Opinion ID: 1039768
Heading Depth: 2
Heading Rank: 1

Heading: The Channeling Injunction

Text: Montana and the Crown attempt to escape the scope of the channeling injunction by invoking two different provisions of the Bankruptcy Code. First, they say that § 524(g) does not encompass their claims against Grace. They argue that they lack “claims” or “demands” as those terms are used in § 524(g), and that that provision does not permit the channeling of the particular kind of claims they do have, namely claims for indemnification or contribution. Second, they contend that § 1122 should prevent their claims from being placed in the same class as direct personal injury claims. Both arguments do not persuade us, as § 524(g) broadly encompasses all asbestos-related actions against the 15 The Crown raises two independent arguments in this regard, contending that the Plan grants preferential treatment to U.S. claims and impermissibly prevents indirect claimants from qualifying for “extraordinary claim” status. We address those claims in Section II.B, infra. 18 debtor, including claims for indemnification and contribution, and because such claims are sufficiently similar to direct personal injury claims that they can be classified together under § 1122.
As we have explained on previous occasions, § 524(g) “provides a special form of supplemental injunctive relief for an insolvent debtor facing the unique problems and complexities associated with asbestos liability.” In re Combustion Eng’g, 391 F.3d 190, 234 (3d Cir. 2004); see also In re Federal-Mogul Global, Inc., 684 F.3d 355, 362 (3d Cir. 2012) (describing § 524(g) as a “quasi-administrative process” for resolving a company’s asbestos liabilities). Modeled after the “creative solution” to asbestos liability developed during the bankruptcy of the Johns-Manville Corporation, Federal-Mogul, 684 F.3d at 359 (internal quotation marks omitted), § 524(g) permits all asbestosrelated claims against the debtor to be channeled to a trust, and thus it “relieves the debtor of the uncertainty of future asbestos liabilities,” Combustion Eng’g, 391 F.3d at 234. See also H.R. Rep. No. 103-835, at 40 (1994) (explaining that § 524(g) “is modeled on the trust-injunction in the JohnsManville case”).16 By removing that uncertainty and 16 The Johns-Manville Corporation was formerly the world’s largest miner of asbestos, and it filed for bankruptcy in 1982. Kane v. Johns-Manville Corp, 843 F.2d 636, 639 (2d Cir. 1988). Its plan of reorganization pioneered the use of a trust and a channeling injunction to equitably resolve the company’s asbestos liabilities. Id. at 690; see also In re Federal-Mogul Global Inc., 684 F.3d 355, 359 (3d Cir. 2012) 19 allowing the debtor to emerge from bankruptcy free of all asbestos liability, § 524(g) facilitates the company’s ongoing viability, which in turn provides the trust “with an ‘evergreen’ source of funding to pay future claims.” Combustion Eng’g, 391 F.3d at 234. In order to qualify for that relief, however, a debtor must satisfy certain prerequisites designed to ensure that future asbestos claimants will be treated fairly. FederalMogul, 684 F.3d at 359 n.9; see also 11 U.S.C. § 524(g)(2). The statute thus furthers two goals: ensuring the equitable resolution of present and future asbestos claims, and “enabling corporations saddled with asbestos liability to obtain the ‘fresh start’ promised by bankruptcy.” FederalMogul, 684 F.3d at 359. At issue in this case is the proper scope of a § 524(g) channeling injunction. Montana and the Crown argue that, under § 524(g), their legal efforts to obtain indemnification and contribution cannot be channeled to a trust. They say the statute “only enjoins ‘claims’ or ‘demands,’” and that their particular claims – what they like to call “requests” – do not fall within the definition of either term. (Montana Opening (“The primary bankruptcy innovation for addressing mass tort liability has been the post-confirmation trust, which first appeared in the bankruptcy proceedings of the JohnsManville Corporation … .”). The Johns-Manville plan significantly underestimated the number of claims that would be filed, however, and the trust rapidly became insolvent. In re Joint E. & S. Dist. Asbestos Litig., 78 F.3d 764, 769 (2d Cir. 1996). As a result, subsequent litigation produced a settlement agreement that imposed new trust distribution procedures intended to preserve value for future claimants. Id. at 770-71. 