2005 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

12-29-2005

In Re: Armstrong

Precedential or Non-Precedential: Precedential

Docket No. 05-1881

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

 

No. 05-1881

 

 IN RE: ARMSTRONG WORLD INDUSTRIES, INC., 

 Appellant 

 

On Appeal from the United States District Court

for the District of Delaware

(No. 00-04471)

District Judge: Honorable Eduardo C. Robreno

 

Argued October 24, 2005

Before: SLOVITER and FISHER, Circuit Judges, and

THOMPSON*, District Judge

(Filed: December 29, 2005)

 

Gregory S. Coleman (Argued)

Weil, Gotshal & Manges LLP

Austin, TX 78759

Stephen Karotkin

Debra A. Dandeneau

Weil, Gotshal & Manges LLP

New York, NY 10153

Mark D. Collins

Rebecca L. Booth

Richards, Layton & Finger, P.A.

Wilmington, DE 19899
2

Attorneys for Appellant Armstrong World Industries, Inc.

Mark E. Felger

Jeffrey R. Waxman

Cozen & O’Connor

Wilmington, DE 19801

Stephen J. Shimshak (Argued)

Andrew N. Rosenberg

Curtis J. Weidler

Paul, Weiss, Rifkind, Wharton & Garrison LLP

New York, NY 10019

Attorneys for Appellee Official Committee of Unsecured

Creditors of Armstrong World Industries, Inc.

Marla R. Eskin

Campbell & Levine, LLC

Wilmington, DE 19801

Elihu Inselbuch

Caplin & Drysdale, Chartered

New York, NY 10022

Peter Van N. Lockwood

Nathan D. Finch

Caplin & Drysdale, Chartered

Washington, D.C. 20005

Attorneys for Appellee Official Committee of Asbestos 

Claimants of Armstrong World Industries, Inc.

James L. Patton, Jr.

Sharon M. Zieg

Edwin J. Harron

Young, Conaway, Stargatt & Taylor, LLP

Wilmington, DE 19801

Michael J. Crames

Andrew A. Kress
Honorable Anne E. Thompson, United States District Judge *

for the District of New Jersey, sitting by designation.

3

Kaye Scholer, LLP

New York, NY 10022

Attorneys for Appellee Dean M. Trafelet, Legal

Representative for Future Asbestos Personal Injury

 Claimants of Armstrong World Industries, Inc.

OPINION OF THE COURT

THOMPSON , District Judge. *

This matter is before the Court on Armstrong Worldwide

Industries, Inc.’s (“AWI”) appeal of the District Court’s decision

to deny confirmation of AWI’s bankruptcy reorganization plan. 

In its decision, the District Court concluded that the plan could

not be confirmed because the distribution of warrants to AWI’s

equity interest holders over the objection of the class of

unsecured creditors violated the absolute priority rule, as

codified in 11 U.S.C. § 1129(b)(2)(B). AWI filed a timely

appeal, contending that (1) the issuance of warrants does not

violate the absolute priority rule, and (2) an equitable exception

to the absolute priority rule applies. For the following reasons,

we affirm the judgment of the District Court.

I.

FACTS AND PROCEDURAL HISTORY

AWI designs, manufactures, and sells flooring products,

kitchen and bathroom cabinets, and ceiling systems. Due to

asbestos litigation liabilities, AWI and two of its subsidiaries

filed for Chapter 11 bankruptcy in the United States Bankruptcy

Court for the District of Delaware on December 6, 2000. The

United States Trustee for the District of Delaware appointed two

committees to represent AWI’s unsecured creditors: (1) the

Official Committee of Asbestos Personal Injury Claimants
4

(“APIC”), and (2) the Official Committee of Unsecured

Creditors (“UCC”). The Bankruptcy Court appointed Dean M.

Trafelet as the Future Claimants’ Representative (“FCR”). 

