Restructuring

Contributed by Debra A. Dandeneau.
The decision of the United States Bankruptcy Court for the Southern District of New York denying confirmation of the plan of reorganization of Quigley Company contains many noteworthy rulings.  In re Quigley Company, Inc., 2010 WL 3528818 (Bankr. S.D.N.Y. Sept. 8, 2010).  Although certain of the rulings were couched in the context of the 524(g) injunction that was the feature of Quigley’s plan and would have protected Quigley and its non-debtor parent Pfizer Corporation from present and future claims relating to Quigley’s sale of asbestos products, it would be dangerous to write off the decision as being limited to the specific context of asbestos chapter 11 cases.  We will focus on these rulings and their potential applicability outside the context of asbestos chapter 11 cases in a series of blog entries.

The Quigley decision is one of the only — and certainly the most thorough — decisions to attempt to quantify both the level of potential liability of the non-debtor party being protected by the section 524(g) injunction compared against the value of the contribution that entity is making to the asbestos trust.  Section 524(g)(4) is unique in the Bankruptcy Code as it provides the only statutorily sanctioned means of protecting non-debtors that also may have exposure to the claims that are being discharged (and, in the context of asbestos liabilities, future “demands” that may not be dischargeable).  The bankruptcy court in Quigley interpreted the requirement in section 524(g)(4)(B)(ii) that the court evaluate the injunction to determine if it is “fair and equitable” “in light of the benefits provided , or to be provided, to such trust on behalf of … such third party” to require the non-debtor party being protected (e.g., Pfizer, the debtor’s parent) to make an economic contribution to the trust.
The requirement of a demonstrable contribution by the protected third party has its parallel in non-asbestos-related chapter 11 cases in which courts, relying upon the general equity powers of the bankruptcy courts, have upheld non-consensual third party releases in chapter 11 plans so long as certain elements are established.  In the jurisdictions that have upheld non-consensual plan releases, one of the factors that the courts have considered is whether the non-consensual release is given in exchange for “adequate consideration” or a “substantial contribution.”
None of the cases, however, has attempted to quantify the sufficiency of the contribution to the extent that the bankruptcy court has done in Quigley.  Although the bankruptcy court in Quigley states that the calculation need not be done with mathematical precision, it holds that “the third-party must contribute amounts consistent with its likely liability, at least where the plan will pay less than 100% of the scheduled amount of the asbestos claims.”  The Quigley decision weighs each element that Pfizer is said to be contributing under the plan for the benefit of the asbestos trust and assigns a specific numerical value to the contribution.  It then compares that level of contribution to the potential exposure of Pfizer to the claims asserted against Quigley.
What is interesting, and potentially concerning, about the Quigley’s court’s weighing of Pfizer’s contribution against its potential liability is that the potential liability that the court evaluates does not pertain to any contractual exposure of Pfizer, such as under a guarantee, but is premised upon Pfizer’s potential liability as the parent of Quigley to asbestos claims asserted against Quigley and arising from the operations of Quigley.  Notwithstanding that Pfizer had never been adjudicated responsible for any Quigley claims, the bankruptcy court relied upon the fact that Pfizer had been named as a defendant in prepetition lawsuits and that all prepetition settlements of Quigley asbestos claims (before Pfizer and Quigley changed their settlement structure in anticipation of the chapter 11 filing) secured a release for both Pfizer and Quigley.  In paying the settlements, Pfizer and Quigley sent separate checks and allocated the payments 30% to Pfizer and 70% to Quigley.
The bankruptcy court used Pfizer’s historical settlement practices and amounts as the foundation to develop its estimate of Pfizer’s potential liability.  Although historical settlement amounts often have been used in the asbestos context to estimate a debtor’s present and future asbestos liability, the Quigley decision is the first of which I am aware in which a court used voluntary settlement payments by a non-debtor party whose liability is exclusively derivative of the debtor’s liability and that has never itself been judicially determined to have derivative liability to set the appropriate level of contribution to be entitled to receive the protection of a 524(g) injunction.  Although settling parties may believe that such a settlement history should have no bearing on a determination of future liability, particularly given the protections offered by Fed. R. Evid. 408, the Quigley court did not believe that Rule 408 prevented it from using historical settlement practices as a means of measuring whether a non-debtor protected party is making a sufficient contribution to warrant protection against the debtor’s asbestos liability in the context of a 524(g) injunction.
In recent years, one might argue that non-consensual third party releases have become even more difficult to obtain.  Indeed, the Ninth and Tenth Circuit Courts of Appeals have long held that they are not permissible under the Bankruptcy Code.  The Second Circuit’s test in Metromedia is rigorous, but not impossible, and requires the bankruptcy court to find that “truly unusual circumstances render the release terms important to the success of the plan.”  Most recently, in Pacific Lumber, the Fifth Circuit has rejected an attempt to protect certain third parties under a plan from claims relating to the implementation and administration of the plan.  Given the corollaries between section 524(g) and the judicial standards for third party releases in the non-asbestos context, Quigley raises the prospect that the type of calculation performed by the court in determining if the non-debtor party’s contribution to the reorganization effort is “adequate” or “substantial,” if upheld, will be applied beyond the limited realm of 524(g).