Opinion ID: 6496837
Heading Depth: 2
Heading Rank: 3

Heading: The Standard Applicable to FCR

Text: Appointments The briefing and the opinion the Bankruptcy Court issued in this case offer us a wide range of alternatives for the 6 The parties characterize this issue as one of forfeiture, but waiver and forfeiture are not precisely the same. Waiver contemplates that an argument has been “intentional[ly] relinquish[ed] or abandon[ed],” while forfeiture is merely a failure to timely raise an issue. Hamer v. Neighborhood Hous. Servs. of Chi., 138 S. Ct. 13, 17 n.1 (2017) (quoting United States v. Olano, 507 U.S. 725, 733 (1993)). Because it seems in this case that the Insurers intentionally chose to raise other objections before the deadline, and only brought an untimely “supplemental objection” about the Warren Pumps representation after the Bankruptcy Court indicated that topic was of particular interest to it, we agree with the District Court’s characterization of the issue here as waiver. Regardless, this distinction would not change whether we reach this issue. See Barna v. Bd. of Sch. Dirs. of the Panther Valley Sch. Dist., 877 F.3d 136, 147–48 (3d Cir. 2017) (noting that courts reach forfeited issues in “exceptional circumstances,” such as “when the public interest requires”). 17 standard applicable to FRC appointments. The Bankruptcy Court rejected the “disinterestedness” standard adopted by a handful of other courts, and held that “a legal representative under section 524 . . . must be independent of the debtors and other parties-in-interest in the case and must be able to act with undivided loyalty to demand holders.” JA 33. While Imerys and Patton contend that 11 U.S.C. § 101(14)’s definition of “disinterested person” 7 should govern FCR appointments, the Insurers advocate for a “guardian-ad-litem test,” which they acknowledge is what the Bankruptcy Court adopted in substance. But they do not stop there. The Insurers also urge us to apply § 327 of the Bankruptcy Code, which governs a trustee’s employment of certain professionals and requires that any actual conflict of interest held by those professionals is per se disqualifying. 11 U.S.C. § 327(a), (c). Meanwhile, the United States Trustee, as amicus, 8 does not espouse the 7 That definition provides that a “disinterested person”: (A) is not a creditor, an equity security holder, or an insider; (B) is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor; and (C) does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason. 11 U.S.C. § 101(14). 8 The United States Trustee participated in the FCR appointment process before the Bankruptcy Court, objecting to Patton’s appointment on the basis that the Bankruptcy Court should have considered other candidates in addition to the one put forward by the debtor. However, the Trustee did not participate in the objection that spawned this appeal. We 18 application of § 327 but agrees with the Bankruptcy Court and the Insurers that FCRs “should be held to the high standards applicable to fiduciaries who represent parties not before the Court,” such as guardians ad litem. U.S. Tr. Amicus Br. 2. As the Trustee frames it, “the [FCR] must be an effective advocate, free from any appearance of conflict of interest, and must have undivided loyalty to the future claimants he or she represents.” Id. (citing Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928)). For the reasons set forth below, we agree with the Bankruptcy Court and the Trustee that the FCR standard requires more than disinterestedness. An FCR must be able to act in accordance with a duty of independence from the debtor and other parties in interest in the bankruptcy, a duty of undivided loyalty to the future claimants, and an ability to be an effective advocate for the best interests of the future claimants. 9 We reach this conclusion after considering (1) the Bankruptcy Code itself; (2) the parties’ arguments concerning legislative history and legislative acquiescence; (3) the standards governing creditors’ committees, which we see as playing an analogous representational role in the bankruptcy process; and (4) the administrability of the fiduciary standard therefore invited him to submit supplemental amicus briefing regarding the appropriate FCR appointment standard. We are grateful the Trustee accepted that invitation and appreciate his prompt response and excellent quality of the submission. 9 The parties generally refer to this standard as a “guardian ad litem” standard—a characterization also referenced by the court in In re Fairbanks Co., 601 B.R. 831, 841 (Bankr. N.D. Ga. 2019), which the Bankruptcy Court below considered in fashioning its standard. But using that precise label is unnecessary and may have unintended consequences. We do not suggest, for example, that an FCR is a guardian ad litem for the future claimants; true guardians ad litem have the legal authority to bind those they represent, which an FCR does not (it merely participates in the negotiation of a plan and channeling injunction that will govern its constituents’ future claims). What we adopt here is merely a standard akin to those employed for guardians ad litem in other contexts. 19 we adopt in the bankruptcy context. Because many of the district and bankruptcy courts in our Circuit had settled on the disinterestedness standard from which we now depart, 10 we address each of these considerations in some detail.