After holding negotiations with APIC, UCC, and FCR,

AWI filed its Fourth Amended Plan of Reorganization (the

“Plan”) and Amended Disclosure Statement with the Bankruptcy

Court in May 2003. Under the Plan, AWI’s creditors were

divided into eleven classes, and AWI’s equity interest holders

were placed into a twelfth class. Relevant to this appeal are

Class 6, a class of unsecured creditors; Class 7, a class of present

and future asbestos-related personal injury claimants; and Class

12, the class of equity interest holders who own AWI’s common

stock. (App. at 1146-47, 1151.) The only member of Class 12 is

Armstrong Worldwide, Inc. (“AWWD”), the parent company of

AWI, which is in turn wholly owned by Armstrong Holdings,

Inc. (“Holdings”). Classes 6 and 7 hold equal priority, and have

interests senior to those of Class 12. (App. at 0019.) All three

are impaired classes because their claims or interests would be

altered by the Plan. 11 U.S.C. § 1124.

The Plan provided that AWI would place approximately

$1.8 billion of its assets into a trust for Class 7 pursuant to 11

U.S.C. § 524(g). (App. at 1147-49.) Class 7’s members would

be entitled to an initial payment percentage from the trust of 20%

of their allowed claims. (App. at 1177.) Meanwhile, Class 6

would recover about 59.5% of its $1.651 billion in claims. 

(App. at 1146-47.) The Plan would also issue new warrants to

purchase AWI’s new common stock, estimated to be worth $35

to $40 million, to AWWD or Holdings (Class 12). If Class 6

rejected the Plan, then the Plan provided that Class 7 would

receive the warrants. (App. at 1149.) However, the Plan also

provided that Class 7 would automatically waive receipt of the

warrants, which would then be issued to AWWD or Holdings

(Class 12).

The Bankruptcy Court set September 22, 2003 as the

deadline for voting on the Plan and for the parties to object to the

Plan’s confirmation. Because the Plan would distribute property

to AWI’s equity interest holders without fully paying off the
See generally Patrick M. Hanlon, Asbestos Legislation: 1

The FAIR Act Two Years On, 1 Pratt’s J. Bankr. L. 207 (2005).

As it happened, the FAIR Act did not pass, but similar bills have

been reintroduced in subsequent sessions of Congress.

(Appellant’s Br. 15; App. at 1243.) 

5

unsecured creditors’ claims, all impaired unsecured creditor

classes were required to approve the Plan under 11 U.S.C. §

1129(a)(8). If any impaired class objected to the Plan, then the

Plan could only be “crammed down” if it was “fair and

equitable” to the objecting class. See 11 U.S.C. § 1129(b)(1).

UCC represented all of the classes of unsecured creditors,

including Class 6, during the negotiations that led to the Plan. 

Although UCC initially approved of the Plan in May 2003, it

later filed a conditional objection to the Plan’s confirmation on

September 22, 2003 based on (1) the greater potential

distribution to creditors that would result if federal asbestos

legislation was passed (namely, the FAIR Act), and (2) the

possible applicability of the absolute priority rule, as codified in

11 U.S.C. § 1129(b), if the Plan was not accepted by all classes. 

As indicated in its conditional objection, UCC’s

reservations about the Plan were prompted in part by the

proposal of the FAIR Act, which was reported out of the Senate

Judiciary Committee in July 2003. If passed, the FAIR Act 1

would remove asbestos-related personal injury claims from the

courts and absolve asbestos defendants of liability in return for

mandatory contributions to a federally supervised trust. (App. at

0017-18.) AWI’s contribution to the FAIR Act trust was

estimated to range from $520 to $805 million, far less than the

$1.8 billion it would put in trust for the Class 7 asbestos

claimants under the Plan. Thus, if the FAIR Act passed,

approximately $1 billion could be freed up for distribution

among AWI’s other creditors, including the class of unsecured

creditors. 

In response to UCC’s concerns about the FAIR Act, the

Bankruptcy Court extended the final deadline for voting to
6

October 31, 2003. (App. at 0018.) To accept the Plan, class

members holding at least fifty percent of the number of claims

and two-thirds of the amount of the claims would need to vote

for the Plan. See 11 U.S.C. § 1126(c). Although 88.03% of

Class 6 claim holders voted for the Plan, only 23.21% of the

amount of the claims voted to accept the Plan. (App. at 1456.) 

As a result, Class 6 rejected the Plan. Classes 7 and 12 accepted

the Plan, but Class 12’s acceptance was rescinded under the Plan

due to Class 6’s rejection. (App. at 0020.)

