], the statute does not authorize injunctions of these sorts of claims against non-debtor third parties. Rather, section 524(g) only “limits the situations where a channeling injunction may enjoin actions against third parties to those where a third party has derivative liability for the claims against the debtor.”12

In subsequent proceedings to compel Travelers to make payments under the settlements, the district court recently held that a condition precedent to the settlement, which had required that the Clarifying Order “‘contain[] prohibitions against Claims at least as broad’” as those contained in an exhibit, was not satisfied in light of these rulings.13

Quigley decision: This year, the Second Circuit revisited these issues in Pfizer v. Law Offices of Peter G. Angelos (In re Quigley), 676 F.3d 45 (2d Cir. 2012). Quigley, which had been involved in the manufacture of refractory products, some of which allegedly contained asbestos, was acquired by Pfizer in 1968.14 Quigley and Pfizer shared certain insurance policies and funds contained in trust under which both companies were joint beneficiaries.15 After Quigley filed for bankruptcy in 2004, the bankruptcy court issued an injunction (as modified in 2007) that tracked the language of §524(g)(4)(A)(ii) (the Amended Preliminary Injunction, or API).16

At issue in Quigley was the scope of the bankruptcy court’s jurisdiction to issue a Clarifying Order that applied the API to certain lawsuits that had been filed against Pfizer in Pennsylvania state court under an “apparent manufacturer” theory of liability under the Restatement (Second) of Torts §400.17 Plaintiffs argued that the particular liability sought to be imposed under §400 was “based on Pfizer’s own conduct in permitting its label to be affixed to Quigley products containing asbestos and to Quigley advertising” and therefore the particular state court proceedings were not barred by the API.18 The bankruptcy court concluded in its Clarifying Order that the state court litigation was barred. The district court reversed, and the case was then appealed to the Second Circuit.

The Second Circuit examined its earlier decisions, including the Manville line of cases, and stated that these cases did not represent a change in Second Circuit jurisprudence, and “did not impose a requirement that an action must both directly affect the estate and be derivative of the debtor’s rights and liabilities for bankruptcy jurisdiction over the action to exist.”19 The Second Circuit thus explained that “while we have treated whether a suit seeks to impose derivative liability as a helpful way to assess whether it has the potential to affect the bankruptcy res, the touchstone for bankruptcy jurisdiction remains ‘whether its outcome might have any “conceivable effect” on the bankruptcy estate.’”20 Addressing the litigation against Pfizer at issue in Quigley, the court stated that where it “would almost certainly result in the drawing down of insurance policies that are part of the bankruptcy estate of Quigley, the exercise of bankruptcy jurisdiction to enjoin these suits was appropriate.”21

The court then went on to conclude that under the particular facts before it, the §400 state claims at issue were not actually enjoined because they fell outside the scope of the API, which tracked the statutory language of §524(g), stating:

We conclude that the phrase “by reason of,” as employed in 11 U.S.C. §524(g)(4)(A)(ii), requires that the alleged liability of a third party for the conduct of or claims against the debtor arises, in the circumstances, as a legal consequence of one of the four relationships between the debtor and the third party enumerated in subsections (I) through (IV). Pfizer does not argue that its ownership of Quigley is pertinent in any legal sense to the claims asserted in the Angelos suits. Indeed, as the district court very aptly noted, Pfizer’s ownership interest in Quigley is “legally irrelevant” to [the §400 claims]…. Consequently, the API, modeled as it is on 11 U.S.C. §524(g)(4)(A)(ii), does not enjoin the suits at issue.22

Notably, the court added:

Finally, although not necessary to its holding, Manville III briefly addressed 11 U.S.C. §524(g)(4)(A)(ii)’s requirement that any injunctions imposed under §524(g) may only bar actions against third parties “alleged to be directly or indirectly liable for the conduct of, claims against, or demands on the debtor,” suggesting that an injunction is available only in “situations where…a third party has derivative liability for the claims against the debtor…. [Plaintiffs] argue[] that the suits at issue may not be enjoined pursuant to the API because §400 liability is not derivative in nature as a matter of Pennsylvania law. As explained…, because we conclude that the…suits do not attempt to fix on Pfizer liability arising by reason of Pfizer’s ownership of a financial interest in Quigley, 11 U.S.C. §524(g)(4)(A)(ii)(I), we do not reach this question.”23

