452 B.R. 21
S.D.N.Y.2011Background
- FairPoint purchased Verizon landline operations in 2008, creating $2.5 billion in debt the company could not service.
- FairPoint filed for chapter 11 on October 26, 2009 with secured lenders and an unsecured creditors’ committee appointed.
- Creditors approved FairPoint’s Second Amended Plan and related disclosures in 2010, which contemplated a Litigation Trust for spinoff-related claims.
- The Litigation Trust Agreement includes a Verizon Injunction limiting Litigation Trust Defendants from pursuing third-party claims against entities that could obligate FairPoint or Reorganized FairPoint to pay claims.
- FairPoint filed its Third Amended Plan in December 2010, incorporating the Litigation Trust and Verizon Injunction; confirmation hearings occurred January 2011 after regulatory approvals.
- On January 24, 2011 the Plan became effective; reorganized FairPoint issued stock, raised financing, canceled old equity and debt, and began operations under fresh-start accounting.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the bankruptcy court had jurisdiction to enjoin non-derivative third-party claims | Verizon argues no jurisdiction to enjoin non-derivative claims not directly against the estate. | FairPoint/Trust argues the injunction is within related-to/in rem jurisdiction and tailored to affect the estate. | Yes, jurisdiction exists to enjoin. |
| If jurisdiction exists, whether the Verizon Injunction is proper under Manville framework | Manville III prohibits non-derivative third-party injunctions not directly affecting the estate. | Injunction directly affects the estate via contingent indemnity/contribution obligations. | Properly tailored to affect the estate; jurisdiction affirmed. |
| Whether Verizon’s appeal is equitably moot due to plan consummation | Equitable mootness bars merits consideration after substantial consummation. | Plan substantial consummation supports mootness and waives rights to relief. | Equitable mootness applies; issue not reached on merits. |
Key Cases Cited
- Celotex Corp. v. Edwards, 514 U.S. 300 (1995) (bankruptcy court may enjoin third-party claims to protect the estate)
- In re Johns-Manville Corp., 600 F.3d 135, 600 F.3d 135 (2d Cir. 2010) (Manville IV; discusses scope of in rem jurisdiction and related-to jurisdiction)
- In re Metromedia Fiber Network, Inc., 416 F.3d 136, 416 F.3d 136 (2d Cir. 2005) (substantial consummation and ability to provide remedies in bankruptcy)
- Manville III, 517 F.3d 52, 517 F.3d 52 (2d Cir. 2010) (non-derivative third-party claims must directly affect the estate to be enjoined)
- In re W.R. Grace & Co., 591 F.3d 164, 591 F.3d 164 (3d Cir. 2009) (addressed indemnification/credit implications in bankruptcy)
- In re El Paso Refinery, LP, 302 F.3d 343, 302 F.3d 343 (5th Cir. 2002) (upheld broader related-to jurisdiction to enjoin third-party litigation)
- In re Wolverine Radio Co., 930 F.2d 1132, 930 F.2d 1132 (6th Cir. 1991) (supports broader injunction power to protect estate)
- Travelers Indemnity Co. v. Bailey, 129 S. Ct. 2195 (2009) (Supreme Court on related-to/indemnification considerations in bankruptcy)