Imerys Talc America, Inc v.

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
Nos. 20-3485, 20-3486, 20-3487, 20-3488
____________
In re: IMERYS TALC AMERICA, Inc.,
a/k/a Luzenac America, Inc.
a/k/a Imerys Talc Ohio Inc.
a/k/a Imerys Talc Delaware, Inc., et al., Debtors
Cyprus Historical Excess Insurers,
Appellants
____________
On Appeal from the United States District Court for the
District of Delaware
(Case Nos. 1:19-cv-944, 1:19-cv-1120, 1:19-cv-1121, 1:19-
cv-1122)
District Judge: Hon. Maryellen Noreika
____________
Argued October 5, 2021
Before: KRAUSE, BIBAS, and RENDELL, Circuit Judges
(Opinion Filed: June 30, 2022)
Tancred V. Schiavoni
Anton Metlitsky [Argued]
O’MELVENY & MYERS LLP
Times Square Tower, 7 Times Square
New York, NY 10036
Counsel for Cyprus Historical Excess Insurers
Jeffrey E. Bjork
Amy C. Quartarolo
Helena G. Tseregounis
LATHAM & WATKINS LLP
355 South Grand Avenue
Suite 1000
Los Angeles, CA 90071
Roman Martinez [Argued]
Caroline A. Flynn
Gregory B. in den Berken
LATHAM & WATKINS LLP
555 Eleventh Street, N.W.
Suite 1000
Washington, D.C. 20004
Michael J. Merchant
Marcos A. Ramos
Amanda R. Steele
RICHARDS, LAYTON & FINGER, P.A.
One Rodney Square
920 North King Street
Wilmington, DE 19801
Counsel for Imerys Talc America, Inc., Imerys Talc
Vermont, Inc., and Imerys Talc Canada Inc.
Robert S. Brady
Edwin J. Harron [Argued]
Sara Beth A.R. Kohut
Catherine C. Lyons
Sharon M. Zieg
YOUNG CONAWAY STARGATT & TAYLOR, LLP
Rodney Square
1000 North King Street
Wilmington, Delaware 19801
Counsel for Future Claimants Representative
Robert J. Schneider, Jr.
OFFICE OF UNITED STATES TRUSTEE
1085 Raymond Boulevard
2
One Newark Center, Suite 2100
Newark, NJ 07102
Dana Kaersvang
UNITED STATES DEPARTMENT OF JUSTICE
Room 7209
950 Pennsylvania Avenue, N.W.
Washington, DC 20530
Counsel for Amicus Curiae United States Trustee
Region 3
____________
OPINION OF THE COURT
____________
KRAUSE, Circuit Judge.
A group of insurance companies 1 appeals an order
appointing a representative for the interests of unidentified
future asbestos and talc claimants in an ongoing bankruptcy
proceeding. According to these insurers, who fund the
asbestos claims trust established under 11 U.S.C. § 524(g), this
“future claimants’ representative” (“FCR”) has a conflict of
interest precluding him from serving in this role because the
FCR’s law firm also represented two of the insurance
companies in a separate asbestos-related coverage dispute. But
the Bankruptcy Court did not abuse its discretion in appointing
the FCR. In applying in substance the appointment standard
we adopt today, it gave due consideration to the purported
conflict, and it correctly determined that the interests of both
1
The Appellants in this case—collectively, “the
Insurers”—are various insurance companies that had issued
policies to Imerys or its predecessors, and thus that have an
interest in Imerys’s reorganization process. They are:
Columbia Casualty Company, Continental Casualty Company,
the Continental Insurance Company (“Continental”), Lamorak
Insurance Company, Berkshire Hathaway Specialty Insurance
Company, and National Union Fire Insurance Company of
Pittsburgh, PA (“National Union”).
3
the insurance companies and the future claimants were
adequately protected. We therefore will affirm.
I. BACKGROUND
We focus today on the appointment and conflicts
standard for an FCR. But because the history and purpose of
the so-called “524(g) trust” provides necessary context for
our analysis, we begin with a brief historical overview before
recounting the factual and procedural history of this case.
A. Historical Background
Appellees Imerys Talc America, Inc., Imerys Talc
Vermont, Inc., and Imerys Talc Canada Inc. (collectively,
“Imerys”) are among the latest in a long line of companies to
turn to the bankruptcy process in response to the crushing
liability imposed by mounting asbestos and talc personal injury
claims. See In re Combustion Eng’g, Inc., 391 F.3d 190, 200-
01 (3d Cir. 2004).
Asbestos liabilities pose particular challenges for
bankruptcy proceedings: While Chapter 11 bankruptcy
reorganization normally affects only the rights of a debtor’s
current creditors and equity holders, many of the claimants
who will suffer harm from asbestos exposure traceable to the
debtor will not manifest those injuries until long after the
reorganization process has concluded. Yet one of the primary
goals for a debtor entering Chapter 11 bankruptcy is to cleanly
resolve its various liabilities to preserve the going concern of
its business. For that reason, a reorganization plan that failed
to account for future asbestos liabilities would be of limited
utility to the debtor, and likewise, a reorganization plan that did
not address future claimants would fail to provide adequately
for all parties with an interest in the debtor’s assets.
When the once-dominant American producer of
asbestos, the Johns-Manville Corporation, filed for bankruptcy
in 1982, its reorganization process introduced a novel
mechanism for dealing with these issues: a trust designed to
compensate present and future asbestos claimants, coupled
with an injunction against future asbestos liability. H.R. REP.
NO. 114-352, at 5 (2015); In re Fed.-Mogul Glob., Inc., 684
4
F.3d 355, 359 (3d Cir. 2012). The combination of the trust and
injunction allowed the debtor to emerge from bankruptcy
without the uncertainty of future asbestos liabilities hanging
over its head, while ensuring claimants would not be
prejudiced just because they had not yet manifested injuries at
the time of the bankruptcy. Another major asbestos company,
UNR Industries, soon “follow[ed] Johns-Manville’s lead” and
deployed a similar trust and injunction in its own bankruptcy
plan. H.R. REP. NO. 103-835, at 40 (1994).
In 1994, Congress opted to follow the Manville/UNR
model by amending the Bankruptcy Code to include 11 U.S.C.
§ 524(g), which “allow[s] for the resolution of asbestos
liability claims against a debtor through a trust-based system.”
H.R. REP. NO. 114-352, at 5. That section allows the debtor to
establish a trust that will serve as the exclusive source of
compensation for any present and future asbestos mass-tort
claimants after the confirmation of the reorganization plan. Id.;
11 U.S.C. § 524(g)(2)(B)(i). Provided that the trust meets
certain statutory requirements, the bankruptcy court issues to
the debtor a channeling injunction, which prevents any plaintiff
from suing the reorganized debtor for liability based on
exposure to asbestos or asbestos-containing products, id.§ 524(g)(1)(B), and “channel[s] all current and future claims
based on the debtor’s asbestos liability to [the] trust,” Fed.-
Mogul Glob., 684 F.3d at 357.
But the mere establishment of the trust and channeling
injunction is not enough. In any asbestos-driven bankruptcy
proceeding, there are naturally conflicting interests within the
larger group of asbestos claimants with respect to the trust.