20 Br. at 26.) They further indicate that, even if they do hold “claims” or “demands” within the meaning of § 524(g), those claims are not the sort that can be channeled to a trust. They assert that § 524(g) permits a channeling injunction to extend only to personal injury, wrongful death, and property damage actions, not to their claims for indemnification and contribution, which are “of a different nature” because they arise from Montana’s and the Crown’s alleged failures to warn their citizens of the dangers of Grace’s activities.17 (Montana Opening Br. at 25.) Grace responds that both arguments misunderstand the text, history, and purpose of § 524(g), which is designed to permit all asbestos-related actions against the debtor – both direct and indirect – to be channeled to a trust, including actions for contribution and indemnification. To determine whether the scope of § 524(g) encompasses “requests” like those that Montana and the Crown plan to make, we look first to the text of that provision. Section 524(g) allows a court “to enjoin entities from taking legal action for the purpose of directly or indirectly collecting, recovering, or receiving payment or recovery with respect to any claim or demand that, under a plan of reorganization, is to be paid in whole or in part by a trust described in [§ 524(g)(2)(B)(i)] … .” 11 U.S.C. § 524(g)(1)(B). Put more simply, “any claim or demand” that 17 In their briefing, Montana and the Crown make those arguments in reverse order. We address them in the order here because it seems more logical to consider whether Montana and the Crown have claims at all before determining if the substance of those claims is proper. 21 will be paid by a § 524(g) trust cannot, because of the § 524(g) injunction, be brought against the debtor. That brings us to the question of what constitutes a “claim or demand.” The Bankruptcy Code defines a “claim” using the “broadest available definition,” FCC v. NextWave Pers. Commc’ns Inc., 537 U.S. 293, 302 (2003) (internal quotation marks omitted), which provides that a “claim” is a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, legal, equitable, secured, or unsecured,” 11 U.S.C. § 101(5)(A). Section 524(g) takes that definition and expands it even further, including within the sweep of the channeling injunction not only “claims” but also “demands.” Id. § 524(g)(1)(B). A “demand” is then defined as a “demand for payment, present or future” that “was not a claim during the proceedings leading to the confirmation of a plan of reorganization” but “arises out of the same or similar conduct or events that gave rise to the claims addressed by the injunction.” Id. § 524(g)(5). A § 524(g) channeling injunction can therefore include any right to or demand for payment that arises from the debtor’s underlying asbestos liabilities, regardless of when that right or demand arises, whether it was raised during the bankruptcy proceeding or is contingent on a future event. Despite the breadth of those definitions, Montana and the Crown contend that their particular “requests” for contribution and indemnification somehow fall outside of the channeling injunction’s scope. They say that their “requests” cannot be considered “claims” because claims for contribution and indemnification do not technically arise until a judgment or settlement has been paid, and at the time of 22 Grace’s bankruptcy petition no such judgments had been entered against either Montana or the Crown. Their “requests” are also not “demands,” they explain, because those requests are not personal injury, wrongful death, or property damage claims, and thus they did not “aris[e] out of the same or similar conduct” as the claims subject to the injunction. See id. § 524(g)(5)(B). While those arguments reflect some creativity, they are ultimately unpersuasive. Montana’s and the Crown’s assertion that a “claim” arises when it fully accrues is based on the now-rejected reasoning of Avellino & Bienes v. M. Frenville Co. (In re Frenville), 744 F.2d 332, 335-36 (3d Cir. 1984), which we explicitly overruled in In re Grossman’s, Inc., 607 F.3d 114 (3d Cir. 2010) (en banc). See Grossman’s, 607 F.3d at 121 (holding that the “accrual test” previously established in Frenville “should be and now is overruled”).18 The law in this Circuit now is that “a claim arises when an 18 In re Frenville held that “a ‘claim,’ as that term is defined by the Bankruptcy Code, arises when the underlying state law cause of action accrues.” Grossman’s, 607 F.3d at 118 (citing In re Frenville, 744 F.2d at 337). That approach to determining when a claim arises was uniformly criticized as incompatible with the broad definition of “claim” in the Bankruptcy Code, id. at 120, and in Grossman’s we rejected it in favor of the rule 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,” id. at 125. Two years later, in Wright v. Owens Corning, we expanded that holding to include conduct that occurs post-petition but pre-confirmation. 