Following a hearing on November 17 and 18, 2003, the

Bankruptcy Court recommended confirmation of the Plan to the

District Court in its December 19, 2003 Proposed Findings and

Conclusions. (App. at 1430.) The Bankruptcy Court found that

the absolute priority rule, as codified in section 1129(b)(2) of the

Bankruptcy Code, was satisfied because the warrants were

distributed to the holder of equity interests because of the waiver

by Class 7, citing In re Genesis Health Ventures, Inc., 266 B.R.

591 (D. Del. 2001), and In re SPM Mfg. Corp., 984 F.2d 1305

(1st Cir. 1993). In addition, the Bankruptcy Court found that

UCC had waived its right to object to the Plan when it “entered

into a consensual plan encompassing” the Plan provisions. 

(App. at 1502-03.) Because the Plan included a channeling

injunction under section 524(g) of the Bankruptcy Code, the

District Court was required to affirm the Bankruptcy Court’s

Proposed Findings and Conclusions before the Plan could go

into effect. (App. at 1468.)

UCC filed objections to the Bankruptcy Court’s Proposed

Findings and Conclusions with the United States District Court

for the District of Delaware. The District Court held a hearing

on the objections on December 15, 2004 and issued a

memorandum and order on February 23, 2005 denying

confirmation of the Plan. The District Court found that (1) the

issuance of warrants to the equity interest holders violated the

absolute priority rule, and (2) no equitable exception to the

absolute priority rule applied. In re Armstrong World Indus.,

Inc., 320 B.R. 523 (D. Del. 2005).

AWI now appeals the District Court’s decision, and is
7

joined by Appellees APIC and FCR, who jointly submitted a

brief adopting and supporting AWI’s arguments.

II.

DISCUSSION

A. Jurisdiction

This Court has jurisdiction to hear appeals of “all final

decisions of the district courts.” 28 U.S.C. § 1291 (emphasis

added); Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253 (1992). 

In bankruptcy cases, finality is construed more broadly than for

other types of civil cases. In re Marvel Entm’t Group, Inc., 140

F.3d 463, 470 (3d Cir. 1998). Because bankruptcy proceedings

are often protracted, and time and resources can be wasted if an

appeal is delayed until after a final disposition, our policy has

been to quickly resolve issues central to the progress of a

bankruptcy. See In re Owens Corning, 419 F.3d 195, 203 (3d

Cir. 2005). We consider four factors to determine whether a

district court’s decision in a bankruptcy case is final: (1) the

impact on the assets of the bankruptcy estate; (2) the need for

further fact-finding on remand; (3) the preclusive effect of a

decision on the merits; and (4) the interests of judicial economy. 

See id. (citing Buncher Co. v. Official Comm. of Unsecured

Creditors of GenFarm Ltd. P’ship IV, 229 F.3d 245, 250 (3d Cir.

2000)). 

Although Appellee UCC contends that we cannot hear

this appeal because it involves an interlocutory order rather than

a final order, we find jurisdiction after considering the above

four factors. First, the District Court’s denial of confirmation

will likely affect the distribution of assets between the different

creditor classes. See Buncher Co., 229 F.3d at 250. Second, the

issue presented here requires no additional fact-finding. Third,

this appeal would require us to address a discrete question of law

that would have a preclusive effect on certain provisions of the

Plan. Lastly, practical considerations in the interests of judicial

economy require that we hear this appeal now. Because we find

jurisdiction under 28 U.S.C. § 1291, we will not address whether
 A class is impaired if its legal, equitable, or contractual 2

rights are altered under the reorganization plan. 11 U.S.C. § 1124.

8

we also have jurisdiction under 28 U.S.C. § 158(d). 

B. Standard of Review

We review the District Court’s decision using a de novo

standard for conclusions of law, and a clearly erroneous standard

for findings of fact. In re PWS Holding Corp., 228 F.3d 224,

235 (3d Cir. 2000). Whether a reorganization plan violates the

absolute priority rule is a question of law. See In re Johnston, 21

F.3d 323, 328-29 (9th Cir. 1994).

C. Confirmation of a Reorganization Plan

Confirmation of a proposed Chapter 11 reorganization

plan is governed by 11 U.S.C. § 1129. A court will confirm a

plan if it meets all of the requirements set out in section 1129(a). 