Those who are presently injured—i.e., those who can make a
claim on the trust now or within the foreseeable future—are
indifferent to whether the trust pays out on fraudulent claims,
because the funds are unlikely to be exhausted before they
receive their own payouts. If anything, they may prefer a less
onerous claims review process in order to maximize the speed
with which they can recover against the trust. By contrast,
those who will not manifest injuries for years down the line—
the future claimants—have a strong interest in intensifying the
trust’s protections against fraudulent claims and early
overpayments, as they need the trust’s funds to last until they
can submit their own claims. See generally In re Amatex
5
Corp., 755 F.2d 1034, 1042–43 (3d Cir. 1985) (discussing the
particular interests of future claimants in asbestos bankruptcy
proceedings and concluding that their interests were “adverse”
to those of other parties).
In light of this natural adversity and to protect the due
process rights of the future claimants in bankruptcy
proceedings, § 524(g) includes a requirement that the
bankruptcy court appoint “a legal representative for the
purpose of protecting the rights of [future claimants]”—the
FCR—in the reorganization proceedings in order for the trust
and channeling injunction to “be valid and enforceable.” 11
U.S.C. § 524(g)(4)(B), 524(g)(4)(B)(i); see also H.R. REP. NO.
114-352, at 10. The FCR can then participate in the negotiation
of the reorganization plan and object to terms that unfairly
disadvantage future claimants.
The Bankruptcy Code is silent, however, on exactly
what standard and process the bankruptcy court should use in
appointing the FCR. As described next, it is that silence and
the uncertainty it has engendered that have led to the current
appeal.
B. Factual and Procedural Background
Like asbestos, talc exposure has generated a flood of
personal injury claims over recent years, subjecting many talc
companies to crushing liability. The experience of Imerys, a
company that mined, processed, and distributed talc to third-
party manufacturers for use in their products, is no exception.
Although for many years it was able to tackle the talc claims
as they arose using a combination of insurance assets and free
cash flow, by the time it filed for bankruptcy in early 2019, it
had been sued by over 14,000 claimants and could no longer
afford to fight the growing mountain of claims. It therefore
turned to Chapter 11 bankruptcy with the goal of channeling
the numerous talc claims into a § 524(g) trust.
6
As has become a relatively common practice among
debtors, 2 Imerys began work in preparation for its Chapter 11
bankruptcy proceedings months before actually filing its
petitions. In late 2018, as part of that preparation, it engaged
James Patton, a partner at the law firm of Young, Conaway,
Stargatt & Taylor, LLP (Young Conaway), to serve as
“Proposed FCR” in prepetition negotiations. Patton, in turn,
retained Young Conaway as his counsel.
Both Patton and his firm had much experience in this
area. Patton had worked for decades on mass-tort bankruptcy
matters, served as an FCR for several bankruptcy cases and
post-bankruptcy settlement-trusts, and was recognized for his
competence and expertise in these matters by bankruptcy
courts and his colleagues. He was one of a relatively small
number of experienced FCRs in this specialized field. See
Lloyd Dixon et al., Asbestos Bankruptcy Trust: An Overview
of Trust Structure and Activity with Detailed Reports on the
Largest Trusts, RAND Inst. For Civ. Just., at App. B (listing
the FCRs for several of the largest active trusts and proposed
trusts as of 2010). Young Conaway, too, had represented FCRs
in similar bankruptcies.
The engagement letter Patton signed with Imerys
specified that, notwithstanding Imerys’s obligation to pay his
fees and costs, his “sole responsibility and loyalty [was] to the
future personal injury claimants[.]” JA 184. Additionally,
because the selection and appointment of an FCR is ultimately
2
Prepetition work can be beneficial to enable the debtor
to enter bankruptcy court having already engaged in many of
the negotiations that will lead to a bankruptcy plan, or even
enter with a “prepackaged” bankruptcy plan ready to file,
saving costs and time in court and clearing Chapter 11
sooner. See United Artists Theatre Co. v. Walton, 315 F.3d
217, 224 n.5 (3d Cir. 2003) (explaining the process and utility
of “prenegotiated” and “prepackaged” bankruptcies). As such,
we have cautiously endorsed this practice, while requiring that
the bankruptcy court carefully scrutinize the prepetition
activity of the parties and counsel once the petitions have been
filed. See In re Congoleum Corp., 426 F.3d 675, 693 (3d Cir.
2005).
7
left to the bankruptcy court, not the parties, 11 U.S.C.
§ 524(g)(4)(B)(i), the engagement letter provided that Patton’s
service as Proposed FCR would terminate immediately upon
Imerys filing a bankruptcy petition, that Imerys would suggest
to the Bankruptcy Court that Patton serve as FCR, and that the
Bankruptcy Court would need to appoint him FCR if his work
was to continue beyond the bankruptcy filing.
In February 2019, following several months of
prepetition negotiations, Imerys filed its bankruptcy petitions
in the Bankruptcy Court, followed by a motion for the
Bankruptcy Court to appoint Patton as FCR. That motion was
accompanied by a declaration from Patton and a copy of his
prepetition engagement letter. The declaration set out a list of
“potentially interested parties” in the Imerys bankruptcy—
including “insurers”—and asserted that “except as set forth in
this Declaration,” Patton lacked any connection to the
potentially interested parties. JA 157 (emphasis added).
One of the exceptions that Patton listed was that “Young
Conaway represents [many insurance companies, including
Appellant] National Union Fire Insurance Company of
Pittsburgh, PA . . . in insurance coverage disputes that relate to
environmental liabilities including asbestos claims but
unrelated to talc claims or the Debtors.” JA 158. Specifically,
two of the Appellant Insurers—National Union and
Continental—were party to Warren Pumps v. Century
Indemnity Co., No. N10C-06-141 (Del. Super. Ct.), in which
two pump makers sued their insurers to get coverage for
asbestos-related injury claims. At the time Patton made his
disclosure, that litigation had been ongoing in the Superior
Court of Delaware since June 2010, see Viking Pump, Inc. v.
Century Indem. Co., 2018 WL 2331990, at *1-2 (Del. Super.
Ct. May 23, 2018), with Young Conaway representing both
Continental and National Union. Patton’s disclosure was also
echoed in the declaration of another Young Conaway partner
that was attached to Patton’s motion for appointment of the
firm as his counsel.
Notwithstanding the disclosures in these declarations,
when the deadline for objections to Patton’s proposed
appointment arrived on March 13, 2019, none of the Insurers
raised those representations as an objection. Nor did they
8
reference the Warren Pumps litigation or raise any concerns
with Patton’s application to retain Young Conaway. Rather, a
group of five of Imerys’s insurers filed a limited objection to
Patton’s employment based on his prepetition engagement as
Proposed FCR, which they contended raised questions about
his independence from Imerys. For its part, the U.S. Trustee
argued that the Bankruptcy Court should not give any
deference to Patton as the debtor’s nominee and instead should
hold a hearing to consider a broader pool of candidates.
The Insurers also failed to raise Young Conaway’s
involvement in the Warren Pumps litigation a month later at
the Bankruptcy Court’s hearing on Patton’s appointment,
which addressed both of the objections and related discovery
disputes. Indeed, even though the objecting Insurers’ attorney
who cross-examined Patton at the hearing was himself
involved in the Warren Pumps litigation and thus well aware
of Young Conaway’s involvement, he focused his questions on
other bases for the Insurers’ objections. To the extent Warren
Pumps was referenced at all, it was only obliquely and
briefly—with Patton confirming on cross-examination that:
(1) Young Conaway represented National Union and
Continental, among other insurance companies, (2) both
companies had signed conflicts waivers as part of that
representation, and (3) the National Union representation
concerned insurance coverage for environmental liabilities
including asbestos claims.
