Navigating Recent Bankruptcy Law Trends

I N S I D E T H E M I N D S Navigating Recent Bankruptcy Law Trends Leading Lawyers on Implementing Innovative Bankruptcy Practices, Advising Clients, and Evaluating the Latest Trends and Cases

2010 Thomson Reuters/Aspatore All rights reserved. Printed in the United States of America. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, except as permitted under Sections 107 or 108 of the U.S. Copyright Act, without prior written permission of the publisher. This book is printed on acid free paper. Material in this book is for educational purposes only. This book is sold with the understanding that neither any of the authors nor the publisher is engaged in rendering legal, accounting, investment, or any other professional service. Neither the publisher nor the authors assume any liability for any errors or omissions or for how this book or its contents are used or interpreted or for any consequences resulting directly or indirectly from the use of this book. For legal advice or any other, please consult your personal lawyer or the appropriate professional. The views expressed by the individuals in this book (or the individuals on the cover) do not necessarily reflect the views shared by the companies they are employed by (or the companies mentioned in this book). The employment status and affiliations of authors with the companies referenced are subject to change. Aspatore books may be purchased for educational, business, or sales promotional use. For information, please email West.customer.service@thomson.com. For corrections, updates, comments or any other inquiries please email TLR.AspatoreEditorial@thomson.com. First Printing, 2010 10 9 8 7 6 5 4 3 2 1 If you are interested in purchasing the book this chapter was originally included in, please visit www.west.thomson.com.

Recent Decisions Regarding Third-Party Releases and the Scope of Jurisdiction of Bankruptcy Courts Deborah E. Greenspan Partner Dickstein Shapiro LLP

Inside the Minds Published by Aspatore Books Introduction For practitioners involved in mass tort (particularly asbestos-related) bankruptcies, the issue of the scope of the court s jurisdiction to enjoin future litigation against third parties, and thereby achieve total peace, is of paramount interest. The bankruptcy option has grown in interest and importance since the Supreme Court s decisions in Amchem and Ortiz, addressing the structure of class action settlements that involve future claims. This chapter outlines recent developments that may affect mass tort bankruptcies, as well as other bankruptcy actions. Key Features of Recent Changes in Commercial Bankruptcy Law The issue of providing third-party releases and/or injunctions (i.e., for nondebtor entities or persons) in the context of a bankruptcy case has generated considerable debate. Recently the Supreme Court, the Second Circuit, and the Third Circuit have issued decisions relevant to that debate in the context of asbestos bankruptcy cases. In the past decade, companies have turned increasingly to the Bankruptcy Code (Section 524(g) in particular) in an effort to resolve future potential liability for asbestos claims. In many instances, the resulting plan of reorganization provides for a channeling injunction and release that prevents the assertion of certain asbestos claims against non-debtor entities. Such entities may include parent companies, affiliates, and insurers. The Second Circuit has issued two decisions in the past two years (both in the context of the long-standing Manville asbestos bankruptcy case) that squarely address the scope of the third-party channeling injunction and that purport to define the scope of the jurisdiction of the bankruptcy courts. The Supreme Court reviewed one of those decisions but did not squarely address the fundamental issue. The Third Circuit has addressed the scope of the related to jurisdiction of the bankruptcy courts, also in the context of asbestos bankruptcy cases. These various decisions could have a significant effect on the use of the Bankruptcy Code to address future asbestos claims of non-debtor entities, and they are likely to receive much attention and scrutiny.

By Deborah E. Greenspan Manville Litigation in the Second Circuit Background After filing a voluntary Chapter 11 petition in 1982, the Johns-Manville Corporation reached an agreement with many of its insurers in 1984 under which settling insurers, including Travelers, Manville s long-time primary insurer, would be relieved of all obligations related to the disputed policies (termed policy claims ) and would be protected from claims based on such obligations by order of the bankruptcy court. See In re Johns-Manville Corp., 600 F.3d 135, 138-39 (2d Cir. 2010). The agreement defined policy claims as any and all claims by any Person based upon, arising out of or related to any or all of the Policies at issue in the settlement. After notice, which included mailing and publication, and objections to the scope of policy claims were raised, the parties executed an amendment that stated that the channeling order would be intended only to channel claims against the res [of the Manville estate] to the Settlement Fund and the injunction is intended only to restrain claims against the res (i.e., the Policies) which are or may be asserted against the Settling Insurers. Id. at 141. The bankruptcy court approved the settlement in 1986. The insurance settlement order defined policy claims as any and all claims (whether or not presently known) which have been, or could have been, or might be, asserted by any Person against any or all members of [Manville] or against any or all members of the Settling Insurer Group based upon, arising out of or relating to any or all of the Policies, and contained a permanent injunction that prohibited all Persons from commencing and/or continuing any suit of any type or nature for Policy Claims against any or all members of the Settling Insurer Group. Id. at 141-42. The final confirmation order incorporated by reference the insurance settlement order, and challenges to the 1986 orders were rejected by the Second Circuit on direct appeal. See MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89, 94 (2d Cir. 1988). Subsequently, asbestos claimants began to file direct actions against Travelers and other insurers, which were generally either (i) statutory direct actions based on states statutory regulation of insurance practices, or (ii) common law direct actions, which alleged that Travelers and others

