In an area bereft of precedent, the Third Circuit ruled that the qualification of a future claimants’ representative in an “asbestos” case is governed by a higher standard than disinterestedness. On the other hand, the appeals court said that the “mere existence” of a technical conflict may not disqualify a future claimants’ representative, or FCR.
The appeal before the Third Circuit involved Imerys Talc, which had filed a chapter 11 petition in 2019 to deal with crushing personal injury claims for exposure to asbestos and talc. To craft a plan that would dispose of claims not yet manifest, the bankruptcy court in Delaware was obliged under Section 524(g) to appoint an FCR. The statute is silent about the procedure for appointing an FCR or the standards by which the court should determine the qualifications of the individual chosen to serve.
Well before the chapter 11 filing, the debtor selected an individual that it would propose to serve as the FCR. The debtor also agreed that the individual could appoint his firm to serve as his counsel as the FCR. Both the individual and the firm were highly experienced, having served previously in similar roles in other chapter 11 cases.
The FCR’s firm disclosed to the debtor and to the court that it had been serving for about 10 years as counsel in a different case for two of the insurance companies that provided coverage for Imerys. The longstanding representation was unrelated to Imerys. The two insurance companies had previously given the FCR and his firm a prospective waiver allowing them to serve in later cases where those insurers might be involved.
Of significance, the firm had a long-established ethical wall insulating the firm’s FCR lawyers from a different set of lawyers providing defense to insurance companies.
None of the debtor’s insurers filed a timely objection to engagement of the FCR and his firm based on the firm’s representation of the two insurers in the other long-pending case. The two insurers and other defendants first raised the objection long after the objection deadline had passed.
The bankruptcy court nonetheless explored the objection minutely, Circuit Judge Cheryl Ann Krause said her in June 30 opinion for the Third Circuit. The bankruptcy court proceeded to approve the engagement of the FCR and his counsel. The district court affirmed. Several insurers appealed a second time.
The Merits
Judge Krause first ruled that the insurance companies had standing to appeal. Even though the insurers might have waived the objection, she ruled on the merits, given the “significant implications for bankruptcy law.” For readers interested in standing and waiver, we recommend reading the opinion in full text given the significance of the holdings by Judge Krause.
Regarding the standard for evaluating an FCR’s qualification, Judge Krause rejected the “disinterestedness” standard employed “by a handful of other courts.” Rather, she decided to use a standard “akin” to judging the qualifications for a guardian ad litem “in other contexts.”
Judge Krause said that the standard for an FCR “requires more than disinterestedness.” An FCR, she said, “must be able to act in accordance with a duty of independence from the debtor and other parties in interest in the bankruptcy, a duty of undivided loyalty to the future claimants, and an ability to be an effective advocate for the best interests of the future claimants.”
Disinterestedness was no fit, Judge Krause said, because it requires impartiality. An FCR is not impartial. Rather, an FCR is appointed specifically to present a particular constituency and by definition will be adverse to the debtor.
The use of the words “legal representative” in Section 524(g) led Judge Krause to hold that an FCR “must be more than merely disinterested, and instead be able to fulfill the heightened duties owed by fiduciaries.”
The objectors contended that the appointment was improper because representation of the two insurers was a conflict. Judge Krause rejected the argument, saying:
[T]he mere existence of a technical conflict should not disqualify an FCR if the bankruptcy court concludes he or she will meet the duties of independence and undivided loyalty and will serve as an effective advocate for the future claimants.
The representation of the two insurers in the other case might present an issue conflict for the FCR and his firm. In a “typical conflicts analysis,” Judge Krause said that “substantially related” does not refer to similar legal issues but to substantially related transactions.
Having established the standard, Judge Krause declined to “prescribe any particular process the bankruptcy court must follow in making that appointment.” Indeed, she said that “variations in the appointment process are otherwise within the discretion of the bankruptcy court.”
Having established the standard and having reviewed the process employed by the bankruptcy judge, Judge Krause found no abuse of discretion in approving the appointment of the FCR.
In an area bereft of precedent, the Third Circuit ruled that the qualification of a future claimants’ representative in an “asbestos” case is governed by a higher standard than disinterestedness. On the other hand, the appeals court said that the “mere existence” of a technical conflict may not disqualify a future claimants’ representative, or FCR.
The appeal before the Third Circuit involved Imerys Talc, which had filed a chapter 11 petition in 2019 to deal with crushing personal injury claims for exposure to asbestos and talc. To craft a plan that would dispose of claims not yet manifest, the bankruptcy court in Delaware was obliged under Section 524(g) to appoint an FCR. The statute is silent about the procedure for appointing an FCR or the standards by which the court should determine the qualifications of the individual chosen to serve.