Instead, it was the Bankruptcy Court that flagged the
Warren Pumps representation as a potential conflict. In its
initial ruling on Patton’s appointment on May 8, 2019, the
Court disagreed with the objecting Insurers that Patton’s
prepetition work necessarily undermined his independence as
FCR, but it expressed concerns about Patton’s personal
involvement in Young Conaway’s previously disclosed
representation of “Certain Excess Insurance companies in
insurance coverage litigation related to environmental
liabilities, including asbestos liabilities.” JA 32. In resolving
the motion, the Court articulated its view of the requirements
for FCR appointments: “[T]he standard for approval of a legal
representative under section 524 is that he must be independent
of the debtors and other parties-in-interest in the case and must
be able to act with undivided loyalty to demand holders.” JA
9
33. The Court therefore sought to reassure itself of Patton’s
independence by directing Patton to file supplemental
disclosures, postponing a final decision on his appointment.
Patton complied, and his supplemental disclosures
revealed that, as part of Young Conaway’s engagement letter
with the insurance companies in the Warren Pumps litigation,
those companies agreed to a prospective waiver for certain
conflicts of interest that might arise out of Young Conaway’s
bankruptcy-related work. The disclosures also confirmed that
Young Conaway had taken the precautionary step of erecting
an ethical wall between Patton’s FCR team and the firm’s other
insurance litigation.
Ironically, it was only upon receipt of this reassurance 3
that the Insurers, for the first time, objected to Patton’s
appointment based on the purported Warren Pumps conflict. 4
On May 17, 2019—ten days after the Court’s initial ruling and
over two months after the deadline for objections—they filed
a “supplemental objection,” arguing that Young Conaway’s
representation of Continental and National Union presented a
3
Patton submitted an initial disclosure on May 13,
2019, followed by a second disclosure on May 17, 2019 with
more detail on the terms of the conflict waiver and the details
of Young Conaway’s ethical wall.
4
This was not the same combination of insurers as that
which filed the original objection; the five original companies
were joined for this later objection by National Union (one of
the two points of overlap between the Appellant Insurers and
the companies involved in Warren Pumps), and it is this group
of six Insurers that now brings the instant appeal.
And, although the Insurers’ Corporate Disclosure
Statement submitted to this Court includes a seventh company,
Lexington Insurance Company, that company is not actually a
party to this appeal and, in fact, never seems to have been a
part of the shifting group of insurers raising objections to
Patton’s appointment at any point in the Bankruptcy Court
proceedings. The company also seems to have been
inappropriately included in the Insurers’ initial appeal to the
District Court.
10
concurrent conflict of interest that precluded Patton’s
appointment. JA 939.
That filing did not sit well with the Bankruptcy Court.
The Court took a dim view of the Insurers’ supplemental
objection as “both confusing and largely irrelevant to the issues
actually presented by the Supplemental Declarations, and for
that matter, Mr. Patton’s original declaration.” JA 35
(footnotes omitted). Nevertheless, it went on to address, and
ultimately to reject, the merits of the Insurers’ arguments.
Based on the language of the prospective conflicts waiver and
the sophistication of the signatories, the Court concluded the
waiver was valid and precluded the Insurers’ latest objections.
And upon consideration of Patton’s supplemental disclosures,
it concluded that that Patton met the appointment standard
described in its previous ruling. Thus, on June 3, 2019, the
Court formally appointed Patton to the FCR position and
authorized him to retain Young Conaway.
The District Court affirmed, and the Insurers appealed
to this Court.
II. JURISDICTION AND STANDARD OF REVIEW
This case was before the Bankruptcy Court as a core
proceeding pursuant to 28 U.S.C. § 157(b), and the District
Court had jurisdiction under 28 U.S.C. § 158(a). We have
jurisdiction pursuant to 28 U.S.C. § 158(d)(1).
In our review of the Bankruptcy Court’s decision, “‘we
stand in the shoes of the District Court’ and apply the same
standard of review.” In re Somerset Reg’l Water Res., LLC,
949 F.3d 837, 844 (3d Cir. 2020) (quoting In re Glob. Indus.
Techs., Inc., 645 F.3d 201, 209 (3d Cir. 2011) (en banc)).
Thus, “our review duplicates that of the district court and we
view the bankruptcy court decision unfettered by the district
court’s determinations.” In re Brown, 951 F.2d 564, 567 (3d
Cir. 1991) (citing Universal Mins., Inc. v. C.A. Hughes & Co.,
669 F.2d 98, 101–03 (3d Cir. 1981)). Like the District Court,
then, “[w]e review the bankruptcy court’s legal determinations
de novo, its factual findings for clear error, and its discretionary
decisions for abuse of discretion.” Somerset Reg’l Water Res.,
11
949 F.3d at 844 (citing In re Pursuit Cap. Mgmt., LLC, 874
F.3d 124, 133 n.14 (3d Cir. 2017)).
III. DISCUSSION
The Insurers challenge the merits of the Bankruptcy
Court’s decision to appoint Patton FCR. But before we can
reach that question, we must address two threshold issues in
this appeal: the Insurers’ standing to bring this challenge, and
their waiver of their particular objection to Patton’s
appointment. After disposing of these preliminary questions,
we turn to the standard a bankruptcy court must apply in
making an FCR appointment under § 524(g) and to the
propriety of Patton’s appointment under that standard.
A. Standing
As a threshold matter, we consider the Insurers’
standing, as it appears that not all Appellants are properly
before us. The two that were involved in Warren Pumps,
Continental and National Union, unquestionably have standing
to object to Patton’s appointment based on his alleged conflict
of interest with them specifically. The closer question is
whether the remaining Insurers, who were not themselves
involved in Warren Pumps, also have standing.
Appellants argue that they do because the conflict
“implicate[s] the integrity of the bankruptcy process[.]” Rep.
Br. 20. Relying on In re Congoleum Corp., 426 F.3d 675, 685–
86 (3d Cir. 2005), they contend that even if they themselves
will not be prejudiced by Patton’s appointment, they have
standing to raise it on behalf of the future claimants. But
Appellants mistake the import of Congoleum.
Both before and after that case, standing in bankruptcy
appeals has been limited to “person[s] aggrieved” and, as we
explained in Travelers Insurance Co. v. H.K. Porter Co., Inc.,
parties meet that standard only when a contested order
“diminishes their property, increases their burdens, or impairs
their rights.” 45 F.3d 737, 742 (3d Cir. 1995) (quoting In re
Dykes, 10 F.3d 184, 187 (3d Cir. 1993)); see also In re
Combustion Eng’g, Inc., 391 F.3d at 214. The “person
aggrieved” standard is thus “more restrictive” than Article III’s
12
“case or controversy” requirement. Travelers, 45 F.3d at 741.
But that is necessary. Bankruptcy proceedings “typically
involve a ‘myriad of parties . . . indirectly affected by every
bankruptcy court order,’” so in the absence of such a stringent
standing rule, collateral appeals could proliferate and unduly
slow the emergence of the filer from the proceedings. Id.(alteration in original) (quoting Kane v. Johns-Manville Corp.,
843 F.2d 636, 642 (2d Cir. 1988)); see also Combustion Eng’g,
391 F.3d at 215.
To the extent there was any question about the viability
of Travelers after Congoleum, we clarify today that the “person
aggrieved” standard we articulated there remains good law.
The Insurers point out that a proper FCR appointment is
required for a valid plan confirmation under § 524(g) and thus
“involves ‘procedural due process concerns that implicate the
integrity of the bankruptcy court proceeding as a whole,’” just
as we observed was true for the retention of the special
insurance counsel in Congoleum. Rep. Br. at 21 (quoting
Congoleum, 426 F.3d at 685). But it was the particular
circumstances in Congoleum that led us to conclude that the
insurers there were “entitled to standing even under the more
restrictive standard applied to bankruptcy proceedings.”
