Restructuring

In a recent decision, the United States District Court for the Southern District of New York upheld a bankruptcy court order that enjoined a plaintiff holding an asbestos claim from pursuing a state court products liability claim against the successor to Manville Forest Products  Corporate (“MFP”).  Notably, the Court reaffirmed that a claim relating to prepetition exposure to asbestos is a prepetition claim, even though the injury may not have manifested itself until after the petition date.  Rather than being entitled to pursue her claim against MFP’s successor, the plaintiff was relegated to asserting a claim against the Manville Trust – the entity that was established more than 30 years ago to provide a source of recovery for injured persons.

Background:

Johns-Manville Corporation (“Manville”) was one of the world’s largest manufacturers and suppliers of asbestos-containing products. Manville was one of the first asbestos manufacturers to file for relief under the Bankruptcy Code when it filed its petition on August 26, 1982, amidst a torrent of products liability actions aimed at asbestos manufacturers. 

MFP, one of Manville’s wholly owned subsidiaries, was one of the 20 Manville subsidiaries that filed for relief on the same day.  MFP, however, confirmed its own, separate chapter 11 plan on March 26, 1984. MFP’s plan and confirmation order discharged prepetition claims.  Manville’s plan, which came two years later, was historic in that it channeled claims to a trust set up to handle asbestos related claims (the “Manville Trust”).  Also novel in the Manville case was the appointment of a representative for holders of so-called “future claims” – claims that existed as of the Manville petition date, even though the personal injury to the claimants had not manifested itself as of that time. 

In 2016, Lydia Berry (the “Appellant”), brought an action against Graphic Packaging International (“Graphic”), the successor to MFP, in a Louisiana state court seeking to recover on asbestos related personal injury claims caused by derivative exposure through her husband, who had worked for MFP from 1961 to 2010. Graphic filed a motion in the United States Bankruptcy Court for the Southern District of New York, the court in which the Manville and MFP cases were filed, seeking to enjoin Appellant’s prosecution of the state court action.  Graphic contended that the prosecution of the state court action violated the confirmation orders entered in the MFP and Manville cases and that Appellant’s only recourse was to assert a right to payment from the Manville Trust.

The bankruptcy court’s decision, enjoining the prosecution of the state court action, focused on whether the Appellant had a valid claim under the Bankruptcy Code, and if so, when such claim arose. The bankruptcy court concluded that the Appellant had a prepetition claim under the “prepetition relationship test,” that due process requirements for unknown future claimants had been satisfied, that the MFP plan enjoined the prosecution of Appellant’s claim, and that the claim must be channeled to the Manville Trust. The Appellant appealed, raising eleven issues.  The eleven issues presented fell into three general categories: (1) the timing of the claim; (2) whether the bankruptcy court had subject matter jurisdiction; and (3) whether the MFP plan satisfied requirements for procedural due process.

Analysis:

The Appellant had a Prepetition Claim that had to be Channeled Through the Manville Trust

The bankruptcy court relied upon the “prepetition relationship test,” under which claims are deemed to arise when contact, exposure, impact, etc. exists between a claimant and a debtor. See In re Piper Aircraft, 162 B.R. 619, 627 (Bankr. S.D. Fla. 1994). Specifically, the bankruptcy court noted that prepetition exposure to asbestos leading to postpetition injury constitutes a prepetition claim for bankruptcy purposes. The bankruptcy court, therefore, concluded that if the Appellant did have a claim, it would be a prepetition claim because her first exposure to asbestos was prepetition.

On appeal, the Appellant argued that her injury did not result solely from prepetition exposure to asbestos, and that the bankruptcy court improperly relied on cases where claimants’ asbestos exposure was exclusively prepetition. The Appellant tried to distinguish these cases from her situation on the basis that her exposure continued postpetition.

