Volume 1, Number 1
The
Role of a Futures Representative in
Chapter 7 Liquidation Proceedings
Written by J. Gregg
Miller, Esq.
Pepper Hamilton LLP
. . . [S]uch injunction shall be valid and enforceable . . ., if –Section 524(g) does not describe how the legal representative is to protect the rights of persons that might assert “demands.” It does not give the legal rep a vote on the plan of reorganization, nor does it give him an express veto power over the plan, as does companion Section 524(h), which validates retroactively pre-1994 channeling injunctions, if –
(i) as part of the proceedings leading to issuance of such injunction, the court appoints a legal representative for the purpose of protecting the rights of persons that might subsequently assert demands of such kind . . .
(C) such legal representative did not object to confirmation of such plan or issuance of such injunction . . .Neither the Bankruptcy Code nor the reported cases to date directly answer the question: What role does a futures rep have in chapter 7 liquidation proceedings?
Some of the arguments against any role for a futures rep in chapter 7 are: (i) the “plain language” of the statute, and (ii) the people he represents don’t have “claims.” The “plain language” argument is that Congress mentioned a legal representative only in connection with the confirmation of a chapter 11 plan, when it could easily have expressly provided a legal rep standing in other matters under the Bankruptcy Code. The “claims” argument is that the narrow definition of a bankruptcy “claim” prohibits any distributions in chapter 7 to persons that might subsequently assert “demands” for payment. The Third Circuit has adopted the “state law claim theory,” which provides that there is no claim for bankruptcy purposes until a claim has accrued under state law. In re M. Frenville Co., 744 F.2d 332 (3d Cir. 1984). Although most courts criticize the “state law claim theory” as being too narrow, that theory remains binding in the Third Circuit. Jones v. Chemetron Corp., 212 F.3d 1999, 206 (3d Cir. 2000).
Some of the arguments in favor of a role for a futures representative in chapter 7 are: (i) the legislative history of the statute negates the “plain language” argument, (ii) “claims” may be defined more expansively, (iii) futures representatives have been appointed in chapter 11 liquidation proceedings for reasons that apply equally as well in chapter 7, (iv) the “free-and-clear” sale process is enhanced by a futures rep, and (v) state law requires a futures rep.
The legislative history of Section 524(g) indicates that its purpose was to supplement the discharge a corporation gets in chapter 11. However, in chapter 7, a corporation does not receive a discharge. Therefore, there would be no reason for Congress to mention a chapter 7 legal representative in this part of the Bankruptcy Code. Further, Section 111(b) of the Bankruptcy Reform Act of 1994 provides a “Rule of Construction” that indicates that Sections 524(g) and (h) shall not be construed to modify, impair or supercede any other authority of the Bankruptcy Court to creatively deal with mass tort problems. Pub. L. No. 103-394, Section 111(b) (1994). Finally, the Third Circuit decided that future asbestos claimants were “parties-in-interest,” without deciding if they held “claims,” In re Amatex Corporation, 755 F2d. 1034 (3rd Cir. 1985). “Parties-in-interest” have a right to appear and be heard in both chapter 11 and chapter 7 proceedings, and it follows that they should be represented in both kinds of cases by a legal representative.
“Claims” may be defined more expansively outside the Third Circuit. Although the Third Circuit definition of “claim” is narrow, the definitions adopted by the Second, Fourth, Ninth and Eleventh Circuits are broader. The Fourth Circuit has adopted the “conduct test,” which provides that a claim or right to payment arises when the conduct giving rise to the alleged liability occurs. Grady v. A.H. Robins, 839 F2d. 198 (4th Cir. 1998). Under this test, all future claimants who had been exposed to the debtor’s products pre-petition would hold claims against the estate and have a legal right to participate in the bankruptcy case and share in payments. The “pre-petition relationship test” has been adopted by the Ninth and Second Circuits and recognizes claims only where there is some type of pre-petition relationship, such as contact, exposure, impact, or privity, between the debtor’s pre-petition conduct and the claimant. In re Jensen, 995 F2d. 925 (9th Cir. 1993); In re Chateaugay Corp., 944 F2d. 997 (2nd Cir. 1991). The Eleventh Circuit has adopted a modified pre-petition relationship test called the “Piper Test,” which recognizes claims against a debtor if (i) events occurring before confirmation create a relationship, such as contact, exposure, impact or privity, between the claimant and the debtor’s product; and (ii) the basis for liability is the debtor’s pre-petition conduct in designing, manufacturing and selling the allegedly defective or dangerous product. Epstein v. Official Committee of Unsecured Creditors, 58 F3d. 1573 (11th Cir. 1995). Under each of these tests, the future tort claimants would hold recognizable claims against the chapter 7 estate, and they should be represented in protecting those claims by a legal representative.
