Restructuring

Introduction

In a recent decision, Bath Iron Works Corp. v. Congoleum Corp. (In re Congoleum Corp.), 2021 Bankr. LEXIS 10, 2021 WL 28396 (Bankr. D.N.J. Jan. 4, 2021), the Bankruptcy Court for the District of New Jersey denied a motion by Congoleum Corporation (the “Debtor”) for approval pursuant to Bankruptcy Rule 9019 of a settlement agreement, (the “Settlement”) between the Debtor and Bath Iron Works Corporation (“BIW”).  The Court declined to approve the Settlement, which was conditioned on the Court making findings that could impact litigation in another court, because the Court was unwilling to make all the requested findings.  However, instead of explaining why it was denying approval of the Settlement or issuing partial findings, the Court denied the motion in its entirety, because to do otherwise while related pending litigation existed would, in the Court’s view, amount to little more than an inappropriate advisory opinion. 

Although this decision turned on unique procedural and jurisdictional issues, it is a reminder that while the standards for approval pursuant to Bankruptcy Rule 9019 of debtor settlements are generally considered to be lenient or easy to satisfy, obtaining bankruptcy court approval of a settlement is not a “slam dunk.” 

I. Background

On December 31, 2003, the Debtor filed for chapter 11 relief in the Bankruptcy Court for the District of New Jersey (the “First Bankruptcy”).  In August 2009, the district court withdrew the reference and assumed authority over the First Bankruptcy, and on June 7, 2010, the district court entered an order confirming the Debtor’s chapter 11 plan of reorganization (the “Confirmation Order”).  Paragraph 104 of the Confirmation Order provided that that BIW had “no responsibility for any of the liabilities of the Congoleum Flooring Business.”

After the First Bankruptcy, two lawsuits were filed relating to the Debtor’s and BIW’s potential environmental obligations.  The first of the pending lawsuits was brought against the Debtor for damages relating to the remediation of environmental contamination on property previously owned by the Debtor and BIW.  The Debtor, in turn, impleaded BIW on theories of successor liability.  A second lawsuit was brought against over 100 defendants, including BIW, for costs relating to the remediation of certain water contamination.  In response, BIW filed a third party complaint against the Debtor.  BIW and the Debtor agreed to stay the proceedings between them pending the outcome of the first lawsuit.

Throughout the above lawsuits, BIW contended that the plaintiff’s claims against it were barred by res judicata based on the Confirmation Order in the First Bankruptcy.  The Debtor, in turn, contended that BIW was the responsible party for the relevant environmental liabilities, and that nothing in the First Bankruptcy–including the Confirmation Order–absolved BIW of such liability. 

On July 13, 2020, the Debtor again filed for chapter 11 relief in the Bankruptcy Court for the District of New Jersey (the “Court”).  Shortly thereafter, BIW filed an adversary complaint against the Debtor seeking, among other things, a declaratory judgment from the Court that Paragraph 104 meant that BIW was not a successor to one of the Debtor’s businesses and was not responsible for that business’s liabilities, including environmental liabilities.

BIW and the Debtor eventually reached the Settlement, pursuant to which BIW would withdraw its $14.5 million proof of claim against the Debtor and pay $1 million to the Debtor’s bankruptcy estate.  However, the Settlement was conditioned on the Court entering certain specific findings resolving the scope, intent, and enforceability of Paragraph 104 of the Confirmation Order on an agreed evidentiary record in a manner favorable to BIW in the underlying litigation.  The Debtor admitted in its papers that it did not agree with all of the requested findings (perhaps because the findings were in conflict with the Debtor’s prior position in the litigation), but nonetheless argued that the Court should make the findings as part of the overall Settlement which would benefit the Debtor’s estate.  Debtor’s Reply, at ¶ 4, ECF No. 591.

The plaintiffs to those lawsuits objected to the Settlement, arguing that the Court should not approve the Settlement and make the requested findings, because the Court did not have the jurisdiction or the constitutional or statutory authority to rule on either the Settlement or the scope, meaning, and enforceability of the pertinent portions of the Confirmation Order.  The objectors also disagreed with BIW’s substantive position on the scope and enforceability of the relevant findings in the Confirmation Order.

II. Court’s Reasoning

The Court recognized that the motion to approve the Settlement was unusual, as courts are typically asked to approve settlements where parties reach an agreement on contested issues.  In the case before it, in contrast, the Court was being asked to resolve the parties’ disputes upon an agreed factual record.

The Court stated that it would ultimately deny the motion, because it was unable to make all the requested findings.  Interestingly, however, the Court refused to provide its reasoning or make any partial findings, because it held that doing so would amount to a merely advisory opinion.  It noted that if it made any findings or rulings apart from simply denying the Settlement, the ruling would have no effect on the parties’ litigation positions in the pending adversary proceeding apart from possibly revealing the Court’s thought process on the parties’ respective positions.  In denying the motion, the Court cited the Third Circuit’s decision in In re Lazy Days’ RV Ctr. Inc., 724 F.3d 418, 22 (3d Cir. 2013), which held that if “a bankruptcy opinion does ‘nothing to resolve whether . . . courts would be required to abide by it, . . . the opinion ha[s] no legal effect’ and is merely advisory.”  The Court further relied on In re Cubic Energy, Inc., 587 B.R. 849 (D. Del. 2018), which it found to have analogous facts, in finding that a ruling on the merits regarding the meaning and enforceability of a provision in a prior plan of reorganization, “with the intention of then using those holdings to assist in litigations pending in another court” would “run afoul of the proscription on advisory opinions.”

Ultimately, the Court declined to provide any ruling that the Debtor or BIW could use in its favor in any pending litigation, including the adversary proceeding, and denied the motion for approval of the Settlement in its entirety.

Takeaways & Practical Implications

• This is a rare example of a court denying a 9019 motion in its entirety.
• Courts are reluctant to issue advisory opinions, especially if doing so would have an impact on other litigation.