The district court determined that the timing of the act giving rise to the liability is what governs whether the Appellant holds a prepetition claim or a postpetition claim. The court cited various Second Circuit bankruptcy court decisions holding that asbestos claims arise at the time of exposure and not at the time of injury. See In re Waterman SS Corp., 141 B.R. 552, 556 (Bankr. S.D.N.Y. 1992). The court noted that in asbestos cases, the duty and breach elements of a negligence cause of action occur at the time of first exposure, thereby establishing a prepetition relationship under the “prepetition relationship test.” Because the “prepetition relationship test” does not require a prepetition injury, an asbestos claimant holds a claim at the moment of exposure.

Like the bankruptcy court, the district court also rejected Appellant’s “continuing theory of exposure,” and found that Appellant’s first exposure was undisputedly prepetition. The court, therefore, affirmed the bankruptcy court and agreed that Appellant had a prepetition claim.  Consequently, Appellant could not pursue an action against Graphic, Manville, or MFP but, instead, had to seek payment from the Manville Trust.

The Bankruptcy Court had Subject Matter Jurisdiction

The court also concluded that the bankruptcy court had subject matter jurisdiction to consider Graphic’s motion because it was a “core proceeding” concerning the administration of the estate. Moreover, the court noted that the bankruptcy court retained jurisdiction to clarify its prior confirmation orders and to enforce injunctions issued in connection therewith.

Procedural Due Process was Satisfied

While Appellant conceded that due process was afforded to future claimants with respect to the Manville plan, she argued that the lack of a future claims representative under the MFP plan deprived her of procedural due process.  The district court also rejected this argument, finding that the Appellant cited no authority for the proposition that a parent and a subsidiary each needs its own future claims representative.  Moreover, the Manville plan, as to which Appellant did not contest the adequacy of notice, clearly enjoined her claim because it covered claims against Manville or any subsidiary.  Finally, the district court noted that Appellant’s husband had, in fact, asserted a claim against the Manville Trust, leading the court to conclude that “it is hard to imagine that Ms. Berry could have been completely unaware that the Mill filed for bankruptcy, or that MFP’s bankruptcy was linked to Manville’s bankruptcy and asbestos litigation.”  Accordingly, the court rejected the due process argument.

Conclusion and Takeaway:

The court affirmed the bankruptcy court’s decision and concluded that Appellant held a prepetition asbestos claim that had to be channeled to the Manville Trust.  The contrast that the court drew to the Motors Liquidation Company decision of the United States Court of Appeals for the Second Circuit is an interesting one. See Elliott v. General Motors, LLC, 829 F.3d 135 (2d Cir. 2016).

In Motors Liquidation Company, the Second Circuit held that, despite the “free and clear” language of the sale order, holders of claims arising from the conduct of the purchaser of the assets of General Motors (“New GM”), and claims of owners of used cars that were acquired after the issuance of the sale order, were entitled to assert their claims against New GM. Although the defective ignition switches had been manufactured by General Motors prior to the commencement of its chapter 11 case, the key difference noted by the district court is that in Motors Liquidation Company, the allowed claims at issue were either (i) based on the wrongful conduct of New GM in misrepresenting the safety of cars post-sale, or (ii) were claims of individuals who purchased used vehicles with unknown ignition switch defects after the section 363 sale. Moreover, such claims did not involve what the district court described as the “latency” issue that arises in asbestos cases – the fact that “the latency between exposure and injury makes it impossible to determine what circumstances led to the injury.”   

On balance, the district court’s Manville decision, upholds the use of channeling orders and personal injury settlement trusts for mass tort cases; such frameworks have proven invaluable in many cases since Manville’s groundbreaking 1982 case. While, at first blush, the decisions of the bankruptcy court and the district court seem harsh from the perspective of the claimant, any other outcome would have undermined the use of the Manville framework, because potential investors, acquirers, or settling parties would not be willing to pay a purchase price or settlement amount substantial enough to allow the debtor to fund a substantial claims settlement trust, ultimately limiting funds available to mass tort victims whose injuries are unmanifested. The decision demonstrates that the framework negotiated and established by Manville, its advisors, its insurers, and co-defendants more than 30 years ago was farsighted and remains effective and important.

The district court’s decision has been appealed to the Second Circuit.