Congoleum, 426 F.3d at 685; see also In re Boy Scouts of
America, — F.4th —, 2022 WL 1634643, at *4 (3d Cir. 2022)
(concluding that an appellant met the “person aggrieved”
standard to challenge the retention of counsel where the “same
considerations” involved in Congoleum applied). In particular,
we observed that (1) “as a practical matter,” it was “highly
unlikely” that any parties other than those who sought standing
in that case would seek to challenge the special insurance
counsel’s retention; (2) the insurers’ objection seemed to have
been made in good faith, based on their counsel’s
responsibility to report a clear violation of the ethical rules that
would have otherwise been left unaddressed; and (3) it was
“extremely important” that the purported conflict be addressed
at the point when the insurers brought their challenge, as the
court was unlikely to have another opportunity to do so.
Congoleum, 426 F.3d at 685–87.
But the conditions discussed in Congoleum are not
present here. First, there is no need to expand the pool of those
with standing to raise this particular conflict in order to ensure
13
it receives judicial review. In contrast to Congoleum, we do
have other litigants here who are better equipped than the
remaining Insurers to alert the court to the Warren Pumps
conflict—the two insurers who were actually parties to Warren
Pumps—and those litigants had ample time and opportunity to
raise the issue before the Bankruptcy Court.
Second, in the absence of that need, it appears that the
Insurers are only bringing this objection as a tactical one to
delay Imerys’s plan confirmation. This is just the sort of bad-
faith tactic that Congoleum itself recognized and cautioned
against, because of the “acute need to limit appeals in
bankruptcy cases.” Congoleum, 426 F.3d at 685–86 (citing In
re Combustion Eng’g, Inc., 391 F.3d at 217–18).
Finally, we are dealing here not with the permissive
approval of a debtor’s application for additional insurance
counsel under § 327(e), as in Congoleum, 426 F.3d at 683, but
with the bankruptcy court’s mandatory appointment of the
FCR under § 524. Under § 524, the bankruptcy court itself
must make the appointment and thus take an active role in
considering and “protecting the rights of” the future claimants.
11 U.S.C. § 524(g)(4)(B)(i). So the need for third parties to
play that role is significantly reduced. It is the court that is
charged with protecting the integrity of the appointment
process, and the Bankruptcy Court here did just that by
identifying the potential conflict, requesting supplemental
disclosures, and assuring itself of Patton’s integrity before
appointing him FCR.
In short, Congoleum did not eliminate Travelers’s
heightened standard for bankruptcy appellate standing and it
did not authorize parties to bankruptcy proceedings to raise
conflicts of interest on behalf of other parties in all
circumstances. The Insurers here still must meet the “persons
aggrieved” standard, and while Continental and National
Union do, 5 Columbia Casualty Company, Continental
5
In their letter response brief to the U.S. Trustee’s
amicus brief, the Insurers argue for the first time that they have
standing to raise the future claimants’ interests because
Continental and National Union, who they contend “were
14
Casualty Company, Lamorak Insurance Company, and
Berkshire Hathaway Specialty Insurance Company do not.
Accordingly, those four insurers lack appellate standing and
their claims will be dismissed on that basis.
B. Waiver
Before addressing the merits of the claims of
Continental and National Union, we confront another threshold
issue: whether they waived any objection based on the Warren
Pumps representation by failing to timely raise it in the
bankruptcy proceedings. An argument is waived where a party
fails to “adequately raise it” with a “minimum level of
thoroughness” in the lower court. In re Ins. Brokerage
Antitrust Litig., 579 F.3d 241, 262 (3d Cir. 2009); Barefoot
Architect, Inc. v. Bunge, 632 F.3d 822, 834–35 (3d Cir. 2011).
And in bankruptcy appeals, avoiding a waiver determination at
the district court or appellate court requires a party to have
properly brought the argument before the bankruptcy court. In
re Trib. Media Co., 902 F.3d 384, 400 (3d Cir. 2018) (citing
Buncher Co. v. Off. Comm. of Unsecured Creditors of
GenFarm Ltd. P’ship IV, 229 F.3d 245, 253 (3d Cir. 2000)).
Here, the Insurers objected to Patton’s proposed
appointment as FCR ever since Imerys first put his name
forward, but the first time they raised the Warren Pumps
representation issue was in a “supplemental objection” filed
months after the Bankruptcy Court’s deadline for objections
had passed. JA 939.
As previously recounted, this was not because Young
Conaway’s involvement in Warren Pumps had only just come
to light. Both Patton and Young Conaway had included
effectively sued by their own lawyer,” can invoke doctrines
developed to protect others as “a common mode of argument.”
Insurer Response to U.S. Tr. Amicus Br. at 2. But this has
never been in dispute. The issue here is not whether, once
standing is ascertained, the Insurers can mount arguments
involving the interests of future claimants. The issue is
whether, at the threshold, the remaining four Insurers—who
have no apparent conflict with Patton or Young Conaway—
can establish standing.
15
references to the litigation in their initial disclosures; the
representation was likewise mentioned at the FCR appointment
hearing; and, perhaps most significantly, the same attorney for
the Insurers who cross-examined Patton about Young
Conaway’s asbestos and talc work at that hearing was also
counsel to some of the insurers in Warren Pumps itself. The
Insurers thus had adequate notice and opportunity to raise their
Warren Pumps objection at the appropriate time in the FCR
appointment process, and instead made the strategic decision
to focus their objections on other grounds. Failing to bring an
argument at the appropriate time can result in a finding of
waiver. See, e.g., Pichler v. UNITE, 542 F.3d 380, 396 n.19
(3d Cir. 2008) (holding an argument waived where a party
raised it at oral argument, but not in its briefs); Confer v.
Custom Eng’g Co., 952 F.2d 41, 44 (3d Cir. 1991) (noting that
the district court “exercised sound discretion” in deeming
arguments waived that litigant had brought in a motion for
reconsideration, but not in the original summary judgment
papers).
And, to be clear, the Insurers’ delay in bringing this
argument was not without consequence. Much ink was spilled
and hours of hearing testimony consumed on the subject of
Patton’s prepetition work with Imerys (the focus of the
Insurers’ objections for the bulk of the FCR appointment
process), while there was little to no record development
concerning any conflict with the Warren Pumps
representation. As a result, the record is devoid of evidence
about what Young Conaway might have learned in the Warren
Pumps representation that could compromise the Insurers’ or
others’ interests in this bankruptcy proceeding—information
that would have helped us assess the existence, nature, and
severity of the purported conflict. And the “general rule” that
we will not “consider issues on appeal that were not raised in
the lower courts” “applies with added force where,” as here,
“the timely raising of the issue would have permitted the
parties to develop a factual record.” In re Am. Biomaterials
Corp., 954 F.2d 919, 927–28 (3d Cir. 1992) (citations omitted).
In short, there are valid reasons to conclude, as the
District Court did, that the Insurers waived their Warren
16
Pumps argument before the Bankruptcy Court. 6 But there are
more compelling reasons to address it. For one, the
Bankruptcy Court on its own initiative addressed the merits of
the Insurers’ objection, and we review the Bankruptcy Court’s
decision “unfettered by the district court’s determinations.”
