Restructuring

Contributed by Debra A. Dandeneau.
In “Manville III,” the Second Circuit became the first circuit to determine the scope of asbestos protection available to non-debtors facing claims relating to the debtor’s own asbestos liability.  Although the Third Circuit in Combustion Engineering previously addressed the issue of protection of non-debtors, it did so in the context of a debtor trying to protect such non-debtors from claims arising from the asbestos-related activities of the non-debtors and not claims arising from the debtor’s own asbestos activities.  In Manville III, the Second Circuit refused to protect insurers from direct causes of action that asbestos plaintiffs had against the insurers.   Manville III still left open the question of how far section 524(g)(4)(A) of the Bankruptcy Code should go to protect non-debtors from asbestos claims for which the debtors are primarily liable.  Quigley now provides the answer in the Second Circuit – not very far.  With Quigley, the Second Circuit has further circumscribed the protection available to non-debtors facing claims that admittedly arise from the debtor’s own asbestos-related activities, but which plaintiffs’ lawyers can successfully package as “independent” claims.
In our previous blog entry we described the district court’s decision in Quigley, which held that an injunction issued by the bankruptcy court during Quigley’s chapter 11 case did not protect Quigley’s parent, Pfizer Corporation, against asbestos personal injury lawsuits seeking to hold Pfizer “directly” liable for injuries caused by Quigley’s products under an “apparent manufacturer” theory of liability arising out of the  Restatement (Second) of Torts § 400.  As the Quigley injunction simply echoed the language of section 524(g)(4)(A), which enables the protection of certain classes of non-debtors based upon their relationships with the debtors, the courts necessarily had to determine the scope of section 524(g)(4)(A) to determine the scope of available protection.
During the heyday of high temperature asbestos-containing installation, Quigley manufactured and sold “Insulag,” a form of asbestos-containing insulation.  After Pfizer acquired Quigley, it allowed Quigley to use the Pfizer logo on Quigley’s products, including Insulag.  The parties did not appear to dispute that Pfizer only allowed Quigley to use the logo because Quigley was Pfizer’s subsidiary.  Not surprisingly, when asbestos plaintiffs brought claims allegedly on account of their exposure to Quigley’s products, they also sued Quigley’s deep pocket parent, Pfizer.  The causes of action brought against Pfizer included liability under the “apparent manufacturer” theory for having allowed its logo to be placed on Insulag packages and used in Quigley’s advertising.
Quigley filed for chapter 11 protection in 2004 after it essentially had ceased operations.  Eight years later, the fight over Quigley’s attempted prepackaged bankruptcy continues.  Early in the chapter 11 case, an ancillary dispute arose over whether Pfizer could be protected from Quigley-based lawsuits during the pendency of Quigley’s chapter 11 case.  The bankruptcy court judge issued an injunction that mirrored section 524(g)(4)(A) of the Bankruptcy Code and later held that the scope of such section was broad enough to protect Pfizer from suits under the “apparent manufacturer” theory because Pfizer never would have entered into the branding relationship with Quigley if Pfizer had not been Quigley’s parent.  Therefore, “but for” the parent-subsidiary relationship, Pfizer would not have been subjected to claims relating to Quigley’s asbestos-containing products, and protection of Pfizer from such claim was appropriate.
Both the district court and the Second Circuit, however, held that this relationship was insufficient to protect Pfizer under section 524(g)(4)(A).  Instead, both courts reasoned that such protection only could be provided in the limited circumstance in which, as a matter of law, the non-debtor only could be liable as a result of the legal nature of its relationship with the debtor and not because its relationship gave rise to a factual situation in which the non-debtor and the debtor would be co-liable for the debtor’s asbestos-related claims.  As a result of such holding, the Second Circuit has limited the use of section 524(g) injunctions to protect non-debtors from asbestos-related claims that arise out of the debtor’s operations and activities.
In an effort to show it is not completely eviscerating section 524(g)(4), the Second Circuit attempts in Quigley to identify the types of legal relationships that could give rise to claims against which the non-debtor could be protected:  a parent entity could be protected against veil piercing claims, and an insurer might be protected against “direct action” liability.
