In re Energy Future Holdings Corp

• Decision Date: 18 February 2020
• Docket Number: No. 19-1430,19-1430
• Citation: 949 F.3d 806
• Parties: IN RE: ENERGY FUTURE HOLDINGS CORP, aka TXU Corp., aka Texas Utilities, et al., Debtors Shirley Fenicle, individually and as successor-in-interest to the Estate of George Fenicle; David William Fahy; John H. Jones; David Heinzmann; Harold Bissell; *Kurt Carlson ; *Robert Albini, individually and as successor-in-interest to the Estate of Gino Albini; Denis Bergschneider, Appellants
• Court: U.S. Court of Appeals — Third Circuit

949 F.3d 806

IN RE: ENERGY FUTURE HOLDINGS CORP, aka TXU Corp., aka Texas Utilities, et al., Debtors

Shirley Fenicle, individually and as successor-in-interest to the Estate of George Fenicle; David William Fahy; John H. Jones; David Heinzmann;^* Harold Bissell; *Kurt Carlson ; *Robert Albini, individually and as successor-in-interest to the Estate of Gino Albini; Denis Bergschneider, Appellants

No. 19-1430

United States Court of Appeals, Third Circuit.

Argued September 18, 2019

Opinion filed: February 18, 2020

Daniel K. Hogan, Hogan McDaniel, 1311 Delaware Avenue, Suite 1, Wilmington, DE 19806

Steven Kazan, Kazan McClain Satterley & Greenwood, 55 Harrison Street, Suite 400, Oakland, CA 94607

Leslie M. Kelleher [ARGUED], Jeanna R. Koski, Caplin & Drysdale, One Thomas Circle, N.W., Suite 1100, Washington, DC 20005, Counsel for Appellants

Matthew C. Brown, Thomas E. Lauria, Joseph A. Pack, White & Case, 200 South Biscayne Boulevard, Suite 4900, Miami, FL 33131

J. Christopher Shore [ARGUED], White & Case, 1221 Avenue of the Americas, New York, NY 10020

Jeffrey M. Schlerf, Fox Rothschild, 919 North Market Street, Suite 300, Wilmington, DE 19801, Counsel for Appellee Reorganized EFH Debtors

Daniel J. DeFranceschi, Jason M. Madron, Richards Layton & Finger, 920 North King Street, One Rodney Square, Wilmington, DE 19801

Mark E. McKane [ARGUED], Kirkland & Ellis, 555 California Street, Suite 2700, San Francisco, CA 94104, Counsel for Appellee EFH Plan Administrator Board

Jennifer Bennett, Public Justice, 475 14th Street, Suite 610, Oakland, CA 94607

Michael J. Quirk, Motley Rice, 40 West Evergreen Avenue, Suite 104, Philadelphia, PA 19118, Counsel for Amicus Curiae Public Justice

Before: KRAUSE and MATEY, Circuit Judges, and QUIÑONES ALEJANDRO,^† District Judge

OPINION OF THE COURT

KRAUSE, Circuit Judge.

We must determine whether and under what circumstances a bankruptcy debtor’s Chapter 11 plan of reorganization may discharge the claims of latent asbestos claimants. The Bankruptcy Court determined that the discharge of such claims is permissible so long as the claimants receive an opportunity to reinstate their claims after the debtor’s reorganization that comports with due process. We agree and therefore will affirm.

I. Facts

This case, while complex on its surface, is in fact quite simple when understood in historical and legal context. We thus set out that context before turning to a discussion of the underlying facts and procedural history.

A. Asbestos Litigation in Bankruptcy

The great tragedy of this country’s history of asbestos exposure and related disease is by now well documented. The asbestos crisis entails "a tale of danger known in the 1930s, exposure inflicted upon millions of Americans in the 1940s and 1950s, injuries that began to take their toll in the 1960s, and a flood of lawsuits beginning in the 1970s." Amchem Prods., Inc. v. Windsor , 521 U.S. 591, 598, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997) (citation omitted). Those lawsuits have proved particularly difficult for our courts to manage because asbestos exposure gives rise to "a latency period that may last as long as 40 years for some asbestos related diseases." Id. (citation omitted). That latency period bifurcates most classes of asbestos plaintiffs between those who have already contracted asbestos-related disease ("manifested claimants") and those who have been exposed and are merely at risk ("latent claimants"), see id. at 610–11, 117 S.Ct. 2231 ; many of the latter may not even realize the fact of their exposure, id. at 611, 117 S.Ct. 2231. Such "legions so unselfconscious and amorphous" pose problems for which our civil procedure rules were not designed. Id. at 628, 117 S.Ct. 2231.