Inside the Minds Published by Aspatore Books violated duties to disclose asbestos-related information they had learned as insurers of the asbestos industry. 600 F.3d at 142. Because many of the suits at issue [sought] to hold Travelers liable for an independent wrong by Manville, they [were] not direct actions in the terms of strict usage as under direct action statute in Louisiana. Id. (citation omitted). There was no dispute that the true direct actions brought under the Louisiana statute were enjoined by the 1986 orders. Id. at 142 n.5. In 2002, relying on the terms of the 1986 order, Travelers sought an injunction from the bankruptcy court against several then-pending direct actions, and after the matter was referred to mediation, a settlement was reached under which Travelers would pay over $400 million into three separate funds based on the type of direct action. The 2004 direct action settlement required that claimants release Travelers from further liability separate and apart from Travelers protection under the 1986 Orders, but was also conditioned upon the entry of a clarifying order by the bankruptcy court that would state that the direct actions are and have always been prohibited by the 1986 orders. Id. at 142-43. Chubb, which had not been a party to the 1984 settlement but was one of Travelers co-defendants in the common law direct actions, objected to the direct action settlement with Travelers, seeking to preserve its ability to bring claims against Travelers for contribution and indemnity relating to their potential joint liability in those common law direct actions, and contending that the bankruptcy court lacked authority to enjoin it from doing so. Chubb argued: (i) the bankruptcy court lacked subject matter jurisdiction to enjoin non-derivative claims against Travelers, a third-party non-debtor, in Manville s Chapter 11 proceedings, and (ii) Travelers was seeking injunctive relief that could not constitutionally be applied since, in the 1980s, Chubb was in the position of a future claimant with no knowledge of its potential future claims against Travelers and for which no future claims representative was appointed to protect its own rights. Id. at 143. 2004 Bankruptcy Court Orders In 2004, the bankruptcy court entered findings of fact and conclusions of law and a clarifying order (collectively, the bankruptcy court 2004 orders )

By Deborah E. Greenspan in In re Johns-Manville Corp., Nos. 82-B-11656, et al, 2004 WL 1876046 (Bankr. S.D.N.Y. Aug. 17, 2004), which: Based on its fact finding that Travelers learned virtually everything it knew about asbestos from its relationship with Manville, clarified that all direct actions are within the scope of the [1986 Orders ] prohibitions, and are and always have been permanently barred. Id. at 13, 30. Rejected Chubb s arguments that the bankruptcy court was unauthorized to bar the contribution and indemnity claims Chubb might have against Travelers. Id. at 15. Approved a gate keeping provision in response to creative plaintiff claims that vested initial determination regarding whether an asbestos suit against Travelers would violate the 1986 and 2004 orders with the bankruptcy court rather than the court in which the claims were filed. Id. at 35. District Court Decision The district court affirmed the bankruptcy court s 2004 orders in all respects except with respect to the gate keeping provisions. In re Johns- Manville Corp., 340 B.R. 49, 60, 65-66 (S.D.N.Y. 2006). The district court agreed that the language of the 1986 orders barred all of the direct actions, and that the bankruptcy court had jurisdiction over Travelers insurance policies and could act to protect them from dissipation by direct action claims by enjoining those claims and channeling them to the Manville Trust, emphasizing the bankruptcy court s factual findings relating to Travelers relationship with Manville and the nature of the direct actions. Id. at 63. The court also concluded that it was unlikely that the 2004 orders impermissibly bars suits involving Travelers conduct with respect to insureds other than Manville and asbestos injury completely unrelated to Manville, and thus held that the bankruptcy court had subject matter jurisdiction to enjoin the direct action suits pursuant to the 1986 orders and the clarifying order. Id. at 67. The district court rejected Chubb s argument that it could not be bound by the 1986 orders, finding instead that as a sophisticated insurer, the

Inside the Minds Published by Aspatore Books bankruptcy court s 1984 notice should have put it on notice with regards to whatever asbestos-related claims it may have against Travelers and other settling insurers. Id. at 68. The court reasoned that unlike the class action settlements in Amchem and Ortiz, 1 which involved exercises of in personam jurisdiction, the injunction here is based on the Bankruptcy Court s in rem power of the Manville estate. Id. at 68-69 (finding that there is an exception to the due process concerns raised by Chubb because the bankruptcy court creates a special remedial scheme that allows for the foreclosure of successive litigation by nonlitigants ) See Ortiz, 527 U.S. 815, 846(1999). 2008 Second Circuit Decision On further appeal, the Second Circuit found that the bankruptcy court had not possessed subject matter jurisdiction to enjoin the direct action claims against Travelers, reasoning that clarification cannot be used as a predicate to enjoin claims over which the [court] had no jurisdiction. Johns-Manville Corp. v. Chubb Indem. Ins. Co., 517 F.3d 52, 61 (2d Cir. 2008). In light of Travelers concession that the direct action claims sought damages that were unrelated to the policy proceeds that were part of the Manville bankruptcy estate, the Second Circuit criticized the jurisdictional analysis of the lower courts for failure to analyze separately the state law legal duties that serve as a basis of the direct action claims. Id. at 63, 67. Distinguishing true direct action claims, like those under the Louisiana statutes that were properly enjoined, the court held that the bankruptcy court lacked 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. Id. at 65. 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. Id. at 66. 1 Amchem and Ortiz involved efforts by companies facing asbestos liability to resolve future claims via the class settlement device. In those cases, the Supreme Court found defects in the class certification based in part on due process issues (i.e., adequacy of representation with respect to future claimants) whose interests could be adverse to those of existing claimants. The court further noted the considerable impediments to providing constitutionally sufficient notice to individuals who had not yet manifested an asbestosrelated condition.