Futures representatives have been appointed in chapter 11 liquidation proceedings for reasons that apply equally as well in chapter 7. In re H.K. Porter Company, 156 BR 16 (Bankr. W.D. Pa. 1993); In re Forty-Eight Insulations Inc., 58 BR 476 (Bankr. N.D. Ill. 1986). The liquidation proceedings of Forty-Eight Insulations took place in the late 1980s. In that case, the court appointed a legal representative over the objections of the Asbestos Committee. The court reasoned that failure to do so would leave futures holding the bag, with no share of the bankruptcy distribution.
This court holds that it would be highly inequitable to distribute the liquidated assets of the debtor to the currently known plaintiffs to the detriment of the potential claimants merely because the potential claimants have not yet manifested an injury.The court in H.K. Porter expressed similar reasoning in directing the appointment of a futures representative in a chapter 11 liquidation:
Therefore, it is hereby ordered that the debtor’s petition for appointment of a legal representative for future asbestos-related claimants is allowed. 58 BR 477, 478.
The real problem is whether there should be a reserve fund for those individuals who manifest an injury after an otherwise “final” distribution. We will direct the United States Trustee to appoint a person to serve as “futures” representative who will represent those individuals who will manifest an asbestos-related disease after an otherwise “final” distribution.The “free-and-clear” sale process is enhanced by the involvement of a futures rep. A bankruptcy court has the power to sell all of the assets of a debtor’s business pursuant to Bankruptcy Code Section 363 “free and clear” of claims, including “successor liability claims.” In re Trans World Airlines Inc., 322 F3d. 283 (3rd Cir. 2003). However, due process of law must be observed. If holders of successor liability claims do not receive notice of the sale, their claims are not discharged. In re Savage Industries Inc., 43 F3d. 714 (1st Cir. 1994). The only way to provide notice to future claimants is to appoint a legal representative for them. This will enhance the sale process and will elevate the purchase price, because a buyer will pay more for assets that have been cleansed of successor liability claims. Frederick Tung, Taking Future Claims Seriously: Future Claims and Successor Liability in Bankruptcy, 49 Case W. Res. 435 (1999).
While the status of claims of the futures is not as clear, it is clear that the [Asbestos] Committee plans a liquidation of all of the debtor’s assets and a distribution of the proceeds of the liquidation to the asbestos claimants. Once the debtor’s assets are distributed, futures will have no source of compensation for their injuries. We, therefore, conclude that the Futures require a voice in these proceedings. (Citations omitted) 156 BR 18, 19.
State law may require the appointment of a legal representative for future claimants. For example, the corporation statutes of Pennsylvania and Delaware both require that the directors of a dissolving business corporation make provision for compensation to unknown future claimants. The statutes also provide that a state court may appoint a guardian ad litem to represent the interests of such future unknown claimants in the dissolution proceeding. 15 PA. Cons. Stat. Ann. §1995 (2001); Del. Code Ann. tit. 8, §280 (2001). Section 280 of the Delaware General Corporation Law provides as follows in subsection (c)(3):
A corporation or successor entity which has given notice in accordance with subsection (a) of this section [i.e., notice of a proof of claim bar date] shall petition the Court of Chancery to determine the amount and form of security which will be reasonably likely to be sufficient to provide compensation for claims that have not been made known to the corporation or that have not arisen but that, based on facts known to the corporation or successor entity, are likely to arise or to become known to the corporation or successor entity within five years after the date of dissolution or such longer period of time as the Court of Chancery may determine not to exceed ten years after the date of dissolution. The Court of Chancery may appoint a guardian ad litem in respect of any such proceeding brought under this subsection. The reasonable fees and expenses of such guardian, including all reasonable expert witness fees, shall be paid by the petitioner in such proceeding.As indicated above, respectable arguments can be made both for and against a legal representative in chapter 7 cases. Only time will tell how the courts will resolve this issue.
OTHER
STORIES
IN THIS ISSUE:
Excerpts
From Address by Hon. Griffin B. Bell
2003 ABI Annual Spring Meeting