Code The Code does not explicitly lay out an FCR appointment standard. It specifies only that, in order for a channeling injunction to be enforceable in combination with an asbestos trust, the court must do two things: (1) as part of the bankruptcy proceedings leading to the issuance of that injunction, “appoint[] a legal representative for the purposes of protecting the rights” of the future claimants, and (2) “determine[]” that the terms of the injunction are “fair and equitable with respect to” the future claimants,” in light of the benefits” provided to the trust by the debtor and other relevant parties. 11 U.S.C. § 524(g)(4)(B). We begin with the text of the Code, for “[w]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.” Russello v. United States, 464 U.S. 16, 23 (1983) (quoting United States v. Wong Kim Bo, 472 F.2d 720, 722 (5th Cir. 1972)). Congress specifically chose to deploy § 101(14)’s “disinterested person” standard in eleven other sections of the Code. See 11 U.S.C. §§ 327(a), 328(c), 332(a), 333(a)(2)(A), 701(a)(1), 703(c), 1104(b)(1), (d), 1163, 1183(a), 1202(a), and 1302(a). In § 524(g), however, it did not. Given the structure and context of the Code, that is not surprising. As the Bankruptcy Court noted, the sections in 10 See, e.g., In re Duro Dyne Nat’l Corp., No. 18-15563, 2019 WL 4745879, at  (D.N.J. Sept. 30, 2019); Fed. Ins. Co. v. W.R. Grace, Nos. 04-844, 04-845, 2004 WL 5517843, at  (D. Del. Nov. 22, 2004); In re Maremont Corp., No. 19-10118, ECF No. 126, at 101 (Bankr. D. Del. Mar. 8, 2019)); In re Leslie Controls, Inc., No. 10-12199, ECF No. 146, at 70 (Bankr. D. Del. Aug. 9, 2010). 20 which the Code applies the “disinterested person” standard relate to professionals whose duties run to the entire estate or to the court, requiring that they remain impartial. Section 327, for example, applies to “attorneys, accountants, appraisers, auctioneers, or other professional persons” who are hired by the trustee and approved by the court “to represent or assist the trustee in carrying out the trustee’s duties[,]” but excludes any professional who “represent[s] an interest adverse to the estate.” 11 U.S.C. § 327(a). The FCR, by contrast, is the “legal representative” for just such an adverse interest, having been appointed specifically “for the purpose of protecting the rights of” future asbestos claimants. Id. § 524(g)(4)(B)(i). The absence of language invoking the disinterested person standard in § 524(g) thus counsels against adopting that standard for FCR appointments. But if the language Congress chose to leave out from § 524(g) is significant, so too is that which it opted to include. Section 524(g) directs that the bankruptcy court appoint a “legal representative” for certain interests. Id. § 524(g)(4)(B)(i). “Legal representative” is a term of art, referring to one who owes fiduciary duties to his absent, represented constituents. See, e.g., Kem Mfg. Corp. v. Wilder, 817 F.2d 1517, 1520 (11th Cir. 1987) (construing “legal representative” in Fed. R. Civ. P. 60(b)). And “it is a cardinal rule of statutory construction that, when Congress employs a term of art, it presumably knows and adopts the cluster of ideas that [a]re attached to [it].” See FAA v. Cooper, 566 U.S. 284, 292 (2012) (internal quotations omitted). We presume, therefore, that when Congress employed that term in § 524(g), it anticipated that the FCR would serve as fiduciary to the future claimants. Indeed, legal representatives and their attendant fiduciary duties are central to the bankruptcy process. See, e.g., Listecki v. Official Comm. of Unsecured Creds., 780 F.3d 731, 739 (7th Cir. 2015) (creditors’ committee is a representative for “the larger interests of the unsecured private creditors” and so “it is to them . . . that the committee owes a fiduciary duty); In re AFI Holding, Inc., 530 F.3d 832, 845 (9th Cir. 2008) (a trustee is both “the ‘legal representative’ and ‘fiduciary’ of the estate”); In re Smart World Techs., LLC, 423 F.3d 166, 174–75 & n.12 (2d Cir. 2005) (the debtor-inpossession is a “legal representative of the bankruptcy estate” 21 and thus is a “fiduciary” for the estate, just as the creditors’ committee “owes a fiduciary duty to the class it represents”). The statutory text of § 524(g) therefore suggests that an FCR appointed under that section must be more than merely disinterested, and instead be able to fulfill the heightened duties owed by fiduciaries.