679 F.3d 101, 106-07 (3d Cir. 2012). 23 individual is exposed pre-confirmation to a product or other conduct giving rise to an injury that underlies a ‘right to payment’ under the Code.” Wright v. Owens Corning, 679 F.3d 101, 107 (3d Cir. 2012) (emphasis omitted). A “claim” can therefore exist “before a right to payment exists under state law.” Grossman’s, 607 F.3d at 121. Regardless of when Montana and the Crown may have had judgments entered against them,19 the material fact is that Grace’s asbestos-related activities underlie any rights to indemnification and contribution that they can assert. Grace’s relevant activities all occurred long before its bankruptcy filing, and thus, to the extent that Montana and the Crown have “claims,” those claims arose before confirmation of the Joint Plan. For largely the same reason, Montana’s and the Crown’s argument regarding “demands” also fails. Although they claim that requests for contribution and indemnification do not “aris[e] from” the same conduct as personal injury or property damage claims, that argument ignores the underlying basis for such requests: Grace’s alleged asbestos liability. Any action that Montana and the Crown say they have against Grace arises from the same events as do all the other claims and demands covered by the channeling injunction, namely Grace’s production of asbestos-containing materials. Therefore, if Montana and the Crown have requests for 19 Montana says that, “with the exception of one complaint, [it] was not named as a defendant in any … State Court Actions until after the Petition Date.” (Montana Opening Br. at 10.) It appears, however, to have settled all of the state court claims against it prior to confirmation of the Joint Plan. 24 payment that were not “claims” during the bankruptcy proceeding, those requests would meet the definition of “demand” in § 524(g). See 11 U.S.C. § 524(g)(5). More fundamentally, the arguments made by Montana and the Crown are based on a misunderstanding of the purpose of § 524(g). By arguing that they have “requests” for payment from Grace that cannot be called “claims” or “demands,” Montana and the Crown suggest that those terms constitute discreet categories, and that some asbestos-related actions fall into neither category and thus cannot be subject to § 524(g). The text and history of § 524(g) tell us just the opposite. As for the text, § 524(g)’s definition of “demand” overlaps to some degree with the Bankruptcy Code’s definition of “claim” – a “demand” could be a request for payment that was not raised during the bankruptcy proceeding, which also fits the Code’s definition of a “claim.” Furthermore, by taking the already broad definition of “claim” and expanding it to include all other “demands for payment” that arise from the same conduct, § 524(g) evinces an intent to include all potential asbestos-related liability of a debtor, regardless of when such liability arose. See 11 U.S.C. § 524(g)(1)(B), (5). That intent is also reflected in the history and purpose of the provision. Congress enacted § 524(g) in part because of the long latency period of many asbestos-related diseases, which, in cases like this, typically creates a large pool of future claimants whose disease has not yet manifested. See H.R. Rep. No. 103-835, at 40 (1994) (noting that “[a]sbestosrelated disease has a long latency period” of “up to 30 years or more”). Congress was concerned about those claimants for two reasons – they lack the ability to protect their own 25 interests during the bankruptcy proceeding, and they create tremendous uncertainty for companies in Grace’s position, which can hinder a company’s financial rebound and limit available recovery for all asbestos victims. See id. (explaining that future claimants “do not have their own voice” and that “lingering uncertainty” can “undermine[] the ‘fresh start’ objectives of bankruptcy and the goals of the trust