Contributed by Debra A. Dandeneau.
Mike Stivic (“Meathead”): You know, you are totally incomprehensible.
Archie Bunker: Maybe so, but I make a lot of sense.
How protected is a third party by a section 524(g) injunction? Since section 524(g) of the Bankruptcy Code was enacted to protect asbestos debtors and various third parties against whom asbestos claims may be asserted by virtue of their relationships with asbestos debtors, few cases have had to interpret and apply the scope of the protection afforded by section 524(g) to third parties. In Combustion Engineering, the Third Circuit made it clear that a debtor could not use an asbestos injunction under section 524(g) to protect an affiliate from claims relating to such affiliate’s own asbestos-containing products – what seemed at the time to most practitioners to be a fairly obvious proposition. Later, in Johns-Manville, the Second Circuit held that the asbestos channeling injunction issued in the Johns-Manville chapter 11 case (on which section 524(g) was modeled) could not protect an insurer against direct claims that allegedly arose because of the insurer’s own actions and not simply because of its provision of insurance to the asbestos debtor. Although the asbestos claimants asserted that the insurers had committed independent torts by failing to disclose the dangers of asbestos, the insurers would not have been liable but for their provision of insurance to Johns-Manville. As such, Johns-Manville perhaps signaled a more hair splitting approach than Combustion Engineering to interpreting how far a third party can be protected from asbestos claims under a debtor’s asbestos channeling injunction.
At the time Johns-Manville was decided, many might have been inclined to limit its holding to the narrow bad faith claims asserted by the plaintiffs against the insurer. A recent S.D.N.Y. decision in the long-running Quigley Corporation chapter 11 case, though, not only may be a harbinger of a narrower interpretation of the protection that courts will afford non-debtor parties against asbestos claims under section 524(g), but also may make it nearly impossible to obtain nonconsensual third party releases to protect non-debtors against other types of claims.
Quigley did not involve an interpretation of a 524(g) asbestos injunction under a chapter 11 plan, but an injunction issued during the case that was modeled on section 524(g). Among other things, during the pendency of its “prepackaged” chapter 11 case (now in its seventh year), Quigley sought to protect its parent, Pfizer Corporation, from having to continue litigating asbestos lawsuits brought against Pfizer. The original injunction issued by Judge Beatty was quite broad – even relating to claims allegedly based upon Pfizer’s own products. After Judge Bernstein succeeded Judge Beatty on the case, he narrowed the scope of the injunction to claims that alleged that Pfizer was liable for Quigley’s asbestos claims and not Pfizer’s own products. Following the language of section 524(g)(4)(A)(ii) of the Bankruptcy Code, the modified injunction protected Pfizer against claims that alleged that Pfizer was directly or indirectly liable for Quigley-related asbestos claims as a result of, among other things, Pfizer’s ownership of Quigley or involvement in the management of Quigley.
That language, however, did not deter enterprising plaintiffs’ lawyers from continuing their prepetition lawsuits against Pfizer. Following entry of the modified injunction, one such lawyer, Peter Angelos, argued that asbestos plaintiffs could still pursue Pfizer for claims relating to Quigley’s products because, after Pfizer acquired Quigley, Pfizer had co-branded Quigley’s asbestos-containing products with the Pfizer name and logo. Angelos argued that the use of Pfizer’s name on Quigley’s products gave rise to independent claims against Pfizer under Pennsylvania law and that such independent claims were not, and could not be, protected by the bankruptcy court’s injunction.
The bankruptcy court disagreed with Angelos and sided with Pfizer and Quigley. It reasoned that the co-branding arrangement arose out of Pfizer’s corporate affiliation with Quigley, and, therefore, any asbestos claims arising as a result of the use of Pfizer’s name and logo on Quigley’s products were prohibited by the injunction. The district court disagreed. Reasoning that any injunction, including a 524(g) injunction, that protects a third party must be construed narrowly, the district court concluded that the claims were not barred by the injunction because Pfizer’s corporate affiliation was “legally irrelevant” to Pfizer’s liability. In other words, the claims against Pfizer resulted from Pfizer placing its name and logo on harmful products, and this could have occurred whether or not Quigley was affiliated with Pfizer. Under the district court’s analysis, the critical issue was whether the corporate affiliation was the sine qua non of the liability.
As such, the district court’s holding only appears to protect affiliates under section 524(g) from those causes of action that would not arise but for the corporate relationship – suits such as alter ego and piercing the corporate veil. The bankruptcy court had noted the incongruity of holding that section 524(g) could protect Pfizer from asbestos claims arising out of alleged misconduct in its treatment of its subsidiary but not claims arising from simple co-branding of Quigley’s products with the Pfizer name. Nevertheless, the district court was resolute in its determination that, if the claims could theoretically be brought against Pfizer whether or not it was affiliated with Quigley, then Pfizer was not protected by the injunction: “The crux of this analysis is not whether the predicate acts for one cause of action are better or worse, but rather whether those claims derive as a legal matter from Pfizer’s ownership of Quigley.” Because the plaintiffs had alleged that “Pfizer breached an independent legal duty not to employ its name and logo in the marketing of a defective product,” the plaintiffs were bringing a claim against Pfizer that existed wholly independently of the corporate affiliation between Pfizer and Quigley. The district court did not consider the use of the Pfizer name to be sufficiently part of the corporate relationship to warrant protection, reasoning that Pfizer could have agreed to license its name on any unrelated party’s products; likewise, an independent distributor could have agreed to put its name on Quigley’s products and thereby have created liability. The district court presumably did not consider relevant whether independent economic consideration supported the branding – it was sufficient that the potential claims did not necessarily arise out of the corporate relationship. Accordingly, the district court concluded that the terms of the injunction did not protect Pfizer against the claims brought by the plaintiffs. Indeed, the district court held that, putting aside the interpretation of the language of the injunction, the bankruptcy court had no power to protect against such claims.
The district court did agree with the bankruptcy court that the claims against Pfizer relating to Quigley’s products satisfied the statutory requirement that Pfizer be “directly or indirectly liable” for Quigley asbestos-related claims. The district court did not elaborate on this, but instead simply agreed with the bankruptcy court’s conclusion that, in the absence of a defective product by Quigley, no basis would exist to assert claims against Pfizer. The district court, however, did not address what might constitute a “direct claim” against an entity given its narrow interpretation of the scope of the 524(g) protection. The types of claims that would be protected under the district court’s theory – alter ego and veil piercing – all would appear to be forms of indirect liability for claims against an affiliate. What might constitute direct liability where the liability could not exist but for the third party’s corporate affiliation with the debtor?
It might be tempting to write off Quigley as pertaining exclusively to the limited realm of asbestos channeling injunctions. The concerns raised by Quigley are not limited to the asbestos context, though. Section 524(g), after all, is the only section of the Bankruptcy Code that expressly confers upon bankruptcy courts the power to protect third parties against claims that are in some way related to the debtor’s liability. Some jurisdictions, such as the Ninth Circuit and the Tenth Circuit have concluded that no power exists under the Bankruptcy Code to effect nonconsensual third party releases. While the Second Circuit did not expressly preclude nonconsensual third party releases in Metromedia, it certainly erected significant obstacles to obtaining such releases. The district court’s decision in Quigley suggests, however, that when it comes to protecting non-debtor parties against claims of any sort, such protection may not be possible if any basis exists on which to assert an “independent” claim against the non-debtor party. How many nonconsensual third party releases included in chapter 11 plans would fall within this narrow category? Although Quigley clearly warns parties of the perils of trying to protect third parties in asbestos cases, its broader reasoning should not be ignored in other chapter 11 cases.