The poor fit between our civil procedure rules and asbestos litigation has been mirrored by an equally poor fit between our bankruptcy law and asbestos litigation. The mismatch occurs because the long latency period for asbestos-related disease is incompatible with the "public policy of affording finality to bankruptcy judgments." In re Cont’l Airlines , 91 F.3d 553, 560 (3d Cir. 1996) (en banc). In the normal course of a bankruptcy proceeding, the court sets a deadline—known as a "bar date"—before which proofs of claim against the debtor’s estate must be filed; all of these claims receive treatment under the proposed plan of reorganization and, upon confirmation of the plan, all claims for which proofs of claim are not filed are discharged by the bankruptcy. But while this "procedural design works relatively well in the typical Chapter 11 corporate restructuring of the debtor’s current assets and liabilities," it is poorly outfitted to "address the claims of not only current creditors but also currently unknowable future creditors" like latent asbestos claimants. S. Todd Brown, How Long Is Forever This Time? The Broken Promise of Bankruptcy Trusts , 61 Buff. L. Rev. 537, 541–42 (2013). That is because discharging the claims of "unknowable future creditors" implicates due process concerns: namely, that they have been deprived of their property—their claims—without notice of or a hearing regarding the discharge. See id.

This dilemma was first confronted in the landmark case of In re Johns-Manville Corp. , 68 B.R. 618 (Bankr. S.D.N.Y. 1986). There, the court announced an "innovative and unique" solution to the problem of asbestos-driven bankruptcy. Id. at 621. The court’s innovation was to abstain from addressing all of the debtor’s asbestos liability at once; instead, it provided for the creation and funding of a trust by the debtor to address individual asbestos claims against the debtor as those claims manifested. Id. at 621–22. To ensure that the claims were directed toward the trust, the court imposed an injunction that "effectively channel[ed] all asbestos related claims and obligations away from the reorganized entity and target[ed] [them] towards the ... [t]rusts." Id. at 624. The injunction thereby ensured that latent claimants were "treated identically" to symptomatic claimants. Kane v. Johns-Manville Corp. , 843 F.2d 636, 640 (2d Cir. 1988).

The Johns-Manville court’s innovation proved so successful that Congress decided to codify it. As we later explained, "The Manville Trust was the basis for Congress’ effort to deal with the problem of asbestos claims on a national basis, which it did by enacting § 524(g) of the Bankruptcy Code." In re Grossman’s Inc. , 607 F.3d 114, 126 (3d Cir. 2010) (en banc). That new provision, § 524(g), "took account of the due process implications of discharging future claims of individuals whose injuries were not manifest at the time of the bankruptcy petition," id. at 127, by requiring the court to determine that the injunction is "fair and equitable" to future claimants, 11 U.S.C. § 524(g)(4)(B)(ii), to appoint a representative of future claimants’ interests, id. § 524(g)(4)(B)(i), and to obtain an approval vote from at least three-quarters of asbestos claimants, id. § 524(g)(2)(B)(ii)(IV)(bb).

But § 524(g), while expanding the toolbox for resolving asbestos liability in bankruptcy, was not a panacea. Our Court discovered as much in In re Combustion Engineering, Inc. , 391 F.3d 190 (3d Cir. 2004). There, we recognized that "just and efficient resolution of [asbestos] claims has often eluded our standard legal process" and, consequently, that "asbestos liabilities ha[d] pushed otherwise viable companies into bankruptcy." Id. at 200–01. Combustion Engineering was one such case: The debtor had fallen into bankruptcy because of "mounting personal injury liabilities," and it sought to resolve its debts with a Chapter 11 reorganization founded upon a § 524(g) trust and injunction. Id. at 201. On the facts of that case, however, we were forced to conclude that even the § 524(g) trust might have "impermissibly discriminate[d] against certain asbestos personal injury claimants," and we therefore "remand[ed] for additional fact-finding." Id. at 239.

Our struggle with asbestos-driven bankruptcy and due process left off—until today—with Grossman’s . In that case, we convened en banc to consider whether a person whose "underlying asbestos exposure occurred pre-petition but [whose] injury manifested itself post-petition" had a "claim" for bankruptcy purposes. 607 F.3d at 117. We held that such a person did have a claim—i.e., that bankruptcy claims accrue at the time of exposure—overruling our much-maligned rule that bankruptcy claims accrued at the time of an injury. Id. at 125. But as this holding dictated that asbestos claims—even those that are latent at the time of bankruptcy—are dischargeable through the bankruptcy process, we cautioned that "fundamental principles of due process" still applied. Id. Thus, while we echoed our earlier observation in Combustion Engineering that a § 524(g) trust was "specifically tailored to protect the due process rights of future claimants" and was perhaps the best vehicle for addressing these concerns, id. at 127 (quoting Combustion Eng’g , 391 F.3d at 234 n.45 ), we made clear that the ultimate question remained whether the discharge of latent asbestos claims "comport[ed] with due process," taking into account various factors—only one of which was "whether it was reasonable or possible for the debtor to establish a trust for future claimants as provided by § 524(g)." Id. at 127–28.

Against that backdrop, we turn to the facts of this case, where latent claims were discharged in bankruptcy without the creation of a § 524(g) trust, prompting us again to consider the application of due process to this challenging context.

B. EFH’s Bankruptcy

Appellee Energy Future Holdings Corporation ("EFH") was a holding company for various energy properties. Among EFH’s many subsidiaries were four that we will call, collectively, the "Asbestos Debtors"—long-defunct entities only in existence because of ongoing asbestos liability. One of the Asbestos Debtors, EECI, was the successor corporation of a firm involved in power-plant...