Brown, 951 F.2d at 567. For another, the waiver rule “is one
of discretion rather than jurisdiction,” and we may overlook
waiver where, as here, the “public interest is better served by
addressing [an argument] than by ignoring it” and addressing
that argument does not cause “surprise or prejudice” to the
parties. Barefoot Architect, 632 F.3d at 834–35 (internal
quotation and citation omitted). Here, the open legal questions
in the case have significant implications for bankruptcy law,
and the parties will not be prejudiced because these questions
were fully briefed following the Bankruptcy Court’s issuance
of a reasoned opinion on the merits. We therefore proceed to
address the proper standard for appointing an FCR and the
propriety of Patton’s appointment under that standard.
C. The Standard Applicable to FCR
Appointments
The briefing and the opinion the Bankruptcy Court
issued in this case offer us a wide range of alternatives for the
6
The parties characterize this issue as one of forfeiture,
but waiver and forfeiture are not precisely the same. Waiver
contemplates that an argument has been “intentional[ly]
relinquish[ed] or abandon[ed],” while forfeiture is merely a
failure to timely raise an issue. Hamer v. Neighborhood Hous.
Servs. of Chi., 138 S. Ct. 13, 17 n.1 (2017) (quoting United
States v. Olano, 507 U.S. 725, 733 (1993)). Because it seems
in this case that the Insurers intentionally chose to raise other
objections before the deadline, and only brought an untimely
“supplemental objection” about the Warren Pumps
representation after the Bankruptcy Court indicated that topic
was of particular interest to it, we agree with the District
Court’s characterization of the issue here as waiver.
Regardless, this distinction would not change whether we
reach this issue. See Barna v. Bd. of Sch. Dirs. of the Panther
Valley Sch. Dist., 877 F.3d 136, 147–48 (3d Cir. 2017) (noting
that courts reach forfeited issues in “exceptional
circumstances,” such as “when the public interest requires”).
17
standard applicable to FRC appointments. The Bankruptcy
Court rejected the “disinterestedness” standard adopted by a
handful of other courts, and held that “a legal representative
under section 524 . . . must be independent of the debtors and
other parties-in-interest in the case and must be able to act with
undivided loyalty to demand holders.” JA 33. While Imerys
and Patton contend that 11 U.S.C. § 101(14)’s definition of
“disinterested person” 7 should govern FCR appointments, the
Insurers advocate for a “guardian-ad-litem test,” which they
acknowledge is what the Bankruptcy Court adopted in
substance. But they do not stop there. The Insurers also urge
us to apply § 327 of the Bankruptcy Code, which governs a
trustee’s employment of certain professionals and requires that
any actual conflict of interest held by those professionals is per
se disqualifying. 11 U.S.C. § 327(a), (c). Meanwhile, the
United States Trustee, as amicus, 8 does not espouse the
7
That definition provides that a “disinterested person”:
(A) is not a creditor, an equity
security holder, or an insider;
(B) is not and was not, within 2
years before the date of the filing
of the petition, a director, officer,
or employee of the debtor; and
(C) does not have an interest
materially adverse to the interest of
the estate or of any class of
creditors or equity security
holders, by reason of any direct or
indirect relationship to, connection
with, or interest in, the debtor, or
for any other reason.
11 U.S.C. § 101(14).
8
The United States Trustee participated in the FCR
appointment process before the Bankruptcy Court, objecting to
Patton’s appointment on the basis that the Bankruptcy Court
should have considered other candidates in addition to the one
put forward by the debtor. However, the Trustee did not
participate in the objection that spawned this appeal. We
18
application of § 327 but agrees with the Bankruptcy Court and
the Insurers that FCRs “should be held to the high standards
applicable to fiduciaries who represent parties not before the
Court,” such as guardians ad litem. U.S. Tr. Amicus Br. 2. As
the Trustee frames it, “the [FCR] must be an effective
advocate, free from any appearance of conflict of interest, and
must have undivided loyalty to the future claimants he or she
represents.” Id. (citing Meinhard v. Salmon, 164 N.E. 545, 546
(N.Y. 1928)).
For the reasons set forth below, we agree with the
Bankruptcy Court and the Trustee that the FCR standard
requires more than disinterestedness. An FCR 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. 9 We reach this conclusion after considering (1) the
Bankruptcy Code itself; (2) the parties’ arguments concerning
legislative history and legislative acquiescence; (3) the
standards governing creditors’ committees, which we see as
playing an analogous representational role in the bankruptcy
process; and (4) the administrability of the fiduciary standard
therefore invited him to submit supplemental amicus briefing
regarding the appropriate FCR appointment standard. We are
grateful the Trustee accepted that invitation and appreciate his
prompt response and excellent quality of the submission.
9
The parties generally refer to this standard as a
“guardian ad litem” standard—a characterization also
referenced by the court in In re Fairbanks Co., 601 B.R. 831,
841 (Bankr. N.D. Ga. 2019), which the Bankruptcy Court
below considered in fashioning its standard. But using that
precise label is unnecessary and may have unintended
consequences. We do not suggest, for example, that an FCR is
a guardian ad litem for the future claimants; true guardians ad
litem have the legal authority to bind those they represent,
which an FCR does not (it merely participates in the
negotiation of a plan and channeling injunction that will govern
its constituents’ future claims). What we adopt here is merely
a standard akin to those employed for guardians ad litem in
other contexts.
19
we adopt in the bankruptcy context. Because many of the
district and bankruptcy courts in our Circuit had settled on the
disinterestedness standard from which we now depart, 10 we
address each of these considerations in some detail.
1. Text and Structure of the Bankruptcy
Code
The Code does not explicitly lay out an FCR
appointment standard. It specifies only that, in order for a
channeling injunction to be enforceable in combination with
an asbestos trust, the court must do two things: (1) as part of
the bankruptcy proceedings leading to the issuance of that
injunction, “appoint[] a legal representative for the purposes
of protecting the rights” of the future claimants, and (2)
“determine[]” that the terms of the injunction are “fair and
equitable with respect to” the future claimants,” in light of the
benefits” provided to the trust by the debtor and other
relevant parties. 11 U.S.C. § 524(g)(4)(B).
We begin with the text of the Code, for “[w]here
Congress includes particular language in one section of a
statute but omits it in another section of the same Act, it is
generally presumed that Congress acts intentionally and
purposely in the disparate inclusion or exclusion.” Russello v.
United States, 464 U.S. 16, 23 (1983) (quoting United States v.
Wong Kim Bo, 472 F.2d 720, 722 (5th Cir. 1972)). Congress
specifically chose to deploy § 101(14)’s “disinterested person”
standard in eleven other sections of the Code. See 11 U.S.C.
§§ 327(a), 328(c), 332(a), 333(a)(2)(A), 701(a)(1), 703(c),
1104(b)(1), (d), 1163, 1183(a), 1202(a), and 1302(a). In
§ 524(g), however, it did not.
Given the structure and context of the Code, that is not
surprising. As the Bankruptcy Court noted, the sections in
10
See, e.g., In re Duro Dyne Nat’l Corp., No. 18-15563,
2019 WL 4745879, at *9 (D.N.J. Sept. 30, 2019); Fed. Ins. Co.
v. W.R. Grace, Nos. 04-844, 04-845, 2004 WL 5517843, at *7
(D. Del. Nov. 22, 2004); In re Maremont Corp., No. 19-10118,
ECF No. 126, at 101 (Bankr. D. Del. Mar. 8, 2019)); In re
Leslie Controls, Inc., No. 10-12199, ECF No. 146, at 70
(Bankr. D. Del. Aug. 9, 2010).