arrangement”); see also In re Flintkote Co., 486 B.R. 99, 124 (Bankr. D. Del. 2012) (“In part because of long latency periods of certain asbestos-related illnesses, Congress enacted § 524(g) to protect the due process rights of the exposed yet unimpaired.”). Section 524(g) addresses those concerns by imposing requirements to protect the rights of future claimants, and then, if those requirements are met, channeling all present and future asbestos-related liability to a trust funded by the debtor. Congress wanted to cover the whole set, and it did. The distinction, to the extent there is one, between a “claim” and a “demand” is therefore unimportant to the scope of the channeling injunction; the relevant question is instead whether an action seeks recovery that stems from the debtor’s asbestos-related liabilities. If it does, then it falls somewhere within the broad category of “any claim or demand,” and can be subject to a channeling injunction. Montana and the Crown dispute the breadth of that interpretation, arguing that, for due process reasons, their requests cannot be channeled to a trust. They cite our recent decision in Wright v. Owens Corning, see supra note 18, which concluded that due process prevents some claims from being discharged by reorganization plans that were proposed and confirmed during the Frenville era. 679 F.3d at 107-09. 26 Because the law during those bankruptcies was that claims arise when they accrue, some potential claimants might have received notice of a bankruptcy but failed to file a claim because they understood that their claims had not yet “arisen.” Id. at 108. Therefore, although claims against a debtor are generally discharged by plan confirmation, such claimants lacked adequate notice for their claims to have been discharged without violating due process. But Owens Corning is inapposite, because the bankruptcy plan at issue in that case did not involve a § 524(g) trust and channeling injunction. Although Montana’s and the Crown’s claims against Grace will be discharged, § 524(g) sends those claims, along with all other asbestos-related claims and demands, to a trust. Montana and the Crown will therefore have an opportunity to litigate their claims and potentially obtain relief, which means that the due process concern in Owens Corning – that claimants would lose any opportunity for relief without first receiving proper notice – is not implicated. Rather, the potential due process issue associated with channeling claims to a trust is the fairness of forcing future claimants, many of whom might have had no notice at all of the bankruptcy, to bring their claims against a trust rather than against the debtor directly. That concern is addressed by the proper application of § 524(g). As we explained in Combustion Engineering, and again in Grossman’s, § 524(g) includes a number of requirements that “are specifically tailored to protect the due process rights of future claimants,” such as the “fair and equitable” provision and the mandatory seventy-five percent approval requirement. Combustion Eng’g, 391 F.3d at 234 n.45 (citing, inter alia, 11 U.S.C. § 524(g)(4)(B)(ii), (g)(2)(B)(ii)(IV)(bb)); see also Grossman’s, 607 F.3d at 127 27 (“By enacting § 524(g), Congress took account of the due process implications of discharging future claims of individuals whose injuries were not manifest at the time of the bankruptcy petition.”). Therefore, as long as a court correctly determines that § 524(g)’s requirements are satisfied, present and future claims can be channeled to a § 524(g) trust without violating due process.20 Montana’s and the Crown’s next argument is that their claims for indemnification and contribution are substantively different from Grace’s other asbestos-related liabilities, and thus cannot be channeled to the trust for that reason. They base that contention on § 524(g)(2)(B)(i), which explains that the purpose of a trust “is to assume the liabilities of a debtor 20 Montana and the Crown also contend that, under Owens Corning, they cannot be considered to have “claims.” They base that contention on Owens Corning’s discussion of the lingering effect of our overruled Frenville decision. See Owens Corning, 679 F.3d at 109 (explaining that Frenville must continue to define when certain claims can be discharged, for the due process reasons discussed above). But that discussion does not help their case, because in Owens Corning we did not hold that Frenville continues to define when a claim arises – we held only that “[t]he shadow of Frenville” prevents some claims from being discharged. Id. Indeed, the opinion explicitly separates those two issues, concluding that an individual did hold a claim during the bankruptcy, but that the claim could not be discharged without violating due process. Id. at 107. Montana’s and the Crown’s contention that they do not even hold claims is therefore flatly contradicted by both Grossman’s and Owens Corning. 