In Re W.R. Grace & Co.

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
Nos. 12-1521/2904
_____________
In Re: W.R. Grace & Co., et al., Debtors
Her Majesty the Queen in Right of Canada,
Appellant in 12-1521
The State of Montana,
Appellant in 12-2904
_______________
On Appeal from the United States District Court
for the District of Delaware
(D.C. No. 11-cv-199)
District Judge: Hon. Ronald L. Buckwalter
_______________
Argued
June 17, 2013
Before: AMBRO, FISHER and JORDAN, Circuit Judges.
(Filed: September 4, 2013)
_______________
Jacqueline Dais-Visca
Senior Counsel
Ontario Regional Office
130 King Street West - #3400
Toronto, Ontario M5X1K6
Kevin J. Mangan
Francis A. Monaco, Jr. [ARGUED]
Matthew P. Ward
Womble, Carlyle, Sandridge & Rice
222 Delaware Avenue - #1501
Wilmington, DE 19801
Counsel for Appellant her Majesty the Queen
In Right of Canada by the Attorney General of Canada
Kevin J. Mangan
Francis A. Monaco, Jr. [ARGUED]
Matthew P. Ward
Womble, Carlyle, Sandridge & Rice
222 Delaware Avenue - #1501
Wilmington, DE 19801
Counsel for Appellant State of Montana
John Donley [ARGUED]
Lisa G. Esayian
Adam C. Paul
Kirkland & Ellis
300 N. LaSalle Street
Chicago, IL 60654
2
Roger J. Higgins
111 E. Wacker Drive - #2800
Chicago, IL 60601
Laura D. Jones
Kathleen P. Makowski
James E. O’Neill, III
Pachulski Stang Ziehl & Jones
919 N. Market Street – 17th Fl.
Wilmington, DE 19801
Christopher Landau
Kirkland & Ellis
655 15th Street NW - #1200
Washington, DC 20005
Counsel for Appellee W.R. Grace & Co.
Mark T. Hurford
Campbell & Levine
222 Delaware Avenue - #1620
Wilmington, DE 19801
Peter V. Lockwood [ARGUED]
Caplin & Drysdale
One Thomas Circle, NW - #1100
Washington, DC 20005
Counsel for Appellee Official Committee of Asbestos
Personal Injury
3
Elisa Alcabes
Simpson, Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Robert J. Dehney
Morris, Nichols, Arsht & Tunnell
1201 North Market Street
P.O. Box 1347
Wilmington, DE 19899
Mary Beth Forshaw
Simpson, Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Andrew T. Frankel
Simpson, Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Neal J. Levitsky
Fox Rothschild
919 North Market Street
Citizens Bank Center
Suite 1300
Wilmington, DE 19801
4
Seth A. Niederman
Fox Rothschild
919 North Market Street
Citizens Bank Center
Suite 1300
Wilmington, DE 19801
Counsel for Appellee Travelers Casualty & Surety Co
Roger L. Frankel [ARGUED]
Orrick, Herrington & Sutcliffe
1152 15th Street, N.W.
Columbia Center
Washington, DC 20005
Counsel for Appellee David T. Austern, Asbestos PI Future
Claimants Representative
Mark M. Maloney
Thaddeus D. Wilson
King Spalding LLP
1180 Peachtree Street, NE
Atlanta, GA 30309
Ashley C. Parrish
Matthew S. Owen
Carolyn M. Sweeney
King & Spalding LLP
1700 Pennsylvania Avenue, NW
Washington, DC 20006
Counsel for Amicus Curiae Imperial Tobacco Canada
Limited
_______________
5
OPINION OF THE COURT
_______________
JORDAN, Circuit Judge.
The State of Montana (“Montana”) and Her Majesty
Queen Elizabeth II in Right of Canada (“the Crown”)1 appeal
the June 11, 2012 order2 of the United States District Court
for the District of Delaware affirming the Bankruptcy Court’s
confirmation of the plan of reorganization of W.R. Grace &
Co, et al. (“Grace”).3 We conclude that the District Court
1
Although other courts of appeals have referred to the
Queen by the territory over which she is sovereign, see, e.g.,
Her Majesty the Queen in Right of Ontario v. EPA, 912 F.2d
1525, 1529 (D.C. Cir. 1990) (referring to “Her Majesty the
Queen in Right of Ontario” as “Ontario”), for consistency’s
sake we adopt the term used by her counsel and the District
Court, and further adopt the District Court’s convention of
referring to the sovereign as “it.”
2
The District Court first issued an order affirming the
Bankruptcy Court’s confirmation decision on January 30,
2012. See In re W.R. Grace & Co., 468 B.R. 81 (D. Del.
2012). At the request of the parties, the Court subsequently
addressed an additional issue not relevant to this appeal and,
on June 11, 2012, it issued an amended and superseding
opinion and order. See In re W.R. Grace & Co., 475 B.R. 34(D. Del. 2012). Montana and the Crown appealed both
orders, but the earlier order has since been withdrawn.
3
For simplicity, we refer to the appellee-debtors
collectively and in the singular as “Grace,” as the District
6
correctly denied Montana’s and the Crown’s objections to
plan confirmation, and we will accordingly affirm.
I. Background
A. The Grace Bankruptcy
This appeal arises from Grace’s ongoing efforts to
reorganize under Chapter 11 of the Bankruptcy Code, 11
U.S.C. § 1101, et seq., in a manner that resolves all of its
present and future asbestos liabilities. The company, which
has manufactured and sold specialty chemicals and
construction materials for more than a century, began facing
asbestos-related lawsuits in the 1970s. Those lawsuits were
based on alleged harm caused by a number of Grace’s
products and activities, including its operation of a
vermiculite mine in Libby, Montana. Grace operated the
mine from 1963 to 1990, and during that period the mining
process released asbestos-containing dust into the atmosphere
and allegedly sickened hundreds of area residents. Grace also
had to confront many property damage lawsuits, including
claims seeking recovery for the removal of asbestos-
containing products from homes and businesses.
As a result of Grace’s production of asbestos-
containing materials, Montana and the Crown have been
subject to asbestos-related lawsuits due to their alleged failure
to warn their citizens of the risks posed by Grace’s products
Court did. See In re W.R. Grace & Co., 475 B.R. at 63 n.3.
Grace actually consists of 62 separate entities. See In re W.R.
Grace & Co., 446 B.R. 96, 102 n.2 (Bankr. D. Del. 2011)
(listing those entities).
7
and activities. Montana was named as a defendant in
approximately 210 cases in Montana state courts, based on
allegations that Montana officials failed to warn people in the
vicinity of the vermiculite mine that they were at risk of
asbestos exposure. Some of the cases also involved claims
that Montana aided and abetted Grace’s allegedly unlawful
activities. In 2004, the Montana Supreme Court held that the
state had a duty to warn residents of “workplace conditions
known to be hazardous to health,” but the court did not
resolve whether Montana had breached that duty. Orr v.
State, 106 P.3d 100, 110, 118 (Mont. 2004). The state settled
all of those cases for $43 million in 2011. As for the Crown,
it has been named as a defendant in several failure-to-warn
class action lawsuits involving property damage and personal
injury claims arising from the use of “Zonolite Attic
Insulation” (“ZAI”), a Grace insulation product that contains
trace amounts of asbestos. The Crown further asserts that
there may be future asbestos claims against it. Because of
their exposure to asbestos liability, Montana and the Crown
contend that they are entitled to contribution and
indemnification from Grace.4
By 2001, the number of asbestos-related lawsuits
against Grace had grown to 65,000, which threatened the
company’s financial viability and prompted it to file for
Chapter 11 protection. Grace hoped that it could use § 524(g)
of the Bankruptcy Code, 11 U.S.C. § 524(g), to establish a
means for resolving the thousands of present and future
4
The Crown also claims to have direct property
damage claims against Grace due to “costs incurred to seal
attics and otherwise remediate ZAI installed in homes on
military bases in Canada.” (Crown Opening Br. at 14.)