Only one of these requirements concerns us in this appeal, and

that is the requirement that the plan be consensual, with

unanimous acceptance by all of the impaired classes. 11 U.S.C. 2

§ 1129(a)(8). If the plan is not consensual, a court may still

confirm as long as the plan meets the other requirements of

section 1129(a), and “does not discriminate unfairly, and is fair

and equitable” as to any dissenting impaired class. 11 U.S.C. §

1129(b)(1); see Bank of Am. Nat’l Trust & Sav. Ass’n v. 203 N.

LaSalle St. P’ship, 526 U.S. 434, 441 (1999) [hereinafter

LaSalle]. The latter type of confirmation is also called a “cram

down,” as the court can cram a plan down over the objection of

an impaired class. See generally Kenneth N. Klee, All You Ever

Wanted to Know About Cram Down Under the New Bankruptcy

Code, 53 Am. Bankr. L.J. 133 (1979).

1. The Absolute Priority Rule

The issues in this case require us to examine the “fair and

equitable” requirement for a cram down, which invokes the

absolute priority rule. The absolute priority rule is a judicial
9

invention that predated the Bankruptcy Code. It arose from the

concern that because a debtor proposed its own reorganization

plan, the plan could be “too good a deal” for that debtor’s

owners. LaSalle, 526 U.S. at 444. In its initial form, the

absolute priority rule required that “creditors . . . be paid before

the stockholders could retain [equity interests] for any purpose

whatever.” Id. (quoting N. Pac. Ry. Co. v. Boyd, 228 U.S. 482,

508 (1913)) (emphasis added).

The absolute priority rule was later codified as part of the

“fair and equitable” requirement of 11 U.S.C. § 1129(b). Under

the statute, a plan is fair and equitable with respect to an

impaired, dissenting class of unsecured claims if (1) it pays the

class’s claims in full, or if (2) it does not allow holders of any

junior claims or interests to receive or retain any property under

the plan “on account of” such claims or interests. 11 U.S.C. §

1129(b)(2)(B)(i)-(ii); LaSalle, 526 U.S. at 441-42.

At the heart of this appeal is the Plan provision that

distributes warrants to AWI’s equity interest holders (Class 12)

through Class 7 in the event that Class 6 rejects the Plan. 

Appellant AWI argues that this provision does not violate the

absolute priority rule because (1) legislative history and

historical context indicate that the rule does not prohibit the

transfer of warrants to the equity interest holders under the

current circumstances; (2) case law establishes that Class 7 can

transfer part of its distribution under the Plan to another

claimant; and (3) the Plan did not give the warrants to Class 12

“on account of” its equity interests. We address each of these

contentions in turn.

a. Interpreting the Absolute Priority Rule

First, AWI suggests that this Court should apply a flexible

interpretation of the absolute priority rule based on its legislative

history and historical context. Because the absolute priority rule

is now codified as part of the Bankruptcy Code, we will interpret

it using standard principles of statutory construction. We begin

by looking at the plain language of the statute. See United States

v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989). If the
10

meaning is plain, we will make no further inquiry unless the

literal application of the statute will end in a result that conflicts

with Congress’s intentions. Id. at 242-43. In such a case, the

intentions of Congress will control. Id. 

AWI contends that application of the absolute priority

rule would be contrary to Congress’s intentions because the rule

was designed to prevent the “‘squeezing out’ [of] intermediate

unsecured creditors.” See In re Wabash Valley Power Ass’n, 72

F.3d 1305, 1314 (7th Cir. 1995) (citing N. Pac. Ry. Co., 228

U.S. 482) (emphasis added). AWI supports its claim with floor

statements by Representative Don Edwards and Senator Dennis

DeConcini, key legislators of the Bankruptcy Code. See Begier

v. I.R.S., 496 U.S. 53, 64 n.5 (1990) (considering these remarks

as “persuasive evidence of congressional intent”). These

statements indicate that “a senior class will not be able to give up

value to a junior class over the dissent of an intervening class

unless the intervening class receives the full amount, as opposed

to value, of its claims or interests.” 124 Cong. Rec. 32,408 &

34,007 (1978) (remarks of Rep. Edwards on Sept. 28, 1978 and

remarks of Sen. DeConcini on Oct. 5, 1978, respectively)

(emphasis added). AWI argues that this language demonstrates

that the absolute priority rule was not meant to apply to the

situation before us because Class 6 is not an intervening (or

intermediate) class, and is not being squeezed out by Class 7’s

transfer of warrants to Class 12 under the Plan.

