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

Heading: Disparate Treatment of Creditors

Text: 33 We turn next to the contention that the Joint Plan should not have been confirmed because the TDPs22 may result in disparate treatment among claims within the same class. As Montana and the Crown correctly note, “equality of distribution among creditors is a central policy of the Bankruptcy Code” that is furthered by several different Code provisions. In re Combustion Eng’g, 391 F.3d at 239 (quoting Bergier v. IRS, 496 U.S. 53, 58 (1990) (internal quotation marks omitted). Relevant here, § 1123(a)(4) requires that a plan “provide the same treatment for each claim or interest of a particular class,” 11 U.S.C. § 1123(a)(4),23 and § 524(g) mandates that “present claims and future demands that involve similar claims” be paid “in substantially the same manner,” id. § 524(g)(2)(B)(ii)(V). Together, the two provisions ensure that claims in a class that will be channeled to a § 524(g) trust receive the same treatment, regardless of when they are brought. In determining whether a plan provides for the same treatment of claimants in a class, “we consider the bankruptcy scheme as an integrated whole.” In re Combustion Eng’g, 391 F.3d at 241. Although “neither the Code nor the legislative history precisely defines the standards of equal treatment,” In re AOV 22 The TDPs, as earlier noted, see supra Section I.B, are the trust distribution procedures for the personal injury trust established in the Joint Plan. 23 Section 1123 permits disparate treatment when “the holder of a particular claim or interest agrees to … less favorable treatment,” but neither Montana nor the Crown has done so here. 11 U.S.C. § 1123(a)(4). 34 Indus., Inc., 792 F.2d at 1152, courts have interpreted the “same treatment” requirement to mean that all claimants in a class must have “the same opportunity” for recovery. In re Dana Corp., 412 B.R. 53, 62 (S.D.N.Y. 2008); see also In re Cent. Med. Ctr., Inc., 122 B.R. 568, 575 (Bankr. E.D. Mo. 1990) (concluding that a plan that “subjects all members of the same class to the same process for claim payment” is “sufficient to satisfy the requirements of Section 1123(a)(4)”). For example, the United States Court of Appeals for the Second Circuit has held that “[a]sbestos health claimants would receive the ‘same treatment’ if they all were permitted to present their claims to a jury and were all paid whatever amounts the jury awarded, until funds were no longer available.” In re Joint E. & S. Dist. Asbestos Litig., 982 F.2d 721, 749 (2d Cir. 1992), opinion modified on rehearing, 993 F.2d 7 (2d Cir. 1993). What matters, then, is not that claimants recover the same amount but that they have equal opportunity to recover on their claims. See id. (“Without question, the ‘same treatment’ standard of section 1123(a)(4) does not require that all claimants within a class receive the same amount of money.”) Courts are also in agreement that § 1123(a)(4) “does not require precise equality, only approximate equality.” In re Quigley Co., Inc., 377 B.R. 110, 116 (Bankr. S.D.N.Y. 2007); see also In re Multiut Corp., 449 B.R. 323, 334 (Bankr. N.D. Ill. 2011) (same). Certain procedural differences, such as a “delay in receipt of distributions” for some claims, “do[] not alone constitute unequal treatment.” In re New Power Co., 438 F.3d 1113, 1122-23 (11th Cir. 2006); see also In re Multiut, 449 B.R. at 337 (same). In fact, § 524(g) “clearly envisions that asbestos claims will be paid periodically as they accrue and as they are allowed,” since it 35 requires courts to ensure that there will be sufficient funds available for both future demands and present claims to receive similar treatment. In re W. Asbestos Co., 313 B.R. 832, 842-43 (Bankr. N.D. Cal. 2003). Therefore, differences in the timing of distributions and other procedural variations that have a legitimate basis do not generally violate § 1123(a)(4) unless they produce a substantive difference in a claimant’s opportunity to recover. See In re New Power Co., 438 F.3d at 1122-23 (concluding that a plan provision did not violate § 1123(a)(4) in part because it was “procedural rather than substantive”); cf. In re Dow Corning Corp., 280 F.3d 648, 660 (6th Cir. 2002) (holding that a difference in the procedural protections offered to certain claimants violated § 1123(a)(4) because some claimants were “accorded far more effective recovery rights” than others). Under that standard, none of the provisions of the TDPs that Montana and the Crown complain of amounts to disparate treatment of creditors. Montana and the Crown first take issue with a provision that allows indirect claims to be considered “presumptively valid” only if, among other things, “the Indirect Claimant has paid all or a portion of a liability or obligation that the PI Trust had to the Direct Claimant.” (Montana Opening Br. at 47 (quoting J.A. at 200326) (internal quotation marks omitted).) They say that such a requirement may provide no payout for indirect claims, and is therefore discriminatory. But the only indirect claims that will not be paid based on that provision are those for which Grace has no underlying liability. As the District Court rightly said, there is no “legal authority that requires a debtor to reimburse third parties for wrongs for which the debtor is not responsible,” and thus a bar on such recovery cannot be 36 said to constitute disparate treatment. In re W.R. Grace & Co., 475 B.R. at 136. Montana and the Crown next complain that the “firstin, first-out” mechanism for processing and paying claims discriminates against indirect claims. Citing testimony from the future claimants’ representative that “there is a possibility” that the trust may have insufficient funds to pay future claims, they argue that, because claims for indemnification and contribution depend on another judgment first being obtained, their claims will likely be brought later than direct asbestos claims and thus will be less likely to obtain recovery. (Montana Opening Br. at 51 (quoting J.A. at 201664A) (internal quotation marks omitted).) They say that the only fair method for resolving claims against the trust is “for no distributions to be made until all” indemnification and contribution claims have arisen and been asserted. (Id. at 52.) There are significant problems with that argument. First, although there may be a “possibility” that the trust will have insufficient funds to compensate future claimants, the Joint Plan endeavors to make that scenario as unlikely as possible. To that end, it funds the personal injury trust with the amount agreed to by the PI Committee and the future claimants’ representative, it limits recoveries using the “Payment Percentage” (which is specifically designed to ensure that present and future claimants receive equivalent amounts), and it allows the Payment Percentage to be modified as needed to permit future recoveries.24 Second, the 24 As discussed earlier, see supra Section I.B, the “Payment Percentage” limits each claimant’s recovery to a certain percentage of the liquidated value of his or her claim, 37 “first-in, first-out” payment process is a common feature of § 524(g) trusts, see In re Federal-Mogul, 684 F.3d at 360 n.12, and it treats all claims identically, resolving both direct and indirect claims in the order that they are received. Although it may be true that indirect claims will generally recover later under that process because they require the additional step of a judgment being entered against the claimant, the “delayed receipt of distributions to members of a class whose claims remain disputed does not, in and of itself, violate § 1123(a)(4).” In re New Power Co., 438 F.3d at 1122. Finally, it would be wholly unreasonable to require asbestos victims – many of whom have already waited through twelve years of bankruptcy – to continue to wait indefinitely until all indirect claims accrue before they can recover from the trust. Cf. In re W. Asbestos Co., 313 B.R. at 842 (“It is not necessary to make liquidated claims wait for payment until all disputed and unliquidated claims have been resolved.”). Rather, by requiring courts to ensure that future demands will be treated fairly, § 524(g) specifically acknowledges that some claims against a trust may recover earlier than others. See 11 U.S.C. § 524(g)(2)(B)(ii)(V) (requiring that the court ensure that the trust will “operate through mechanisms … that provide reasonable assurance that the trust will value, and be in a financial position to pay, present claims and future demands that involve similar claims in substantially the same manner”). We therefore agree with the District Court that the “first-in, first-out” mechanism does not violate § 1123(a)(4) or § 524(g). in order to ensure that funds will be available for future claims. 38 Montana and the Crown also assert that the TDPs are discriminatory because they impose additional restrictions on indirect claims. Specifically, the complaints are that indirect claimants cannot recover attorneys’ fees; that, in order to have a presumptively valid claim, an indirect claimant must secure a release of liability against the trust from the direct claimant; and that personal injury claims are limited by the “maximum value” provision of the TDPs. The District Court properly rejected the argument that any of those features make the TDPs unfair. Montana and the Crown have not demonstrated a right to attorneys’ fees under their local tort regimes, and there is therefore no reason why they should expect to recover attorneys’ fees from the trust. There is also nothing discriminatory about requiring an indirect claimant to obtain a release from the direct claimant whose claims provide the basis for seeking indemnification or contribution. That requirement has the legitimate objective of ensuring that an indirect claimant has satisfied a liability of the debtors, and it would not make sense to extend it to direct claims. In any event, the release provision does not limit a claimant’s opportunity for recovery, as indirect claimants who are unable to obtain a release can still pursue their claims through the individual review process.25 As for the “maximum value” 25 The release of liability is only required for indirect claimants seeking expedited review of their claims. The TDPs expressly state that, “[i]f an Indirect Claimant cannot meet the presumptive requirements” necessary for expedited review, “including the requirement that the Indirect Claimant provide the [personal injury] [t]rust with a full release of the Direct Claimant’s claim, the Indirect Claimant may request that the [personal injury] [t]rust review the … [c]laim individually.” (J.A. at 200326.) 39 provision, that requirement applies with equal force to direct and indirect claims, and therefore does not result in disparate treatment of claims. Finally, the Crown independently argues that the TDPs are discriminatory both because Canadian property damage claimants will allegedly receive inferior recovery to U.S. property damage claimants, and because the Crown cannot qualify for “extraordinary claim” treatment. The first of those contentions seems to be based on the amount allocated to the Canadian ZAI property damage claims fund, which is significantly less than the amount being allocated for U.S. property damage claims. But, as the District Court correctly noted, Canadian and U.S. property damage claimants are classified in separate classes, operate under separate tort regimes, and reached separate settlement agreements. See In re W.R. Grace & Co., 475 B.R. at 138-39. There is therefore no reason to expect that they would receive the same dollar amount in recovery, and, more importantly, § 1123(a)(4) does not demand that they receive equal treatment, as it requires only that a plan “provide the same treatment for each claim or interest of a particular class.” 11 U.S.C. § 1123(a)(4) (emphasis added). Moreover, it is unclear whether the Crown’s assertion that Canadian claimants will receive less than their U.S. counterparts is even factually accurate, as the Crown provides no information on the estimated number of Canadian property damage claims, so there is no way to conclude that the available funds are unduly limited. As for the “extraordinary claim” provision, it is designed to provide a remedy for certain individuals harmed by Grace who have “little likelihood of a substantial recovery elsewhere.” (J.A. at 200323.) The Crown is therefore correct 40 that the provision treats certain claims differently than others, but it does so based on the claimant’s particular factual situation, in much the same way that the expedited review process treats claims differently based on the particular disease at issue. The Crown does not contest that such substantive distinctions among claims are valid bases for potential differences in the amount of recovery, nor does it argue that the individualized review process will value its claims at less than they would be worth under the tort system. Therefore, it has not shown that the “extraordinary claim” provision unfairly limits its opportunity for recovery. In sum, the District Court rightly determined that the Joint Plan satisfies the equal treatment provisions of § 1123(a)(4) and § 524(g). Although there may, at the margins, be some differences in recovery for direct and indirect claims, those differences do not amount to disparate treatment of creditors.