8
asbestos-related claims against the company. That provision,
discussed in depth herein, allows a company like Grace to set
up a trust that will assume its asbestos liabilities. The statute
likewise authorizes an injunction to channel all asbestos-
related claims to such a trust. See 11 U.S.C. § 524(g)(1)(A),
(2)(B). Section 524(g) thus allows companies to emerge from
bankruptcy free of asbestos liability, but only if the particular
channeling injunction in the case satisfies certain
prerequisites, including that it be “fair and equitable” to
future claimants. See id. § 524(g)(4)(B)(ii).
It took Grace and its creditors’ committees seven years
of contentious negotiations and litigation to reach an
agreement regarding the basic structure of the company’s
reorganization. The litigation included a protracted dispute
over estate assets, which focused on Grace’s transfer of
billions of dollars to two former affiliates, as well as
numerous disagreements with Grace’s insurance providers.
Those disputes eventually settled, resulting in the allocation
of more than 1.5 billion dollars to a proposed § 524(g) trust.
Grace also worked to resolve disputes with the nearly
130,000 claimants who brought pre-petition asbestos personal
injury and property damage claims. The company
successfully settled with the vast majority of claimants
bringing what came to be called “traditional” property
damage claims – i.e., claims that do not involve ZAI – and it
reached global agreements addressing the resolution of
present and future ZAI property damage claims. With regard
to the personal injury claims, Grace and the claimants
engaged in extended negotiations over the estimated value of
Grace’s personal injury liabilities and the corresponding
amount needed to adequately fund a § 524(g) trust. In April
9
2008, the Bankruptcy Court held an “estimation trial” to
resolve those questions. At that trial, representatives for the
personal injury claimants, which included the personal injury
creditors’ committee (the “PI Committee”) and a court-
appointed future claimants’ representative, presented expert
testimony that estimated Grace’s liability to be somewhere
between 6.3 and 7.4 billion dollars. Grace’s experts, on the
other hand, put the company’s liability at 468 million dollars.
Given that disparity, the parties opted for settlement and
agreed to a term sheet that created the essential structure of a
joint plan.
B. The Joint Plan
Soon after that settlement in April 2008, Grace, the PI
Committee, the future claimants’ representative, and the
equity committee proposed a Joint Plan of Reorganization
(the “Plan” or the “Joint Plan”),5 the central pillars of which
are two trusts – a personal injury trust and a property damage
trust – that will assume all of Grace’s current and future
asbestos liabilities. The Joint Plan also provides for a
§ 524(g) channeling injunction, which will send all asbestos-
related claims against Grace (and certain protected third
parties), including future claims, to the trusts, allowing the
protected parties to be “unconditionally, irrevocably and fully
released” from “any and all Asbestos-Related Claims.” (J.A.
at 200117.) As its name suggests, the personal injury trust
will assume all of Grace’s direct and indirect asbestos
5
The Joint Plan was initially filed on September 19,
2008, and a “finalized” version was filed on February 27,
2009. The Plan continued to undergo modifications,
however, through December 23, 2010.
10
personal injury liabilities.6 It is funded by the 1.5 billion
dollars obtained through settlements with Grace’s insurers
and former affiliates, by an initial payment from Grace of 450
million dollars, by a warrant to acquire 10 million shares of
Grace common stock at 17 dollars a share, and by deferred
cash payments from Grace of 100 to 110 million dollars per
year through 2033.7 In total, those funding sources will
provide more than 3 billion dollars to the trust. The property
damage trust will likewise assume all of the protected parties’
direct and indirect property damage liabilities, including ZAI
property damage claims, and it is funded by an initial
payment of 180 million dollars, and a subsequent payment of
6
Specifically, the personal injury trust will “assume
the liabilities of the Debtors with respect to all Asbestos
[Personal Injury] Claims,” and will “process, liquidate, pay
and satisfy all Asbestos [Personal Injury] Claims in
accordance … with [the] Plan.” (J.A. at 200092.) The Plan’s
definition of an Asbestos Personal Injury Claim includes any
claim against Grace that, “directly or indirectly,” is “based
on, arising out of, resulting from, or attributable to … death,
wrongful death, personal or bodily injury …, sickness,
disease, loss of consortium, survivorship, medical monitoring,
or other personal injuries,” and “the presence of or exposure
at any time to” Grace’s asbestos products or production. (J.A.
at 200041.) It therefore includes personal injury claims
arising from ZAI.
7
The deferred payments to the trust are secured by a
majority of Grace’s common stock.
11
30 million dollars.8 Some of that money will then be
transferred to a special fund that will be used to compensate
Canadian ZAI property damage claimants.
In addition to being separately funded, the two trusts
proposed by the Joint Plan have separate mechanisms for
resolving claims. Claims brought against the personal injury
trust are to be resolved in accordance with the personal injury
trust agreement and the “trust distribution procedures,” or
“TDPs.” The TDPs establish two primary methods by which
claims will be assessed, valued, and paid. Under an
“expedited review” process, claims will be categorized and
assigned a set amount of recovery according to a schedule of
eight asbestos-related disease levels, some of which require
demonstration of certain medical or exposure criteria.
Claimants who do not meet those criteria, or who “seek to
establish a liquidated value for the claim that is greater than
its Scheduled Value,” will also have the option of utilizing an
individual review process, which could involve arbitration or
litigation of their claims. (J.A. at 200293.) Both the
expedited review and the individual review will result in a
determination of the liquidated value of a claim. Claimants
will not be paid the full liquidated value, however. Rather,
each claimant will recover a certain percentage of the
liquidated value of his or her claim – a “Payment Percentage”
– in order to ensure that there is money left for future
claimants to receive comparable recoveries. The TDPs set
the initial Payment Percentage at between 25% and 35%,
meaning that personal injury claimants should receive
8
Subject to certain conditions, reorganized Grace is
also obliged to make additional future payments to the trust if
needed to satisfy future demands.
12
somewhere between 25% and 35% of the liquidated value of
their claims. That percentage may “be adjusted upwards or
downwards from time to time … to reflect then-current
estimates of the [personal injury] [t]rust’s assets and its
liabilities, as well as [the] then-estimated value of then-
pending and future claims.” (J.A. at 200296.) All claims are
also limited to a “maximum value” based on the relevant
disease level, unless the claim qualifies as an “extraordinary
claim,”9 in which case it is capped at the “maximum
extraordinary value” for such claims. Claims will be paid on
a “first-in, first-out” basis, which means that a claimant can
recover from the trust as soon as the value of the claim is
established. The trust will be administered by designated
trustees, in consultation with a Trust Advisory Committee and
the future claimants’ representative.
The property damage trust resolves claims somewhat
differently. Under the agreement governing that trust, all
allowable “traditional” property damage claims will be paid
in full, and there is no expedited process for determining the
value of a claim. ZAI property damage claims brought by
United States residents will also be paid from the property
damage trust, but they will be resolved in accordance with
procedures that closely resemble the personal injury TDPs.
9
An “extraordinary claim” is a claim held by someone
“whose exposure to asbestos … occurred predominately as a
result of working in a manufacturing facility of Grace … or
… was at least 75% the result of exposure to asbestos or an
asbestos-containing product or to conduct for which Grace
has legal responsibility, and in either case there is little
likelihood of a substantial recovery elsewhere.” (J.A. at
200323.)
13
Canadian ZAI property damage claimants will be paid
pursuant to a settlement agreement reached by representatives
of those claimants and Grace.
In addition to establishing the two § 524(g) trusts, the
Joint Plan divides claimants into eleven classes, one of which
is further divided into two subclasses.10 Relevant here, Class
6 includes all asbestos personal injury claims (including
Canadian and U.S. ZAI personal injury claims), Class 7A
includes traditional asbestos property damage claims, Class
7B includes U.S. ZAI property damage claims, and Class 8
includes Canadian ZAI property damage claims.11 Like the
10
Both Montana and the Crown filed proofs of claim
against Grace during its bankruptcy case.