The absolute priority rule, as codified, ensures that “the

holder of any claim or interest that is junior to the claims of [an

impaired dissenting] class will not receive or retain under the

plan on account of such junior claim or interest any property.” 

11 U.S.C. § 1129(b)(2)(B)(ii). The plain language of the statute

makes it clear that a plan cannot give property to junior

claimants over the objection of a more senior class that is

impaired, but does not indicate that the objecting class must be

an intervening class.

We find that the plain meaning of the statute does not

conflict with Congress’s intent. The legislative history shows

that section 1129(b) was at least designed to address “give-up”
11

situations where a senior class gave property to a class junior to

the dissenting class. Other statements in the legislative history

of section 1129(b), however, appear to apply the statute more

broadly. For example, the House Report for H.R. 8200, the bill

that was eventually enacted, states that section 1129(b) “codifies

the absolute priority rule from the dissenting class on down.” 

H.R. Rep. No. 95-595, at 413 (1978), reprinted in 1978

U.S.C.C.A.N. 5963, 6369. Despite amendments to the original

version of H.R. 8200, the House Report has been considered an

authoritative source of legislative history for section 1129(b). 

See 124 Cong. Rec. 32,408 & 34,007 (1978) (remarks of Rep.

Edwards on Sept. 28, 1978 and remarks of Sen. DeConcini on

Oct. 5, 1978, respectively) (“[T]he House report remains an

accurate description of confirmation of section 1129(b).”). In

addition, the floor statements of Representative Edwards and

Senator DeConcini do not rule out the possibility that an

impaired class may object to a co-equal class’s distribution of

property to a junior class. See id. (“As long as senior creditors

have not been paid more than in full, and classes of equal claims

are being treated so that the dissenting class of impaired

unsecured claims is not being discriminated against unfairly, the

plan may be confirmed if the impaired class of unsecured claims

receives less than 100 cents on the dollar (or nothing at all) as

long as no class junior to the dissenting class receives anything

at all.”). As a result, we will apply the plain meaning of the

statute. Under this reading, the statute would be violated

because the Plan would give property to Class 12, which has

claims junior to those of Class 6. This finding does not end our

consideration of this appeal, as AWI makes further arguments

regarding exceptions to the absolute priority rule.

b. Transfers of Bankruptcy Distributions 

Between Creditors and Equity Interest Holders

Second, AWI contends that Class 7 may distribute the

property it will receive under the Plan to Class 12 without

violating the absolute priority rule. AWI derives this result from

application of the so-called “MCorp-Genesis” rule, which is

based on a line of cases where creditors were allowed to

distribute their proceeds from the bankruptcy estate to other
12

claimants without offending section 1129(b). See SPM, 984

F.2d 1305 (permitting senior secured creditors to share

bankruptcy proceeds with junior unsecured creditors while

skipping over priority tax creditors in a Chapter 7 liquidation);

Genesis Health, 266 B.R. at 602, 617-18 (allowing senior

secured lenders to (1) give up a portion of their proceeds under

the reorganization plan to holders of unsecured and subordinated

claims, without including holders of punitive damages claims in

the arrangement, and (2) allocate part of their value under the

plan to the debtor’s officers and directors as an employment

incentive package); In re MCorp Fin., Inc., 160 B.R. 941, 948

(S.D. Tex. 1993) (permitting senior unsecured bondholders to

allocate part of their claim to fund a settlement with the FDIC

over the objection of the junior subordinated bondholders).

The District Court rejected this argument, and found that

the MCorp-Genesis line of cases was distinguishable. It began

its analysis with SPM, a First Circuit opinion cited by both the

MCorp and Genesis Health courts to support the legality of the

distribution schemes presented to them. SPM, 984 F.2d 1305. 

The District Court differentiated SPM from the current case in

three ways: (1) SPM involved a distribution under Chapter 7,

which did not trigger 11 U.S.C. § 1129(b)(2)(B)(ii); (2) the

senior creditor had a perfected security interest, meaning that the

property was not subject to distribution under the Bankruptcy

Code’s priority scheme; and (3) the distribution was a “carve

out,” a situation where a party whose claim is secured by assets

in the bankruptcy estate allows a portion of its lien proceeds to

be paid to others. Armstrong, 320 B.R. at 539; see generally

Richard B. Levin, Almost All You Ever Wanted to Know About

Carve Out, 76 Am. Bankr. L.J. 445 (2002). Similarly, Genesis

Health involved property subject to the senior creditors’ liens

that was “carved out” for the junior claimants. Armstrong, 320

B.R. at 539. In addition, the District Court found MCorp

distinguishable on its facts because the senior unsecured creditor

transferred funds to the FDIC to settle pre-petition litigation. Id. 

