In re Imerys Talc Am., Inc.

• Decision Date: 30 June 2022
• Docket Number: s. 20-3485,20-3486,20-3487,20-3488
• Citation: 38 F.4th 361
• Parties: IN RE: IMERYS TALC AMERICA, INC., a/k/a Luzenac America, Inc. a/k/a Imerys Talc Ohio Inc. a/k/a Imerys Talc Delaware, Inc., et al., Debtors Cyprus Historical Excess Insurers, Appellants
• Court: U.S. Court of Appeals — Third Circuit

38 F.4th 361

IN RE: IMERYS TALC AMERICA, INC., a/k/a Luzenac America, Inc. a/k/a Imerys Talc Ohio Inc. a/k/a Imerys Talc Delaware, Inc., et al., Debtors Cyprus Historical Excess Insurers, Appellants

Nos. 20-3485

20-3486

20-3487

20-3488

United States Court of Appeals, Third Circuit.

Argued October 5, 2021

Opinion Filed: June 30, 2022

Tancred V. Schiavoni, Anton Metlitsky [Argued], O'MELVENY & MYERS LLP, Times Square Tower, 7 Times Square, New York, NY 10036, Counsel for Cyprus Historical Excess Insurers

Jeffrey E. Bjork, Amy C. Quartarolo, Helena G. Tseregounis, LATHAM & WATKINS LLP, 355 South Grand Avenue, Suite 1000, Los Angeles, CA 90071, Roman Martinez [Argued], Caroline A. Flynn, Gregory B. in den Berken, LATHAM & WATKINS LLP, 555 Eleventh Street, N.W., Suite 1000, Washington, D.C. 20004, Michael J. Merchant, Marcos A. Ramos, Amanda R. Steele, RICHARDS, LAYTON & FINGER, P.A., One Rodney Square, 920 North King Street, Wilmington, DE 19801, Counsel for Imerys Talc America, Inc., Imerys Talc Vermont, Inc., and Imerys Talc Canada Inc.

Robert S. Brady, Edwin J. Harron [Argued], Sara Beth A.R. Kohut, Catherine C. Lyons, Sharon M. Zieg, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Rodney Square, 1000 North King Street, Wilmington, Delaware 19801, Counsel for Future Claimants Representative

Robert J. Schneider, Jr., OFFICE OF UNITED STATES TRUSTEE, 1085 Raymond Boulevard, One Newark Center, Suite 2100, Newark, NJ 07102, Dana Kaersvang, UNITED STATES DEPARTMENT OF JUSTICE, Room 7209, 950 Pennsylvania Avenue, N.W., Washington, DC 20530, Counsel for Amicus Curiae United States Trustee Region 3

Before: KRAUSE, BIBAS, and RENDELL, Circuit Judges

OPINION OF THE COURT

KRAUSE, Circuit Judge.

A group of insurance companies¹ appeals an order appointing a representative for the interests of unidentified future asbestos and talc claimants in an ongoing bankruptcy proceeding. According to these insurers, who fund the asbestos claims trust established under 11 U.S.C. § 524(g), this "future claimants' representative" ("FCR") has a conflict of interest precluding him from serving in this role because the FCR's law firm also represented two of the insurance companies in a separate asbestos-related coverage dispute. But the Bankruptcy Court did not abuse its discretion in appointing the FCR. In applying in substance the appointment standard we adopt today, it gave due consideration to the purported conflict, and it correctly determined that the interests of both the insurance companies and the future claimants were adequately protected. We therefore will affirm.

I. BACKGROUND

We focus today on the appointment and conflicts standard for an FCR. But because the history and purpose of the so-called "524(g) trust" provides necessary context for our analysis, we begin with a brief historical overview before recounting the factual and procedural history of this case.

A. Historical Background

Appellees Imerys Talc America, Inc., Imerys Talc Vermont, Inc., and Imerys Talc Canada Inc. (collectively, "Imerys") are among the latest in a long line of companies to turn to the bankruptcy process in response to the crushing liability imposed by mounting asbestos and talc personal injury claims. See In re Combustion Eng'g, Inc. , 391 F.3d 190, 200-01 (3d Cir. 2004).

Asbestos liabilities pose particular challenges for bankruptcy proceedings: While Chapter 11 bankruptcy reorganization normally affects only the rights of a debtor's current creditors and equity holders, many of the claimants who will suffer harm from asbestos exposure traceable to the debtor will not manifest those injuries until long after the reorganization process has concluded. Yet one of the primary goals for a debtor entering Chapter 11 bankruptcy is to cleanly resolve its various liabilities to preserve the going concern of its business. For that reason, a reorganization plan that failed to account for future asbestos liabilities would be of limited utility to the debtor, and likewise, a reorganization plan that did not address future claimants would fail to provide adequately for all parties with an interest in the debtor's assets.