11
The full list of classes provided for in the Joint Plan
is as follows:
Class 1: Priority Claims
Class 2: Secured Claims
Class 3: Employee Benefit Claims
Class 4: Workers’ Compensation
Claims
Class 5: Intercompany Claims
Class 6: Asbestos Personal Injury
Claims
Class 7A: Asbestos Property
Damage Claims, excluding United
States ZAI Claims
Class 7B: United States ZAI
Claims
Class 8: Canadian ZAI Claims
14
trusts, those classes do not distinguish between direct and
indirect claims, and so Montana’s claims for indemnification
and contribution are classified in Class 6 alongside claims
brought directly by people allegedly harmed by Grace’s
activities. The Crown’s claims fall into two different classes;
any claims arising from personal injury ZAI suits are grouped
in Class 6, whereas all direct and indirect ZAI property
damage claims are in Class 8. Both of those classes are
considered to be “impaired classes,” as is Class 7B, because
claimants in those classes will not be able to recover the full
value of their liquidated claims. All of the claims in Classes
6, 7, and 8 are subject to the channeling injunction provided
for in the Joint Plan.
C. Procedural History
Following the submission of the Joint Plan, the
bankruptcy trustees solicited votes from members of the
impaired classes and the classes whose claims would be
channeled to the trusts. Each of the classes of channeled
claims easily cleared the hurdle of a 75 percent vote in favor
of the Plan, as is required by § 524(g), see 11 U.S.C.
§ 524(g)(2)(B)(ii)(IV)(bb) (providing that a class of claimants
“whose claims are to be addressed by a trust” must “vote[],
by at least 75 percent of those voting, in favor of the plan”),
Class 9: General Unsecured
Claims
Class 10: Equity Interests in the
Parent
Class 11: Equity Interests in
Debtors Other Than the Parent
15
and the only other class that the Joint Plan considers to be
“impaired” (Class 11 – the equity holders) also voted for the
Plan.12 The Bankruptcy Court then held a sixteen-day
confirmation hearing, which began on September 8, 2009.
During that hearing, numerous parties, including Montana
and the Crown, objected to confirmation of the Joint Plan on
the basis that it did not comply with the requirements of the
Bankruptcy Code. In particular, Montana and the Crown
argued that their claims could not properly be considered in
Class 6, that they were improperly subject to the channeling
injunction, and that they were treated unfairly under the Plan.
After the Bankruptcy Court heard testimony and
argument from both the Plan proponents and the objectors,
the Plan was amended to address many of the objections. The
Court then entered a confirmation order on January 31, 2011,
and overruled the remaining objections, including the
objections of Montana and the Crown. In re W.R. Grace &
Co., 446 B.R. 96, 102-03 (Bankr. D. Del. 2011).13 On appeal,
the District Court affirmed the Bankruptcy Court’s order,
12
Another class of creditors – bank lenders in the
“general unsecured creditors” class – also claim to be
impaired, and did not vote in favor of the Joint Plan. Their
objections to the Plan are the subject of a different appeal.
13
On February 15, 2011, the Bankruptcy Court issued
an order clarifying the January 31, 2011 order and
memorandum opinion, which made “clear that the Joint Plan
as modified is confirmed” and requested “that the District
Court issue and affirm the Confirmation Order … including,
without limitation, the injunction pursuant to § 524(g)(3).”
(J.A. at 100081.)
16
accepting as “reasonable” the inclusion of Montana’s and the
Crown’s claims in classes with direct asbestos claims, In re
W.R. Grace & Co., 475 B.R. 34, 110 (D. Del. 2012), and
concluding that their claims “are properly enjoined and
channeled to the trust,” id. at 111, and that “the record is
devoid of any evidence indicating disparate treatment” of
their claims, id. at 136. The Court therefore held that the
Bankruptcy Court had properly overruled Montana’s and the
Crown’s objections to plan confirmation. This timely appeal
followed.
II. Discussion14
Montana and the Crown both argue on appeal that the
Bankruptcy Court and the District Court erred in confirming
14
The Bankruptcy Court had jurisdiction pursuant to
28 U.S.C. §§ 157(a) and 1334(b). The District Court had
appellate jurisdiction over the Bankruptcy Court’s decision
under 28 U.S.C. § 158(a). We have jurisdiction over this
appeal pursuant to 28 U.S.C. §§ 158(d) and 1291. We
exercise “plenary review of an order from a district court
sitting as an appellate court in review of a bankruptcy court.”
In re Exide Techs., 607 F.3d 957, 961-62 (3d Cir. 2010).
Under that standard, “[w]e review the District Court’s
conclusions of law de novo, its factual findings for clear
error, and its exercise of discretion for abuse thereof.” In re
Combustion Eng’g, Inc., 391 F.3d 190, 214 n.19 (3d Cir.
2004). Under the clearly erroneous standard, we must uphold
the Bankruptcy Court’s factual findings unless we are “left
with the definite and firm conviction that a mistake has been
committed.” In re CellNet Data Sys., Inc., 327 F.3d 242, 244
(3d Cir. 2003) (internal quotation marks omitted).
17
Grace’s Joint Plan of Reorganization because the Plan fails to
comply with the applicable provisions of the Bankruptcy
Code. See 11 U.S.C. § 1129(a)(1) (“The court shall confirm a
plan only if … [t]he plan complies with the applicable
provisions of this title.”). Although they raise many specific
objections, which we discuss infra, Montana and the Crown
have three fundamental complaints about the Plan: (1) it
wrongly channels their claims to the § 524(g) trusts; (2) it
discriminates against their claims for indemnification and
contribution;15 and (3) it is not “fair and equitable” to future
claimants. We address each of those contentions in turn, and
conclude that each was rightly rejected.
A. The Channeling Injunction
Montana and the Crown attempt to escape the scope of
the channeling injunction by invoking two different
provisions of the Bankruptcy Code. First, they say that §
524(g) does not encompass their claims against Grace. They
argue that they lack “claims” or “demands” as those terms are
used in § 524(g), and that that provision does not permit the
channeling of the particular kind of claims they do have,
namely claims for indemnification or contribution. Second,
they contend that § 1122 should prevent their claims from
being placed in the same class as direct personal injury
claims. Both arguments do not persuade us, as § 524(g)
broadly encompasses all asbestos-related actions against the
15
The Crown raises two independent arguments in
this regard, contending that the Plan grants preferential
treatment to U.S. claims and impermissibly prevents indirect
claimants from qualifying for “extraordinary claim” status.
We address those claims in Section II.B, infra.
18
debtor, including claims for indemnification and contribution,
and because such claims are sufficiently similar to direct
personal injury claims that they can be classified together
under § 1122.
1. Section 524(g)
As we have explained on previous occasions, § 524(g)
“provides a special form of supplemental injunctive relief for
an insolvent debtor facing the unique problems and
complexities associated with asbestos liability.” In re
Combustion Eng’g, 391 F.3d 190, 234 (3d Cir. 2004); see
also In re Federal-Mogul Global, Inc., 684 F.3d 355, 362 (3d
Cir. 2012) (describing § 524(g) as a “quasi-administrative
process” for resolving a company’s asbestos liabilities).
Modeled after the “creative solution” to asbestos liability
developed during the bankruptcy of the Johns-Manville
Corporation, Federal-Mogul, 684 F.3d at 359 (internal
quotation marks omitted), § 524(g) permits all asbestos-
related claims against the debtor to be channeled to a trust,
and thus it “relieves the debtor of the uncertainty of future
asbestos liabilities,” Combustion Eng’g, 391 F.3d at 234. See
also H.R. Rep. No. 103-835, at 40 (1994) (explaining that
§ 524(g) “is modeled on the trust-injunction in the Johns-
Manville case”).16 By removing that uncertainty and
16
The Johns-Manville Corporation was formerly the
world’s largest miner of asbestos, and it filed for bankruptcy
in 1982. Kane v. Johns-Manville Corp, 843 F.2d 636, 639
(2d Cir. 1988). Its plan of reorganization pioneered the use of
a trust and a channeling injunction to equitably resolve the
company’s asbestos liabilities. Id. at 690; see also In re
Federal-Mogul Global Inc., 684 F.3d 355, 359 (3d Cir. 2012)
19
allowing the debtor to emerge from bankruptcy free of all
asbestos liability, § 524(g) facilitates the company’s ongoing
viability, which in turn provides the trust “with an ‘evergreen’
source of funding to pay future claims.” Combustion Eng’g,
391 F.3d at 234. In order to qualify for that relief, however, a
debtor must satisfy certain prerequisites designed to ensure
that future asbestos claimants will be treated fairly. Federal-
Mogul, 684 F.3d at 359 n.9; see also 11 U.S.C. § 524(g)(2).