We adopt the District Court’s reading of these cases, and

agree that they do not stand for the unconditional proposition

that creditors are generally free to do whatever they wish with
13

the bankruptcy proceeds they receive. Creditors must also be

guided by the statutory prohibitions of the absolute priority rule,

as codified in 11 U.S.C. § 1129(b)(2)(B). Under the plan at

issue here, an unsecured creditor class would receive and

automatically transfer warrants to the holder of equity interests

in the event that its co-equal class rejects the reorganization plan. 

We conclude that the absolute priority rule applies and is

violated by this distribution scheme.

In addition, the structure of the Plan makes plain that the

transfer between Class 7 and Class 12 was devised to ensure that

Class 12 received the warrants, with or without Class 6’s

consent. The distribution of the warrants was only made to

Class 7 if Class 6 rejected the Plan. In turn, Class 7

automatically waived the warrants in favor of Class 12, without

any means for dissenting members of Class 7 to protest. 

Allowing this particular type of transfer would encourage parties

to impermissibly sidestep the carefully crafted strictures of the

Bankruptcy Code, and would undermine Congress’s intention to

give unsecured creditors bargaining power in this context. See

H.R. Rep. No. 95-595, at 416, reprinted in 1978 U.S.C.C.A.N.

5963, 6372 (“[Section 1129(b)(2)(B)(ii)] gives intermediate

creditors a great deal of leverage in negotiating with senior or

secured creditors who wish to have a plan that gives value to

equity.”). 

c. On Account of

Third, AWI argues that the warrants would not be

distributed to Class 12 on account of their equity interests, but

rather would be given as consideration for settlement of their

intercompany claims. UCC disputes the existence of any such

settlement, alleging that such an arrangement should have been

brought to the attention of the Bankruptcy Court. In response,

AWI indicates that the settlement was detailed in the Plan’s

Disclosure Statement, which the Bankruptcy Court approved on

June 2, 2003. (Appellee’s Br. 4.) The relevant portion of the

Disclosure Statement reads as follows: 

In the ordinary course of business, such intercompany claims
14

have been recorded on the books and records of Holdings,

AWWD and AWI, and, assuming that all such intercompany

claims are valid, the net intercompany claim so recorded is in

favor of Holdings in the approximate amount of $12 million. In

consideration of, among other things, AWI’s agreement under

the Plan to fund the reasonable fees and expenses associated

with the Holdings Plan of Liquidation, the treatment of

Holdings, AWWD, and their respective officers and directors as

PI Protected Parties under the Asbestos PI Permanent

Channeling Injunction, the simultaneous release by AWI of any

claims (known and unknown) AWI has against Holdings and

AWWD, and the issuance of the New Warrants to AWWD, and

to avoid potentially protracted and complicated proceedings to

determine the exact amounts, nature and status under the Plan of

all such claims and to facilitate the expeditious consummation

of the Plan and the completion of Holdings’ winding up,

Holdings and AWWD will, effective upon and subject to the

occurrence of the Effective Date, release all such intercompany

claims (known and unknown) against AWI or any of AWI’s

subsidiaries[.] 

(App. at 1138) (emphasis added). 

As stated earlier, section 1129(b)(2)(B)(ii) provides that

holders of junior claims or interests “will not receive or retain

[any property] under the plan on account of such junior claim or

interest.” 11 U.S.C. § 1129(b)(2)(B)(ii) (emphasis added). In

LaSalle, the Supreme Court interpreted “on account of” to mean

“because of,” or a “causal relationship between holding the prior

claim or interest and receiving and retaining property.” 526 U.S.

at 450-51. Although the Supreme Court did not decide what

degree of causation would be necessary, its discussion on that

topic revealed that the absolute priority rule, as codified, was not

in fact absolute. First, it indicated that the “on account of”

language would be redundant if section 1129(b) was read as a

categorical prohibition against transfers to prior equity. Id. at

452-53. Second, it noted that a “less absolute prohibition”

stemming from the “on account of language” would “reconcile

the two recognized policies underlying Chapter 11, of preserving

going concerns and maximizing property available to satisfy
 Because AWI does not assert any argument regarding a 3

new value exception to the absolute priority rule, we do not address

that issue.