U.S. Supreme Court Decision By Deborah E. Greenspan The Supreme Court granted certiorari and reversed the Second Circuit s 2008 decision, focusing on a different jurisdictional inquiry than the Second Circuit s determination of whether the bankruptcy court had exceeded its jurisdiction in 1986. See Travelers Indem. Co. v. Bailey, 129 S. Ct. 2195, 2205 (2009). Instead, the Supreme Court characterized the jurisdictional argument as an impermissible collateral attack on the 1986 orders, the plain terms of which it found unambiguously barred the direct actions. Id. at 2203-05. The court reasoned that the direct action claims are policy claims under the 1986 orders, a point emphasized by the bankruptcy court s factual findings that the Direct Actions seek to recover against Travelers either for supposed wrongdoing in its capacity as Manville s insurer or for improper use of information that Travelers obtained from Manville as its insurer. Id. at 2203. The court found that the 1986 orders had become final on direct review over two decades ago, and that the bankruptcy court s jurisdiction to enter the 1986 orders was not subject to collateral attack by parties who were bound by the previous orders, and that the 2004 orders were a proper exercise of the bankruptcy court s authority to interpret the 1986 orders. Id. at 2203. The Supreme Court declined, however, to decide whether any particular [party] is bound by the 1986 Orders, and thus instructed the lower court to address Chubb s due process argument and other properly preserved objections. Id. at 2207; see In re Johns-Manville Corp., 600 F.3d at 147. The court also emphasized that due to the posture of the case, it did not resolve whether a bankruptcy court, in 1986 or today, could properly enjoin claims against non-debtor insurers that are not derivative of the debtor s wrongdoing. Id. at 2207. 2010 Second Circuit Decision In Johns-Manville Corp. v. Chubb Indem Ins. Co. (In re Johns-Manville Corp.), 600 F.3d 135 (2d Cir. 2010), the Second Circuit 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:

Id. at 153. Inside the Minds Published by Aspatore Books On remand, we remain persuaded that the 1986 Orders, as interpreted in 2004, exceed the bounds of the bankruptcy court s in rem jurisdiction. In 2004, the bankruptcy court interpreted the 1986 Orders to enjoin not only claims that are directed at the Travelers insurance policies in the res of the Manville estate, but also non-derivative claims by Chubb that seek to impose liability on Travelers separately. The bankruptcy court, in essence, interpreted the 1986 Orders to have an in personam effect. Tellingly, although Congress codified a version of the bankruptcy court s 1986 channeling injunction at 11 U.S.C. 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. In re Combustion Eng g Inc., 391 F.3d at 234; see also id. at 235 n.47. Nevertheless, under Bailey, the parties who were present or represented in the proceedings that led to the entry of the 1986 Orders are barred from collaterally attacking the bankruptcy court s 2004 interpretation. But that cannot be so as to Chubb, if making it subject to the 1986 Orders would violate due process. As a result, our due process analysis must take into account the in personam manner in which the 1986 Orders were interpreted by the bankruptcy court in 2004. Viewed from this perspective, the district court s reasoning unravels. With respect to due process concerns, the district court had found that the bankruptcy court had acted on an in rem basis, which it thought distinguished Amchem and Ortiz. See 340 B.R. at 68-69. The Second Circuit found that while the contrast between in rem bankruptcy proceedings and the in personam class action settlements in Amchem and Ortiz was apt, the district court had placed the Manville proceedings at least in their

By Deborah E. Greenspan present procedural posture in the wrong category since, whatever the bankruptcy court s factual findings, Chubb s claims for contribution and indemnification seek to proceed against Travelers on an in personam basis. 600 F.3d at 154. The court explained that because Chubb s claims against Travelers for indemnity and contribution seek to impose liability on Travelers itself rather than the insurance policies that are assets of the Manville bankruptcy estate, the bankruptcy court s 2004 interpretation of the 1986 Orders attributed those prior judicial acts as in personam in effect. Id. at 153 n.13. The Second Circuit reasoned that the bankruptcy court s 2004 interpretation of the 1986 orders was not confined to in rem claims against the estate: Chubb does not, as a legal matter, seek to collect from the insurance policies that Travelers issued to Manville. Thus, contrary to the district court s ruling, the bankruptcy court was not exercising its in rem power when it concluded that Chubb s claims were enjoined. Therefore, the special remedial scheme due process exception relating to in rem bankruptcy proceedings is insufficient to sustain the bankruptcy court s actions at to Chubb. Id. at 154 (citation omitted). The Second Circuit also disagreed with the district court s conclusion that Chubb s due process rights were satisfied by the 1984 notice, finding that, under the circumstances, notice in the class action settlement context was most apt, and that the due process issue discussed in that context presented grave representation and notice problems with respect to Chubb. Id. at 156. The court reasoned: Because the 1986 Orders purport to bind Chubb s in personam claims, the better due process analogy in terms of notice and representation principles is to class action settlements, not in rem bankruptcy proceedings. As a result, we find [Amchem] and Stephenson v. Dow Chemical Co., 273 F.3d 249 (2d Cir. 2001) to be the pertinent authority.