The statute thus furthers two goals: ensuring the equitable
resolution of present and future asbestos claims, and
“enabling corporations saddled with asbestos liability to
obtain the ‘fresh start’ promised by bankruptcy.” Federal-
Mogul, 684 F.3d at 359.
At issue in this case is the proper scope of a § 524(g)
channeling injunction. Montana and the Crown argue that,
under § 524(g), their legal efforts to obtain indemnification
and contribution cannot be channeled to a trust. They say the
statute “only enjoins ‘claims’ or ‘demands,’” and that their
particular claims – what they like to call “requests” – do not
fall within the definition of either term. (Montana Opening
(“The primary bankruptcy innovation for addressing mass tort
liability has been the post-confirmation trust, which first
appeared in the bankruptcy proceedings of the Johns-
Manville Corporation … .”). The Johns-Manville plan
significantly underestimated the number of claims that would
be filed, however, and the trust rapidly became insolvent. In
re Joint E. & S. Dist. Asbestos Litig., 78 F.3d 764, 769 (2d
Cir. 1996). As a result, subsequent litigation produced a
settlement agreement that imposed new trust distribution
procedures intended to preserve value for future claimants.
Id. at 770-71.
20
Br. at 26.) They further indicate that, even if they do hold
“claims” or “demands” within the meaning of § 524(g), those
claims are not the sort that can be channeled to a trust. They
assert that § 524(g) permits a channeling injunction to extend
only to personal injury, wrongful death, and property damage
actions, not to their claims for indemnification and
contribution, which are “of a different nature” because they
arise from Montana’s and the Crown’s alleged failures to
warn their citizens of the dangers of Grace’s activities.17
(Montana Opening Br. at 25.) Grace responds that both
arguments misunderstand the text, history, and purpose of
§ 524(g), which is designed to permit all asbestos-related
actions against the debtor – both direct and indirect – to be
channeled to a trust, including actions for contribution and
indemnification.
To determine whether the scope of § 524(g)
encompasses “requests” like those that Montana and the
Crown plan to make, we look first to the text of that
provision. Section 524(g) allows a court “to enjoin entities
from taking legal action for the purpose of directly or
indirectly collecting, recovering, or receiving payment or
recovery with respect to any claim or demand that, under a
plan of reorganization, is to be paid in whole or in part by a
trust described in [§ 524(g)(2)(B)(i)] … .” 11 U.S.C.
§ 524(g)(1)(B). Put more simply, “any claim or demand” that
17
In their briefing, Montana and the Crown make
those arguments in reverse order. We address them in the
order here because it seems more logical to consider whether
Montana and the Crown have claims at all before determining
if the substance of those claims is proper.
21
will be paid by a § 524(g) trust cannot, because of the
§ 524(g) injunction, be brought against the debtor.
That brings us to the question of what constitutes a
“claim or demand.” The Bankruptcy Code defines a “claim”
using the “broadest available definition,” FCC v. NextWave
Pers. Commc’ns Inc., 537 U.S. 293, 302 (2003) (internal
quotation marks omitted), which provides that a “claim” is a
“right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, legal, equitable, secured, or
unsecured,” 11 U.S.C. § 101(5)(A). Section 524(g) takes that
definition and expands it even further, including within the
sweep of the channeling injunction not only “claims” but also
“demands.” Id. § 524(g)(1)(B). A “demand” is then defined
as a “demand for payment, present or future” that “was not a
claim during the proceedings leading to the confirmation of a
plan of reorganization” but “arises out of the same or similar
conduct or events that gave rise to the claims addressed by the
injunction.” Id. § 524(g)(5). A § 524(g) channeling
injunction can therefore include any right to or demand for
payment that arises from the debtor’s underlying asbestos
liabilities, regardless of when that right or demand arises,
whether it was raised during the bankruptcy proceeding or is
contingent on a future event.
Despite the breadth of those definitions, Montana and
the Crown contend that their particular “requests” for
contribution and indemnification somehow fall outside of the
channeling injunction’s scope. They say that their “requests”
cannot be considered “claims” because claims for
contribution and indemnification do not technically arise until
a judgment or settlement has been paid, and at the time of
22
Grace’s bankruptcy petition no such judgments had been
entered against either Montana or the Crown. Their
“requests” are also not “demands,” they explain, because
those requests are not personal injury, wrongful death, or
property damage claims, and thus they did not “aris[e] out of
the same or similar conduct” as the claims subject to the
injunction. See id. § 524(g)(5)(B).
While those arguments reflect some creativity, they are
ultimately unpersuasive. Montana’s and the Crown’s
assertion that a “claim” arises when it fully accrues is based
on the now-rejected reasoning of Avellino & Bienes v. M.
Frenville Co. (In re Frenville), 744 F.2d 332, 335-36 (3d Cir.
1984), which we explicitly overruled in In re Grossman’s,
Inc., 607 F.3d 114 (3d Cir. 2010) (en banc). See Grossman’s,
607 F.3d at 121 (holding that the “accrual test” previously
established in Frenville “should be and now is overruled”).18
The law in this Circuit now is that “a claim arises when an
18
In re Frenville held that “a ‘claim,’ as that term is
defined by the Bankruptcy Code, arises when the underlying
state law cause of action accrues.” Grossman’s, 607 F.3d at
118 (citing In re Frenville, 744 F.2d at 337). That approach
to determining when a claim arises was uniformly criticized
as incompatible with the broad definition of “claim” in the
Bankruptcy Code, id. at 120, and in Grossman’s we rejected
it in favor of the rule that “a ‘claim’ arises when an individual
is exposed pre-petition to a product or other conduct giving
rise to an injury, which underlies a ‘right to payment’ under
the Bankruptcy Code,” id. at 125. Two years later, in Wright
v. Owens Corning, we expanded that holding to include
conduct that occurs post-petition but pre-confirmation. 679
F.3d 101, 106-07 (3d Cir. 2012).
23
individual is exposed pre-confirmation to a product or other
conduct giving rise to an injury that underlies a ‘right to
payment’ under the Code.” Wright v. Owens Corning, 679
F.3d 101, 107 (3d Cir. 2012) (emphasis omitted). A “claim”
can therefore exist “before a right to payment exists under
state law.” Grossman’s, 607 F.3d at 121. Regardless of
when Montana and the Crown may have had judgments
entered against them,19 the material fact is that Grace’s
asbestos-related activities underlie any rights to
indemnification and contribution that they can assert. Grace’s
relevant activities all occurred long before its bankruptcy
filing, and thus, to the extent that Montana and the Crown
have “claims,” those claims arose before confirmation of the
Joint Plan.
For largely the same reason, Montana’s and the
Crown’s argument regarding “demands” also fails. Although
they claim that requests for contribution and indemnification
do not “aris[e] from” the same conduct as personal injury or
property damage claims, that argument ignores the underlying
basis for such requests: Grace’s alleged asbestos liability.
Any action that Montana and the Crown say they have against
Grace arises from the same events as do all the other claims
and demands covered by the channeling injunction, namely
Grace’s production of asbestos-containing materials.
Therefore, if Montana and the Crown have requests for
19
Montana says that, “with the exception of one
complaint, [it] was not named as a defendant in any … State
Court Actions until after the Petition Date.” (Montana
Opening Br. at 10.) It appears, however, to have settled all of
the state court claims against it prior to confirmation of the
Joint Plan.
24
payment that were not “claims” during the bankruptcy
proceeding, those requests would meet the definition of
“demand” in § 524(g). See 11 U.S.C. § 524(g)(5).
