Court Opinion

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Opinions of the United
2005 Decisions                                                                                                             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Precedential or Non-Precedential: Precedential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
      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

                               2
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

       *
        Honorable Anne E. Thompson, United States District Judge
for the District of New Jersey, sitting by designation.

                                3
(“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

                                 4
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 2003.1 If passed, the FAIR Act
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

       1
         See generally Patrick M. Hanlon, Asbestos Legislation:
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
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

                                 6
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

                                 7
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.2 11 U.S.C.
§ 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

       2
          A class is impaired if its legal, equitable, or contractual
rights are altered under the reorganization plan. 11 U.S.C. § 1124.

                                 8
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

                                  9
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”

                                  10
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

                                11
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

                                 12
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

                                 13
 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

                                14
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.3 We disagree. According to the Disclosure
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

       3
          Because AWI does not assert any argument regarding a
new value exception to the absolute priority rule, we do not address
that issue.

                                15
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

                                 16
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

                                  17
 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

                                18
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.

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