600 F.3d at 154-55. Inside the Minds Published by Aspatore Books Specifically, the court also found: As to representation, there is no indication in the record that the sort of claims Chubb seeks to bring against Travelers were contemplated, much less accounted for, during the proceedings that led to the 1986 Orders We also conclude that the interests of the asbestos claimants who participated in the negotiations and hearings leading up to the 1986 Orders diverged from Chubb s future interests in a manner that precluded the claimants from adequately representing Chubb in those proceedings. In Amchem, the Supreme Court found that single-class representation was inadequate under Rule 23(a)(4) because the interests of presently injured asbestos claimants conflicted with those of the exposure-only claimants Although we do not rely on Rule 23 here, there is a similar divergence of interests between Chubb and the groups of asbestos claimants that participated in the negotiations that led to the 1986 Orders With respect to notice, we need not break any new ground Under the unique circumstances of this case, there can be little doubt that the publication notice employed by the bankruptcy court in 1984 was insufficient to bind Chubb to the 2004 interpretation of the 1986 Orders. The bankruptcy court s August 2, 1984 Notice of Hearing to Consider Approval of Compromise and Settlement of Insurance Litigation indicated that the parties to the Manville Chapter 11 proceedings were seeking an order enjoining all claims, whether or not presently known, against the Settling Insurers based upon, arising out of or relating to any or all of the insurance policies that the Settling Insurers had issued to Manville. In order to

By Deborah E. Greenspan comprehend that the contemplated channeling injunction would bar Chubb s in personam, non-derivative claims against Travelers, the recipient of this Notice would have to predict that the bankruptcy court would exceed its in rem jurisdiction in entering the 1986 Orders. Such a recipient would also have to be presumed to know or to be able to discern from the 1984 Notice document the factual extent of Travelers relationship with Manville, which ultimately served as the lynchpin of the bankruptcy court s 2004 interpretation of the 1986 Orders The bankruptcy court s factfindings [sic] are presently uncontested, and Chubb was undoubtedly a sophisticated insurer in the early 1980s But we cannot attribute to Chubb the sort of prescience that these predictions would have required, and the August 2, 1984 Notice was insufficient to communicate these issues. Id. at 156-57 (citations omitted). The Second Circuit thus held that Chubb was not adequately represented in the proceedings that led to the bankruptcy court s approval of the 1984 settlement and plan, that it did not receive adequate notice of the 1986 orders, and that it was therefore not bound by the terms of the 1986 orders. Id. at 158. Consequently, the court held that Chubb may attack the Orders collaterally as jurisdictionally void and, as it held in its previous decision, concluded that that attack is meritorious. Id. S.D.N.Y. Motors Liquidation Appeal: Core Jurisdiction Even if Not Moot In Campbell v. Motors Liquidation Co. (In re Motors Liquidation Co.), 428 B.R. 43 (S.D.N.Y. 2010), several product liability claimants, whose contingent claims arose from injuries sustained prior to GM s Chapter 11 filing, appealed the bankruptcy court s Section 363 sale order, which had authorized the sale of substantially all of GM s assets to a U.S. Treasury-sponsored purchaser (New GM) free and clear of their product liability claims, and enjoined any successor claims they might have against New GM.

Inside the Minds Published by Aspatore Books Appellants argued that their appeals were not statutorily mooted under Section 363(m) because the bankruptcy court lacked colorable jurisdiction to enjoin their successor liability claims against New GM. The court concluded that the appeal was moot, but went on to state that even if it was not, it would still reject this argument: Even assuming, arguendo, that Appellants challenge to the Bankruptcy Court s authority is not itself mooted by section 363(m), their arguments regarding colorable jurisdiction nonetheless lack merit. Colorable means appearing to be true, valid, or right. Appellants do not challenge the Bankruptcy Court s inherent [or core] jurisdiction to determine whether the free and clear provisions of the sale apply to in personam claims. Having conceded this point, as they must under wellsettled law Appellants arguments focus instead on the Bankruptcy Court s alleged lack of related to jurisdiction over successor liability actions against the Purchaser Appellees counter, and the Court agrees, that Appellants focus on related to (that is, non-core) jurisdiction is misplaced. The jurisdictional issue here, if any, is the Bankruptcy Court s core or arising under jurisdiction to approve the 363 Transaction and issue the Sale Order. It is well-settled that bankruptcy courts have core jurisdiction to approve section 363 sales and corollary jurisdiction to interpret and enforce their own orders carrying out the provisions of the Bankruptcy Code The injunctive provisions in the Sale Order enjoining successor liability would thus be within the Bankruptcy Court s core jurisdiction to authorize and effectuate the 363 Transaction free and clear of Appellants claims under section 363(f). Id. at 56-57 (citations omitted). The district court also found the Supreme Court s vacatur of the Chrysler appeal to be instructive, reasoning that it was implicit in the Supreme

