In the context of mass tort bankruptcies like Johns Manville, W.R. Grace and Quigley, the Second and Third Circuits have prescribed limits on the extent to which so-called channeling injunctions can bar creditors from asserting their own claims against insurers that provided coverage for debtors.
The Third Circuit issued a seminal decision in August 2018 in the W.R. Grace bankruptcy. Continental Casualty Co. v. Carr (In re W.R. Grace & Co.), 900 F.3d 126 (3d Cir. Aug. 14, 2018).
Reversing and remanding the case to bankruptcy court, the Third Circuit explored the outer limits of channeling injunctions by defining when creditors cannot sue insurance companies and must collect their claims only from a trust created as part of a chapter 11 plan. Basically, the appeals court said that a channeling injunction can go only so far as Section 524(g) allows in protecting non-debtor third parties like insurers. To read ABI’s report on last year’s opinion, click here.
In the lawsuit that the Third Circuit remanded to bankruptcy court, the plaintiffs are asserting claims against W.R. Grace’s insurers under Montana law, contending that the insurers were negligent and failed to warn about the dangers of exposure to asbestos.
After the case was remanded to the Delaware bankruptcy court, the Third Circuit tapped Bankruptcy Judge Ashely M. Chan of Philadelphia to take over for a bankruptcy judge who was retiring.
On September 23, Judge Chan handed down a 56-page opinion where she concluded that the claims were not based on derivative liability and therefore were not enjoined. She authorized the plaintiffs to continue litigation against the insurers in Montana state court.
Judge Chan’s opinion reads like a treatise, tracing the evolution of the law on derivative claims and channeling injunctions principally from the Second and Third Circuits. As mandated by the Third Circuit, she explored Montana law to decide whether the injunction in the W.R. Grace plan stopped the plaintiffs from prosecuting claims against the insurers. In substance, she concluded that the negligence and failure-to-warn claims were not derivative in nature and were therefore not subject to the channeling injunction.
There is a novel aspect to Judge Chan’s decision regarding subject matter jurisdiction. In the appeal last year, the parties did not seriously contest subject matter jurisdiction. Essentially, the Third Circuit tersely said there was “related to” jurisdiction entitling the bankruptcy court to decide whether the injunction was properly imposed under Section 524(g).
Judge Chan took a step back and said there was no subject matter jurisdiction in the first place because the broad “conceivable effect” test for “related to” jurisdiction is more narrow when based on indemnification obligations.
In the course of the W.R. Grace reorganization, the debtor reached a settlement with insurers where they paid $84 million. In return, the debtor agreed, among other things, to indemnify the insurers up to $13 million for any payments they might make on account of asbestos claims that were not channeled through the trust.
Judge Chan recognized that “related to” jurisdiction can result from the effect on the trust stemming from the indemnification obligation. Critical to her decision on jurisdiction, she said that the insurers had no right of indemnification absent the settlement agreement made years before.
Judge Chan parsed In re Combustion Engineering Inc., 391 F.3d 190 (3d Cir. 2004), as amended (Feb. 23, 2005), where the Third Circuit said there is no “related to” jurisdiction when a third party’s claim “did not directly result in liability for the debtor.” Id. at 231.
Judge Chan also analyzed Feld v. Zale Corp. (In re Zale Corp.), 62 F.3d 746 (5th Cir. 1995), where the creditors’ bad faith tort claims against the insurer were based on the misconduct of the insurer, not the debtor. The only connection between the bad faith claims and the debtor’s estate was the debtor’s settlement agreement to indemnify the insurer for claims that could not be brought against the debtor.
Judge Chan quoted the Fifth Circuit as holding “that the settlement agreement did not ‘provide the basis for jurisdiction over the bad faith claims.’” Id. at 756.
Applying the law to the facts, Judge Chan said that neither the debtor nor the trust would have any liability for the Montana claims aside from the settlement and its indemnification agreement. “In other words,” she said, the Montana litigation “does not, in and of itself, give rise to any claims in favor of [the insurers] against Grace or the Trust.” [Emphasis in original.]
Judge Chan returned to Combustion Engineering. When the court lacks subject matter jurisdiction, the Third Circuit said that “the parties cannot create it by agreement even in a plan of reorganization.” Combustion Engineering, 391 F.3d at 228. In other words, the settlement agreement could not confer subject matter jurisdiction when the debtor otherwise would have had no indemnification obligations.
Judge Chan ended her discussion of subject matter jurisdiction by saying that she was “constrained to respectfully observe that the Bankruptcy Court did not have jurisdiction over the Montana Claims.”
Ordinarily, a finding of a lack of jurisdiction would end the discussion, and the court would not explore the merits, like Section 524. Of course, Judge Chan did rule on the merits in accordance with the mandate from the Third Circuit. Her discussion of jurisdiction may be helpful in the future when other courts face similar questions regarding indemnification as a basis for “related to” jurisdiction.
In re Imerys Talc America Inc., 19-mc-103, 2019 BL 267734, 2019 U.S. Dist. Lexis 120572, 2019 WL 3253366 (D. Del. July 19, 2019), is another Delaware case parsing the more limited reach of “related to” jurisdiction based on indemnification claims. To read ABI’s discussion, click here.
In the context of mass tort bankruptcies like Johns Manville, W.R. Grace and Quigley, the Second and Third Circuits have prescribed limits on the extent to which so-called channeling injunctions can bar creditors from asserting their own claims against insurers that provided coverage for debtors.
The Third Circuit issued a seminal decision in August 2018 in the W.R. Grace bankruptcy. Continental Casualty Co. v. Carr (In re W.R. Grace & Co.), 900 F.3d 126 (3d Cir. Aug. 14, 2018).
Reversing and remanding the case to bankruptcy court, the Third Circuit explored the outer limits of channeling injunctions by defining when creditors cannot sue insurance companies and must collect their claims only from a trust created as part of a chapter 11 plan. Basically, the appeals court said that a channeling injunction can go only so far as Section 524(g) allows in protecting non-debtor third parties like insurers. To read ABI’s report on last year’s opinion, click here.
In the lawsuit that the Third Circuit remanded to bankruptcy court, the plaintiffs are asserting claims against W.R. Grace’s insurers under Montana law, contending that the insurers were negligent and failed to warn about the dangers of exposure to asbestos.
After the case was remanded to the Delaware bankruptcy court, the Third Circuit tapped Bankruptcy Judge Ashely M. Chan of Philadelphia to take over for a bankruptcy judge who was retiring.