Restructuring

Contributed by Andrea Saavedra
A wise and learned bankruptcy practitioner once quipped, “If you’re lonely and no one wants to talk to you, go to the bankruptcy court – they’ll listen to anyone.”  But the recent decision of the Third Circuit Court of Appeals, Garlock Sealing Tech. Inc. v. W.R. Grace, serves as a reminder that, absent statutory or constitutional standing, you may not (pun intended) have a leg to stand on.
The chapter 11 cases of W.R. Grace have resulted in a multitude of published decisions, and Garlock adds to the pile.  For more than a century, W.R. Grace has manufactured and sold specialty chemicals and construction materials.  Previously, many of those products and materials included asbestos, and beginning in the 1970s, Grace began to face personal injury lawsuits stemming from asbestos exposure.  By 2001, Grace found itself facing an insurmountable number of such lawsuits, which threatened its ability to survive.  In February 2009, after almost a decade in chapter 11, the bankruptcy court approved Grace’s plan of reorganization.  The plan established two trusts – a personal injury trust and a property damage trust – that are set to assume all of Grace’s current and future asbestos liabilities.
Appellant Garlock Sealing Technologies, among others, objected to the plan.  Garlock is a manufacturer of engineered industrial products, and it formerly used some of Grace’s asbestos-containing materials in its products.  As a result, the two companies were named as codefendants in “thousands” of personal injury cases in the decades prior to Grace’s bankruptcy.  Garlock asserted that, because of the prospect of joint liability with Grace in these litigations, it had potential claims against Grace for contribution and setoff claims against plaintiffs who were set to obtain recovery from Grace under the plan.  However, Garlock never filed a proof of claim against Grace in its chapter 11 cases, and there was no evidence that, prior to its objection to the plan, it had ever asserted these rights in the past.
Garlock seemed to become aware of these rights and claims when it, too, filed for bankruptcy protection in the year prior to confirmation of Grace’s chapter 11 plan.  The bankruptcy court, however, overruled Garlock’s objections on the basis that it lacked standing to object to the plan as it was not a “party in interest” to Grace’s chapter 11 cases.  See 11 U.S.C. §§ 1109(b) (defining same to include, among others, a creditor of the debtor).  The district court agreed with the bankruptcy court, finding that Garlock failed to introduce any evidence that it “ever actually impled Grace or sought contribution and/or set-off from Grace in the decades prior to its bankruptcy, nor had it shown that it had suffered a judgment during the bankruptcy that entitled it to contribution or setoff.”  In other words, Garlock’s potential claims were entirely speculative and hypothetical.
The Third Circuit agreed, finding that, from a statutory perspective, Garlock never established it was a creditor or other type of “party in interest” in Grace’s chapter 11 cases.  Setting aside Garlock’s clear error in not ever having filed a proof of claim against Grace, the Third Circuit noted that, ultimately, the outer boundary of what Garlock’s “interest” in the outcome of Grace’s cases was the same as that required to establish standing under Article III of the Constitution, i.e., Garlock had to demonstrate that it has either suffered, or would suffer, injury in fact if the plan were effectuated.
Although Garlock again asserted its potential rights of contribution and set-off, given the lack of factual evidence in the record that those claims were ripe – or would ever ripen – the Third Circuit found that Garlock’s alleged injury was simply too speculative to warrant a finding of actual injury.  It was particularly persuaded that Garlock’s concerns were entirely farfetched as it failed to present any evidence that it suffered a judgment for which Grace owed it contribution not only in the decades prior to bankruptcy, but also during the ten-year tenure of same.    Moreover, the mere fact that there could be future joint litigation against both Grace and Garlock did not, by itself, provide a foundation for standing, as those claims would also have to produce verdicts or settlements that would entitle Garlock to the claims it was asserting.  Far from being certain, the Third Circuit found that Garlock’s alleged injury was “contingent on the occurrence of events that may never happen, and indeed may never have happened previously,” making it all the more “conjectural and hypothetical,” rather than “actual or imminent.”  Accordingly, the Third Circuit upheld the lower courts’ decisions denying Garlock standing to object to Grace’s plan.