Alternatives To Section 524(g)

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1 MEALEY S TM LITIGATION REPORT Asbestos Alternatives To Section 524(g) by Philip Bentley and David Blabey Jr. Kramer Levin Naftalis & Frankel LLP New York, NY A commentary article reprinted from the January 18, 2012 issue of Mealey s Litigation Report: Asbestos

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3 MEALEY S LITIGATION REPORT: Asbestos Vol. 26, #24 January 18, 2012 Commentary Alternatives To Section 524(g) By Philip Bentley and David Blabey Jr. [Editor s Note: Philip Bentley is a partner and David Blabey is an associate at the law firm of Kramer Levin Naftalis & Frankel LLP. The authors represented the Official Committee of Unsecured Creditors of Motors Liquidation Company (f/k/a General Motors Corp.) in the contested estimation of General Motors aggregate asbestos liabilities as part of its chapter 11 bankruptcy. The views expressed in this article are those of the authors and not necessarily those of the members of the General Motors Creditors Committee. Copyright # 2012 by Philip Bentley and David Blabey Jr. Responses are welcome.] The decision to file for bankruptcy is never an easy one. But to companies considering a chapter 11 filing to address their asbestos liabilities, there is often a powerful deterrent not present in other contexts: the looming specter of section 524(g) of the Bankruptcy Code. That section has been commonly understood to confer on asbestos personal injury claimants an effective veto over any plan of reorganization they do not approve. However, it may not in fact be the case that every asbestos debtor need comply with the strict requirements of section 524(g). Section 524(g) permits the district court to issue an injunction typically known as a channeling injunction protecting a reorganized debtor from future asbestos claims by channeling those claims into a specially designated trust created as part of the debtor s plan of reorganization. The section was added to the Bankruptcy Code as part of the Bankruptcy Reform Act of 1994, and was intended to codify the use of this type of trust-and-injunction mechanism in the chapter 11 cases of In re Johns-Manville Corp. 1 The Manville court had accomplished this result through use of the general equitable powers accorded to bankruptcy courts under Bankruptcy Code section 105(a). 2 The subsequent insolvency of the Manville trust, however, had led certain parties to question the lawfulness of the section 105(a) channeling injunction, and in particular whether the Manville court s actions satisfied the constitutional due process rights of so-called future claimants that is, claimants who had been exposed to the debtor s asbestos, but who at the time of the debtor s bankruptcy case had not yet become sick. In view of this history, one of the principal motives behind the codification of a Manville-type channeling injunction was the preservation of future claimants due process protections. 3 Thus, for instance, section 524(g) provides for the designation of a futures representative acting on behalf of these future claimants, and requires the court issuing the channeling injunction to determine that the injunction is fair and equitable to future claimants. 4 In addition, the section requires that 75% of existing claimants voting on a plan of reorganization vote in favor of the plan before it may be confirmed. 5 Following the implementation of section 524(g), it has been widely assumed that that section provides the only permissible basis for managing a debtor s future asbestos liabilities. This assumption derives fromthegeneralrulethat,whereacodesection addresses a specific issue, a court may not use its catch-all equitable authority to circumvent that 1

4 Vol. 26, #24 January 18, 2012 MEALEY S LITIGATION REPORT: Asbestos section. 6 In Combustion Engineering, the Third Circuit Court of Appeals applied this general rule in the specific context of section 524(g), holding that because section 524(g) contained specific requirements for the extension of a channeling injunction to include third parties liability, and because the specific requirements had not been met in that case, the bankruptcy court could not use its general equitable powers to further extend the injunction to third parties in ways not contemplated by section 524(g). 7 The view that section 524(g) is the only basis for managing a debtor s future asbestos liabilities, however, may be misplaced. The origin of the provision, after all, lies in the Manville court s use of its general equitable powers under section 105(a) of the Bankruptcy Code, a use that was never overruled by any court. Even more importantly, the statute enacting section 524(g) expressly stated that the section should not be construed to modify, impair, or supersede any other authority the court has to issue injunctions in connection with an order confirming a plan of reorganization. 8 The House Report contains similar language, 9 and goes on to say that Congress in enacting the section expresses no opinion as to how much authority a bankruptcy court may generally have under its traditional equitable powers to issue an enforceable injunction of this kind. 10 Combustion Engineering, moreover, is distinguishable. The decision addressed only the narrow question of whether a court could use section 105(a) of the Bankruptcy Code to extend the protection of a channeling injunction to a non-debtor. 11 In answering that question in the negative, the Third Circuit was motivated, at least in part, by the inequity of permitting a nondebtor to secure the benefits of bankruptcy without enduring its rigors. 12 At least as important, the Court of Appeals observed that the proposed channeling injunction might jeopardize the rights of future claimants of the non-debtor parties by depriving them of important section 524(g) protections; for example, no separate futures representative had been appointed to act for future claimants of the non-debtors, even though the interests of those future claimants were not necessarily aligned with those of future Combustion Engineering asbestos claimants. 13 Finally, the Third Circuit found it significant that there was a specific Bankruptcy Code provision section 524(e) that imposed a general prohibition on the discharge of debts of non-debtors, subject only to the limited exceptions described in section 524(g)(4)(A)(ii), which exceptions were not broad enough to include the non-debtors whose liability was at issue in Combustion Engineering. 14 In sum, while it is widely assumed that compliance with 524(g) is a prerequisite to the approval of any trust established for the payment of future asbestos claims in bankruptcy, this assumption is not necessarily supported by Combustion Engineering or by any other precedent. The continued vitality of section 105(a) as a basis for the issuance of channeling injunctions diverting future liability away from a reorganized debtor and into a designated trust is perhaps most apparent in the growing number of cases that have addressed debtors silica liability over the past decade. In these cases, courts have used their section 105(a) powers to issue channeling injunctions that are functionally identical to those authorized under 524(g), with the only apparent difference being the toxic substance in question. The Third Circuit recently endorsed the looser requirements of 105(a) in one such silica case, for example, holding that: For the Plan to be approved as designed (i.e., with the inclusion of the Silica Injunction), the debtors needed to show that the Plan s resolution of silica-related claims is necessary or appropriate under 11 U.S.C. 105(a), which, under our precedent, requires showing with specificity that the Silica Injunction is both necessary to the reorganization and fair. In re Global Indus. Techs., 645 F.3d 201, 206 (3d Cir. 2011). As the silica cases show, 105(a) remains a viable and practical basis for the creation of trust-and-channeling mechanisms and the preservation of future claimants rights in mass-tort cases. It may therefore not be implausible particularly outside of the Third Circuit for a court to appoint a futures representative, allow for the creation of a dedicated asbestos trust, and issue an injunction channeling future claims to that trust using section 105(a) rather than section 524(g). It is worth noting, finally, that an asbestos debtor has certain practical options for addressing its asbestos 2

