Third Circuit Rejects 3 More Appeals of W.R. Grace’s Reorganization Plan

 PHILADELPHIA — (Mealey’s) The Third Circuit U.S. Court of Appeals on Sept. 4 in two opinions rejected challenges by Canada, Montana and a South Carolina hospital to Chapter 11 bankruptcy debtor W.R. Grace & Co.’s confirmed plan of reorganization, finding that the plan is equitable in its treatment of Canada and Montana’s indirect contribution claims and the hospital’s property damage claims (In re:  W.R. Grace & Co., et al., Nos. 12-2923, 12-1521, 12-2904, 3rd Cir.) [an enhanced version of this opinion is available to lexis.com subscribers].

2 Trusts

The reorganization plan for W.R. Grace, which filed for Chapter 11 bankruptcy in 2001 in the U.S. Bankruptcy Court for the District of Delaware along with dozens of related companies (collectively, Grace), was confirmed by the Bankruptcy Court in 2011.  The joint plan establishes two asbestos trusts pursuant to Section 524(g) of the U.S. Bankruptcy Code to compensate personal injury claimants and property owners.  The personal injury trust — one of the largest ever created to compensate asbestos victims — is to be funded with more than $3 billion in cash, stock, warrants, insurance proceeds and deferred payments from Grace, its insurers and third parties.  The second trust will be funded by an initial payment of $180 million for property damage claims to be paid in full on the plan’s effective date.

Although the plan was approved by 99.51 percent of asbestos personal injury claimants, it still faced objections by 12 parties.  But in January 2012, U.S. Senior Judge Ronald L. Buckwalter of the District of Delaware overruled all of the objections, affirmed the Bankruptcy Court’s findings confirming the plan and issued an injunction channeling asbestos claims to the trusts.

After Judge Buckwalter denied a motion for reconsideration and entered an amended opinion and an order again confirming Grace’s plan, eight parties appealed the rulings to the Third Circuit.  The judge and the Third Circuit both denied bids to stay plan confirmation until the appeals are decided, and three appeals were voluntarily dismissed after Grace resolved the parties’ objections.  A Third Circuit panel heard arguments June 17 on all five of the remaining appeals and issued an opinion July 24 denying one of the appeals, filed by fellow Chapter 11 debtor Garlock Sealing Technologies LLC (See August 2013, Page 4).

Canada, Montana

The State of Montana and Her Majesty Queen Elizabeth II in Right of Canada also appealed Grace’s plan confirmation.  Canada and Montana say that as a result of Grace’s production of asbestos-containing materials, including its operation of a vermiculite mine in Libby, Mont., the state and Canada have been subject to asbestos-related lawsuits due to their alleged failure to warn their citizens of the risks posed by Grace’s products and activities.

Both Canada and Montana have been named defendants in failure-to-warn lawsuits involving property damage and personal injury claims.  Because of their exposure to asbestos liability, Canada and Montana contend that they are entitled to contribution and indemnification from Grace.

Canada and Montana argued that the Bankruptcy Court and the District Court erred in confirming Grace’s reorganization plan because the plan fails to comply with the Bankruptcy Code.  The appellants said the plan wrongly channels their claims to the Section 524(g) trusts, discriminates against their claims for indemnification and contribution and is not “fair and equitable” to future claimants.

‘Sufficiently Similar’

The Third Circuit, in an opinion written by Circuit Judge Kent A. Jordan, joined by Circuit Judges Thomas L. Ambro and D. Michael Fisher, rejected Canada and Montana’s contentions that Section 524(g) does not permit the channeling of their indemnification or contribution claims and that Section 1122 of the Bankruptcy Code 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 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,” the panel held.

The panel said Canada and Montana also failed in their argument that the plan’s channeling injunction and trust distribution procedures are “unfair and inequitable” because they “lack certainty regarding the amount of distributions and the procedure for distributions” and because the Trust Advisory Committee includes “attorneys for underlying asbestos claimholders,” which they said is unfair to indirect claimants.

Anderson Memorial Hospital

The panel also denied the appeal of Anderson Memorial Hospital (AMH) in South Carolina, which first filed suit against Grace and its affiliates in state court in 1992, seeking classwide compensation for property damage caused by asbestos-containing products that Grace had manufactured.

The panel, in an opinion written by Judge Fisher, affirmed the lower courts’ judgment on all four issues raised by AMH, which argued that the plan:  does not meet the requirements of Section 524(g), fails to provide equal treatment pursuant to Section 1123(a)(4) of the Bankruptcy Code, was not proposed in good faith pursuant to Section 1129(a)(3) and is not feasible pursuant to Section 1129(a)(11).

AMH argued that Grace’s plan does not meet the standards of Section 524(g) because Grace did not show that it is likely to be subject to substantial future demands for property damage claims, but the panel said that “we find no clear error that would justify disturbing the factual conclusion that there are property damage claimants who will seek redress in the future.”  The panel further held that property damage future claims can exist as a matter of law.

The panel said AMH also fails in its argument that it is not being treated the same as other property damage claimants in Class 7A of the plan because it will not be able to return to the state court system to try its claims before a jury.  “Even if we were to conclude that binding AMH to the jurisdiction of the Bankruptcy Court represented ‘less favorable’ treatment of its claim, AMH ‘agree[d] to a less favorable treatment of such particular claim or interest’ by submitting itself to the Bankruptcy Court’s jurisdiction via its proof of claim,” the panel held.

Counsel

Canada and Montana are represented by Kevin J. Mangan, Francis A. Monaco Jr. and Matthew P. Ward of Womble, Carlyle, Sandridge & Rice in Wilmington, Del.  Canada also is represented by Jacqueline Dais-Visca of the Canada Department of Justice, Ontario Regional Office, in Toronto.

AMH is represented by David L. Rosendorf of Kozyak Tropin & Throckmorton in Miami and Daniel A. Speights of Speights & Runyan in Hampton, S.C.

Grace is represented by Laura Davis Jones, James E. O’Neill and Kathleen P. Makowski of Pachulski, Stang, Ziehl & Jones in Wilmington; John Donley, Lisa G. Esayian and Adam Paul of Kirkland & Ellis in Chicago; Christopher Landau of Kirkland & Ellis in Washington, D.C.; and Roger J. Higgins of Law Offices of Roger J. Higgins in Chicago.

The Official Committee of Asbestos Personal Injury Claimants is represented by Peter V. Lockwood of Caplin & Drysdale in Washington and Mark T. Hurford of Campbell & Levine in Wilmington.

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