A resurgence in mass-tort cases has renewed interest in channeling injunctions, particularly as they protect contributing insurers. While channeling injunctions in asbestos bankruptcy cases are issued pursuant to §524(g), they remain subject to the jurisdictional limitations imposed upon bankruptcy generally. The asbestos provision in §524(g) was modeled on the injunction issued by Judge John Lifland in Johns-Manville to help solve the complications associated with asbestos litigation. Judge Lifland's ruling in Johns-Manville is believed to be the first in which unknown future claimants—those who had been exposed to asbestos, but were not yet exhibiting symptoms due to the decades-long latency period for asbestos-related diseases—were specifically included in a bankruptcy arrangement. The logic of that case remains relevant to utilizing channeling injunctions to protect contributors to central settlements intended to resolve mass-tort Chapter 11 cases that are not asbestos related.

On Sept. 23, 2019, the U.S. Bankruptcy Court for the District of Delaware held that negligence and failure-to-warn tort claims asserted against W.R. Grace's insurers under Montana law following asbestos exposure were not derivative in nature and therefore not subject to a channeling injunction under §524(g). See Cont'l Cas. Co. v. Carr (In re W.R. Grace & Co.), No. 15-50766 (AMC) (Bankr. D. Del. Sept. 23, 2019), ECF No. 91-1. The holding addresses the scope of the channeling injunction contained in W.R. Grace's plan of reorganization, and specifically, whether the channeling injunction enjoins a state-court lawsuit against one of W.R. Grace's insurers. Importantly, it also addresses a bankruptcy court's jurisdiction, a rationale that would extend beyond asbestos provisions and reach channeling injunctions used in other circumstances.

Background

W.R. Grace owned and operated a vermiculite mine and processing facility near Libby, Montana (the Libby Facility) from 1963 to 1990. The Libby Facility released airborne dust containing asbestos, which, in turn, exposed W.R. Grace employees, their families, and residents of Libby to hazardous levels of asbestos. In the 1970s, individuals injured by exposure to asbestos began filing lawsuits against W.R. Grace. Between 1973 and 1985, Continental Casualty Company and Transportation Insurance Company (together, CNA) issued various insurance products to W.R. Grace, some of which permitted CNA to inspect the Libby Facility.

By 2001, over 65,000 asbestos-related personal injury lawsuits involving over 129,000 claims had been filed against W.R. Grace. As a result, W.R. Grace filed a bankruptcy petition in April 2001. Nearly 10 years later, W.R. Grace and CNA entered into a settlement agreement resolving disputes between them over the scope of CNA's coverage of W.R. Grace's asbestos liabilities under CNA's insurance policies. The settlement agreement required CNA to contribute $84 million to a trust established by W.R. Grace's plan of reorganization. The trust would then use those funds, along with funds from other sources, to compensate holders of asbestos-related personal injury claims. Importantly, the trust would also be obligated to reimburse CNA up to $13 million for any payments CNA made on account of asbestos-related personal injury claims not successfully channeled through the trust.

After several appeals, W.R. Grace's plan of reorganization took effect in February 2014. The plan of reorganization established a channeling injunction under §524(g) of the Bankruptcy Code, which enjoined holders of asbestos claims from attempting to recover against W.R. Grace and certain other protected parties outside of the bankruptcy process, including CNA.

After the plan took effect, several complaints were filed in Montana state court against CNA alleging that certain individuals (the Montana plaintiffs) had been exposed to asbestos from the Libby Facility and contracted asbestos-related diseases as a result. The Montana plaintiffs alleged that CNA had voluntarily provided industrial hygiene facilities at the Libby Facility and became aware of such facility's hazardous conditions through inspections. The Montana plaintiffs claimed that: (1) CNA was negligent in performing the industrial hygiene services; and (2) CNA failed to warn the plaintiffs about the danger of asbestos exposure (together, the Montana claims). According to the Montana plaintiffs, CNA's negligence and failure to warn contributed to and/or caused their asbestos-related injuries.

CNA filed an adversary proceeding in the U.S. Bankruptcy Court for the District of Delaware seeking a declaratory judgment that the Montana claims were enjoined by the channeling injunction. The Montana plaintiffs filed a motion to dismiss the adversary proceeding, and CNA filed a motion for summary judgment. The bankruptcy court held that the Montana claims were enjoined by the channeling injunction because the claims met the derivative liability requirement and the statutory relationship requirement under §524(g)(4)(A)(ii). The Montana plaintiffs appealed the bankruptcy court's decision directly to the Third Circuit.