More fundamentally, the arguments made by Montana
and the Crown are based on a misunderstanding of the
purpose of § 524(g). By arguing that they have “requests” for
payment from Grace that cannot be called “claims” or
“demands,” Montana and the Crown suggest that those terms
constitute discreet categories, and that some asbestos-related
actions fall into neither category and thus cannot be subject to
§ 524(g). The text and history of § 524(g) tell us just the
opposite. As for the text, § 524(g)’s definition of “demand”
overlaps to some degree with the Bankruptcy Code’s
definition of “claim” – a “demand” could be a request for
payment that was not raised during the bankruptcy
proceeding, which also fits the Code’s definition of a “claim.”
Furthermore, by taking the already broad definition of
“claim” and expanding it to include all other “demands for
payment” that arise from the same conduct, § 524(g) evinces
an intent to include all potential asbestos-related liability of a
debtor, regardless of when such liability arose. See 11 U.S.C.
§ 524(g)(1)(B), (5).
That intent is also reflected in the history and purpose
of the provision. Congress enacted § 524(g) in part because
of the long latency period of many asbestos-related diseases,
which, in cases like this, typically creates a large pool of
future claimants whose disease has not yet manifested. See
H.R. Rep. No. 103-835, at 40 (1994) (noting that “[a]sbestos-
related disease has a long latency period” of “up to 30 years
or more”). Congress was concerned about those claimants for
two reasons – they lack the ability to protect their own
25
interests during the bankruptcy proceeding, and they create
tremendous uncertainty for companies in Grace’s position,
which can hinder a company’s financial rebound and limit
available recovery for all asbestos victims. See id.
(explaining that future claimants “do not have their own
voice” and that “lingering uncertainty” can “undermine[] the
‘fresh start’ objectives of bankruptcy and the goals of the trust
arrangement”); see also In re Flintkote Co., 486 B.R. 99, 124
(Bankr. D. Del. 2012) (“In part because of long latency
periods of certain asbestos-related illnesses, Congress enacted
§ 524(g) to protect the due process rights of the exposed yet
unimpaired.”).
Section 524(g) addresses those concerns by imposing
requirements to protect the rights of future claimants, and
then, if those requirements are met, channeling all present and
future asbestos-related liability to a trust funded by the
debtor. Congress wanted to cover the whole set, and it did.
The distinction, to the extent there is one, between a “claim”
and a “demand” is therefore unimportant to the scope of the
channeling injunction; the relevant question is instead
whether an action seeks recovery that stems from the debtor’s
asbestos-related liabilities. If it does, then it falls somewhere
within the broad category of “any claim or demand,” and can
be subject to a channeling injunction.
Montana and the Crown dispute the breadth of that
interpretation, arguing that, for due process reasons, their
requests cannot be channeled to a trust. They cite our recent
decision in Wright v. Owens Corning, see supra note 18,
which concluded that due process prevents some claims from
being discharged by reorganization plans that were proposed
and confirmed during the Frenville era. 679 F.3d at 107-09.
26
Because the law during those bankruptcies was that claims
arise when they accrue, some potential claimants might have
received notice of a bankruptcy but failed to file a claim
because they understood that their claims had not yet
“arisen.” Id. at 108. Therefore, although claims against a
debtor are generally discharged by plan confirmation, such
claimants lacked adequate notice for their claims to have been
discharged without violating due process.
But Owens Corning is inapposite, because the
bankruptcy plan at issue in that case did not involve a
§ 524(g) trust and channeling injunction. Although
Montana’s and the Crown’s claims against Grace will be
discharged, § 524(g) sends those claims, along with all other
asbestos-related claims and demands, to a trust. Montana and
the Crown will therefore have an opportunity to litigate their
claims and potentially obtain relief, which means that the due
process concern in Owens Corning – that claimants would
lose any opportunity for relief without first receiving proper
notice – is not implicated. Rather, the potential due process
issue associated with channeling claims to a trust is the
fairness of forcing future claimants, many of whom might
have had no notice at all of the bankruptcy, to bring their
claims against a trust rather than against the debtor directly.
That concern is addressed by the proper application of
§ 524(g). As we explained in Combustion Engineering, and
again in Grossman’s, § 524(g) includes a number of
requirements that “are specifically tailored to protect the due
process rights of future claimants,” such as the “fair and
equitable” provision and the mandatory seventy-five percent
approval requirement. Combustion Eng’g, 391 F.3d at 234
n.45 (citing, inter alia, 11 U.S.C. § 524(g)(4)(B)(ii),
(g)(2)(B)(ii)(IV)(bb)); see also Grossman’s, 607 F.3d at 127
27
(“By enacting § 524(g), Congress took account of the due
process implications of discharging future claims of
individuals whose injuries were not manifest at the time of
the bankruptcy petition.”). Therefore, as long as a court
correctly determines that § 524(g)’s requirements are
satisfied, present and future claims can be channeled to a
§ 524(g) trust without violating due process.20
Montana’s and the Crown’s next argument is that their
claims for indemnification and contribution are substantively
different from Grace’s other asbestos-related liabilities, and
thus cannot be channeled to the trust for that reason. They
base that contention on § 524(g)(2)(B)(i), which explains that
the purpose of a trust “is to assume the liabilities of a debtor
20
Montana and the Crown also contend that, under
Owens Corning, they cannot be considered to have “claims.”
They base that contention on Owens Corning’s discussion of
the lingering effect of our overruled Frenville decision. See
Owens Corning, 679 F.3d at 109 (explaining that Frenville
must continue to define when certain claims can be
discharged, for the due process reasons discussed above). But
that discussion does not help their case, because in Owens
Corning we did not hold that Frenville continues to define
when a claim arises – we held only that “[t]he shadow of
Frenville” prevents some claims from being discharged. Id.Indeed, the opinion explicitly separates those two issues,
concluding that an individual did hold a claim during the
bankruptcy, but that the claim could not be discharged
without violating due process. Id. at 107. Montana’s and the
Crown’s contention that they do not even hold claims is
therefore flatly contradicted by both Grossman’s and Owens
Corning.
28
which … has been named as a defendant in personal injury,
wrongful death, or property-damage actions seeking recovery
for damages allegedly caused by the presence of, or exposure
to, asbestos or asbestos-containing products.” 11 U.S.C.
§ 524(g)(2)(B)(i)(I). Montana and the Crown assert that,
because of that language, only asbestos-related personal
injury, wrongful death, and property damage actions can be
subject to the channeling injunction.
The argument fails, however, since § 524(g) expressly
states that a court can “enjoin entities from taking legal action
for the purpose of directly or indirectly collecting” on a claim
or demand that is to be paid by a trust. Id. § 524(g)(1)(B)
(emphasis added). Although they are each being sued under a
failure-to-warn theory of liability, Montana and the Crown
concede that they only have claims against Grace because the
plaintiffs bringing the failure-to-warn lawsuits were allegedly
harmed by Grace’s asbestos-related products and operations.
In other words, behind each failure-to-warn suit against
Montana and the Crown is a plaintiff with a personal injury,
wrongful death, or property damage claim against Grace.
More precisely, there must be such a plaintiff in order for
Montana and the Crown to have a basis for their claims at all.
Montana’s and the Crown’s actions against Grace therefore
are brought “for the purpose of … indirectly … receiving
payment or recovery” for asbestos-related personal injury and
property damage claims against the debtor, and thus are
subject to the § 524(g) channeling injunction under the plain
language of that statute. See 11 U.S.C. § 524(g)(1)(B),
(2)(B).
That interpretation is consistent with the purpose of
§ 524(g). As noted above, the statute was modeled on the
29
trust established in the Johns-Manville bankruptcy, which
subjected all asbestos-related claims, including
“indemnification or contribution liabilities or obligations” of
the debtor, to a channeling injunction. (Plan Proponents App.
at 602040 (the Manville Corporation Second Amended
Restated Plan of Reorganization, at 2).) Inclusion of such
liabilities in the injunction is also a matter of practicality,
because one of the primary goals of § 524(g) is to allow a
debtor to “emerge[] from bankruptcy free and clear” of
asbestos liability, and thus enable the debtor to “grow[] the
pie available to victims” (provided, of course, that asbestos
claimants’ interests are adequately protected). 140 Cong.
