In Re W.R. Grace & Co.
2013 U.S. App. LEXIS 18346
| 3rd Cir. | 2013Background
- W.R. Grace filed Chapter 11 to resolve massive present and future asbestos liabilities, including liability from its Libby, Montana vermiculite mine and Zonolite Attic Insulation (ZAI) products.
- Grace proposed a Joint Plan creating two § 524(g) trusts (personal injury and property damage) funded by cash, insurance/affiliate settlements, stock warrants, and deferred payments to pay and channel asbestos-related claims to the trusts.
- Montana and Her Majesty the Queen in Right of Canada (the Crown) faced suits (direct and indirect) related to Grace’s asbestos activities and filed proofs of claim asserting rights to indemnification and contribution from Grace; they objected to plan confirmation.
- Bankruptcy and District Courts confirmed the Plan, including a § 524(g) channeling injunction that placed Montana’s and the Crown’s indemnity/contribution claims in classes with direct asbestos claimants and subjected them to trust procedures (TDPs).
- Montana and the Crown appealed, arguing (1) § 524(g) cannot reach their indemnity/contribution “requests”; (2) their claims were misclassified under § 1122; (3) TDPs discriminate within classes in violation of § 1123(a)(4); and (4) the injunction is not “fair and equitable” to future claimants. The Third Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scope of § 524(g) channeling injunction — Do indemnity/contribution claims qualify as "claims or demands" that can be channeled? | Montana/Crown: Their requests are not "claims" or "demands" under § 524(g) (accrual-based), and indemnity/contribution are different in kind from direct PI/property claims. | Grace: § 524(g) uses broad Code definitions and expressly reaches claims or demands that directly or indirectly seek recovery stemming from debtor's asbestos liabilities, including indemnity/contribution. | The court held § 524(g) covers indemnity and contribution claims; claims arise pre-confirmation under Third Circuit precedent and § 524(g)'s "claim or demand" language embraces indirect recovery actions. |
| Classification under § 1122 — Can indirect claims be classed with direct personal-injury claims? | Montana/Crown: Their claims are legally distinct and should not be in Class 6 with direct PI claims. | Grace: Classification focuses on legal character vis-à-vis debtor assets; indirect claims seek recovery from the same source and have similar effect on estate. | The court held the classification was reasonable: indirect and direct claims are substantially similar for § 1122 purposes. |
| Disparate treatment / equal treatment (§ 1123(a)(4) and § 524(g)(2)(B)(ii)(V)) — Do the TDPs unfairly discriminate against indirect claimants? | Montana/Crown: TDP features (presumptive-validity conditions, first-in-first-out payments, limits on attorneys’ fees, release requirements, maximum values) disadvantage indirect claimants and delay or reduce their recoveries. | Grace: Procedural differences are common, do not deny equal opportunity to recover; TDP safeguards (payment percentage, adjustable funding, individual review) protect future claimants; requirements only bar recovery when debtor had no underlying liability. | The court held TDPs do not produce disparate treatment. Procedural differences and conditions are permissible where claimants retain equivalent opportunity to recover; first-in-first-out and other TDP features are acceptable. |
| "Fair and equitable" to future claimants (§ 524(g)(4)(B)(ii)) — Is channeling justified given trust funding and TDP uncertainty? | Montana/Crown: TDP uncertainty about distributions and advisory committee structure render injunction unfair to future claimants. | Grace: Fairness inquiry centers on relationship between trust funding and benefit of injunction; contribution here is substantial and statutory safeguards exist (75% vote, procedural protections, adjustable Payment Percentage). | The court held the injunction is "fair and equitable": contributions and protections reasonably support channeling; procedural uncertainty is inherent and addressed by § 524(g) requirements. |
Key Cases Cited
- In re Combustion Eng’g, 391 F.3d 190 (3d Cir. 2004) (describing § 524(g) as supplemental injunctive relief tailored to asbestos liability and protecting future claimants)
- In re Federal‑Mogul Global, Inc., 684 F.3d 355 (3d Cir. 2012) (describing § 524(g) process and trust mechanics)
- In re Grossman’s, Inc., 607 F.3d 114 (3d Cir. 2010) (overruling accrual test and clarifying when a "claim" arises under the Code)
- Wright v. Owens Corning, 679 F.3d 101 (3d Cir. 2012) (addressing due-process concerns for claims arising pre-confirmation and post-petition)
- FCC v. NextWave Pers. Commc’ns Inc., 537 U.S. 293 (2003) (noting the Bankruptcy Code’s broad definition of "claim")
- United States v. Bornstein, 423 U.S. 303 (1976) (judicial duty to give faithful meaning to statutory text)
- In re Frenville, 744 F.2d 332 (3d Cir. 1984) (former accrual-rule authority discussed and later rejected)