Restructuring

Contributed by Abigail Lerner
Some bankruptcy cases can have long tails with issues developing years after the entities confirm their chapter 11 plans.  That seems to be particularly true when cases deal with mass torts.  As the recent case of Piper Aircraft Corporation demonstrates, an issue can arise in a chapter 11 case over twenty years after the debtor’s plan was confirmed.  In Piper’s case, the United States Bankruptcy Court for the Southern District of Florida was required to decide whether claims filed by victims of two plane crashes were the types of claims that were channeled to the trust established under Piper’s chapter 11 plan or whether they were independent claims that could be asserted against the purchaser of Piper Aircraft’s assets. 
Background
In July 1991, Piper Aircraft filed its chapter 11 case.  In July 1995, Piper Aircraft confirmed a plan of reorganization that provided for the sale of substantially all of the debtor’s assets and for the creation of a trust.  The trust was created to address successor liability and protect the purchaser from incurring costs and facing liability in defending against certain claims defined as “Future Claims.”  Pursuant to the terms of the plan, a channeling injunction channeled Future Claims to the trust and enjoined suits by holders of Future Claims against the purchaser (among other protected parties).
To constitute a “Future Claim,” the claim must have (a) arisen out of liability based on planes or parts manufactured by the debtor and (b) been based on wrongdoing by the debtor, whether for product liability, design defects, or failure to warn.  By channeling Future Claims to the trust, the plan shielded the purchaser from liability arising from liabilities relating to post-confirmation crashes of planes built pre-confirmation so long as the liability was based on the debtor’s wrongful acts.
Actions Against the Purchaser and Its Motion to Enforce the Confirmation Order
As the bankruptcy court noted, the trust and the channeling injunction worked effectively for twenty years without its intervention.  Within the past year, however, lawsuits were brought against the purchaser arising out of crashes of planes built by the debtor.  In one set of lawsuits (the “Amerosa Complaints”), the plaintiffs based liability against the purchaser solely upon the purchaser’s alleged failure to warn of a defect not known by the debtor but of which allegedly the purchaser became aware after the plan was confirmed.
The second lawsuit (the “Hendrickson Complaint”) also related to the crash of a plane manufactured by the debtor.  In the Hendrickson Complaint, the plaintiffs asserted two counts against the purchaser, one for negligence and the other for strict liability.  The Hendrickson Complaint stated that it was based solely on the purchaser’s failure to update a Pilot’s Operating Handbook after safety recommendations were issued advising that slow flight and stall training exercises in the Piper PA-38-112 Tomahawk (the plane that crashed) should be conducted at increased altitudes.  The Hendrickson Complaint alleged that, after multiple accidents involving the Tomahawk during stall training exercises, the purchaser was negligent in waiting to revise the Handbook until after the Hendrickson crash.
The Court’s Analysis of the Amerosa and Hendrickson Claims
Regarding the Amerosa Complaints, the court explained that the liability asserted against the purchaser was not based on design defects at the time the plane was manufactured.  Rather, the plaintiffs alleged, and sought to establish liability, based upon post-confirmation wrongdoing by the purchaser, including the purchaser’s failure to warn about defects that the plaintiffs alleged it knew or should have known about through a pattern of in-flight breakup accidents that occurred after the purchaser’s acquisition of Piper Aircraft’s assets.  Similarly, the court noted that the Hendrickson Complaint did not allege defects in the plane built by the debtor or allege that the Pilot’s Operating Handbook in effect pre-confirmation was negligently prepared or defective.  Instead, the Hendrickson Complaint alleged solely that the purchaser negligently failed to revise the Handbook until after the accident.  Because liability could not be established based on wrongdoing by the debtor, the bankruptcy court concluded that the claims asserted in the Amerosa and Hendrickson Complaints were not “Future Claims.”
Notably, the Trust Agreement carved out from the trust’s indemnity obligations to the purchaser failure to warn claims for defects not known to the debtor, but known to the purchaser as a result of information acquired post-confirmation.  As to this exception, the Trust Agreement states that “[t]he Trust does not assume, and does not agree to indemnify [the purchaser] for, that part of any Future Claim” that falls within the exception (emphasis added).  Because the sentence uses the phrase “that part of any Future Claim,” the purchaser argued that claims fitting the exception were Future Claims that must be channeled to and administered by the trust.  The bankruptcy court rejected this interpretation, concluding that it “ma[de] no sense.”  The court reasoned that this interpretation would force the plaintiffs to proceed against the trust on claims that assert no liability against the trust.  The logical procedure, the court explained, and the one contemplated by the plan and Trust Agreement, was for plaintiffs who assert claims based solely on wrongful acts by the purchaser to pursue those claims against the purchaser directly.
Therefore, the bankruptcy court ruled that any claims that fell within the indemnification exception were not Future Claims, that the claims were not channeled to the trust, and that the plaintiffs were not in violation of the channeling injunction in prosecuting the claims in state court.  Accordingly, the court denied the purchaser’s motions to enforce the confirmation order.
Conclusion
Piper Aircraft shows the new tactic many plaintiffs’ lawyers are taking in dealing with channeling injunctions – attempt to characterize the claims as an “independent” claim against the defendant and not one that is derivative of the debtor’s liability.  This was the successful argument in certain challenges to an injunction in Quigley several years ago, although a similar argument relating to claims against Johns-Manville’s insurer recently fell short.  Just because a channeling injunction is in place does not necessarily mean that a defense to liability exists under every potential claim against a successor.  Rather, the parameters of the injunction should be closely studied to determine if protection exists.