Rec. S4521-01 (daily ed.) (Apr. 20, 1994) (statement of Sen.
Brown). If the reorganized debtor could still be exposed to
indirect asbestos claims for indemnification and contribution,
lingering uncertainty regarding the scope of that liability
would threaten the debtor’s recovery and hinder Congress’s
objective of providing “an ‘evergreen’ source of funding to
pay future claims.” Combustion Eng’g, 391 F.3d at 234.
Finally, the narrow interpretation of § 524(g) advanced
by Montana and the Crown is unsupported by any caselaw
and would effectively rewrite the provision. Montana and the
Crown offer no explanation for § 524(g)’s explicit inclusion
of actions that “indirectly” seek recovery on asbestos-related
claims. Instead, they simply ignore that language and assert
that § 524(g) addresses only direct personal injury, wrongful
death, and property damage actions. But we are not free to
ignore an express provision of the statute, as it is our “judicial
duty to give faithful meaning to the language Congress
adopted.” United States v. Bornstein, 423 U.S. 303, 309
(1976). It is a mystery what Congress could have meant by
an action that “indirectly” seeks recovery if it did not mean to
30
include an action seeking indemnification or contribution.
Little wonder, then, that courts have consistently upheld the
channeling of such claims to § 524(g) trusts. See, e.g., In re
Armstrong World Indus., Inc., 348 B.R. 136, 168-69 (D. Del.
2006) (“Because Indirect PI Trust Claims … relate to direct
Asbestos Personal Injury Claims, they are appropriately
channeled to the Asbestos PI Trust and have historically been
channeled to trusts established in connection with asbestos
related chapter 11 cases.”); In re Pittsburgh Corning Corp.,
453 B.R. 570, 582 (Bankr. W.D. Pa. 2011) (concluding that
“an entity that may pay a future demand holder and thereby
acquire an indirect claim” against the debtor has “interests
that are no different from any other Indirect Claimant’s
interests,” and the entity’s claims can thus be channeled to a
§ 524(g) trust); In re Celotex Corp., 204 B.R. 586, 622
(Bankr. M.D. Fla. 1996) (enjoining any claim or demand
“asserting or accomplishing any setoff, right of subrogation,
indemnity, contribution or recoupment of any kind” against
the debtor).
We therefore conclude that the Bankruptcy Court and
the District Court correctly held that Montana’s and the
Crown’s claims for indemnification and contribution are
subject to the channeling injunction included in the Joint
Plan. Section 524(g) gives courts the express authority to
“enjoin entities from taking legal action for the purpose of
directly or indirectly … recovering … with respect to any
claim or demand that … is to be paid … by a [§ 524(g)]
trust,” 11 U.S.C. § 524(g)(1)(B), which is precisely the type
of action that Montana and the Crown each wish to take
against reorganized Grace. The channeling injunction thus
properly encompasses their claims, and their arguments to the
contrary were rightly rejected.
31
2. Section 1122
Having decided that § 524(g) permits a channeling
injunction to extend to the claims asserted by Montana and
the Crown, we can readily dispense with the argument that
those claims were improperly placed in Class 6, which
includes all asbestos personal injury claims.21 Under § 1122
of the Bankruptcy Code, “a plan may place a claim or an
interest in a particular class only if such claim or interest is
substantially similar to the other claims or interests of such
class.” 11 U.S.C. § 1122(a). To determine whether claims
are “substantially similar,” the proper focus is on “the legal
character of the claim as it relates to the assets of the debtor.”
In re AOV Indus., Inc., 792 F.2d 1140, 1150 (D.C. Cir. 1986)
(emphasis omitted); see also In re Tribune Co., 476 B.R. 843,
855 (Bankr. D. Del. 2012) (concluding that the phrase
“substantially similar” reflects “the legal attributes of the
claims, not who holds them” (internal quotation marks
omitted); In re Quigley Co., 377 B.R. 110, 116 (Bankr.
S.D.N.Y. 2007) (“Claims are similar if they have
substantially similar rights to the debtor’s assets.” (emphasis
and internal quotation marks omitted)). The Bankruptcy
Court has “broad discretion” to decide if a plan satisfies that
requirement, and we will uphold a plan’s classification
scheme so long as it is “reasonable” and does not “arbitrarily
designate classes.” In the Matter of Jersey City Med. Ctr.,
817 F.2d 1055, 1061 (3d Cir. 1987) (internal quotation marks
21
Although some of the Crown’s claims are classified
in Class 8 (Canadian ZAI Claims), see supra Section I.B, it
only challenges the classification of its indirect personal
injury claims in Class 6 (Asbestos Personal Injury Claims).
32
omitted); see also John Hancock Mut. Life Ins. Co. v. Route
37 Bus. Park Assocs., 987 F.2d 154, 158 (3d Cir. 1993)
(interpreting § 1122(a) to bar the debtor from “arbitrarily”
designating classes or doing so in a manner that “would not
serve any legitimate purpose”).
Here, Montana and the Crown identify only one
difference in “legal effect against the debtor’s assets”
between their claims and the other claims in Class 6: their
claims “are not subject (or should not be subject) to an
injunction imposed pursuant to Bankruptcy Code section
524(g).” (Montana Opening Br. at 43.) That argument fails,
because, for all of the reasons already discussed, their claims
certainly are subject to the channeling injunction. Moreover,
as the District Court observed, “[b]oth direct and indirect
claims under the Plan exhibit a similar effect on Grace’s
bankruptcy estate – they seek recovery from the trust for
actions related to Grace’s asbestos liability.” In re W.R.
Grace & Co., 475 B.R. at 110. Although Montana and the
Crown must first be held liable for failure to warn before they
can bring a claim against the trust, that makes no difference to
Grace, as its liability for such a claim depends solely on its
asbestos-related activities. The Joint Plan therefore
reasonably classified claims for indemnification and
contribution together with direct personal injury claims.
B. Disparate Treatment of Creditors
33
We turn next to the contention that the Joint Plan
should not have been confirmed because the TDPs22 may
result in disparate treatment among claims within the same
class. As Montana and the Crown correctly note, “equality of
distribution among creditors is a central policy of the
Bankruptcy Code” that is furthered by several different Code
provisions. In re Combustion Eng’g, 391 F.3d at 239(quoting Bergier v. IRS, 496 U.S. 53, 58 (1990) (internal
quotation marks omitted). Relevant here, § 1123(a)(4)
requires that a plan “provide the same treatment for each
claim or interest of a particular class,” 11 U.S.C.
§ 1123(a)(4),23 and § 524(g) mandates that “present claims
and future demands that involve similar claims” be paid “in
substantially the same manner,” id. § 524(g)(2)(B)(ii)(V).
Together, the two provisions ensure that claims in a class that
will be channeled to a § 524(g) trust receive the same
treatment, regardless of when they are brought. In
determining whether a plan provides for the same treatment
of claimants in a class, “we consider the bankruptcy scheme
as an integrated whole.” In re Combustion Eng’g, 391 F.3d at
241.
Although “neither the Code nor the legislative history
precisely defines the standards of equal treatment,” In re AOV
22
The TDPs, as earlier noted, see supra Section I.B,
are the trust distribution procedures for the personal injury
trust established in the Joint Plan.
23
Section 1123 permits disparate treatment when “the
holder of a particular claim or interest agrees to … less
favorable treatment,” but neither Montana nor the Crown has
done so here. 11 U.S.C. § 1123(a)(4).
34
Indus., Inc., 792 F.2d at 1152, courts have interpreted the
“same treatment” requirement to mean that all claimants in a
class must have “the same opportunity” for recovery. In re
Dana Corp., 412 B.R. 53, 62 (S.D.N.Y. 2008); see also In re
Cent. Med. Ctr., Inc., 122 B.R. 568, 575 (Bankr. E.D. Mo.