15

creditors.” Id. at 453-54.

In keeping with these observations, we noted in PWS that

the “on account of” language “confirms that there are some cases

in which property can transfer to junior interests not ‘on account

of’ those interests but for other reasons.” 228 F.3d at 238

(discussing LaSalle, 526 U.S. at 451-52). In PWS, the debtors

released their legal claims against various parties to facilitate

their reorganization, including an avoidance claim that would

have allowed them to avoid certain aspects of a previous

recapitalization. Id. at 232-35. The appellants in PWS argued

that releasing the avoidance claim resulted in a prohibited

transfer of value to equity interest holders who had participated

in the recapitalization. We held that “without direct evidence of

causation, releasing potential claims against junior equity does

not violate the absolute priority rule in the particular

circumstance [where] the claims are of only marginal viability

and could be costly for the reorganized entity to pursue.” Id. at

242. 

AWI would analogize AWWD and Holdings’s release of

intercompany claims in exchange for warrants to the release of

claims in PWS. We disagree. According to the Disclosure 3

Statement, the warrants have an estimated value of $35 to $40

million. (App. at 1157.) In contrast, the intercompany claims

were valued at approximately $12 million. This settlement

would amount to a substantial benefit for Class 12, especially as

the warrants were only part of the consideration for which the

intercompany claims were released. Among other things, the

intercompany claims were also ostensibly released in exchange

for the simultaneous release of any claims by AWI against

AWWD or Holdings and facilitation of the reorganization

process. (App. at 1138.) AWI gives no adequate explanation for

this difference in value, leading us to conclude that AWWD or

Holdings (Class 12) would receive the warrants on account of
16

their status as equity interest holders. See LaSalle, 526 U.S. at

456.

D. Equity

1. Applicability of Penn Central

Appellant AWI further contends that this Court should

apply equitable considerations to allow an exception to the

absolute priority rule. It finds such an exception in the case of In

re Penn Central Transportation Co., 596 F.2d 1127, 1142 (3d Cir.

1979), and points to language in Norwest Bank Worthington v.

Ahlers, 485 U.S. 197 (1988), that indicates that exceptions to the

absolute priority rule may indeed exist. See id. at 206 (stating

that the enactment of section 1129(b) “bar[s] any expansion of

any exception to the absolute priority rule beyond that

recognized” in pre-1978 Bankruptcy Code cases).

Penn Central involved a “monumental [reorganization]

plan designed to resolve what [at the time was] the most complex

set of interrelated and conflicting claims ever addressed under . .

. the Bankruptcy Act.” 596 F.2d at 1129. Penn Central

Transportation Company, which was formed in 1968 by the

merger of the Pennsylvania Railroad Company and the New

York Central Railroad Company, filed a petition for

reorganization under the Bankruptcy Code in 1970. Id. at 1133. 

Thereafter, to prevent a rail transportation crisis and to address

the particular difficulties of that reorganization, Congress passed

the Regional Rail Reorganization Act of 1973, which directed

that major portions of Penn Central’s rail assets be conveyed to

Conrail, a new company formed under the Act to continue

operation of some of the routes served by Penn Central. Id. at

1134. In light of these exceptional circumstances, we found that

“[o]ur construction and application of precedents such as the

absolute priority rule must necessarily take account of the unique

facts of this Plan and proceed in an environment pervaded more

by relativity than by absolutes.” Id. at 1142. 

AWI argues that the facts of the case before us are

similarly unique, and also warrant a more equitable and flexible
17

application of the absolute priority rule. (Appellant’s Br. 36.) 