5 MEALEY S LITIGATION REPORT: Asbestos Vol. 26, #24 January 18, 2012 liabilities that avoid section 524(g) entirely. A debtor could, for example, confirm a plan addressing its past, but not its future, asbestos liabilities thereby obviating the need for section 524(g). (The debtor would need to show an ability to satisfy future asbestos liabilities outside of bankruptcy, a showing that may be increasingly viable as the aggregate amount of asbestos liability decreases over time.) The details of these and other practical alternatives are beyond the scope of this article. Together with the discussion of section 524(g), above, however, these alternatives suggest that an asbestos debtor s options in chapter 11 may not be as circumscribed as is commonly believed. Endnotes 1. See H.R. Rep. No (1994); 140 Cong. Rec. H10765 (daily ed. October 4, 1994). 2. In spite of Congress s apparent enthusiasm for the Manville injunction, the Manville trust went insolvent within two years of its first distribution to claimants. As Judge Weinstein of the Eastern District of New York explained in a 1991 opinion relating to the insolvency, within its first two years of operation the Trust faced almost 50% more claims than the highest projection made at the time of confirmation for the total number of claims to be filed during the entire life of the Trust. In re Joint Eastern and Southern District Asbestos Litigation, No , 1991 U.S. Dist. LEXIS 7527, at *89-90 (E.D.N.Y. May 16, 1991) (emphasis added). Ultimately, the reorganized Manville Corporation reached a settlement with claimants wherein it agreed to provide the trust with, among other things, as much as $580 million in new financing over the first seven years after the settlement went effective. Id. at * See, e.g., In re Combustion Eng g, Inc., 391 F.3d 190, 234 n. 45 (3d Cir. 2004) (noting that many of the requirements of section 524(g) are specifically tailored to protect the due process rights of future claimants ); see also H.R. Rep. No (1994); 140 Cong. Rec. H10765 (daily ed. October 4, 1994) (noting that the section sought to meet the same kind of high standards with respect to regard for the rights of claimants, present and future, as displayed in the two pioneering cases ) U.S.C. 524(g)(4)(B)(i), 524(g)(4)(B)(ii) U.S.C. 524(g)(2)(B)(ii)(IV)(bb). 6. See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (U.S. 1988) ( [W]hatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code. ). 7. SeeInreCombustionEng g,inc., 391 F.3d 190, 236 (3d Cir. 2004) (noting that the general powers of 105(a)cannotbeusedtoachievearesult not contemplated by the more specific provisions of 524(g) ). 8. Bankruptcy Reform Act of 1994, Pub L. No , 111(b), 108 Stat. 4106, 4117 (1994) (codified at 11 U.S.C. 524(g)). 9. H.R. Rep. No (1994); 140 Cong. Rec. H10765 (daily ed. October 4, 1994) (noting that the statute is not intended to alter any authority bankruptcy courts may already have to issue injunctions in connection with a plan or reorganization ). 10. Id. 11. Combustion Eng g, 391 F.3d at 234 ( Based on the facts here, we do not believe that 105(a) can be employed to extend a channeling injunction to nondebtors in an asbestos case where the requirements of 524(g) are not otherwise met. ) Id. at Id. at Id. at 237 n. 48. n 3

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