Kane v. Johns-Manville Corp.

Decision Date30 March 1988
Docket NumberD,No. 412,JOHNS-MANVILLE,412
Citation843 F.2d 636
Parties, 17 Bankr.Ct.Dec. 695, Bankr. L. Rep. P 72,264 Lawrence KANE, a Class-4 creditor and asbestos-health claimant, on his own behalf and on behalf of individual Class-4 creditors and asbestos-health claimants, Appellants, v.CORPORATION, Manville Corporation, Manville International Corporation, Manville Export Corporation, Johns-Manville International Corporation, Manville Sales Corporation, f/k/a Johns-Manville Sales Corporation, successor by merger to Manville Buildings Materials Corporation, Manville Products Corporation, and Manville Service Corporation, Manville International Canada, Inc., Manville Canada, Inc., Manville Investment Corporation, Manville Properties Corporation, Allan-Deane Corporation, Ken- Caryl Ranch Corporation, Johns-Manville Idaho, Manville Canada Service Inc., and Sunbelt Contractors, Inc., Appellees. In reCORPORATION, et al., Debtors. ocket 87-5032.
CourtU.S. Court of Appeals — Second Circuit

Michael L. Goldberg, Washington, D.C. (Aaron H. Simon, Charles B. O'Reilly, George M. Rosenberg, Greene, O'Reilly, Broillet, Paul, Simon, McMillan, Wheeler & Rosenberg, Washington, D.C., Vern Countryman, Moraga, Cal., on the brief), for appellants.

Lowell Gordon Harriss, New York City (Laureen F. Bedell, Gregor Baer, Davis Polk & Wardwell, New York City, on the brief), and Herbert Stephen Edelman, New York City (Andrew A. Kress, Levin & Weintraub & Crames, New York City, on the brief), for appellees Johns-Manville Corp., et al.

Matthew Gluck, New York City (Fried, Frank, Harris, Shriver & Jacobson, New York City, on the brief), for appellees Legal Representative for Future Claimants.

Elihu Inselbuch, New York City (Caplin & Drysdale, New York City, on the brief), for appellee Official Committee of Asbestos Health-Related Litigants and/or Creditors.

John J. Jerome, Milbank, Tweed, Hadley, & McCloy, New York City, submitted a brief for appellee Official Committee of Unsecured Creditors.

Before NEWMAN, WINTER, and MINER, Circuit Judges.

JON O. NEWMAN, Circuit Judge:

This appeal challenges the lawfulness of the reorganization plan of the Johns-Manville Corporation ("Manville"), a debtor in one of the nation's most significant Chapter 11 bankruptcy proceedings. Lawrence Kane, on behalf of himself and a group of other personal injury claimants, appeals from an order of the District Court for the Southern District of New York (Whitman Knapp, Judge) affirming an order of the Bankruptcy Court (Burton R. Lifland, Chief Judge) that confirmed a Second Amended Plan of Reorganization (the "Plan"). Kane and the group of 765 individuals he represents (collectively "Kane") are persons with asbestos-related disease who had filed personal injury suits against Manville prior to Manville's Chapter 11 petition. The suits were stayed, and Kane and other claimants presently afflicted with asbestos-related disease were designated as Class-4 creditors in the reorganization proceedings. Kane now objects to confirmation of the reorganization Plan on several grounds: it discharges the rights of future asbestos victims who do not have "claims" within the meaning of 11 U.S.C. Sec. 101(4) (1982), it was adopted without constitutionally adequate notice to various interested parties, the voting procedures used in approving the Plan violated the Bankruptcy Code and due process requirements, and the Plan fails to conform with the requirements of 11 U.S.C. Sec. 1129(a) and (b) (1982 & Supp. IV 1986). We determine that Kane lacks standing to challenge the Plan on the grounds that it violates the rights of future claimants and other third parties, and we reject on the merits his remaining claims that the Plan violates his rights regarding voting and fails to meet the requirements of section 1129(a) and (b). The order of the District Court affirming the Bankruptcy Court's confirmation of the Plan is affirmed.

Background

Prior to its filing for reorganization in 1982, Manville was the world's largest miner of asbestos and a major manufacturer of insulating materials and other asbestos products. Beginning in the 1960's, scientific studies began to confirm that exposure to asbestos fibers over time could cause a variety of respiratory diseases, including certain forms of lung cancer. A significant characteristic of these asbestos-related diseases is their unusually long latency period. An individual might not become ill from an asbestos-related disease until as long as forty years after initial exposure. Hence, many asbestos victims remain unknown, most of whom were exposed in the 1950's and 1960's before the dangers of asbestos were widely recognized. These persons might not develop clinically observable symptoms until the 1990's or even later.