When the once-dominant American producer of asbestos, the Johns-Manville Corporation, filed for bankruptcy in 1982, its reorganization process introduced a novel mechanism for dealing with these issues: a trust designed to compensate present and future asbestos claimants, coupled with an injunction against future asbestos liability. H.R. REP. NO. 114-352, at 5 (2015); In re Fed.-Mogul Glob., Inc. , 684 F.3d 355, 359 (3d Cir. 2012). The combination of the trust and injunction allowed the debtor to emerge from bankruptcy without the uncertainty of future asbestos liabilities hanging over its head, while ensuring claimants would not be prejudiced just because they had not yet manifested injuries at the time of the bankruptcy. Another major asbestos company, UNR Industries, soon "follow[ed] Johns-Manville's lead" and deployed a similar trust and injunction in its own bankruptcy plan. H.R. REP. NO. 103-835, at 40 (1994).

In 1994, Congress opted to follow the Manville/UNR model by amending the Bankruptcy Code to include 11 U.S.C. § 524(g), which "allow[s] for the resolution of asbestos liability claims against a debtor through a trust-based system." H.R. REP. NO. 114-352, at 5. That section allows the debtor to establish a trust that will serve as the exclusive source of compensation for any present and future asbestos mass-tort claimants after the confirmation of the reorganization plan. Id. ; 11 U.S.C. § 524(g)(2)(B)(i). Provided that the trust meets certain statutory requirements, the bankruptcy court issues to the debtor a channeling injunction, which prevents any plaintiff from suing the reorganized debtor for liability based on exposure to asbestos or asbestos-containing products, id. § 524(g)(1)(B), and "channel[s] all current and future claims based on the debtor's asbestos liability to [the] trust," Fed.-Mogul Glob. , 684 F.3d at 357.

But the mere establishment of the trust and channeling injunction is not enough. In any asbestos-driven bankruptcy proceeding, there are naturally conflicting interests within the larger group of asbestos claimants with respect to the trust. Those who are presently injured—i.e., those who can make a claim on the trust now or within the foreseeable future—are indifferent to whether the trust pays out on fraudulent claims, because the funds are unlikely to be exhausted before they receive their own payouts. If anything, they may prefer a less onerous claims review process in order to maximize the speed with which they can recover against the trust. By contrast, those who will not manifest injuries for years down the line—the future claimants—have a strong interest in intensifying the trust's protections against fraudulent claims and early overpayments, as they need the trust's funds to last until they can submit their own claims. See generally In re Amatex Corp. , 755 F.2d 1034, 1042–43 (3d Cir. 1985) (discussing the particular interests of future claimants in asbestos bankruptcy proceedings and concluding that their interests were "adverse" to those of other parties).

In light of this natural adversity and to protect the due process rights of the future claimants in bankruptcy proceedings, § 524(g) includes a requirement that the bankruptcy court appoint "a legal representative for the purpose of protecting the rights of [future claimants]"—the FCR—in the reorganization proceedings in order for the trust and channeling injunction to "be valid and enforceable." 11 U.S.C. § 524(g)(4)(B), 524(g)(4)(B)(i) ; see also H.R. REP. NO . 114-352, at 10. The FCR can then participate in the negotiation of the reorganization plan and object to terms that unfairly disadvantage future claimants.

The Bankruptcy Code is silent, however, on exactly what standard and process the bankruptcy court should use in appointing the FCR. As described next, it is that silence and the uncertainty it has engendered that have led to the current appeal.

B. Factual and Procedural Background

Like asbestos, talc exposure has generated a flood of personal injury claims over recent years, subjecting many talc companies to crushing liability. The experience of Imerys, a company that mined, processed, and distributed talc to third-party manufacturers for use in their products, is no exception. Although for many years it was able to tackle the talc claims as they arose using a combination of insurance assets and free cash flow, by the time it filed for bankruptcy in early 2019, it had been sued by over 14,000 claimants and could no longer afford to fight the growing mountain of claims. It therefore turned to Chapter 11 bankruptcy with the goal of channeling the numerous talc claims into a § 524(g) trust.

As has become a relatively common practice among debtors,² Imerys began work in preparation for its Chapter 11 bankruptcy proceedings months before actually filing its petitions. In late 2018, as part of that preparation, it engaged James Patton, a partner at the law firm of Young, Conaway, Stargatt & Taylor, LLP (Young Conaway), to serve as "Proposed FCR" in prepetition negotiations. Patton, in turn, retained Young Conaway as his counsel.

Both Patton and his firm had much experience in this area. Patton had worked for decades on mass-tort bankruptcy matters, served as an FCR for several bankruptcy cases and post-bankruptcy settlement-trusts, and was recognized for his competence and expertise in these matters by bankruptcy courts and his colleagues. He was one of a relatively small number of experienced FCRs in this specialized field. See Lloyd Dixon et al., Asbestos Bankruptcy Trust: An Overview of Trust Structure and Activity with Detailed Reports on the Largest Trusts , RAND Inst. For Civ. Just., at App. B (listing the FCRs for several of the largest active trusts and proposed trusts as of 2010). Young Conaway, too, had represented FCRs in similar bankruptcies.

The engagement...