982 F.2d 721 (2nd Cir. 1992), 91-5036, In re Joint Eastern and Southern Dist. Asbestos Litigation

Docket Nº:91-5036(L), 91-5070.
Citation:982 F.2d 721
Party Name:24 Fed.R.Serv.3d 686, In re JOINT EASTERN AND SOUTHERN DISTRICT ASBESTOS LITIGATION. In re JOHNS-MANVILLE CORPORATION, Debtor. Bernadine K. FINDLEY, as Executrix of the Estate of Hillard Findley, et al., Plaintiffs-Appellees, Putative Class Members Owens-Corning Fiberglass Corporation, et al., Appellants, v. Donald M. BLINKEN, et al., Defendants-Ap
Case Date:December 04, 1992
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Page 721

982 F.2d 721 (2nd Cir. 1992)

24 Fed.R.Serv.3d 686,

In re JOINT EASTERN AND SOUTHERN DISTRICT ASBESTOS LITIGATION.

In re JOHNS-MANVILLE CORPORATION, Debtor.

Bernadine K. FINDLEY, as Executrix of the Estate of Hillard

Findley, et al., Plaintiffs-Appellees,

Putative Class Members Owens-Corning Fiberglass Corporation,

et al., Appellants,

v.

Donald M. BLINKEN, et al., Defendants-Appellees.

Manville Personal Injury Settlement Trust, et al., Appellees.

In re Bernadine K. FINDLEY, as Executrix of the Estate of

Hillard Findley, et al., and Donald M. Blinken, et

al., Petitioners.

Bernadine K. FINDLEY, as Executrix of the Estate of Hillard

Findley, et al., and Donald M. Blinken, et al., Appellants,

v.

Leslie Gordon FAGEN, as Legal Representative of Future

Claimants, Appellee.

Nos. 900-913, 1071, Dockets 91-5068(L), 91-5064, 91-5072,

91-5076, 91-5078, 91-5080, 91-5082, 91-5084,

91-5086, 91-5088, 91-5090; and 91-3029,

91-5036(L), 91-5070.

United States Court of Appeals, Second Circuit

December 4, 1992

Argued Feb. 24, 1992.

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Page 724

Roger E. Podesta, New York City (Anne E. Cohen, Geoffrey H. Coll, Marc E. Elovitz, Joseph Evall, Debevoise & Plimpton, New York City; John D. Aldock, William R. Hanlon, Shea & Gardner, Wash., DC; Andrew T. Berry, McCarter & English, Newark, NJ, on the brief), for appellants representatives of the co-defendant beneficiaries.

Tybe A. Brett, Pittsburgh, PA (Thomas W. Henderson, Henderson & Goldberg, Pittsburgh, PA; Richard F. Scruggs, Hayden S. Dent, Pascagoula, MS, Hal C. Pitkow, Washington, DC, Robert E. Sweeney & Mary B. Sweeney, Cleveland, OH, and Peter G. Angelos & Timothy J. Hogan, Baltimore, MD, on the brief), for appellants Bainter, Abbey, Austin, Coleman, Nicholson, et al.

James C. Gavin, Haddonfield, NJ (Gavin & Gavin, on the brief), for appellants Alston, et al.

John H. Faricy, Jr., Minneapolis, MN (James J. Higgins, Boyar, Higgins & Suozzo, Morristown, NJ, on the brief), for appellants MacArthur Co., Western MacArthur Co., & Milwaukee Insulation, Inc.

Elihu Inselbuch, New York City (C. Sanders McNew, Caplin & Drysdale, Ness, Motley, Loadholt, Richardson & Poole, Cartwright, Slobodin, Bokelman, Wilentz Goldman & Spitzer, Baron & Budd, Rose, Klein & Marias, on the brief), for appellee plaintiff class on the main appeal & for petitioner plaintiff class on the mandamus petition & appellant plaintiff class on the Interim 706 Report appeal.

David T. Austern, Gen. Counsel, Washington, DC (Kemble H. Garrett, Deputy Gen. Counsel, on the brief), for appellee Manville Personal Injury Settlement Trust on behalf of its Trustees on the main appeal & for petitioners Trustees on the mandamus petition & appellants Trustees on the Interim 706 Report appeal.

Leslie Gordon Fagen, New York City (Clifford Petersen, Beth Friedman Levine, Jane Anne Murray, Paul, Weiss, Rifkind, Wharton & Garrison, on the brief), for appellee Legal Representative of Future Claimants.

(Katherine M. Steel, Madden, Poliak, MacDougall & Williamson, Seattle, WA, submitted a brief for appellant E.J. Bartells Co.).

(David M. Lascell, Hallenbeck, Lascell & Pineo, Rochester, NY, for appellant Hopeman Bros., Inc.

Lynn M. Luker, Adams & Reese, New Orleans, LA, & Norman J. Barry, Rothschild, Barry & Myers, Chicago, IL, for appellant Foster Wheeler Corp., Foster Wheeler Energy Corp., & Foster Wheeler Boiler Corp.

William F. Mahoney, Segal, McCambridge, Singer & Mahoney, Ltd., Chicago, IL, for Greene, Tweed & Co., John J. Repcheck, Sharlock, Repcheck & Mahler, Pittsburgh, PA, for appellant Anchor Packing Co., submitted a brief).