The Third Circuit affirmed the bankruptcy court's holding that the CNA policies were covered by the channeling injunction and confirmed that the bankruptcy court had jurisdiction to enjoin the Montana claims. The Third Circuit also vacated the bankruptcy court's holding that the Montana claims satisfied the derivative liability and statutory relationship requirements under §524(g)(4)(A)(ii) and remanded the issues back to the bankruptcy court.

Bankruptcy Court's Opinion on Remand

Derivative Liability and Statutory Relationship Requirements Under §524(g). The bankruptcy court analyzed two requirements of §524(g)(4)(A)(ii): (1) the derivative liability requirement; and (2) the statutory relationship requirement. Under the derivative liability requirement, the court had to determine whether the Montana claims were derivative claims. With regard to the statutory relationship requirement, the court had to determine whether CNA's provision of insurance to W.R. Grace was legally relevant to the elements of the tort claims. If CNA satisfied both requirements, then the Montana claims would be enjoined under §524(g)(4)(A)(ii) and channeled to W.R. Grace's bankruptcy trust. If CNA failed to establish either requirement, then the Montana claims could proceed in state court.

Under the derivative liability requirement, if a plaintiff's claim against a third party is based on (1) the plaintiff's claim against a debtor (i.e., the debtor's liability); and (2) the debtor's claim against the third party (i.e., the third party's liability to the debtor), then the plaintiff's claim is derivative. By contrast, if the plaintiff's claim against a third party is not based upon the debtor's liability and the third party's liability to the debtor but, rather, is an entirely independent claim held by the plaintiff directly against the third party, then the plaintiff's claim is non-derivative.

Here, the bankruptcy court recognized that the Montana plaintiffs filed two tort claims against CNA under Montana law: negligence and failure to warn. According to the complaints, CNA had voluntarily provided industrial hygiene services at the Libby Facility and become aware of the hazardous conditions there through its inspections of such facility. The complaints alleged that CNA's negligence in performing the industrial hygiene services and its failure to warn the Montana plaintiffs about the dangers of asbestos exposure contributed to and/or caused the Montana plaintiffs' asbestos-related injuries. Under the elements of each claim, CNA allegedly owed a duty to the Montana plaintiffs entirely independent of CNA's contractual duties to W.R. Grace under the insurance policies. Furthermore, the tort claims were not based upon claims that W.R. Grace has against CNA, and W.R. Grace could not have filed claims of this nature against CNA under Montana law. The bankruptcy court recognized that the tort claims are based upon allegations that CNA engaged in misconduct and are not based upon W.R. Grace's conduct. As a result, even if the Montana plaintiffs were successful, the tort claims would not affect the res of W.R. Grace's bankruptcy estate because any ultimate judgment could only be executed against CNA's assets and not W.R. Grace's assets. Thus the bankruptcy court held that CNA could not show that the tort claims satisfy the derivative liability requirement set forth in §524(g)(4)(A)(ii).

Under the statutory relationship requirement, the bankruptcy court held that CNA's provision of insurance to W.R. Grace had no legal relevance to the Montana claims. Instead, for the negligence claim, CNA only needed to provide a service to W.R. Grace for the duty to arise. For the failure to warn claim, CNA only needed to engage with a hazard or be in a position with respect to foreseeable victims and a hazard for the duty to arise. Ultimately, neither tort claim requires the third party to provide insurance to the plaintiff in order for the third party's duty to arise under Montana law. Thus, the bankruptcy court held that CNA could not show the requisite statutory relationship required under §524(g)(4)(A)(ii)(III).

Subject Matter Jurisdiction. With respect to subject matter jurisdiction, the Third Circuit had originally concluded that there was "related to" jurisdiction in the case, entitling the bankruptcy court to decide whether the injunction was properly imposed under §524(g). Such conclusion echoed the bankruptcy court decision below, which held that the Montana claims would affect the res of the bankruptcy estate because the trust would be required to reimburse CNA for part of any payment CNA makes to the Montana plaintiffs on account of the Montana claims. The Third Circuit treated the issue brusquely, stating that "related to" jurisdiction exists over actions against non-debtors involving contractual indemnity obligations between the debtor and non-debtor that automatically result in indemnification liability against the debtor. Thus, based upon the trust's obligation to indemnify CNA under the settlement agreement's reimbursement provision, the Third Circuit concluded that the bankruptcy court had jurisdiction to enjoin the Montana claims.