By Deborah E. Greenspan Court s instructions to dismiss the Chrysler appeal as moot which left the bankruptcy court s sales order intact that the bankruptcy court had jurisdiction to enjoin existing claimants successor liability claims against the purchaser pursuant to section 363(f). Id. at 58. Following the closing of the Section 363 sale in GM, the Supreme Court vacated the Second Circuit s affirmance in Chrysler and remanded with instructions to dismiss the appeal as moot. Indiana State Police Pension Trust v. Chrysler LLC, 130 S. Ct. 1015 (2009), vacating and remanding appeal, 576 F.3d 108 (2d Cir. 2009); see In re Chrysler LLC, 592 F.3d 370, 370 (2d Cir. 2010) (per curiam) (dismissing the appeal on remand). The Second Circuit s vacated decision had expressly declined to define the scope of the bankruptcy court s authority to extinguish the potential claims of future claimants in Chrysler, and such claims were not at issue in the Campbell appeal in the GM case. See Campbell, 428 B.R. at 59 n.20; In re Chrysler, 576 F.3d at 127. The district court thus concluded that in light of the historic and immediate precedent, it was clear that the bankruptcy court had more than colorable jurisdiction and that, in any event, given the foregoing authority, which confirms that the jurisdiction of the Bankruptcy Court was more than colorable, and that the strict limitation of section 363(m) applies on this appeal, any merits analysis of Bankruptcy Court s application of section 363(f) is beyond our power to review. 428 B.R. at 59. In supplemental briefing, appellants had also sought to rely on the Second Circuit s 2010 Manville opinion to support their argument that Section 363(f) did not authorize the bankruptcy court to transfer GM s assets free and clear of in personam product liability claims. Id. at 58 n.18. The court found that while In re Johns-Manville Corp., 600 F.3d 135 (2d Cir. 2010) (Manville IV), held that the bankruptcy court had exceeded its in rem jurisdiction, that jurisdictional holding was inapposite: The underlying settlement approval orders at issue in Manville III and Manville IV channeled potential policy claims against the insurers of the company into a settlement trust. As we noted above, the Second Circuit had cited to the free and clear provision of section 363(f) as analogous authority when initially affirming the channeling injunctions, but noted that the Johns-Manville

Inside the Minds Published by Aspatore Books injunctions were distinct from the sort of free and clear injunctions typically authorized by 363(f). See MacArthur, 837 F.2d at 94; see also 11 U.S.C. 524(g) (codifying a version of the bankruptcy court s channeling injunction in the Manville case); Manville IV, 600 F.3d at 153-54. In any event, the Court of Appeals recent holding in Manville IV is distinguishable not only because a different source of injunctive authority was at issue, but also because that appeal involved the bankruptcy court s injunction of another liability insurer s third-party contribution and indemnity claims against a settling insurer based on the settling insurer s allegedly independent wrongdoing, where the non-derivative claim did not involve the res of the estate. Instead, the appellant-insurer sought to impose separate liability on the settling insurer. See 600 F3.d at 152-53. In addition, and in contrast to the instant case, the appellant-insurer in Manville IV lacked adequate notice of the underlying channeling and settlement orders such that due process concerns rendered mootness and res judicata doctrines inapplicable. Id. at 158. In re Motors Liquidation, 428 B.R. at 58 n.18. Third Circuit Decision in W.R. Grace and Related Precedent on Related to Jurisdiction In In re W.R. Grace & Co., 591 F.3d 164 (3d Cir. 2009), the Court of Appeals for the Third Circuit affirmed a ruling that the bankruptcy court in the W.R. Grace case lacked related to jurisdiction over proceedings brought by individuals (Libby claimants) against the state of Montana, alleging exposure to asbestos from the debtor s mining operations near Libby, Montana. The court stated: While 105(a) of the Bankruptcy Code allows a bankruptcy court to issue any order necessary to carry out the provisions of the Code, it does not provide an independent source of federal subject matter jurisdiction

By Deborah E. Greenspan Thus, before considering the merits of any 105(a) injunction, a bankruptcy court must establish that it has subject matter jurisdiction to enter the injunction There are [three] types of bankruptcy jurisdiction, commonly called arising under, arising in, and related to jurisdiction. Only the last of these is at issue here. Proceedings over which a bankruptcy court can legitimately exercise related-to jurisdiction include suits between third parties that conceivably may have an effect on the bankruptcy estate. Id. at 170 (citations omitted). The court reasoned that because Grace would not be bound by any judgment against Montana (but, rather, that Montana would first have to be found liable in the state courts, and would then have to successfully bring an indemnification or contribution claim against Grace), the claims against Montana did not have any impact on the bankruptcy estate, and the bankruptcy court lacked jurisdiction to expand the preliminary injunction that had been entered in the case to include the state court negligence claims of the Libby claimants. Id. at 172-73. The decision on Grace is in line with a series of decisions by the Third Circuit over the last twenty-five years that reached similar conclusions. See Pacor Inc. v. Higgins, 743 F.2d 984, 995 (3d Cir. 1984) (adopting the any conceivable effect test but finding that the asbestos claim against nondebtor Pacor would in no way bind a debtor (Manville) in a bankruptcy proceeding despite Pacor having filed a third-party complaint impleading Manville and alleging that it was the original manufacturer of the asbestos, reasoning that any judgment received by [plaintiff] could not itself result in even a contingent claim against Manville, since Pacor would still be obligated to bring an entirely separate proceeding to receive indemnification ); In re Federal-Mogul Global Inc., 300 F.3d 368 (3d Cir. 2002) (bankruptcy court did not have related to jurisdiction because indemnification claim against debtors had not yet accrued and would require another lawsuit before having an impact on the bankruptcy proceedings); In re Combustion Engineering, 391 F.3d 190 (3d Cir. 2004)

