The Next Round in Asbestos ‘Prepacks’: Are We There Yet?
by Domenic E. Pacitti, Saul Ewing LLP; Wilmington, Del.
Are we there yet? Perhaps! Two asbestos debtors recently filed modified chapter 11 plans that appear to address the Third Circuit Court of Appeals’ ruling in Combustion Engineering Inc., 391 F.3d 190 (3rd Cir. 2004), vacating and remanding the district court’s confirmation order. On June 10, 2005, Congoleum Corporation (Congoleum) filed its fifth modified joint reorganization plan and Modified Disclosure Statement. Two weeks later, on June 24, 2005, Combustion Engineering Inc. (CE), filed its modified reorganization plan and modified disclosure statement. Both CE and Congoleum are seeking authority to resolicit impaired claimants who voted on their prior plans pursuant to §1127(d) of the Bankruptcy Code.
The Third Circuit in Combustion Engineering determined that the bankruptcy court does not have “related to” jurisdiction to issue a channeling injunction in favor of non-debtors with respect to non-derivative asbestos claims. The Third Circuit further held that non-debtors with independent asbestos liabilities who did not meet the requirements of §524(g) could not “ride the coattails” of the debtor’s §524(g) channeling injunction by using §105(a) of the Bankruptcy Code. Regarding the two-trust structure of the CE plan, which enjoined pre-petition settled asbestos claims in exchange for payment made by a pre-petition trust created for the benefit of settled asbestos claims and a separately funded §524(g) trust for non-settling asbestos claims and “stub claims” of settling asbestos claimants, the Third Circuit cautioned that this structure potentially provided for impermissible disparate treatment and remanded for further findings on this issue. With respect to the potential gerrymandering of voting by the creation of impaired “stub claims” of settled asbestos claims, the Third Circuit also cautioned that such a voting structure potentially allows the debtor to manipulate plan voting and implicates the good faith requirements of §1129(a)(3) of the Bankruptcy Code. Both issues were also remanded for further findings.
In an apparent effort to address the Third Circuit’s concerns, CE’s modified plan provides for a channeling injunction to be issued pursuant to §524(g) in conjunction with an injunction under §105(a) that will channel all asbestos claims asserted solely against the debtor consistent with the enumerated protections provided under §524(g). Additionally, non-derivative asbestos claims against non-debtors are no longer afforded protection under the modified plan. Rather, in response to the Third Circuit’s admonitions, CE’s corporate affiliate, BBB Lummus Global Inc. (Lummus), is expected to solicit its own prepackaged plan and file its own chapter 11 bankruptcy. This modification certainly addresses the Third Circuit’s determination that non-debtors seeking to channel non-derivative asbestos liability should seek their own protection under §524(g) by filing their own chapter 11 proceedings. However, Judge Fitzgerald in a recent status conference expressed concern about the contingency in the CE modified plan that a Lummus prepackaged bankruptcy be filed prior to the CE modified plan becoming effective. See In re Combustion Engineering Inc., Case No. 03-10495 (JKF) (Bankr. D. Del.), Transcript of July 7, 2005, Docket No. 2350.
To address the Third Circuit’s concerns regarding disparate treatment, plan voting and good faith issues implicated by a two-trust structure, CE’s modified plan altered the treatment of pre-petition settled asbestos claims by providing that such settled claims solely have a right to distribution from the pre-petition trust and the remaining “stub claims” will be released and receive no distributions from the §524(g) trust as was contemplated by the prior plan. Additionally, CE’s modified plan attempts to achieve parity of treatment between the pre-petition trust and the §524(g) trust by increasing the funding of the 524(g) trust. This is done also in part by the release of “stub claims” by those claimants who received payments from the pre-petition trust in exchange for a release of pending preference claims against such claimants.
While at least one concern has already been raised by the court in the modified plan, it appears that the CE modified plan has come a long way to address the specific concerns raised by the Third Circuit. Of course, only the bankruptcy court and appellate courts will have the final say. Not all potential plan confirmation objections were addressed by the Third Circuit and remain open for potential objection during the confirmation of the modified plan. As we have seen in asbestos cases, there remains no lack of potential issues.
Congoleum’s modified plan alters the two-trust structure and, as a consequence the concomitant voting, disparate treatment and good faith concerns raised by the Third Circuit may not be implicated. Congoleum’s prior plan did not appear to implicate the “related to” jurisdiction and non-debtor injunction concerns addressed by the Third Circuit in Combustion Engineering. Congoleum’s prior plan recognized the priority in payment provided to settled secured asbestos claims that hold a security interest in insurance rights to secure 75 percent of the settled claim amounts. Additionally, the prior plan recognized the “stub claims” of the settled secured asbestos claimants, providing that such “stub claims” be paid along with non-settling asbestos claims and future claims from the §524(g) trust.
Congoleum’s modified plan provides for a forbearance, upon the effective date of the modified plan, by settling secured asbestos claimants who vote in favor of the modified plan or who do not object to its forbearance provisions. The forbearance requires that settling secured asbestos claimants will refrain from exercising their rights as secured creditors under the pre-petition trust and from enforcing their right to priority in payment as a result of the pre-petition settlement and grant of security. The intended effect of the forbearance appears to be to provide similar treatment of both settled secured asbestos claims, non-settled asbestos claims and future claims from the §524(g) trust contemplated by the modified plan. Like CE, the Congoleum plan appears to address issues raised by the Third Circuit. As in the CE case, additional potential objections remain open for determination at the confirmation hearing on the modified plan.
It is anticipated that confirmation hearings on both plans will begin sometime this fall.