1990) (concluding that a plan that “subjects all members of
the same class to the same process for claim payment” is
“sufficient to satisfy the requirements of Section
1123(a)(4)”). For example, the United States Court of
Appeals for the Second Circuit has held that “[a]sbestos
health claimants would receive the ‘same treatment’ if they
all were permitted to present their claims to a jury and were
all paid whatever amounts the jury awarded, until funds were
no longer available.” In re Joint E. & S. Dist. Asbestos Litig.,
982 F.2d 721, 749 (2d Cir. 1992), opinion modified on
rehearing, 993 F.2d 7 (2d Cir. 1993). What matters, then, is
not that claimants recover the same amount but that they have
equal opportunity to recover on their claims. See id.(“Without question, the ‘same treatment’ standard of section
1123(a)(4) does not require that all claimants within a class
receive the same amount of money.”)
Courts are also in agreement that § 1123(a)(4) “does
not require precise equality, only approximate equality.” In
re Quigley Co., Inc., 377 B.R. 110, 116 (Bankr. S.D.N.Y.
2007); see also In re Multiut Corp., 449 B.R. 323, 334
(Bankr. N.D. Ill. 2011) (same). Certain procedural
differences, such as a “delay in receipt of distributions” for
some claims, “do[] not alone constitute unequal treatment.”
In re New Power Co., 438 F.3d 1113, 1122-23 (11th Cir.
2006); see also In re Multiut, 449 B.R. at 337 (same). In fact,
§ 524(g) “clearly envisions that asbestos claims will be paid
periodically as they accrue and as they are allowed,” since it
35
requires courts to ensure that there will be sufficient funds
available for both future demands and present claims to
receive similar treatment. In re W. Asbestos Co., 313 B.R.
832, 842-43 (Bankr. N.D. Cal. 2003). Therefore, differences
in the timing of distributions and other procedural variations
that have a legitimate basis do not generally violate
§ 1123(a)(4) unless they produce a substantive difference in a
claimant’s opportunity to recover. See In re New Power Co.,
438 F.3d at 1122-23 (concluding that a plan provision did not
violate § 1123(a)(4) in part because it was “procedural rather
than substantive”); cf. In re Dow Corning Corp., 280 F.3d
648, 660 (6th Cir. 2002) (holding that a difference in the
procedural protections offered to certain claimants violated
§ 1123(a)(4) because some claimants were “accorded far
more effective recovery rights” than others).
Under that standard, none of the provisions of the
TDPs that Montana and the Crown complain of amounts to
disparate treatment of creditors. Montana and the Crown first
take issue with a provision that allows indirect claims to be
considered “presumptively valid” only if, among other things,
“the Indirect Claimant has paid all or a portion of a liability or
obligation that the PI Trust had to the Direct Claimant.”
(Montana Opening Br. at 47 (quoting J.A. at 200326)
(internal quotation marks omitted).) They say that such a
requirement may provide no payout for indirect claims, and is
therefore discriminatory. But the only indirect claims that
will not be paid based on that provision are those for which
Grace has no underlying liability. As the District Court
rightly said, there is no “legal authority that requires a debtor
to reimburse third parties for wrongs for which the debtor is
not responsible,” and thus a bar on such recovery cannot be
36
said to constitute disparate treatment. In re W.R. Grace &
Co., 475 B.R. at 136.
Montana and the Crown next complain that the “first-
in, first-out” mechanism for processing and paying claims
discriminates against indirect claims. Citing testimony from
the future claimants’ representative that “there is a
possibility” that the trust may have insufficient funds to pay
future claims, they argue that, because claims for
indemnification and contribution depend on another judgment
first being obtained, their claims will likely be brought later
than direct asbestos claims and thus will be less likely to
obtain recovery. (Montana Opening Br. at 51 (quoting J.A. at
201664A) (internal quotation marks omitted).) They say that
the only fair method for resolving claims against the trust is
“for no distributions to be made until all” indemnification and
contribution claims have arisen and been asserted. (Id. at 52.)
There are significant problems with that argument.
First, although there may be a “possibility” that the trust will
have insufficient funds to compensate future claimants, the
Joint Plan endeavors to make that scenario as unlikely as
possible. To that end, it funds the personal injury trust with
the amount agreed to by the PI Committee and the future
claimants’ representative, it limits recoveries using the
“Payment Percentage” (which is specifically designed to
ensure that present and future claimants receive equivalent
amounts), and it allows the Payment Percentage to be
modified as needed to permit future recoveries.24 Second, the
24
As discussed earlier, see supra Section I.B, the
“Payment Percentage” limits each claimant’s recovery to a
certain percentage of the liquidated value of his or her claim,
37
“first-in, first-out” payment process is a common feature of
§ 524(g) trusts, see In re Federal-Mogul, 684 F.3d at 360
n.12, and it treats all claims identically, resolving both direct
and indirect claims in the order that they are received.
Although it may be true that indirect claims will generally
recover later under that process because they require the
additional step of a judgment being entered against the
claimant, the “delayed receipt of distributions to members of
a class whose claims remain disputed does not, in and of
itself, violate § 1123(a)(4).” In re New Power Co., 438 F.3d
at 1122. Finally, it would be wholly unreasonable to require
asbestos victims – many of whom have already waited
through twelve years of bankruptcy – to continue to wait
indefinitely until all indirect claims accrue before they can
recover from the trust. Cf. In re W. Asbestos Co., 313 B.R. at
842 (“It is not necessary to make liquidated claims wait for
payment until all disputed and unliquidated claims have been
resolved.”). Rather, by requiring courts to ensure that future
demands will be treated fairly, § 524(g) specifically
acknowledges that some claims against a trust may recover
earlier than others. See 11 U.S.C. § 524(g)(2)(B)(ii)(V)
(requiring that the court ensure that the trust will “operate
through mechanisms … that provide reasonable assurance
that the trust will value, and be in a financial position to pay,
present claims and future demands that involve similar claims
in substantially the same manner”). We therefore agree with
the District Court that the “first-in, first-out” mechanism does
not violate § 1123(a)(4) or § 524(g).
in order to ensure that funds will be available for future
claims.
38
Montana and the Crown also assert that the TDPs are
discriminatory because they impose additional restrictions on
indirect claims. Specifically, the complaints are that indirect
claimants cannot recover attorneys’ fees; that, in order to
have a presumptively valid claim, an indirect claimant must
secure a release of liability against the trust from the direct
claimant; and that personal injury claims are limited by the
“maximum value” provision of the TDPs. The District Court
properly rejected the argument that any of those features
make the TDPs unfair. Montana and the Crown have not
demonstrated a right to attorneys’ fees under their local tort
regimes, and there is therefore no reason why they should
expect to recover attorneys’ fees from the trust. There is also
nothing discriminatory about requiring an indirect claimant to
obtain a release from the direct claimant whose claims
provide the basis for seeking indemnification or contribution.
That requirement has the legitimate objective of ensuring that
an indirect claimant has satisfied a liability of the debtors, and
it would not make sense to extend it to direct claims. In any
event, the release provision does not limit a claimant’s
opportunity for recovery, as indirect claimants who are unable
to obtain a release can still pursue their claims through the
individual review process.25 As for the “maximum value”
25
The release of liability is only required for indirect
claimants seeking expedited review of their claims. The
TDPs expressly state that, “[i]f an Indirect Claimant cannot
meet the presumptive requirements” necessary for expedited
review, “including the requirement that the Indirect Claimant
provide the [personal injury] [t]rust with a full release of the
Direct Claimant’s claim, the Indirect Claimant may request
that the [personal injury] [t]rust review the … [c]laim
individually.” (J.A. at 200326.)
39
provision, that requirement applies with equal force to direct
and indirect claims, and therefore does not result in disparate
treatment of claims.