Inside the Minds Published by Aspatore Books (finding no related to jurisdiction for asbestos claims against non-debtor affiliates of Combustion Engineering, despite alleged unity of interest based on debtor s potential indemnity obligations to affiliates and shared insurance between debtor and affiliates). The majority view holds that a plan can release non-debtors in appropriate limited circumstances. See Revisiting the Propriety of Third-Party Releases of Non-debtors, 18 J. Bankr. L & Prac. 4 (Aug. 2009) ( Since the enactment of the Bankruptcy Code in 1978, the majority of federal circuits have found authority for bankruptcy courts to use third-party non-debtor releases and injunctions to deal with unusual and complex cases. The First, Second, Third, Fourth, Sixth, Seventh, Eleventh and D.C. Circuits have all ruled, in varying degrees, that 11 U.S.C 105(a) authorizes a bankruptcy court to issue injunctions or releases benefitting third-party non-debtors. ) (citing Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973, 980-81(1st Cir. 1995); In re Drexel Burnham Lambert Group Inc., 960 F.2d 285, 292 (2d Cir. 1992); In re Continental Airlines, 203 F.3d 203, 214 (3d Cir. 2000); In re A.H. Robins Co. Inc., 880 F.2d 694, 700 (4th Cir. 1989); In re Dow Corning Corp., 280 F.3d 648, 658 (6th Cir. 2002); In re Specialty Equip. Companies Inc., 3 F.3d 1043, 1047 (7th Cir. 1993); In re Munford, 97 F.3d 449, 455 (11th Cir. 1996); In re AOV Indus., 792 F.2d 1140, 1152 (D.C. Cir. 1986). In Pace v. American International Group Inc., No. 08-C-945, 2010 WL 1325657 (N.D. Ill. Mar. 30, 2010), the court found that a breach of contract claim brought in state court against AIG was properly enjoined where AIG was a released party under a channeling injunction issued in the ARTRA bankruptcy case. The plaintiff in the case had settled his asbestos claim in May 2002 pursuant to an agreement between the plaintiff, ARTRA, Kemper Insurance, and AIG, but in June 2002, ARTRA filed for bankruptcy. Id. at *1-2. In support of its claim against AIG following confirmation of the plan in ARTRA, the plaintiff argued that the bankruptcy court exceeded its jurisdiction by enjoining him for pursuing his contract claim against AIG, and that the language of the injunction was not broad enough to cover the claim. Id. at *4-5 ( [Plaintiff] explains that the Bankruptcy Court s exercise of jurisdiction here was improper because [his] claim against AIG derives from AIG s independent, contractual obligation to [him] and therefore concerns the

By Deborah E. Greenspan property of AIG, but not ARTRA From [plaintiff s] point of view, this agreement memorialized the parties separate, distinct obligations to him and extinguished AIG s (and Kemper s) role as ARTRA s insurers. ). The court, however, found that the plaintiff did not account for the special purpose of a channeling injunction under Section 524(g), and that the language of the ARTRA channeling injunction was sufficiently broad to sweep in [plaintiff s] contract claim against AIG, and therefore the Bankruptcy Court s enforcement of the injunction against [plaintiff s] claim was proper. Id. at *5. The Fifth, Ninth, and Tenth Circuits have adopted a minority view that Bankruptcy Code 524(e) s language expressly limits the scope of any discharge to apply only to claims against the debtor and that courts cannot use 105(a) to circumvent this provision of the Bankruptcy Code by granting relief to non-debtors. Id. (See In re Zale Corp., 62 F.3d 746 (5th Cir. 1995); In re Lowenschuss, 67 F.3d 1394 (9th Cir. 1995); In re Western Real Estate Fund Inc., 922 F.2d 592 (10th Cir. 1990). Federal Mogul Decision on Plan A Settlement of Pneumo Claims In In re Federal-Mogul Global Inc., 411 B.R. 148 (Bankr. D. Del. 2008), Judge Fitzgerald held that claims against Pneumo Abex and Cooper could not be enjoined and channeled under 524(g) because they did not derive from liability of the debtors. Specifically at issue in the case was approval of the second of two alternative settlements of Pneumo Abex/Cooper liabilities (Settlement A), under which Cooper and Pneumo Abex would contribute $740 million to a sub-fund for a trust and receive in return the benefits of a 524(g) injunction. The issue had been bifurcated from the plan confirmation process and the Settlement B alternative (which resolved Cooper s and Pneumo Abex s claims against the debtors in return for payment to those entities of $140 million), and which plan had already been confirmed. Id. at 153. Pneumo asbestos claims to be covered under the settlement stemmed from alleged exposure to asbestos-containing friction products