20
which the Code applies the “disinterested person” standard
relate to professionals whose duties run to the entire estate or
to the court, requiring that they remain impartial. Section 327,
for example, applies to “attorneys, accountants, appraisers,
auctioneers, or other professional persons” who are hired by
the trustee and approved by the court “to represent or assist the
trustee in carrying out the trustee’s duties[,]” but excludes any
professional who “represent[s] an interest adverse to the
estate.” 11 U.S.C. § 327(a). The FCR, by contrast, is the “legal
representative” for just such an adverse interest, having been
appointed specifically “for the purpose of protecting the rights
of” future asbestos claimants. Id. § 524(g)(4)(B)(i).
The absence of language invoking the disinterested
person standard in § 524(g) thus counsels against adopting that
standard for FCR appointments.
But if the language Congress chose to leave out from
§ 524(g) is significant, so too is that which it opted to include.
Section 524(g) directs that the bankruptcy court appoint a
“legal representative” for certain interests. Id.
§ 524(g)(4)(B)(i). “Legal representative” is a term of art,
referring to one who owes fiduciary duties to his absent,
represented constituents. See, e.g., Kem Mfg. Corp. v. Wilder,
817 F.2d 1517, 1520 (11th Cir. 1987) (construing “legal
representative” in Fed. R. Civ. P. 60(b)). And “it is a cardinal
rule of statutory construction that, when Congress employs a
term of art, it presumably knows and adopts the cluster of ideas
that [a]re attached to [it].” See FAA v. Cooper, 566 U.S. 284,
292 (2012) (internal quotations omitted). We presume,
therefore, that when Congress employed that term in § 524(g),
it anticipated that the FCR would serve as fiduciary to the
future claimants. Indeed, legal representatives and their
attendant fiduciary duties are central to the bankruptcy process.
See, e.g., Listecki v. Official Comm. of Unsecured Creds., 780
F.3d 731, 739 (7th Cir. 2015) (creditors’ committee is a
representative for “the larger interests of the unsecured private
creditors” and so “it is to them . . . that the committee owes a
fiduciary duty); In re AFI Holding, Inc., 530 F.3d 832, 845 (9th
Cir. 2008) (a trustee is both “the ‘legal representative’ and
‘fiduciary’ of the estate”); In re Smart World Techs., LLC, 423
F.3d 166, 174–75 & n.12 (2d Cir. 2005) (the debtor-in-
possession is a “legal representative of the bankruptcy estate”
21
and thus is a “fiduciary” for the estate, just as the creditors’
committee “owes a fiduciary duty to the class it represents”).
The statutory text of § 524(g) therefore suggests that an
FCR appointed under that section must be more than merely
disinterested, and instead be able to fulfill the heightened
duties owed by fiduciaries.
2. Legislative History and Acquiescence
The legislative history and acquiescence arguments on
which some courts have relied likewise provide little support
for the “disinterested person” standard. See, e.g., In re Duro
Dyne Nat’l Corp., No. 18-15563, 2019 WL 4745879, at *9
(D.N.J. Sept. 30, 2019).
Whatever one thinks of using legislative history to
interpret statutes, it is of little help here. It appears that
Congress drafted § 524(g) to codify the trust-and-channeling
injunction mechanisms pioneered in the Johns-Manville and
UNR Industries bankruptcies and that it was satisfied with the
protection they provided to future claimants. See H.R. REP.
NO. 103-835, at 41 (explaining that § 524(g) was crafted “in
order to strengthen the Manville and UNR trust/injunction
mechanisms and to offer similar certitude to other asbestos
trust/injunction mechanisms that meet the same kind of high
standards with respect to regard for the rights of claimants,
present and future, as displayed in the two pioneering cases”).
It also appears that the Johns-Manville and UNR courts applied
something like the disinterested standard to their choice of
proto-FCRs. 11 Neither, however, was explicit about doing so.
11
In Johns-Manville, the court scheduled a hearing to
address the role of the representative for future claimants, and
noted that while it was “consider[ing] in preliminary fashion
several formulations of legal representation: guardian ad litem,
amicus curiae and examiner,” it was not precluded from
adopting another model altogether. In re Johns-Manville
Corp., 36 B.R. 743, 758–59 (Bankr. S.D.N.Y. 1984) (footnote
omitted). Following that hearing, the court appointed a
representative for future claimants that would exercise the
same powers as creditors’ committees, a decision affirmed by
22
And the congressional report accompanying the bill, while
gesturing generally to the Johns-Manville and UNR
bankruptcies, never specifically called out their FCR
appointment processes. See id. at 40–41 (omitting mention of
the FCR position in its discussion of the new § 524(g)).
As for the legislative acquiescence argument, legislative
silence does not often tell us much, and here it tells us nothing.
It is true that—against the backdrop of certain courts importing
§ 101(14)’s “disinterested person” test into § 524(g)—
Congress amended § 524 on three occasions 12 without
clarifying the test for FCRs. But that silence does not portend
acquiescence because there was only a smattering of district
and bankruptcy court cases on point, not the “longstanding
interpretation” and “almost perfect consistency” in the
decisions of the Courts of Appeals, Gulf Oil Corp. v. Copp
Paving Co., 419 U.S. 186, 200–01 (1974), or the “virtual
the district court. See In re Johns-Manville Corp., 52 B.R. 940,
942–43 (S.D.N.Y. 1985). By opting for this model of
representation, in which the representative had no authority to
bind future claimants, id. at 943, the court implicitly rejected
the previously proposed guardian ad litem model, see 36 B.R.
at 758 n.7 (explaining that future claimants “would be bound
by the actions of [a guardian ad litem] by virtue of the doctrine
of equitable virtual representation” if it relied on that model).
The UNR Industries court similarly entrusted its future
claimants’ representative with a creditors’ committee’s
powers. In re UNR Indus., Inc., 46 B.R. 671, 676 (Bankr. N.D.
Ill. 1985). In soliciting nominations for that representative, it
called for someone who was a “disinterested party to serve as
Legal Representative for putative asbestos disease victims.”
Id. Without further explanation, it is difficult to determine if
the UNR court deliberately chose disinterestedness as the
standard, so much as invoked it as a default.
12
See Small Business Reorganization Act of 2019, Pub.
L. No. 116-54, § 4(a)(9)(A)–(C), 133 Stat. 1086, 1087 (2019);
Bankruptcy Technical Corrections Act of 2010, Pub. L. No.
111-327, § 2(a)(19), 124 Stat. 3557, 3559 (2010); Bankruptcy
Abuse and Prevention and Consumer Protection Act of 2005,
Pub. L. 109-8, §§ 202, 203(a), 119 Stat. 43, 194 (2005).
23
unanimity” among the federal courts over decades, Monessen
Sw. Ry. Co. v. Morgan, 486 U.S. 330, 338 (1988), as have been
present when past courts have assumed legislative
acquiescence. In addition, the amendments to § 524 were
specific and targeted, and as the Supreme Court has cautioned,
“when ‘Congress has not comprehensively revised a statutory
scheme but has made only isolated amendments . . . [i]t is
impossible to assert with any degree of assurance that
congressional failure to act represents affirmative
congressional approval of [a court’s] statutory interpretation.’”
AMG Cap. Mgmt., LLC v. Fed. Trade Comm’n, 141 S. Ct.
1341, 1351 (2021) (alterations in AMG Cap. Mgmt.) (quoting
Alexander v. Sandoval, 532 U.S. 275, 292 (2001)). In short,
§ 524’s history as concerns the “disinterested person” standard
is at best inconclusive.
