On June 30, 2016, the U.S. Bankruptcy Court for the Southern District of New York issued yet another decision around the Johns-Manville asbestos litigation. Before the court was Graphic Packaging International’s emergency motion to enforce the confirmation and channeling orders in the Johns-Manville Corp. (“Manville”) and the Manville Forest Products Corp. (“MFP”) chapter 11 cases. The motion sought to enjoin an asbestos-related lawsuit brought in Louisiana state court against Graphic, the successor of MFP.
By way of background, Manville was the largest supplier and manufacturer of asbestos-related products. After decades of asbestos-related litigation, Manville and 20 of its subsidiaries, including MFP, were forced to commence chapter 11 cases. The cornerstone of the Manville chapter 11 case was the establishment of the “Manville Trust,” which was created for the benefit of both present and future asbestos claimants. After confirmation of all the plans filed by Manville and its subsidiaries, claims against the trust would be the only avenue available for asbestos claimants.
Although MFP did not manufacture asbestos itself, it was nonetheless concerned with derivative liability as a subsidiary of Manville, and as a result was forced to commence its own chapter 11 case. The MFP confirmation order and plan discharged MFP from all unsecured, pre-confirmation debts. After the confirmation of its own chapter 11 plan, MFP changed its name to Riverwood International Corp. and eventually merged with Graphic.
In 2015, Lynda Berry commenced an action against Graphic in Louisiana state court asserting personal-injury claims relating to asbestos exposure. Berry sought to recover against Graphic based on her derivative exposure to asbestos through her husband’s work at the mill owned by MFP.
Graphic sought protection from the U.S. Bankruptcy Court for the Southern District of New York arguing that the lawsuit violated both MFP’s and Manville’s confirmation order and that Berry’s claim could only be asserted against the Manville Trust. Berry contended that (1) MFP was not a beneficiary of the Manville confirmation order, (2) her exposure was ongoing and therefore not subject to the confirmation order, and (3) Graphic had waived its discharge/injunction defense by defending separate asbestos-related suits against it without using the Manville Trust as a defense.
The bankruptcy court began by reviewing the confirmation and channeling orders entered in the Manville and MFP bankruptcy cases, finding that the orders discharged all unsecured pre-confirmation debts and permanently enjoined all entities whose debts were discharged by these orders. Therefore, if Berry held a pre-confirmation claim against MFP, it would be subject to the discharge and channeling orders. The Bankruptcy Code defines a “claim” as “a right to payment whether or not such right is reduced to judgment, liquidated, unliquidated, fixed or contingent, matured, un-matured, disputed, undisputed, legal, equitable, secured or unsecured.”[1] The court noted that this definition has been defined by case law to have the broadest scope possible, including contingent claims — ones where the legal obligation to pay does not come into existence until a future event.
There are generally three tests applied by federal courts to determine when a claim arises under the Bankruptcy Code: the “accrual test,” the “conduct test” and the “pre-petition relationship test.”[2] The “conduct test” looks to when the acts giving rise to the liability occurred.[3] The “pre-petition relationship test” requires a pre-petition relationship, such as a contract, exposure, impact or privity, between the debtor’s pre-petition conduct and the claimant.[4] Under the relationship test set forth by the Second Circuit, a sufficient relationship is formed when the claimant is exposed to the asbestos as a result of the debtor’s allegedly tortious conduct. In the context of asbestos cases, numerous courts have found that pre-petition exposure to asbestos that gives rise to a post-petition injury constitutes a claim.
Berry argued that she was continually exposed to the asbestos through contact with her husband’s clothes and that this exposure continued post-petition. Both parties agreed that it was impossible to determine the exact moment when she contracted mesothelioma and that it was more likely than not that most of the exposure came before 1980, or before confirmation of the Manville chapter 11 case. Thus, the court had little difficulty determining that the repeated exposure, even post-petition, gave rise to a pre-petition claim against MFP and that Berry did not hold a post-petition claim against Graphics/MFP as a result of the continuing post-confirmation exposure to asbestos.
The court turned next to Berry’s due process argument, noting that the Supreme Court has held that due process requires notice reasonably calculated to apprise interested parties of the pending action and the opportunity to object.[5] It was agreed by all parties that Berry did not know she had mesothelioma and was unaware of MFP’s bankruptcy until her diagnosis in 2015. However, the bankruptcy court found that Manville and MFP had complied with the due process requirements outlined in Mullane through their publication process. MFP gave notice of its filing and of the bar date through the chapter 11 process. The estate, the court wrote, is only required to make “reasonable diligent efforts” to find unknown creditors. The notices published for all of the subsidiaries, including MFP, provided that all claims against MFP would be barred. The court found that there was previous automatic stay litigation in the bankruptcy court in Louisiana, which had been transferred to the court in New York and that was comprised of employees of MFP, specifically the mill that Berry’s husband was an employee of at the time. Moreover, Berry’s husband had filed a claim with the Manville Trust. As a result, the court concluded that it was very unlikely that Berry was unaware of the bankruptcy proceedings and the fact that future claims, such as hers, would be barred.
The court, having found that Berry held a pre-petition claim and finding no due process violation, ordered that her claims be discharged and enjoined. In addition, and as a consequence, her claim was then funneled to the Manville Trust. Like all other pre-petition and post-petition claimants, she retained the right to seek payment for her injury from the Manville Trust. The trust was created to equally deal with known claimants and future asbestos-related unknown claimants. This trust, the backbone of the Manville plan, was the cornerstone of the successful Manville confirmation and reorganization. As a result, the court held that it had no doubt that Berry’s claims must be channeled to the Manville Trust for payment and that her post-confirmation lawsuit was enjoined.
The Manville Trust still remains the cornerstone of the Manville bankruptcy plan and the plan of its subsidiaries, and it is the only vehicle that asbestos claimants may use to get payment for their injuries. Even 30 years later, the Manville Trust remains a model for large tort claims in chapter 11 bankruptcies.
[1] 11 U.S.C. § 105.
[2] Courts most often apply the “conduct” or “pre-petition relationship” test. See St. Catherine Hosp. of Ind. LLC v. Indiana Family & Soc. Servs. Admin., 800 F.3d 312 (7th Cir. 2015).
[3] See Grady v. A.H. Robins Co., 839 F.2d 198 (4th Cir. 1988). In Grady, the Fourth Circuit held that in the context of future tort claimants, in this case a defective contraceptive device that required surgical removal, the specific acts of the tort that occurred prior to the petition gave rise to the future claimant’s claim for purposes of the Bankruptcy Code.
[4] See In Re Piper Aircraft Corp., 162 B.R. 619 (Bankr. S.D. Fla 1994).
[5] See Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950).