Finally, the Crown independently argues that the TDPs
are discriminatory both because Canadian property damage
claimants will allegedly receive inferior recovery to U.S.
property damage claimants, and because the Crown cannot
qualify for “extraordinary claim” treatment. The first of those
contentions seems to be based on the amount allocated to the
Canadian ZAI property damage claims fund, which is
significantly less than the amount being allocated for U.S.
property damage claims. But, as the District Court correctly
noted, Canadian and U.S. property damage claimants are
classified in separate classes, operate under separate tort
regimes, and reached separate settlement agreements. See In
re W.R. Grace & Co., 475 B.R. at 138-39. There is therefore
no reason to expect that they would receive the same dollar
amount in recovery, and, more importantly, § 1123(a)(4) does
not demand that they receive equal treatment, as it requires
only that a plan “provide the same treatment for each claim or
interest of a particular class.” 11 U.S.C. § 1123(a)(4)
(emphasis added). Moreover, it is unclear whether the
Crown’s assertion that Canadian claimants will receive less
than their U.S. counterparts is even factually accurate, as the
Crown provides no information on the estimated number of
Canadian property damage claims, so there is no way to
conclude that the available funds are unduly limited.
As for the “extraordinary claim” provision, it is
designed to provide a remedy for certain individuals harmed
by Grace who have “little likelihood of a substantial recovery
elsewhere.” (J.A. at 200323.) The Crown is therefore correct
40
that the provision treats certain claims differently than others,
but it does so based on the claimant’s particular factual
situation, in much the same way that the expedited review
process treats claims differently based on the particular
disease at issue. The Crown does not contest that such
substantive distinctions among claims are valid bases for
potential differences in the amount of recovery, nor does it
argue that the individualized review process will value its
claims at less than they would be worth under the tort system.
Therefore, it has not shown that the “extraordinary claim”
provision unfairly limits its opportunity for recovery.
In sum, the District Court rightly determined that the
Joint Plan satisfies the equal treatment provisions of
§ 1123(a)(4) and § 524(g). Although there may, at the
margins, be some differences in recovery for direct and
indirect claims, those differences do not amount to disparate
treatment of creditors.
C. “Fair and Equitable” to Future Claimants
Montana’s and the Crown’s final contention is that the
Joint Plan violates the “fair and equitable” provision of
§ 524(g). That provision requires that, before confirming a
plan involving a § 524(g) trust, a court must determine that
the proposed channeling injunction is “fair and equitable with
respect to the persons that might subsequently assert …
demands” against the trust “in light of the benefits provided
… to such trust on behalf of [the] debtor.” 11 U.S.C.
§ 524(g)(4)(B)(ii).26 In other words, the provision requires a
26
Although it uses similar language, the § 524(g) “fair
and equitable” provision is separate from the “fair and
41
reviewing court to consider whether, given the funds
available in a trust, it is “fair and equitable” to channel future
demands to that trust.
Although no court of appeals has yet interpreted what
“fair and equitable” means in that context, other courts seem
to agree that one way to evaluate the equities is to consider
the amount being contributed to the trust in comparison to the
liability exposure of the protected parties. See, e.g., In re
Plant Insulation Co., 485 B.R. 203, 227 (N.D. Cal. 2012)
(“[T]he analysis appropriately focuses on the relationship
between the contributions of protected entities to the Trust,
and the benefits received by the same under the terms of the
channeling injunction.”); In re Congoleum Corp., 362 B.R.
167, 180 (Bankr. D.N.J. 2007) (“A review of the case law
suggests that finding that an injunction is fair and equitable is
closely tied to the value being contributed to the plan.”).
Given the substantial benefit provided by the channeling
injunction, courts have held that the protected parties’
contribution to the trust must be sufficient to justify that
extraordinary form of relief. See In re Quigley Co., 437 B.R.
at 133; In re Plant Insulation Co., 485 B.R. at 227
(considering whether the protected parties provided the trust
equitable” provision of 11 U.S.C. § 1129(b), which provides
that the court can confirm a plan over the objection of an
impaired and dissenting class of creditors if it is “fair and
equitable … with respect to each class of claims or interests
that is impaired under, and has not accepted, the plan.” 11
U.S.C. § 1129(b)(1). Because Montana and the Crown are in
classes that overwhelmingly accepted Grace’s Joint Plan, they
do not challenge plan confirmation under § 1129(b), and it is
not at issue in this appeal.
42
“with sufficient benefits to justify the injunctive relief
provided to them, from the perspective of future asbestos
injury claimants”). Under that standard, channeling
injunctions have generally been considered “fair and
equitable” to future claimants when the trust contribution that
will be available to those claimants bears some relationship to
the estimated value to the debtor of enjoining their claims. In
re Quigley Co., 437 B.R. at 140 (denying plan confirmation
because future demand holders would receive only about
$147 million, whereas the value to the debtor of enjoining
their claims was $613 million); see also In re G-I Holdings
Inc., 420 B.R. 216, 276 (D.N.J. 2009) (concluding that the
“substantial contributions provided” to the trust made it fair to
future claimants).
Montana and the Crown do not suggest that the
amount being contributed to the personal injury and property
damage trusts is out of sensible proportion to the liability
exposure of the protected parties.27 Rather, they contend that
27
Because Montana and the Crown do not take issue
with the size of the trust contribution, we need not determine
in this case when an imbalance between the liability exposure
and the amount being contributed to a trust prevents an
injunction from being “fair and equitable” under § 524(g).
We note, however, that the trust contribution does not have to
be equal to the projected liability in order for the injunction to
be fair to future claimants. Although the statutory language at
issue focuses on the funds available to pay future claims,
§ 524(g) does not require that those claims be paid in full.
Rather, it requires that future claims be paid “in substantially
the same manner” as present claims. 11 U.S.C.
§ 524(g)(2)(B)(ii)(V). In many cases, the trust may be funded
43
the TDPs are “unfair and inequitable” because they “lack
certainty regarding the amount of distributions and the
procedure for distributions” (Montana Opening Br. at 56),
and because the Trust Advisory Committee includes
“attorneys for underlying asbestos claimholders,” which they
say is unfair to indirect claimants (id. at 57). We are
unconvinced that those allegations are even relevant to the
question of whether the channeling injunction is fair and
equitable under § 524(g). As Grace points out,
§ 524(g)(4)(B)(ii) “is not a catch-all provision” for objecting
to plan provisions (Grace Br. at 78); rather, it specifically
addresses whether it is fair to enjoin future claims against the
debtor in light of the amount being contributed to the trust.
But even if Montana’s and the Crown’s allegations of
in an amount that, as here, only allows present and future
claimants to recover a portion of the value of their claims.
See Federal-Mogul, 684 F.3d at 360 n.12 (“[F]ew trusts pay
the full value of submitted claims; current payment
percentages range widely, but the median is 25%, with most
trusts paying between ten and forty-six percent of a claim’s
liquidated value.”). But that alone does not mean that the
injunction is unfair or inequitable, since, without such a
limitation, the debtor may be forced to liquidate and be
unable to pay future claims at all. For that reason, courts look
for a relationship between the protected parties’ contribution
to the trust and the benefit they are receiving from the
injunction, and do not require the trust contribution to be
equal to the estimated value of future claims. We leave for
another day the question of how to determine whether the
benefit of an injunction outweighs the value committed to the
trust to a degree that channeling future claims would be unfair
to future claimants.
44
unfairness were relevant to the statutory inquiry, they are
baseless. Although they complain that the TDPs do not
precisely determine the amount of future recoveries, that
uncertainty is unavoidable, as it is impossible to calculate
precisely how many future demands will be brought or how
much those claimants will be entitled to recover. One cannot
even have a § 524(g) trust unless “the actual amounts,
numbers, and timing of such future demands cannot be
determined.” 11 U.S.C. § 524(g)(2)(B)(ii)(II). As for their
complaint regarding the Trust Advisory Committee members,
that committee exercises only limited control over trust
distributions, and Montana and the Crown have pointed to no
evidence suggesting that the committee has or will engage in
improper conduct. There therefore was no error in the
District Court’s determination that the channeling injunction
is fair and equitable to future claimants under § 524(g).
III. Conclusion
For the foregoing reasons, we conclude that the
District Court correctly affirmed the Bankruptcy Court’s
order overruling the objections of Montana and the Crown to
Grace’s Joint Plan, and we will affirm the Court’s order to
that effect.
45