Restructuring

Contributed by Debra A. Dandeneau.
Is it getting increasingly difficult to use the bankruptcy of an affiliate to obtain the benefits of an asbestos injunction under section 524(g) of the Bankruptcy Code?  Within the course of about a month, two courts have limited the scope of protections available to non-debtor parties alleged also to be liable for asbestos claims asserted against the debtor – First, the S.D.N.Y.’s decision interpreting an injunction in Quigley Corporation’s chapter 11 case and now Judge Fitzgerald’s decision refusing yet again to confirm the chapter 11 plan of Pittsburgh-Corning Corporation.  Although Judge Fitzgerald found the chapter 11 plan flawed because it failed to be “insurance neutral,” she also found that the proposed 524(g) injunction improperly protected non-debtor parties beyond the scope of what section 524(g)(4)(A)(ii)(I)-(IV) contemplates.
The district court in Quigley defined a narrow scope of permissible protection under section 524(g)(4)(A)(ii)(I)-(IV), essentially limiting the protection only to those causes of action that would not be able to be asserted against the non-debtor party but for its relationship with the asbestos debtor.  In defining its injunction, Pittsburgh-Corning started with a slightly broader scope of injunction that it knew would be acceptable because Judge Fitzgerald previously had defined what would, and would not, work under section 524(g)(4)(A)(ii)(I)-(IV).  In a prior decision, Judge Fitzgerald held that asbestos claims that are “derivative” of the debtor’s liability could be channeled under, and protected by, a 524(g) injunction.  Thus, she concluded that “conspiracy theory” claims under which both Pittsburgh-Corning and one of its affiliates were alleged to be liable for asbestos claims could be protected by a 524(g) injunction, but asbestos claims against a non-debtor relating to the non-debtor’s own products could not be protected unless they arose under a conspiracy theory with the debtor.  As Judge Fitzgerald explained in her earlier decision, “derivative” liability would include liability for asbestos claims that are alleged (whether or not proven) to be as a result of the conduct of, claims against, or demands on the debtor or based on the nondebtor’s participation in and control of the debtor.
In its latest version of its plan, Pittsburgh-Corning believed that it had addressed the problems with the scope of the protection afforded to non-debtor parties that Judge Fitzgerald had identified.  Judge Fitzgerald, however, disagreed.  Although Pittsburgh-Corning had appropriately defined the scope of the parties protected by the 524(g) injunction by limiting and defining the non-debtor protected parties to the parties’ relationship with the debtor (parroting the language of the statute), Judge Fitzgerald found that ambiguity existed in the scope of the claims against such parties that were barred by the 524(g) injunction.  Three words much loved by lawyers caused the problem:  “including, without limitation.”  As a result of this phrase, the scope of the asbestos personal injury claims from which non-debtor parties could be protected could cover both derivative and non-derivative claims.  That error doomed Pittsburgh-Corning’s proposed 524(g) injunction.
Notwithstanding the limitation of the 524(g)(4)(A)(ii)(I)-(IV) protection to derivative claims, Judge Fitzgerald’s opinion makes it clear that the scope of what she might consider to be derivative claims is substantially more expansive than that defined by the S.D.N.Y. in Quigley.  One type of claim against which the non-debtors sought protection related to claims arising from exposure to Corhart, a product that was manufactured by a non-debtor subsidiary of Corning Incorporated.  Judge Fitzgerald stated that Corning could not be protected from claims relating to Corhart, but only because no evidence existed that any plaintiff had asserted liability against both Corning and Pittsburgh-Corning for such claims on a theory of joint liability, such as conspiracy.  Her opinion certainly suggests that, even though the debtor’s products or direct actions would not be at issue, a 524(g) injunction would have been available if the plaintiffs had attempted to assert claims against both Corning and Pittsburgh-Corning on any theory of joint liability.
Another type of claim addressed by Judge Fitzgerald involved claims against PPG Industries for Pyrocal, sold by PPG, but manufactured by another unrelated entity.  Although Pittsburgh-Corning was completely uninvolved with the distribution, installation, or manufacture of Pyrocal, prior to Pittsburgh-Corning’s bankruptcy filing, plaintiffs had sought to hold both PPG and Pittsburgh-Corning liable for asbestos claims relating to Pyrocal on theories of joint liability, such as conspiracy.  Judge Fitzgerald’s ruling puts asbestos plaintiffs in an interesting bind – she held that, to the extent that plaintiffs allege that both Pittsburgh-Corning and PPG are liable under for Pyrocal claims under a theory of joint liability, such claims could be channeled to the trust created under Pittsburgh-Corning’s chapter 11 plan, and PPG could be protected against such claims.  If, however, plaintiffs sought to proceed exclusively against non-debtors on theories that did not assert that Pittsburgh-Corning was liable, the plaintiffs would be free to pursue such claims.
Indeed, Judge Fitzgerald determined that, even with respect to the Corhart claims, the court possesses the equitable power under sections 524(g) and 105(a) to prevent parties prospectively from asserting theories of joint liability.  She concluded that it is consistent with the protection offered by section 524(g) to preclude pleadings or proof that would “insinuate” the debtor or involvement with the debtor as the basis for liability if the non-debtor against whom such asbestos claims were asserted was not protected by the 524(g) injunction.  Judge Fitzgerald acknowledged she was giving asbestos plaintiffs a choice: “if the claimant chooses to allege a ‘conspiracy theory’ involving the Debtor, the claim would be presented to the Trust; however, if the claimant removes the Debtor from his complaint, the claim can be prosecuted in state court but the claimant must forego the opportunity to include the Debtor as a conspirator in both allegation and proof.”  Now, the non-debtor defendants may find themselves rooting for a conspiracy allegation.