The legislative history and acquiescence arguments on which some courts have relied likewise provide little support for the “disinterested person” standard. See, e.g., In re Duro Dyne Nat’l Corp., No. 18-15563, 2019 WL 4745879, at  (D.N.J. Sept. 30, 2019). Whatever one thinks of using legislative history to interpret statutes, it is of little help here. It appears that Congress drafted § 524(g) to codify the trust-and-channeling injunction mechanisms pioneered in the Johns-Manville and UNR Industries bankruptcies and that it was satisfied with the protection they provided to future claimants. See H.R. REP. NO. 103-835, at 41 (explaining that § 524(g) was crafted “in order to strengthen the Manville and UNR trust/injunction mechanisms and to offer similar certitude to other asbestos trust/injunction mechanisms that 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”). It also appears that the Johns-Manville and UNR courts applied something like the disinterested standard to their choice of proto-FCRs. 11 Neither, however, was explicit about doing so. 11 In Johns-Manville, the court scheduled a hearing to address the role of the representative for future claimants, and noted that while it was “consider[ing] in preliminary fashion several formulations of legal representation: guardian ad litem, amicus curiae and examiner,” it was not precluded from adopting another model altogether. In re Johns-Manville Corp., 36 B.R. 743, 758–59 (Bankr. S.D.N.Y. 1984) (footnote omitted). Following that hearing, the court appointed a representative for future claimants that would exercise the same powers as creditors’ committees, a decision affirmed by 22 And the congressional report accompanying the bill, while gesturing generally to the Johns-Manville and UNR bankruptcies, never specifically called out their FCR appointment processes. See id. at 40–41 (omitting mention of the FCR position in its discussion of the new § 524(g)). As for the legislative acquiescence argument, legislative silence does not often tell us much, and here it tells us nothing. It is true that—against the backdrop of certain courts importing § 101(14)’s “disinterested person” test into § 524(g)— Congress amended § 524 on three occasions 12 without clarifying the test for FCRs. But that silence does not portend acquiescence because there was only a smattering of district and bankruptcy court cases on point, not the “longstanding interpretation” and “almost perfect consistency” in the decisions of the Courts of Appeals, Gulf Oil Corp. v. Copp Paving Co., 419 U.S. 186, 200–01 (1974), or the “virtual the district court. See In re Johns-Manville Corp., 52 B.R. 940, 942–43 (S.D.N.Y. 1985). By opting for this model of representation, in which the representative had no authority to bind future claimants, id. at 943, the court implicitly rejected the previously proposed guardian ad litem model, see 36 B.R. at 758 n.7 (explaining that future claimants “would be bound by the actions of [a guardian ad litem] by virtue of the doctrine of equitable virtual representation” if it relied on that model). The UNR Industries court similarly entrusted its future claimants’ representative with a creditors’ committee’s powers. In re UNR Indus., Inc., 46 B.R. 671, 676 (Bankr. N.D. Ill. 1985). In soliciting nominations for that representative, it called for someone who was a “disinterested party to serve as Legal Representative for putative asbestos disease victims.” Id. Without further explanation, it is difficult to determine if the UNR court deliberately chose disinterestedness as the standard, so much as invoked it as a default. 