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.