28 which … has been named as a defendant in personal injury, wrongful death, or property-damage actions seeking recovery for damages allegedly caused by the presence of, or exposure to, asbestos or asbestos-containing products.” 11 U.S.C. § 524(g)(2)(B)(i)(I). Montana and the Crown assert that, because of that language, only asbestos-related personal injury, wrongful death, and property damage actions can be subject to the channeling injunction. The argument fails, however, since § 524(g) expressly states that a court can “enjoin entities from taking legal action for the purpose of directly or indirectly collecting” on a claim or demand that is to be paid by a trust. Id. § 524(g)(1)(B) (emphasis added). Although they are each being sued under a failure-to-warn theory of liability, Montana and the Crown concede that they only have claims against Grace because the plaintiffs bringing the failure-to-warn lawsuits were allegedly harmed by Grace’s asbestos-related products and operations. In other words, behind each failure-to-warn suit against Montana and the Crown is a plaintiff with a personal injury, wrongful death, or property damage claim against Grace. More precisely, there must be such a plaintiff in order for Montana and the Crown to have a basis for their claims at all. Montana’s and the Crown’s actions against Grace therefore are brought “for the purpose of … indirectly … receiving payment or recovery” for asbestos-related personal injury and property damage claims against the debtor, and thus are subject to the § 524(g) channeling injunction under the plain language of that statute. See 11 U.S.C. § 524(g)(1)(B), (2)(B). That interpretation is consistent with the purpose of § 524(g). As noted above, the statute was modeled on the 29 trust established in the Johns-Manville bankruptcy, which subjected all asbestos-related claims, including “indemnification or contribution liabilities or obligations” of the debtor, to a channeling injunction. (Plan Proponents App. at 602040 (the Manville Corporation Second Amended Restated Plan of Reorganization, at 2).) Inclusion of such liabilities in the injunction is also a matter of practicality, because one of the primary goals of § 524(g) is to allow a debtor to “emerge[] from bankruptcy free and clear” of asbestos liability, and thus enable the debtor to “grow[] the pie available to victims” (provided, of course, that asbestos claimants’ interests are adequately protected). 140 Cong. Rec. S4521-01 (daily ed.) (Apr. 20, 1994) (statement of Sen. Brown). If the reorganized debtor could still be exposed to indirect asbestos claims for indemnification and contribution, lingering uncertainty regarding the scope of that liability would threaten the debtor’s recovery and hinder Congress’s objective of providing “an ‘evergreen’ source of funding to pay future claims.” Combustion Eng’g, 391 F.3d at 234. Finally, the narrow interpretation of § 524(g) advanced by Montana and the Crown is unsupported by any caselaw and would effectively rewrite the provision. Montana and the Crown offer no explanation for § 524(g)’s explicit inclusion of actions that “indirectly” seek recovery on asbestos-related claims. Instead, they simply ignore that language and assert that § 524(g) addresses only direct personal injury, wrongful death, and property damage actions. But we are not free to ignore an express provision of the statute, as it is our “judicial duty to give faithful meaning to the language Congress adopted.” United States v. Bornstein, 423 U.S. 303, 309 (1976). It is a mystery what Congress could have meant by an action that “indirectly” seeks recovery if it did not mean to 30 include an action seeking indemnification or contribution. Little wonder, then, that courts have consistently upheld the channeling of such claims to § 524(g) trusts. See, e.g., In re Armstrong World Indus., Inc., 348 B.R. 136, 168-69 (D. Del. 2006) (“Because Indirect PI Trust Claims … relate to direct Asbestos