12 See Small Business Reorganization Act of 2019, Pub. L. No. 116-54, § 4(a)(9)(A)–(C), 133 Stat. 1086, 1087 (2019); Bankruptcy Technical Corrections Act of 2010, Pub. L. No. 111-327, § 2(a)(19), 124 Stat. 3557, 3559 (2010); Bankruptcy Abuse and Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, §§ 202, 203(a), 119 Stat. 43, 194 (2005). 23 unanimity” among the federal courts over decades, Monessen Sw. Ry. Co. v. Morgan, 486 U.S. 330, 338 (1988), as have been present when past courts have assumed legislative acquiescence. In addition, the amendments to § 524 were specific and targeted, and as the Supreme Court has cautioned, “when ‘Congress has not comprehensively revised a statutory scheme but has made only isolated amendments . . . [i]t is impossible to assert with any degree of assurance that congressional failure to act represents affirmative congressional approval of [a court’s] statutory interpretation.’” AMG Cap. Mgmt., LLC v. Fed. Trade Comm’n, 141 S. Ct. 1341, 1351 (2021) (alterations in AMG Cap. Mgmt.) (quoting Alexander v. Sandoval, 532 U.S. 275, 292 (2001)). In short, § 524’s history as concerns the “disinterested person” standard is at best inconclusive.
We find useful guidance, however, in the jurisprudence surrounding an analogous player in the bankruptcy process: the creditors’ committee. Just as a creditors’ committee exists to serve the interests of its constituents, the various creditors, the FCR serves the interests of his constituents, the future claimants. See Listecki v. Official Comm. of Unsecured Creds., 780 F.3d 731, 739 (7th Cir. 2015) (noting that “a [creditors’] committee represents the larger interests of the unsecured private creditors, and it is to them, and not the Trustee, court, or any governmental actor, that the committee owes a fiduciary duty” and collecting cases). And in the creditors’ committee context, even though the Code only specifies that the committee be “adequate[ly] representat[ive]” of the relevant creditors, 11 U.S.C. § 1102(a)(2), courts have long required each committee member not only to be free of conflicts of interest but also to fulfill fiduciary duties to the committee’s constituents, including duties of undivided loyalty and honesty. See generally 7 COLLIER ON BANKRUPTCY ¶ 1103.05[2] (16th ed. 2021) (summarizing the fiduciary duties of committee members); see also, e.g., Woods v. City Nat. Bank & Tr. Co. of Chi., 312 U.S. 262, 268 (1941) (“Protective committees . . . are fiduciaries.”); In re Kensington Int’l, Ltd., 368 F.3d 289, 315 (3d Cir. 2004) (“[I]t is established that a Creditors Committee 24 owes a fiduciary duty to the unsecured creditors as a whole[.]”); In re PWS Holding Corp., 228 F.3d 224, 246 (3d Cir. 2000) (“Section 1103(c) of the Bankruptcy Code, which grants to the Committee broad authority to formulate a plan and perform ‘such other services as are in the interest of those represented[,]’ . . . has been interpreted to imply . . . a fiduciary duty to committee constituents[.]”). For an FCR, who functions, in effect, as a “creditors’ committee” of one, that fiduciary standard is equally appropriate, so in view of its long-standing application in that similar context and the text of the Code itself, that is the standard we adopt today.