3. Analogy to the Creditors’ Committee
We find useful guidance, however, in the jurisprudence
surrounding an analogous player in the bankruptcy process: the
creditors’ committee.
Just as a creditors’ committee exists to serve the
interests of its constituents, the various creditors, the FCR
serves the interests of his constituents, the future claimants.
See Listecki v. Official Comm. of Unsecured Creds., 780 F.3d
731, 739 (7th Cir. 2015) (noting that “a [creditors’] committee
represents the larger interests of the unsecured private
creditors, and it is to them, and not the Trustee, court, or any
governmental actor, that the committee owes a fiduciary duty”
and collecting cases). And in the creditors’ committee context,
even though the Code only specifies that the committee be
“adequate[ly] representat[ive]” of the relevant creditors, 11
U.S.C. § 1102(a)(2), courts have long required each committee
member not only to be free of conflicts of interest but also to
fulfill fiduciary duties to the committee’s constituents,
including duties of undivided loyalty and honesty. See
generally 7 COLLIER ON BANKRUPTCY ¶ 1103.05[2] (16th ed.
2021) (summarizing the fiduciary duties of committee
members); see also, e.g., Woods v. City Nat. Bank & Tr. Co. of
Chi., 312 U.S. 262, 268 (1941) (“Protective committees . . . are
fiduciaries.”); In re Kensington Int’l, Ltd., 368 F.3d 289, 315
(3d Cir. 2004) (“[I]t is established that a Creditors Committee
24
owes a fiduciary duty to the unsecured creditors as a
whole[.]”); In re PWS Holding Corp., 228 F.3d 224, 246 (3d
Cir. 2000) (“Section 1103(c) of the Bankruptcy Code, which
grants to the Committee broad authority to formulate a plan
and perform ‘such other services as are in the interest of those
represented[,]’ . . . has been interpreted to imply . . . a fiduciary
duty to committee constituents[.]”).
For an FCR, who functions, in effect, as a “creditors’
committee” of one, that fiduciary standard is equally
appropriate, so in view of its long-standing application in that
similar context and the text of the Code itself, that is the
standard we adopt today.
4. Administrability
We next address the administration of the fiduciary
standard in the FCR appointment process.
To be clear, that standard does not herald a categorical
approach to an FCR’s appointment. The parties to this appeal
vigorously dispute whether Patton had a concurrent conflict of
interest as a result of the Warren Pumps litigation, the
implication being that it would disqualify him per se. 13 But the
question of whether a conflict exists is less relevant to an
appointment than the nature of the conflict and importance of
the conflict to the future claimants’ interests. In a given
instance, a purported ethical conflict might have minimal or no
13
The categorical approach advocated by the Insurers
would effectively preclude service by the most effective FCRs,
for the reality is that the current universe of qualified and
experienced FCRs is small, see Lloyd Dixon et al., Asbestos
Bankruptcy Trusts: An Overview of Trust Structure and
Activity with Detailed Reports on the Largest Trusts, RAND
INST. FOR CIV. JUST., at App. B (2010) (listing 26 of the largest
active trusts and three of the largest proposed trusts as of 2010,
with seven FCRs who serve on two or more of them); JA 735
(noting that Patton currently serves as FCR for six different
trusts), and it is entirely to be expected that the law firms that
are home to those professionals with experience in asbestos-
related bankruptcies would also be involved in asbestos-related
insurance coverage litigation.
25
impact on an FCR’s ability to successfully represent the future
claimants’ interests. For instance, the litigation giving rise to
the conflict may be long over or subject to effective ethical
walls at the FCR’s firm. In such cases, the court, in its
discretion, may well determine that the proposed FCR still
meets the appointment requirements. 14
The comparison to a creditors’ committee is again
instructive, for those members have some degree of inherent
“conflict” in that they each have their own interests as
individual creditors that are arguably adverse to other creditors.
Yet they may still serve on the committee if they can act
independently of their self-interest and fulfill their fiduciary
duties to the creditors as a whole. See Westmoreland Hum.
14
Along similar lines, the Insurers ask us to decide
whether Rule 1.7 of the Model Rules of Professional Conduct
applies to the FCR role, which Imerys disputes because the
FCR is not, technically, a “lawyer” representing a “client” as
contemplated by the terms of the rule. But this debate is largely
beside the point. First, even for those practicing lawyers who
are undisputedly covered by the ethics rules, the bankruptcy
court still has discretion to decide whether or not those rules
should result in disqualification under the circumstances: “[A]
court’s . . . decision about whether to use that power is
discretionary and ‘never is automatic.’” In re Boy Scouts of
America, — F.4th —, 2022 WL 1634643, at *7 (3d Cir. 2022)
(quoting United States v. Miller, 624 F.2d 1198, 1201 (3d Cir.
1980)). Thus, “even when an ethical conflict exists (or is
assumed to exist), a court may conclude based on the facts
before it that disqualification is not an appropriate remedy.”
Id. Second, the ethics rules themselves, even if they applied,
would not determine whether an FCR candidate meets the
appointment standard we set today. If an “actual conflict”
under the Rules is merely technical and extremely unlikely to
prejudice the interests of the future claimants, the bankruptcy
court can still properly make the appointment under § 524 after
engaging in the appropriate analysis of the future claimants’
interests and the appointee’s abilities and qualifications. Cf. id.
at *5 (noting in a conflicts analysis under § 327 that the Rules
“may be informative in some cases,” but are not determinative
of what an “actual conflict” is under the terms of that section).
26
Opportunities, Inc. v. Walsh, 246 F.3d 233, 256 (3d Cir. 2001)
(“We have construed § 1103(c) as implying a fiduciary duty on
the part of members of a creditor’s committee . . . toward their
constituent members. A committee member violates its
fiduciary duty by pursuing a course of action that furthers its
self-interest to the potential detriment of fellow committee
members.” (citing In re PWS Holding Corp., 228 F.3d at 246)).
Just so, the 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.
While we have settled on an FCR appointment standard,
we do not today prescribe any particular process the
bankruptcy court must follow in making that appointment. Of
course, implicit in the FCR appointment standard is one
procedural requirement: that whatever process the bankruptcy
court follows ensures that the court has the information
necessary to assess the candidate(s)’s qualifications. But given
that “as part of the proceedings leading to issuance of [a
channeling] injunction, the court appoints a legal
representative for the purpose of protecting the rights of” future
claimants, 11 U.S.C. § 524(g)(4)(B)(i), variations in the
appointment process are otherwise within the discretion of the
bankruptcy court.
D. Propriety of Patton’s Appointment
With the FCR appointment standard set, we now turn to
the question of whether Patton was properly appointed to the
FCR position in the Imerys bankruptcy. It is important to note
that, ultimately, neither the Insurers nor the Bankruptcy Court
raised any question regarding Patton’s qualifications,
independence, undivided loyalty, or ability to be an effective
advocate for future claimants apart from the purported ethical
conflict arising out of Young Conaway’s work on Warren
Pumps.
The Insurers nonetheless contend that Young
Conaway’s Warren Pumps representation prevents Patton
from meeting the FCR appointment standard. Essentially, they
make two arguments: first, that Warren Pumps creates a direct
conflict of interest between Patton and Continental and
27
National Union themselves, which requires his
disqualification; and second, that his Warren Pumps
connection taints his independence and ability to be an
effective advocate on behalf of the future claimants’ interests.