Inside the Minds Published by Aspatore Books manufactured by the Abex Brake Business of the Friction Products Division of the Abex Corporation. Abex and its predecessors manufactured and distributed various asbestos-containing brake products. Id. at 160. There was a long corporate and transactional history at issue in the case relating to the parties alleged liabilities under which, inter alia, Federal Mogul assumed Cooper s guaranty obligations relating to a prior agreement and became the guarantor of an indemnity owed to Pneumo Abex. The court, however, found: Id. at 163. The bottom line is that both Pneumo Abex and Cooper, now or in the future, may hold claims against FMP or FMC related to the intricacies of the contractual relationships of the parties. What is equally as clear is that the Pneumo Abex Claims evolved from the conduct and products of Pneumo Abex and its predecessors and not in any way from the conduct of, claims against, or demands on the Debtors. The court noted that the statue provided that a third party may receive the benefits of a channeling injunction when that third party is alleged to be directly or indirectly liable for the conduct of, claims against, or demands on the debtor. Id. (quoting 11 U.S.C. 524(g)(4)(A)(ii)). The plan supporters asserted that the statutory requirements were satisfied based on the debtors ownership of a predecessor in interest, management of a predecessor in interest, and involvement in a transaction changing the corporate structure of a predecessor in interest of the Debtor. Id. The court, however, rejected this argument, finding that the Abex Brake Business was merely an unincorporated division of Pneumo Abex, and that the transaction at issue was an asset sale, not a stock sale. Id. at 164. The court reasoned: Operating divisions of corporations that are not themselves incorporated, such as the Pneumo Abex Brake Business, are not legal persons.

By Deborah E. Greenspan The term predecessor in interest in 524(g) must denote an entity with a distinct legal identity, which has rights and obligations, recognized by law, that can be passed on to a successor. An unincorporated operating division of a corporation, which is not itself a legal entity with any rights or interests, cannot pass any rights or interests to a successor Purchase of the Abex Brake Business alone would not have transferred these liabilities; rather, it was a contractual indemnity agreement contained in the 1994 APA which transferred these liabilities to Wagner. Id. at 164 (emphasis added). Moreover, the court found that even if its ruling on Pneumo Abex not being a predecessor in interest of the debtor was incorrect, the mere existence of a predecessor in interest relationship was not sufficient unless the third party s liability is alleged to rise by reason of the relationship. Id. at 165 (citing In re Combustion Engineering, 391 F.3d 190, 235 (3d Cir. 2004)). The court reasoned that Pneumo Abex was not alleged to be liable by reason of any relationship with Federal Mogul, but rather by reason of its own products, and that similarly, Cooper s alleged liability did not arise from its ownership or management of Federal Mogul Products, but from its contractual obligations to Pneumo Abex under a mutual guarantee agreement. Id. 165-66. The court thus concluded that because the claims did not derive in any way from liability of the debtors, they could not be enjoined and channeled under 524(g). Id. at 166. The Third Circuit s JELD-WEN (In re Grossman s) Decision on Discharge in Non-524(g) Cases In JELD-WEN Inc. v. Van Brunt (In re Grossman s Inc.), 607 F.3d 114 (3d Cir. 2010), the Third Circuit addressed the question of whether an asbestos claim involving exposure that occurred prior to a bankruptcy, but with manifestation of injury long after confirmation of a non-section 524(g) plan, was discharged. The lower courts had concluded that the claims were not discharged because they arose after the effective date of the plan, applying existing Third Circuit precedent from In re Frenville Co., 744 F.2d 332 (3d Cir. 1984), which had held that a claim, as that term is defined in the

Inside the Minds Published by Aspatore Books Bankruptcy Code, arises when the underlying stated cause of action accrues. Because applicable New York law in the JELD-WEN case provided that a cause of action for asbestos-related injury does not accrue until the injury manifests itself, the bankruptcy court had concluded that the plaintiff had no claim to discharge in 1997 when Grossmans (a home improvement retailer) had filed for bankruptcy. JELD-WEN, 607 F.3d at 118. On appeal, the Third Circuit overruled the Frenville accrual rule, describing it as having been universally rejected by other circuits and having been characterized as one of the most criticized and least followed precedents decided under the current Bankruptcy Code. Id. at 120-21 (citations omitted). The court noted that other courts had divided on the issue of how otherwise to define when a claim arises for purposes of the code, with numerous variations of different approaches having been applied. Noting that various bankruptcy courts had followed a form of a conduct test when considering the existence of an asbestos-related claim, 2 the court found: Id. at 125. There seems to be something approaching a consensus among the courts that a prerequisite for recognizing a claim is that the claimant s exposure to a product giving rise to the claim occurred pre-petition, even though the injury manifested after the reorganization. We agree and hold that a claim arises when an individual is exposed pre-petition to a product or other conduct giving rise to an injury, which underlies a right to payment under the Bankruptcy Code. See 11 U.S.C. 101(5). Applied to the Van Brunts, it means that their claims arose sometime in 1977, the date Mary Van Brunt alleged that Grossman s product exposed her to asbestos. 2 Citing In re Quigley Co., 383 B.R. 19, 27 (Bankr. S.D.N.Y. 2008) ( If the Asbestos PI Claimant was exposed to asbestos before the Quigley petition date, he or she holds a claim. ); In re Lloyd E. Mitchell Inc., 373 B.R. 416, 424 (Bankr. D. Md. 2007) ( A claim [for asbestos-related injury by a non-manifesting asbestos victim] arises upon exposure, not manifestion. (citing Grady v. A.H. Robins, 839 F.2d 198 (4th Cir. 1988)).