NARCO decision: Other courts have employed different approaches in considering the nature of the third-party injunction in §524(g) cases. In In re North American Refractories, No. 02-20198 (Bankr. W.D. Pa.) (NARCO), the bankruptcy court found that a plan could be confirmed where the injunction included non-debtor Honeywell, whose predecessor’s subsidiary had operated the relevant entity with asbestos liability as an unincorporated division. The debtor acquired NARCO business in a leveraged buyout. Objectors in the bankruptcy court asserted that Honeywell’s independent non-derivative asbestos liability could not be extinguished, and that the plan sought to channel liability relating to the “NARCO Product Line,” which objectors claimed were really claims against the NARCO division of Honeywell prior to the debtor’s purchase of assets from Honeywell.24 In support of confirmation, Honeywell sought to distinguish Combustion Engineering by arguing that the NARCO case involved a channeling of claims arising out of a unitary product line involving the debtor and a predecessor of the debtor.25

After the bankruptcy court ruled that the objecting insurer had no standing and all other objections to the plan and injunction were withdrawn, the bankruptcy court recommended confirmation of the plan, concluding that Honeywell was entitled to the protection of a channeling injunction because Honeywell, as “the party from whom NARCO assumed liabilities, was the Debtor’s predecessor-in-interest.”26 The bankruptcy court found that Honeywell had been alleged to be directly and indirectly liable for the asbestos claims and demands against the debtors and that, as it relates to the asbestos trust claims, because Honeywell (as the party from which NARCO assumed liabilities) is the debtor’s predecessor-in-interest, it is “eligible to be included among the beneficiaries of the NARCO Channeling Injunction.”27

The district court affirmed, similarly finding that insurers had no standing, and an appeal to the Third Circuit was dismissed after the parties reached a settlement, and thus the injunction will cover Honeywell.28

Federal-Mogul decision: A decision by a bankruptcy court in the Third Circuit in another case, In re Federal-Mogul Global, 411 B.R. 148 (Bankr. D. Del. 2008), presents an interesting comparison. In that case, the court found that §524(g) could not apply because the third parties that sought inclusion in the injunction under an alternative plan settlement did not qualify as a predecessor in interest under the statute.29 In this case, the business that was the source of asbestos liability at issue had been an unincorporated operating division of a non-debtor. The court concluded that the term predecessor in interest must denote an entity with a distinct legal identity with rights and obligations that can be passed on to a successor.30 Moreover, the court found that even if the third parties had a qualifying relation, it would be insufficient to support the injunction because the liability did not arise “by reason of” the relationship with the debtor. Rather, the court found that the third parties were alleged to be liable by reason of their own conduct, and cited Combustion Engineering for the proposition that “both the plain language of the statute and its legislative history make clear that §524(g) provides no specific authority to extend a channeling injunction to include third-party actions against non-debtors where the liability alleged is not derivative of the debtor.”31

W.R. Grace decision: Most recently, in an amended opinion issued on June 11 confirming a plan of reorganization in the W.R. Grace case, the district court refused a request by non-debtor Burlington Northern Santa Fe Railway (BNSF) to extend the injunctive relief under the plan to it. See In re W.R. Grace, —B.R.—, 2012 WL 2130981 (D. Del. June 11, 2012). Over the years, BNSF had entered into several leases and contracts with Grace related to shipment of Grace’s asbestos containing products and operations of a mine in Libby, Mont., by which Grace had agreed to indemnify BNSF for asbestos liabilities.32 The court concluded that the channeling injunction could not extend to BNSF’s independent liabilities or to liabilities allegedly derivative of Grace’s conduct under the circumstances of the case. On the later point, the court held that “BNSF’s alleged liability did not arise by any of the four circumstances provided by §524(g),” but rather, its contractual indemnity agreements served “as the crux of its relationship with Grace.” The court found that in Federal Mogul it had been “explicitly recognized…that contractual indemnity agreements that do not otherwise meet the definitional requirements of §524(g) cannot serve as the link in the chain connecting a third party’s liability to the debtor for purposes of extending the channeling injunction to non-debtors.”33

The W.R. Grace court also upheld the injunction included in the plan as to Grace’s settling insurers, rejecting an argument that the injunction was not sufficiently specific in only enjoining claims against Grace’s insurers for their derivative liabilities. The court recognized that claimants could still independently pursue claims against those insurers for their own alleged wrongdoing, but found that such hypothetical claims were “too conjectural” to be specifically addressed and ruled on as part of the bankruptcy plan. Id. at *26-29.