On remand, the bankruptcy court disagreed. The disagreement sprung from a factual point. Leaving aside W.R. Grace's consent to have the trust indemnify CNA for the Montana claims, if the Montana plaintiffs prevailed against CNA on the Montana claims, CNA would not hold any independent right of indemnification against W.R. Grace or the trust. Said differently, the reimbursement provision discussed above was the only basis on which the Montana claims could give rise to any claims in favor of CNA against W.R. Grace or the trust. Under established Third Circuit precedent, financial contributions and other consents, without more, are insufficient to create subject matter jurisdiction. When W.R. Grace would otherwise have had no indemnification obligations, W.R. Grace cannot confer subject matter jurisdiction by its agreement with CNA. For this reason, the bankruptcy court held that it did not have jurisdiction to enjoin the Montana claims in the first instance.

Comparison With Fifth Circuit Precedent. This analysis of subject matter jurisdiction is congruent with the Fifth Circuit's discussion in S.E.C. v. Stanford Int'l Bank, Ltd., 927 F.3d 830 (5th Cir. 2019), an opinion published earlier this year. See Corinne Ball, "Bar Orders: Insurers and Indemnitors May Have Effective Alternative to Third-Party Releases," N.Y.L.J. (Aug. 22, 2019). In Stanford, the Fifth Circuit likewise identified the jurisdictional limits of the bankruptcy court, concluding that the bankruptcy court's jurisdiction cannot extend further than the boundary of the court's in rem jurisdiction. See S.E.C. v. Stanford Int'l Bank, Ltd., 927 F.3d 830 (5th Cir. 2019) (Jones, J.).

The Stanford case involved a federal receivership in the U.S. District Court for the Northern District of Texas over Stanford International Bank, which was running a Ponzi scheme that collapsed in the wake of the 2008 financial crisis. The district court entered a bar order following a settlement between insurers and the receiver over the scope of coverage for certain insurance policies, and prohibited lawsuits by all Stanford employees, officers and directors against the insurers on several grounds. The non-settling insured parties appealed. The non-settling insured parties contended that they had direct claims against the settling insurers seeking the protection of the bar order and that such claims were beyond the jurisdiction of the district court to enjoin via a bar order. The Fifth Circuit reversed the district court's approval of the bar order. The holding was based on the Fifth Circuit's conclusion that a district court's jurisdiction over the receivership estate may not be used to bar independent, non-derivative, third-party claims that do not affect the res of the receivership estate. Notably, when it came to claims of employees against directors and officers, the Fifth Circuit in another recent case upheld an injunction protecting insurers providing the settlement funding. See Zacarias v. Stanford Int'l Bank, No. 17-11073, 2019 WL 3281687 (5th Cir. 2019) (Higginbotham, J.).

Conclusion

The jurisdictional requirement is always present. Concepts that originated in order to address mass tort liability for asbestos and were later enacted as part of the Bankruptcy Code remain relevant points of analysis for the extent of bankruptcy jurisdiction and the scope of a channeling injunction or bar order in other mass tort situations. See, e.g., In re TK Holdings, No. 17-11375 (BLS) (Bankr. D. Del. 2017). Among other concerns, the touchstones of derivative claims and the role of insurance as an asset of the estate continue to be a key part of the jurisdictional analysis. On a practical level, the ability to finally resolve mass-tort liability through a large settlement funded by insurers or other indemnitors is often the primary objective of such a settlement. Assurance that those providing the funding for the settlement of mass-tort claims will be able to walk away and have no further liability is a condition of many such settlements. In W.R. Grace, the additional protection of an indemnity to the settlement funders by the settlement trust provided additional assurance that the settlement funders were protected against further claims relating to W.R. Grace.

To the extent that the debtor as the defendant in a mass-tort circumstance has a continuing and viable business, there is often a role for new capital or new investment. An investor generally is relying upon the channeling injunction to protect its investment in the reorganized debtor, as seen in the investment by Key Safety Systems in purchasing Takata. The investor should take the time to assess the scope of any channeling injunction and any pending or asserted litigation that certain claims are not subject to the channeling injunction. That analysis must take subject matter jurisdiction into account, especially in view of this W.R. Grace decision that consent or post-bankruptcy contractual obligations cannot create subject matter jurisdiction. Appeals premised upon lack of subject matter jurisdiction may not be mooted by confirmation, especially where the non-debtor appellant seeks to enforce its claim against a non-debtor third party claiming protection of the channeling injunction.

The scope and enforceability of channeling injunctions protecting large settlements intended to resolve the mass-tort claims through the provision of a trust or similar funding device will continue to be a central consideration in reaching a resolution of the liability of the debtor, and possibly its non-debtor affiliates or other co-defendants, in mass-tort situations.

Corinne Ball is a partner at Jones Day.