We next address the administration of the fiduciary standard in the FCR appointment process. To be clear, that standard does not herald a categorical approach to an FCR’s appointment. The parties to this appeal vigorously dispute whether Patton had a concurrent conflict of interest as a result of the Warren Pumps litigation, the implication being that it would disqualify him per se. 13 But the question of whether a conflict exists is less relevant to an appointment than the nature of the conflict and importance of the conflict to the future claimants’ interests. In a given instance, a purported ethical conflict might have minimal or no 13 The categorical approach advocated by the Insurers would effectively preclude service by the most effective FCRs, for the reality is that the current universe of qualified and experienced FCRs is small, see Lloyd Dixon et al., Asbestos Bankruptcy Trusts: An Overview of Trust Structure and Activity with Detailed Reports on the Largest Trusts, RAND INST. FOR CIV. JUST., at App. B (2010) (listing 26 of the largest active trusts and three of the largest proposed trusts as of 2010, with seven FCRs who serve on two or more of them); JA 735 (noting that Patton currently serves as FCR for six different trusts), and it is entirely to be expected that the law firms that are home to those professionals with experience in asbestosrelated bankruptcies would also be involved in asbestos-related insurance coverage litigation. 25 impact on an FCR’s ability to successfully represent the future claimants’ interests. For instance, the litigation giving rise to the conflict may be long over or subject to effective ethical walls at the FCR’s firm. In such cases, the court, in its discretion, may well determine that the proposed FCR still meets the appointment requirements. 14 The comparison to a creditors’ committee is again instructive, for those members have some degree of inherent “conflict” in that they each have their own interests as individual creditors that are arguably adverse to other creditors. Yet they may still serve on the committee if they can act independently of their self-interest and fulfill their fiduciary duties to the creditors as a whole. See Westmoreland Hum. 14 Along similar lines, the Insurers ask us to decide whether Rule 1.7 of the Model Rules of Professional Conduct applies to the FCR role, which Imerys disputes because the FCR is not, technically, a “lawyer” representing a “client” as contemplated by the terms of the rule. But this debate is largely beside the point. First, even for those practicing lawyers who are undisputedly covered by the ethics rules, the bankruptcy court still has discretion to decide whether or not those rules should result in disqualification under the circumstances: “[A] court’s . . . decision about whether to use that power is discretionary and ‘never is automatic.’” In re Boy Scouts of America, — F.4th —, 2022 WL 1634643, at  (3d Cir. 2022) (quoting United States v. Miller, 624 F.2d 1198, 1201 (3d Cir. 1980)). Thus, “even when an ethical conflict exists (or is assumed to exist), a court may conclude based on the facts before it that disqualification is not an appropriate remedy.” Id. Second, the ethics rules themselves, even if they applied, would not determine whether an FCR candidate meets the appointment standard we set today. If an “actual conflict” under the Rules is merely technical and extremely unlikely to prejudice the interests of the future claimants, the bankruptcy court can still properly make the appointment under § 524 after engaging in the appropriate analysis of the future claimants’ interests and the appointee’s abilities and qualifications. Cf. id. at  (noting in a conflicts analysis under § 327 that the Rules “may be informative in some cases,” but are not determinative of what an “actual conflict” is under the terms of that section). 26 Opportunities, Inc. v. Walsh, 246 F.3d 233, 256 (3d Cir. 2001) (“We have construed § 1103(c) as implying a fiduciary duty on the part of members of a creditor’s committee . . . toward their constituent members. A committee member violates its fiduciary duty by pursuing a course of action that furthers its self-interest to the potential detriment of fellow committee members.” (citing In re PWS Holding Corp., 228 F.3d at 246)). Just so, the mere existence of a technical conflict should not disqualify an FCR if the bankruptcy court concludes he or she will meet the duties of independence and undivided loyalty and will serve as an effective advocate for the future claimants. While we have settled on an FCR appointment standard, we do not today prescribe any particular process the bankruptcy court must follow in making that appointment. Of course, implicit in the FCR appointment standard is one procedural requirement: that whatever process the bankruptcy court follows ensures that the court has the information necessary to assess the candidate(s)’s qualifications. But given that “as part of the proceedings leading to issuance of [a channeling] injunction, the court appoints a legal representative for the purpose of protecting the rights of” future claimants, 11 U.S.C. § 524(g)(4)(B)(i), variations in the appointment process are otherwise within the discretion of the bankruptcy court.