Neither are persuasive.
i. Alleged Direct Conflict of Interest
To the extent Continental and National Union argue that
Warren Pumps requires Patton’s disqualification because of
the direct conflict of interest it creates between the two
companies and Patton, the Bankruptcy Court was correct in
ruling that the prospective waiver disposed of this issue. In
that waiver provision, those Insurers acknowledged that Young
Conaway maintained a “substantial corporate workout,
bankruptcy[,] and insolvency practice,” and that they “agree[d]
that [Young Conaway] may represent other clients (i) in
workout, bankruptcy[,] and insolvency proceedings, and (ii) in
connection with trusts established pursuant to section 524(g)
of the Bankruptcy Code.” JA 898. They also agreed they
“w[ould] not assert that this instant Engagement is a basis for
disqualifying [Young Conaway] from representing others” in
those bankruptcy-related matters if those Insurers were
creditors of the debtor in those bankruptcies and if the interests
of Young Conaway’s clients in those matters were “directly
adverse” to the Insurers. 15 JA 898–99.
The Insurers next argue that it was impossible for them
to have given informed consent to the conflict when it arose in
the Imerys bankruptcy because Patton’s prepetition work as
Proposed FCR was done pursuant to a non-disclosure
agreement. Even aside from the fact that the Insurers are
sophisticated parties who were represented by both an agent
15
Of course, this was subject to the condition that the
future bankruptcy-related matters were not “the same matter or
a matter substantially related to the same matter” as the one in
which Young Conaway represented the Insurers. JA 898. For
the reasons explained below, however, Continental and
National Union have not met their burden to establish that this
condition of the waiver was not met. See, e.g., Satellite Fin.
Planning Corp. v. First Nat’l Bank of Wilmington, 652 F. Supp.
1281, 1283 (D. Del. 1987).
28
and that agent’s insurance counsel, their argument
misapprehends what we require of valid prospective waivers.
Prospective waivers do not necessitate a second round of
consent when a future conflict actually arises; that would
defeat the purpose of obtaining a prospective waiver in the first
place. Rather, the question is whether at the time of signing the
prospective waiver the clients could give “truly informed
consent” as to the potential conflicts that foreseeably might
arise in the future. Congoleum, 426 F.3d at 691; MODEL
RULES OF PRO. CONDUCT, r. 1.7 cmt. 22 (“The effectiveness of
such [prospective] waivers is generally determined by the
extent to which the client reasonably understands the material
risks that the waiver entails.”). And the waiver at issue here
was quite clear not only that Young Conaway might be
involved in bankruptcy proceedings in which the Insurers
would be creditors, but also that the firm was likely to be
involved in FCR work specifically.
As such, the Bankruptcy Court was justified in
concluding that the Warren Pumps insurers would have known
at the time of signing that there was a material risk that Young
Conaway would be involved in the future in § 524(g)
proceedings that would also involve insurance company
creditors, a risk that materialized with the Imerys bankruptcy. 16
See, e.g., In re Fisker Auto. Holdings, Inc. S’holder Litig., 2018
WL 3991470, at *3–4 (D. Del. Aug. 20, 2018) (upholding the
16
Along similar lines, although we concluded supra
that § 327 does not govern FCR appointments, we note that
even the Insurer’s requested analysis under that section’s per
se disqualification provision would have required more
information regarding the Warren Pumps litigation. In urging
us to apply § 327’s requirements, the Insurers do not identify
an actual (or even a potential or apparent) conflict other than
the fact of Young Conaway’s involvement in the Warren
Pumps litigation. As recently explained, “a conflict is actual
[for the purposes of § 327] when the specific facts before the
bankruptcy court suggest that ‘it is likely that a professional
will be placed in a position permitting it to favor one interest
over an impermissibly conflicting interest.’” Boy Scouts,
— F.4th —, 2022 WL 1634643, at *4 (3d Cir. 2022) (quoting
In re Pillotex, Inc., 304 F.3d 246, 254 (3d Cir. 2002)). Those
facts are lacking here.
29
validity of a prospective waiver based on an analysis of the
waiver’s language and the sophistication of the parties).
ii. Ability to Provide Effective Advocacy
The Insurers’ only remaining argument is that because
the Warren Pumps litigation “involve[d] substantially related
issues” as will be raised in the Imerys Bankruptcy, JA 945, it
impairs Patton’s ability to serve the future claimants’ interests.
Their primary argument on this point is that a future
claimant “would probably be displeased” with Patton’s
appointment, “[e]specially when . . . this isn’t an unrelated
case [to the Warren Pumps litigation]” and “[t]he arguments
that [Young Conaway] was making in that case” about policy
interpretation issues would be “adverse” to the arguments the
FCR can be expected to make about the Insurers’ policies in
this bankruptcy. 17 Tran. 64. But in typical conflicts analyses,
“substantially related” does not refer to the similarities
between the legal issues raised; rather, “[m]atters are
‘substantially related’ . . . if they involve the same transaction
or legal dispute or if there otherwise is a substantial risk that
confidential factual information as would normally have been
obtained in the prior representation would materially advance
the client’s position in the subsequent matter.” MODEL RULES
OF PRO. CONDUCT r. 1.9 cmt. 3 (AM. BAR ASS’N 2020); see
also RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS
§ 132 (2000).
Because the Insurers fail to show that Warren Pumps
involved the same transactions or legal disputes as might be
implicated by Patton’s future work as FCR in the Imerys
bankruptcy, we can only say that the matters are “substantially
17
Apart from this argument, the Insurers support their
contention of the cases being “substantially related” with only
vague assertions that in both cases, “(i) more than one
corporate entity asserts a claim to insurance policy proceeds,
(ii) insurers have contribution rights among insurers, and (iii)
there are issues raised regarding whether excess policies owe
defense obligations and to whom under what limitations and
conditions,” JA 975-76.
30
related” if there is a “substantial risk” that Patton and Young
Conaway will use in the Imerys bankruptcy any confidential
information that Young Conaway obtained from its
representation of Continental and National Union in Warren
Pumps. That is a fact-specific inquiry, see, e.g., Madukwe v.
Del. State Univ., 552 F. Supp. 2d 452, 458 (D. Del. 2008), and
the Insurers simply do not point to any facts that would
establish any risk of weaponized confidential information.
In any event, the Bankruptcy Court carefully considered
this issue. After it set out an appointment standard quite close
in substance to that which we adopt today—one centered on
Patton’s ability to serve the future claimants’ interests
effectively and impartially—the Court requested additional
disclosures concerning the particular matters it thought
relevant to its determination of whether Patton met that
standard. One of those matters was Patton’s involvement in
Young Conaway’s previously disclosed representation of
“many if not all of the Certain Excess Insurance companies in
insurance coverage litigation related to environmental
liabilities, including asbestos liabilities.” JA 32. In response
to that request, the Court received and considered not only
Patton’s disclosures, but also the unsolicited supplemental
objection of the Insurers raising the Warren Pumps conflict,
Patton’s response to that objection, and several related
declarations and exhibits. And what they revealed only
bolstered the Court’s confidence in Patton: that Young
Conaway had implemented an ethical wall between its work on
Warren Pumps and Patton’s work as FCR in the Imerys
bankruptcy, that Patton himself was never involved in the
Warren Pumps matter at all, and that Young Conaway had
billed only a handful of hours to the matter since 2016 and none
since 2018. Given the state of the record on this issue and
Patton’s reputation and qualifications for the FCR role, the
Bankruptcy Court did not abuse its discretion in concluding
that the alleged conflict would not impair Patton’s
performance, and that his credentials, experience, and
expertise would serve the future claimants’ interests with the
required degree of independence and loyalty.
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IV. CONCLUSION
For the foregoing reasons, we will affirm the judgment
of the District Court.
32