Among the facts that AWI finds unique are: (1) the involvement

of UCC in the negotiation and drafting of the Plan; (2) UCC’s

endorsement of the Plan, as indicated by its signature on the

cover letter accompanying the disclosure statement; (3) the lack

of a negative effect on Class 6’s distribution from the granting of

warrants to Class 7; (4) the relatively small value of the warrants

compared to the entire bankruptcy estate; (5) the acceptance of

the Plan by the majority in number of UCC’s constituents; and

(6) the delay caused by UCC’s objection, which was primarily

lodged in anticipation of the passage of the FAIR Act. We do

not find these facts to be as compelling as those that led us to

apply a more flexible absolute priority rule in the past. AWI’s

bankruptcy due to asbestos liabilities simply does not involve the

kind of exigent circumstances present in Penn Central, where

Congress intervened in the reorganization process to avoid a rail

transportation crisis of national import.

In addition, our application of equitable considerations in

Penn Central did not mean that the absolute priority rule was

abandoned. Rather, we held firm to the idea that the rule still

“required . . . that provision be made for satisfaction of senior

claims prior to satisfaction of junior claims.” Id. at 1153. 

2. Judicial Estoppel

AWI also argues that UCC waived its right to object to the

Plan because of its conduct during the reorganization process,

specifically referring to UCC’s role in shaping the Plan, its initial

endorsement of the Plan, and then its subsequent objections to

the Plan based on the possible passage of the FAIR Act. The

Bankruptcy Court agreed with this argument and found that UCC

waived its right to object to the Plan because its behavior was

“too sharp even for a bankruptcy case.” (App. at 1503-04.) The

District Court took a different view, noting that 

[e]ven if the Unsecured Creditors changed their minds based on

political calculus that the FAIR Act would be passed, this was

their prerogative. In the absence of bad faith, which was not

alleged here, and particularly in light of the changed
18

circumstances, until a party consents and the consent is final,

that party may walk away from the table for a good or bad

reason or no reason at all.

Armstrong, 320 B.R. at 534 n.24 (citing In re Huckabee Auto

Co., 33 B.R. 141, 149 (Bankr. M.D. Ga. 1981)).

We agree with the District Court, but recast the issue of

waiver as an issue of judicial estoppel. Judicial estoppel can be

applied when a party asserts a certain position in a legal

proceeding and prevails, only to assert a contrary position later

on because of changed interests. See New Hampshire v. Maine,

532 U.S. 742, 749-51 (2001). Its purpose is to protect the

judicial process by preventing parties from “deliberately

changing positions according to the exigencies of the moment.” 

Id. at 750 (quoting United States v. McCaskey, 9 F.3d 368, 378

(5th Cir. 1993)). In deciding whether to apply judicial estoppel,

a court considers various factors, including whether the party’s

position is clearly inconsistent with its earlier position and

whether the party changing position would gain an unfair

advantage over the opposing party. Id. at 750-51.

UCC clearly changed its position when it lodged a

conditional objection to the Plan after it had endorsed the

disclosure statement and recommended acceptance of the Plan to

its constituents. The confirmation process, however, entitled

UCC to lodge an objection against the Plan before the objection

deadline. See 11 U.S.C. § 1129(a)(8). We recognize that an

objection based on speculation that legislation will be passed can

be cause for concern. See EEOC v. Bethlehem Steel Corp., 727

F. Supp. 952, 955 & n.1 (E.D. Pa. 1990) (commenting on the

problems that stem from delaying judgment because of pending

legislation). UCC’s objection, however, was not based solely on

the impact of the pending FAIR Act, but was also based on a

violation of section 1129(b). 

Furthermore, UCC’s change in position could not be

entirely prejudicial to AWI because the Plan and its disclosure

statement were conditioned on the approval of all impaired

classes. In fact, Class 6, one of UCC’s constituents, did not
19

accept the Plan. While the voting outcome of Class 6 raises the

troubling possibility that a small number of hold-outs owning a

large percentage of claims were causing costly delay in the

reorganization process, this is contemplated by the Bankruptcy

Code, which requires at least a majority vote for the number of

claims and a supermajority vote for the amount of claims for a

class to accept a plan. See 11 U.S.C. § 1126(c). In consideration

of these factors, we will not apply judicial estoppel to silence

UCC’s objection merely because it was an active participant in

the reorganization process.

III.

CONCLUSION

We recognize that the longer that the reorganization

process takes, the less likely that the purposes of Chapter 11

(preserving the business as a going concern and maximizing the

amount that can be paid to creditors) will be fulfilled. 

Nevertheless, we conclude that the absolute priority rule applies

in this case. We will accordingly affirm the District Court’s

decision to deny confirmation of AWI’s Plan.