By Deborah E. Greenspan The court, however, made clear that this did not necessarily mean the claims were discharged by the plan, since any application of the test could not be divorced from the fundamental principles of due process and corresponding requirements of adequate notice, which it stated were issues that arise starkly in asbestos cases. Id. at 126. After discussing the history and requirements of Section 524(g), the court noted that those safeguards were of no help to the plaintiff in the case since the plan at issue did not provide for a channeling injunction or trust under that provision, and the court thus remanded to the district court to decide whether a discharge would comport with due process, and to inquire into the adequacy of notice. Id. at 127. The court gave the following guidance to determine whether an asbestos claim has been discharged: Id. at 127-28. Conclusion The court may wish to consider, inter alia, the circumstances of the initial exposure to asbestos, whether and/or when the claimants were aware of their vulnerability to asbestos, whether the notice of the claims bar date came to their attention, whether the claimants were known or unknown creditors, whether the claimants had a colorable claim at the time of the bar date, and other circumstances specific to the parties, including whether it was reasonable or possible for the debtor to establish a trust for future claimants as provided by 524(g). The cases described in this chapter demonstrate the complexities involved in any bankruptcy case that potentially involves mass claims and/or long tail claims. The practical and legal interest in finality is juxtaposed against legal constructs that were substantially developed in the context of less complex situations. Moreover, the particular legal vehicle (representative action in the form of a class proceeding; bankruptcy action under specific statutory provisions (e.g., 11.U.S.C. 524(g); 11 U.S.C. 363)) affects the analysis, issues, and type of closure.

Inside the Minds Published by Aspatore Books The cases represent an effort to define the boundaries surrounding the use of the Bankruptcy Code to achieve full resolution of all claims related to a particular product or issue. Practitioners must be cognizant of these decisions and the differences in the various jurisdictions when advising clients regarding the potential outcome of any bankruptcy process designed to obtain relief from mass tort claims. Consider carefully the scope of any proposed injunction, the factual basis for the injunction, and the evidentiary support for the relationships that support the injunction. Key Takeaways In a mass tort bankruptcy, the nature of the claims and the nature of the allegations against third parties might be relevant for the court in determining the applicability of a release and injunction. Take the time to learn the underlying cases and their factual and legal predicates. Consider the historical relationship between companies potentially affected by a third-party release and injunction. That relationship might have a bearing on a later analysis of the application of the release/injunction. The Supreme Court s decision in Bailey might encourage certain interested parties to raise more objections to reorganization plans. Be prepared to address objections. Consider the nature and scope of notice. An entity that has notice that outlines potential claims that could be released under the plan may have a less compelling due process argument. Nothing in these decisions precludes the use of third-party releases and injunctions. The issues raised simply address the breadth of those releases. Deborah E. Greenspan is a partner at Dickstein Shapiro LLP in the Complex Dispute Resolution Group. Her practice focuses on class action, mass tort, and bankruptcy law and procedure (with particular expertise in mass torts and product liability); analysis of damages and future liability exposure; negotiation, alternative dispute resolution, claims evaluation, and dispute analysis; settlement distribution design and implementation; claims management and risk analysis; and general litigation. She has represented clients in the most significant

By Deborah E. Greenspan complex litigation matters in the United States, and she has been appointed to serve as a special master and neutral in various matters. Ms. Greenspan was an appointee to the U.S. Department of Justice, and she was the deputy special master of the September 11th Victim Compensation Fund of 2001, responsible for designing the compensation systems and policies for the distribution of over $7 billion to families of victims of the September 11 attacks. Acknowledgment: I wish to acknowledge the invaluable assistance of Fredric Brooks, counsel at Dickstein Shapiro LLP, for his assistance with the formulation of this chapter.

www.aspatore.com Aspatore Books, a Thomson Reuters business, exclusively publishes C- Level executives (CEO, CFO, CTO, CMO, Partner) from the world's most respected companies and law firms. C-Level Business Intelligence, as conceptualized and developed by Aspatore Books, provides professionals of all levels with proven business intelligence from industry insiders direct and unfiltered insight from those who know it best as opposed to thirdparty accounts offered by unknown authors and analysts. Aspatore Books is committed to publishing an innovative line of business and legal books, those which lay forth principles and offer insights that when employed, can have a direct financial impact on the reader's business objectives, whatever they may be. In essence, Aspatore publishes critical tools for all business professionals. Inside the Minds The Inside the Minds series provides readers of all levels with proven legal and business intelligence from C-Level executives and lawyers (CEO, CFO, CTO, CMO, Partner) from the world's most respected companies and law firms. Each chapter is comparable to a white paper or essay and is a futureoriented look at where an industry, profession, or topic is heading and the most important issues for future success. Each author has been selected based upon their experience and C-Level standing within the professional community. Inside the Minds was conceived in order to give readers actual insights into the leading minds of top lawyers and business executives worldwide, presenting an unprecedented look at various industries and professions.