Pittsburgh Corning: In another asbestos bankruptcy case pending in the Third Circuit, In re Pittsburgh Corning, the bankruptcy court has focused on the product line and the nature of the allegations against third-party entities in evaluating the terms of the injunction. The bankruptcy court concluded that the proposed channeling injunction could properly incorporate claims against non-debtor “parent” entities to the extent that the debtor is alleged to be liable for products of the parent entities and to the extent that the parents are alleged to be liable along with the debtor

based on allegations of conspiracy, alter ego, piercing the corporate veil, domination and control, concert of action, common enterprise, aiding and abetting, respondeat superior, negligent provision of services, principal and agent, successor in interest, and other joint and/or several liability theories.34

Conclusion

The case law regarding the scope of third-party injunctions under §524(g) is varied and fact specific. Because of the different and complex factual situations and the different focus of the courts and litigants in each case, it is difficult to draw any bright line. Litigants in §524(g) cases should examine these lines of authority when evaluating their own peculiar situations and facts.

Deborah E. Greenspan is the co-leader of Dickstein Shapiro’s complex dispute resolution group. Fredric Brooks is counsel in the group.

Endnotes:

1. 11 U.S.C. §524(g).

2. Combustion Eng’g, 391 F.3d at 231.

3. See Johns-Manville v. Chubb Indem. Ins. (In re Johns-Manville), 600 F.3d 135, 138-39, 142 (2d Cir.) (Manville IV), cert. denied, 131 S. Ct. 644 (2010).

4. Id. at 142-43.

5. Id. at 143 (quoting Chubb contention).

6. Id. (quoting In re Johns-Manville, No. 82 B 11656 et al., 2004 WL 1876046, at *30 (Bankr. S.D.N.Y. Aug. 17, 2004) (Manville I), aff’d in part, vacated in part, 340 B.R. 49 (S.D.N.Y. 2006) (Manville II)).

7. Id. at 146 (quoting Johns-Manville v. Chubb Indem. Ins. (In re Johns-Manville), 517 F.3d 52, 65 (2d Cir. 2008) (Manville III), rev’d sub. nom. Travelers Indem. v. Bailey, 557 U.S. 137 (2009), remanded to 600 F.3d 135 (2d Cir. 2010)).

8. See id. (quoting Manville III, 517 F.3d at 66).

9. Travelers Indem., 557 U.S. at 147-48.

10. See Manville IV, 600 F.3d at 146-47 (quoting Travelers Indem., 557 U.S. at 155).

11. Travelers Indem., 557 U.S. at 155.

12. Manville IV, 600 F.3d at 153 (citation omitted) (quoting Combustion Eng’g, 391 F.3d at 234).

13. Travelers Indem. v. Statutory & Hawaii Direct Action Settlement Counsel (In re Johns-Manville), —F. Supp. 2d—, 2012 WL 667084, at *6 (S.D.N.Y. March 1, 2012) (Manville V) (citation omitted). This decision has been appealed to the Second Circuit.

14. Quigley, 676 F.3d at 47.

15. Id. at 45.

16. Id. at 48.

17. Id. at 49-52.

18. Id. at 49.

19. Id. at 57 (citing Manville III).

20. Id. (quoting Publicker Indus. v. United States (In re Cuyahoga Equip.), 980 F.2d 110, 114 (2d Cir. 1992)).

21. Id. at 58.

22. Id. at 62 (citation omitted).

23. Id. (quoting Manville III, 517 F.3d at 67-68).

24. Combined Disclosure Statement to Accompany the Third Amended Plans of Reorganization at 6, NARCO, ECF No. 3888; That Certain NARCO Cancer Claimants’ Preliminary Objections to the Third Amended Plan of Reorganization of North American Refractories Company et al., NARCO, ECF No. 4140.

25. Honeywell International Inc.’s Response to Preliminary Objections to Debtors’ Third Amended Plan of Reorganization at 4, 22-23, NARCO, ECF No. 4216.

26. Revised Findings of Fact and Conclusions of Law (Exhibit 1 to Revised Memorandum Opinion on Confirmation of Debtors’ Third Amended Plans of Reorganization) ¶329(b)(2), NARCO, ECF No. 5507.

27. Id.

28. See Order, NARCO, No. 08-3651 (3d Cir. 2010) (dismissing NARCO); Honeywell Form10-Q (July 2011) at 25.

29. Under this proposed alternative (“Plan A”) settlement, non-debtors would have made substantial contributions to the trust in exchange for §524(g) protection. Federal-Mogul, 411 B.R. at 152-53.

30. Id. at 164.

31. Id. at 165-66 (quoting Combustion Eng’g, 391 F.3d at 236).

32. W.R. Grace & Co., 2012 WL 2130981, at *2, *14.

33. Id. at *30 (citing Federal-Mogul, 411 B.R. at 166).

34. In re Pittsburgh Corning, 453 B.R. 570, 576 (Bankr. W.D. Pa. 2011) (quoting In re Pittsburgh Corning, 417 B.R. 289, 293 (Bankr. W.D. Pa. 2006)).