As a result of the studies linking respiratory disease with asbestos, Manville became the target in the 1960's and 1970's of a growing number of products liability lawsuits. By the early 1980's, Manville had been named in approximately 12,500 such suits brought on behalf of over 16,000 claimants. New suits were being filed at the rate of 425 per month. Epidemiological studies undertaken by Manville revealed that approximately 50,000 to 100,000 additional suits could be expected from persons who had already been exposed to Manville asbestos. On the basis of these studies and the costs Manville had already experienced in disposing of prior claims, Manville estimated its potential liability at approximately $2 billion. On August 26, 1982, Manville filed a voluntary petition in bankruptcy under Chapter 11. From the outset of the reorganization, all concerned recognized that the impetus for Manville's action was not a present inability to meet debts but rather the anticipation of massive personal injury liability in the future. See In re Johns-Manville Corp., 36 B.R. 743, 745 (Bankr.S.D.N.Y.1984), aff'd, 52 B.R. 940 (S.D.N.Y.1985).

Because future asbestos-related liability was the raison d'etre of the Manville reorganization, an important question at the initial stages of the proceedings concerned the representation and treatment of what were termed "future asbestos health claimants" ("future claimants"). The future claimants were persons who had been exposed to Manville's asbestos prior to the August 1982 petition date but had not yet shown any signs of disease at that time. Since the future claimants were not yet ill at the time the Chapter 11 proceedings were commenced, none had filed claims against Manville, and their identities were unknown. An Asbestos Health Committee was appointed to represent all personal injury claimants, but the Committee took the position that it represented the interests only of "present claimants," persons who, prior to the petition date, had been exposed to Manville asbestos and had already developed an asbestos-related disease. The Committee declined to represent the future claimants. Other parties in the proceedings, recognizing that an effective reorganization would have to account for the future asbestos victims as well as the present ones, moved the Bankruptcy Court to appoint a legal guardian for the future claimants. The Bankruptcy Court granted the motion, reasoning that regardless of whether the future claimants technically had "claims" cognizable in bankruptcy proceedings, see 11 U.S.C. Sec. 101(4), they were at least "parties in interest" under section 1109(b) of the Code and were therefore entitled to a voice in the proceedings. The Court appointed a Legal Representative to participate on behalf of the future claimants. See In re Johns-Manville Corp., 36 B.R. 743 (Bankr.S.D.N.Y.1984), aff'd, 52 B.R. 940 (S.D.N.Y.1985). Additionally, the Court invited any person who had been exposed to Manville's asbestos but had not developed an illness to participate in the proceedings, and two such persons appeared.

The Second Amended Plan of Reorganization resulted from more than four years of negotiations among Manville, the Asbestos Health Committee, the Legal Representative, the Equity Security Holders' Committee, and other groups interested in the estate. 1 See Manville Corp. v. Equity Security Holders Committee (In re Johns-Manville Corp.), 66 B.R. 517, 518-33 (Bankr.S.D.N.Y.1986). The cornerstone of the Plan is the Asbestos Health Trust (the "Trust"), a mechanism designed to satisfy the claims of all asbestos health victims, both present and future. The Trust is funded with the proceeds from Manville's settlements with its insurers; certain cash, receivables, and stock of the reorganized Manville Corporation; long term notes; and the right to receive up to 20% of Manville's yearly profits for as long as it takes to satisfy all health claims. According to the terms of the Trust, individuals with asbestos-related disease must first try to settle their claims by a mandatory exchange of settlement offers with Trust representatives. If a settlement cannot be reached, the claimant may elect mediation, binding arbitration, or traditional tort litigation. The claimant may collect from the Trust the full amount of whatever compensatory damages he is awarded. The only restriction on recovery is that the claimant may not obtain punitive damages.

The purpose of the Trust is to provide a means of satisfying Manville's ongoing personal injury liability while allowing Manville to maximize its value by continuing as an ongoing concern. To fulfill this purpose, the Plan seeks to ensure that health claims can be asserted only against the Trust and that Manville's operating entities will be protected from an onslaught of crippling lawsuits that could jeopardize the entire reorganization effort. To this end, the parties agreed that as a condition precedent to confirmation of the Plan, the Bankruptcy Court would issue an injunction channeling all asbestos-related personal injury claims to the Trust (the "Injunction"). The Injunction provides...

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