Personal Injury Claims, they are appropriately channeled to the Asbestos PI Trust and have historically been channeled to trusts established in connection with asbestos related chapter 11 cases.”); In re Pittsburgh Corning Corp., 453 B.R. 570, 582 (Bankr. W.D. Pa. 2011) (concluding that “an entity that may pay a future demand holder and thereby acquire an indirect claim” against the debtor has “interests that are no different from any other Indirect Claimant’s interests,” and the entity’s claims can thus be channeled to a § 524(g) trust); In re Celotex Corp., 204 B.R. 586, 622 (Bankr. M.D. Fla. 1996) (enjoining any claim or demand “asserting or accomplishing any setoff, right of subrogation, indemnity, contribution or recoupment of any kind” against the debtor). We therefore conclude that the Bankruptcy Court and the District Court correctly held that Montana’s and the Crown’s claims for indemnification and contribution are subject to the channeling injunction included in the Joint Plan. Section 524(g) gives courts the express authority to “enjoin entities from taking legal action for the purpose of directly or indirectly … recovering … with respect to any claim or demand that … is to be paid … by a [§ 524(g)] trust,” 11 U.S.C. § 524(g)(1)(B), which is precisely the type of action that Montana and the Crown each wish to take against reorganized Grace. The channeling injunction thus properly encompasses their claims, and their arguments to the contrary were rightly rejected. 31
Having decided that § 524(g) permits a channeling injunction to extend to the claims asserted by Montana and the Crown, we can readily dispense with the argument that those claims were improperly placed in Class 6, which includes all asbestos personal injury claims.21 Under § 1122 of the Bankruptcy Code, “a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.” 11 U.S.C. § 1122(a). To determine whether claims are “substantially similar,” the proper focus is on “the legal character of the claim as it relates to the assets of the debtor.” In re AOV Indus., Inc., 792 F.2d 1140, 1150 (D.C. Cir. 1986) (emphasis omitted); see also In re Tribune Co., 476 B.R. 843, 855 (Bankr. D. Del. 2012) (concluding that the phrase “substantially similar” reflects “the legal attributes of the claims, not who holds them” (internal quotation marks omitted); In re Quigley Co., 377 B.R. 110, 116 (Bankr. S.D.N.Y. 2007) (“Claims are similar if they have substantially similar rights to the debtor’s assets.” (emphasis and internal quotation marks omitted)). The Bankruptcy Court has “broad discretion” to decide if a plan satisfies that requirement, and we will uphold a plan’s classification scheme so long as it is “reasonable” and does not “arbitrarily designate classes.” In the Matter of Jersey City Med. Ctr., 817 F.2d 1055, 1061 (3d Cir. 1987) (internal quotation marks 21 Although some of the Crown’s claims are classified in Class 8 (Canadian ZAI Claims), see supra Section I.B, it only challenges the classification of its indirect personal injury claims in Class 6 (Asbestos Personal Injury Claims). 32 omitted); see also John Hancock Mut. Life Ins. Co. v. Route 37 Bus. Park Assocs., 987 F.2d 154, 158 (3d Cir. 1993) (interpreting § 1122(a) to bar the debtor from “arbitrarily” designating classes or doing so in a manner that “would not serve any legitimate purpose”). Here, Montana and the Crown identify only one difference in “legal effect against the debtor’s assets” between their claims and the other claims in Class 6: their claims “are not subject (or should not be subject) to an injunction imposed pursuant to Bankruptcy Code section 524(g).” (Montana Opening Br. at 43.) That argument fails, because, for all of the reasons already discussed, their claims certainly are subject to the channeling injunction. Moreover, as the District Court observed, “[b]oth direct and indirect claims under the Plan exhibit a similar effect on Grace’s bankruptcy estate – they seek recovery from the trust for actions related to Grace’s asbestos liability.” In re W.R. Grace & Co., 475 B.R. at 110. Although Montana and the Crown must first be held liable for failure to warn before they can bring a claim against the trust, that makes no difference to Grace, as its liability for such a claim depends solely on its asbestos-related activities. The Joint Plan therefore reasonably classified claims for indemnification and contribution together with direct personal injury claims.