The Second Circuit struggles a bit, though, when it tries to find examples of situations in which a non-debtor whose asbestos liability is based upon its “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” could be found liable purely as a result of such legal relationship.  Although the Second Circuit identifies claims based upon successor liability as falling within this category (even though the statutory language certainly does not explicitly cover such claims, in contrast with the language in section 524(g)(3)(A)(ii) of the Bankruptcy Code), the court also suggests that “given particular facts,” this category could include claims arising “on an aiding and abetting theory, as when one party induces another to commit a tort.”  Here, though, the Second Circuit fails to distinguish why such a situation would be any different from the situation in which it holds Pfizer is not protected.  An aiding and abetting theory, after all, is not necessarily dependent upon the existence of a particular legal relationship between two parties, but is highly dependent upon the facts of their relationship.  In its effort to show that its test really works, the Second Circuit lays bare the weaknesses of the standard it is setting.
Going even further afield, the Second Circuit analogizes Pfizer’s position – which, after all, seeks to bar parties from asserting Quigley’s asbestos-related claims against Pfizer –  to an attempt to use section 524(g) to bar employment discrimination claims against a third party, stating that the “prosecution of claims bearing only an accidental nexus to an asbestos bankruptcy is less than tangentially related to [the] objective” of section 524(g).  In doing so, the court overlooks all the other protections  imposed by section 524(g), which include the requirement that the injunction pertain only to claims that are channeled to a trust that assumes the liability for such claims and that the plan of reorganization that establishes such trust be approved by a supermajority of the asbestos claimants voting on it.  Assuming, for some reason, the debtor wanted to channel employment discrimination claims to a trust and then its asbestos claimants overwhelmingly agreed that they would share their recovery under a trust with such claimants, why would that defeat the purpose of section 524(g)?
Following Quigley, other courts may be faced with the issue of where to draw the line in protecting third parties under section 524(g).  As a policy matter, the Second Circuit makes only a halfhearted attempt to justify a narrow application of such protection.  After all, if other parties also face liability as a result of a debtor’s asbestos activities, a debtor likely will want to channel their contribution claims against the debtor’s estate to an asbestos trust and obtain protection as a result of its chapter 11 case from such claims.  The Second Circuit provides no justification for limiting such parties’ rights to assert their claims against the debtor while also failing to offer any corresponding protection for such parties.
Moreover, section 524(g)(4)(B)(ii) of the Bankruptcy Code conditions protecting third parties upon the court determining that such parties have made a substantial enough contribution to justify such protection.  Bankruptcy Judge Bernstein, in an earlier Quigley decision conducted a thorough analysis of Pfizer’s historical contributions on account of Quigley asbestos claims and determined that Pfizer’s proposed contribution under the Quigley chapter 11 plan was insufficient to warrant granting Pfizer protection under section 524(g).  A more flexible application of section 524(g), which encourages the protection of third parties in exchange for a realistic determination of the value of such protection and which enables the channeling of all potential claims relating to a debtor’s activities to a single trust, would seem to encourage settlements, maximize the value of asbestos trusts, and minimize the costs for asbestos claimants (but perhaps not plaintiffs’ lawyers) in pursuing recovery for their injuries.
It is worth noting that in Combustion Engineering, the Third Circuit faced an issue at the opposite end of the spectrum – may 524(g) be used to protect a non-debtor from claims that have no relationship to the debtor’s activities?  The Third Circuit quite properly ruled that third parties, even affiliates of the debtor, cannot opportunistically glom on to a debtor’s 524(g) injunction to protect against their own, wholly separate liability.  The Third Circuit, home to many of the most significant asbestos-related debtor chapter 11 cases, has yet to face the issue raised in Quigley.  Courts within the Third Circuit have not displayed an inclination to interpret section 524(g) as narrowly as the Second Circuit has in Quigley.  Will plaintiffs’ lawyers, emboldened by the Second Circuit’s Quigley ruling, attempt to challenge the limits of 524(g) protection in the Third Circuit?  That remains to be seen.  If they do, though, perhaps the Third Circuit will adopt a more functional interpretation of section 524(g)(4) than what the Second Circuit has set forth in Quigley.