(James W. Whitcomb, Paul F. Jones, Phillips, Lytle, Hitchcock, Blaine & Huber, Buffalo, NY, submitted a letter brief for appellants Gen. Refractories Co. & Grefco, Inc.).

(Steven Kazan, Kazan, McClain, Edises & Simon, Oakland, CA, & Bryce C. Anderson, Concord, CA, submitted a brief for amicus curiae Asbestos Victims of America).

Page 725

Before: FEINBERG, NEWMAN, and WINTER, Circuit Judges.

JON O. NEWMAN, Circuit Judge:

This appeal challenges significant rulings made jointly by a district judge and a bankruptcy judge in an effort to restructure the mechanism for distributing compensation to thousands of persons claiming asbestos-related injuries from products manufactured by the Johns-Manville Corporation. The rulings are presented for review on appeal from a judgment jointly entered on August 21, 1991, by the District Courts of the Eastern and Southern Districts of New York and the Bankruptcy Court of the Southern District of New York (Jack B. Weinstein, District Judge, and Burton R. Lifland, Chief Bankruptcy Judge) approving the settlement of a class action.

Some indication of the scope of the rulings is revealed by the fact that the principal opinion explaining them consumes 525 typescript pages--201 printed pages of the Bankruptcy Reporter, supplemented by 68 pages of appendices. See In re Joint Eastern & Southern District Asbestos Litigation ("Asbestos Litigation II"), 129 B.R. 710 (E. & S.D.N.Y., Bankr.S.D.N.Y.1991). The dimensions of the controversy are indicated by the polar characterizations of the contending sides on this appeal. For the principal appellants, the proceedings giving rise to the challenged rulings are "unique in jurisprudential history, if not bizarre," Joint Brief for Appellants at 3, "frightening," id. at 101, and "grossly" beyond "the bounds of judicial power," id. The appellees consider the rulings to be simply the valid settlement of a class action within the jurisdiction of the District Court, accomplished to enhance the fairness of the ultimate distribution of compensation to asbestos victims.

We conclude that the judgment approving the settlement must be vacated because, to the extent that the judgment rests on diversity jurisdiction, the use of a mandatory non-opt-out class action without proper subclasses violates the requirements of Rule 23 of the Federal Rules of Civil Procedure, and, to the extent that the judgment rests on bankruptcy jurisdiction, it represents an impermissible modification of a confirmed and substantially consummated plan of reorganization in violation of section 1127(b) of the Bankruptcy Code.

BACKGROUND

A. The Manville Reorganization. The current controversy arises in the aftermath of the confirmation of a plan of reorganization of the Johns-Manville Corporation ("the Debtor") the world's largest manufacturer of asbestos. Facing claims from current and future victims of asbestos-related deaths and injuries estimated to total $2 billion, the Debtor filed a voluntary petition in bankruptcy under Chapter 11 on August 26, 1982. The reorganization proceeding involved both "present claimants," i.e., persons who, prior to the petition date, had been exposed to Manville asbestos and had developed an asbestos-related disease, and "future claimants," i.e., persons who had been exposed to Manville asbestos prior to the petition date but had not shown any signs of disease at that time. The Bankruptcy Court appointed a legal guardian to represent the interests of the future claimants.

After four years of negotiation, a Second Amended Plan of Reorganization ("the Plan") was presented to the Bankruptcy Court, 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), and confirmed in 1986, In re Johns-Manville Corp., 68 B.R. 618 (Bankr.S.D.N.Y.1986). The cornerstone of the Plan was the Manville Personal Injury Settlement Trust ("the Trust" or "the PI Trust"), a mechanism designed to satisfy the claims of all asbestos health claimants, both present and future. The Trust was to be funded from several sources: the proceeds of the Debtor's settlements with its insurers; certain cash, receivables, and stock of the reorganized Manville Corporation ("Manville"); long term notes; and the right to receive up to 20 percent of Manville's yearly profits for as long as it might take to satisfy all asbestos disease claims.

Page 726

As a condition precedent to confirmation of the Plan, the Bankruptcy Court issued an injunction channeling to the Trust all asbestos-related personal injury claims against the Debtor ("the Injunction"). The Injunction specifies that asbestos health claimants may proceed only against the Trust to satisfy their claims against the Debtor and may not sue Manville, its related operating entities, or its insurers. The Injunction applies to all health claimants, both present and future, regardless of whether they technically have dischargeable "claims" under the Code. Those with present claims unquestionably have dischargeable "claims" within the meaning of 11 U.S.C. § 101(4) (1988) and hold what the Plan categorizes as "AH Claims"; holders of AH Claims are Class-4 unsecured creditors under the Plan. If future claimants are ultimately determined to hold "claims" within the meaning of section 101(4), they too will be Class-4 unsecured creditors. If it is determined that they do not hold "claims," they will then fall within a category denominated by the Plan as "Other Asbestos Obligations." Whether or not the future claimants have creditor status under the Plan, they are nevertheless treated identically to the present claimants, at least to the extent of being obliged to look to the Trust as the sole source of compensation. All health claimants are required to attempt settlement with the Trust. If a settlement cannot be reached, the claimant may elect mediation, binding arbitration, or traditional tort litigation in state or federal court, including trial by jury. The claimant may collect from the Trust...

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