An opinion by District Judge Michael A. Shipp of Trenton, New Jersey, is reminiscent of the old joke that goes like this: “How many [insert the name of a group to be ridiculed] does it take to screw in a light bulb?”
Judge Shipp was tasked with deciding how many candidates there must be for a bankruptcy judge to select a future claimants’ representative in an asbestos bankruptcy. Agreeing with other courts, he concluded that a court does not commit error by considering only the debtor’s candidate.
Disagreeing with a decision from Georgia in April, Judge Shipp ruled in his September 30 opinion that a future claimants’ representative is evaluated by the disinterestedness standard, not by the higher standard of appearance of impropriety.
The Prepacked Claimants’ Representative
The debtor was dealing with thousands of claims for manufacturing products from the 1950s to the 1970s allegedly containing asbestos. The debtor, together with an ad hoc committee for current asbestos claimants, selected an individual to participate in the negotiations as a representative of future claimants. The man they selected had already served as the future claimants’ representative, or FCR, in six other asbestos bankruptcies.
Before his selection, the FCR had no relationship with the debtor, who was to pay his fees. However, the FCR’s fees were not capped by the debtor, who had no right to control or influence his work. Following his selection, the FCR negotiated the plan, disclosure statement and trust documents. His consent was required for the debtor to file a chapter 11 petition.
The FCR never demanded that he serve as the FCR after confirmation and had no guarantee that he would be selected by the court to serve as the FCR after filing.
After the plan was agreed upon by the debtor, the FCR, and the ad hoc committee for current claimants, the debtor filed a chapter 11 petition that would create a trust under Section 524(g) to deal with present and future claims. The debtor quickly moved for the bankruptcy court’s approval of FCR.
After allowing the U.S. Trustee to conduct discovery, and after an evidentiary hearing where the U.S. Trustee cross-examined the FCR, Bankruptcy Judge Michael B. Kaplan of Trenton employed the disinterestedness standard under Section 101(14) and approved the selection of the FCR.
The U.S. Trustee appealed. Among other things, the U.S. Trustee argued that Judge Kaplan should have considered more than one candidate and erred by failing to employ the higher “appearance of impropriety” standard.
Is One Candidate Enough?
The U.S. Trustee argued that the court must consider candidates other than those nominated by the debtor.
Judge Shipp said that Section 524(g) “does not prescribe the process for appointing” an FCR. The statute does not even say who may appoint a candidate, nor does it prescribe how many candidates a court must consider.
Citing legislative history and recent asbestos cases, Judge Shipp held “that a debtor — or any other party in interest — may nominate the future claimants’ representative and that a bankruptcy court may approve a debtor’s nominee.” He went on to say, however, that the court “owes no deference” to the debtor’s nominee.
The Disinterestedness Standard or Higher?
Next, the U.S. Trustee argued that the bankruptcy court erred by employing the disinterestedness standard in Section 101(14) rather than the higher “appearance of impropriety” standard.
As authority, the U.S. Trustee cited In re The Fairbanks Co., 601 B.R. 831 (Bankr. N.D. Ga. April 17, 2019), where the bankruptcy court held that an FCR must meet the higher standard applicable to a guardian ad litem. To read ABI’s discussion of Fairbanks, click here.
To determine the proper standard, Judge Shipp conducted a de novo review interpreting Section 524(g)(4)(B)(i). The statute, he said, does not prescribe the standard, but “the legislative history of Section 524(g) supports the disinterestedness standard.”
Judge Shipp said that the FCR does not have unilateral power to “bind absent persons in the way a guardian ad litem might,” because the trust agreement gives that power to the trustee.
For Judge Shipp, it would be “incongruous” to impose a higher standard on the FCR than on the disinterested trustee to whom the FCR is subordinate.
Under the disinterestedness standard, the U.S. Trustee contended that the FCR did not qualify because the debtor had paid his fees before filing.
Judge Shipp rejected the argument, because the FCR’s prepetition retention agreement made his engagement terminate automatically on filing, and his continuation in office must be authorized by the court.
Although Judge Shipp did not say so, adopting the argument of the U.S. Trustee would disqualify any FCR who had negotiated a prepackaged asbestos bankruptcy.
Having decided that the bankruptcy judge employed the correct standard, Judge Shipp upheld the appointment of the FCR because the bankruptcy court’s findings of fact on disinterestedness were not clearly erroneous.
What Does the Opinion Mean?
The U.S. Trustee cannot sit on the sidelines and complain about an FCR nominated by the debtor. If there are reservations about the debtor’s choice, the U.S. Trustee should make a competing nomination or prove that the debtor’s selection is not disinterested.
Judge Shipp did not designate his opinion for publication. In view of the important analysis and holdings in the opinion, it should be officially published, in this writer’s judgment.
An opinion by District Judge Michael A. Shipp of Trenton, New Jersey, is reminiscent of the old joke that goes like this: “How many [insert the name of a group to be ridiculed] does it take to screw in a light bulb?”
Judge Shipp was tasked with deciding how many candidates there must be for a bankruptcy judge to select a future claimants’ representative in an asbestos bankruptcy. Agreeing with other courts, he concluded that a court does not commit error by considering only the debtor’s candidate.
Disagreeing with a decision from Georgia in April, Judge Shipp ruled in his September 30 opinion that a future claimants’ representative is evaluated by the disinterestedness standard, not by the higher standard of appearance of impropriety.
The debtor was dealing with thousands of claims for manufacturing products from the 1950s to the 1970s allegedly containing asbestos. The debtor, together with an ad hoc committee for current asbestos claimants, selected an individual to participate in the negotiations as a representative of future claimants. The man they selected had already served as the future claimants’ representative, or FCR, in six other asbestos bankruptcies.