In re Johns-Manville Corp.

• Decision Date: 09 January 1984
• Docket Number: No. 83 Civ. 3212-CLB,83 Civ. 4263-CLB and 83 Civ. 5018-CLB.,83 Civ. 3212-CLB
• Citation: 40 BR 219
• Parties: In re JOHNS-MANVILLE CORPORATION, et al., Debtors. JOHNS-MANVILLE CORPORATION, et al., Plaintiffs, v. The ASBESTOS LITIGATION GROUP, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

40 B.R. 219 (1984)

In re JOHNS-MANVILLE CORPORATION, et al., Debtors.

JOHNS-MANVILLE CORPORATION, et al., Plaintiffs, v. The ASBESTOS LITIGATION GROUP, et al., Defendants.

Nos. 83 Civ. 3212-CLB, 83 Civ. 4263-CLB and 83 Civ. 5018-CLB.

United States District Court, S.D. New York.

January 9, 1984.

Lowell G. Harriss, Karen Wagner, Davis, Polk & Wardwell, Susan Johnston, Herbert Edelman, Levin, Weintraub & Crames, New York City, for Johns-Manville Corp.

C. MacNeil Mitchell, Breed, Abbott & Morgan, New York City, for appellant Lake Asbestos of Quebec, Ltd.

Anthony Marchetta, Hannoch, Weisman, Stern, Besser, Berkowitz & Kinney, Newark, N.J., for appellant GAF Corp.

John J. Jerome, Frank S. Plimpton, Milbank, Tweed, Hadley & McCloy, New York City, for Committee of Unsecured Creditors of Johns-Manville Corp., intervenor.

Ira Sacks, Edward Weisfelner, Kaye, Scholer, Fierman, Hays & Handler, New York City, for Travelers Indemnity Company, intervenor.

MEMORANDUM AND ORDER

BRIEANT, District Judge.

Three separate appeals from decisions and orders of the Honorable Burton Lifland, Bankruptcy Judge, are before this Court for determination. They arise out of the proceedings pursuant to Chapter 11 of the Bankruptcy Code, initiated by Johns-Manville Corporation ("Manville"). Since these are related matters, we consider them together.

After more than a century of use of asbestos containing products, in residences, schools, ships, automobiles, factories, and in a vast number of applications, it was suddenly discovered that asbestos is dangerous and that inhalation of the dust is carcinogenic and debilitating. A litigation explosion ensued with a vast number of cases brought by persons claiming injury in plants where the product was used, or otherwise. The financial threat and the disruption of its business flowing from the litigation caused the Debtor Manville, a large manufacturer of asbestos, to seek the protection of the Bankruptcy Court in this district, which it did on August 26, 1982, treating those claiming to have been injured as its contingent creditors in the amounts set forth in their pleadings, making a total of claims in excess of Two Billion Dollars, more than the net worth of the Debtor.

I

As of 1982, appellant Lac D'Amiante du Quebec, Ltee. (hereinafter "Lake") was an original or impleaded defendant in several hundred asbestos-related tort cases pending in various jurisdictions throughout the United States. Manville was also a defendant in many of these suits. Among the proceedings against Manville which were stayed under the Bankruptcy Code following the filing of its Chapter 11 proceedings on August 26, 1982 are approximately 80 cases (the "plantworker cases") pending in New Jersey relating to claims arising from exposure to asbestos suffered at a Manville plant located at Manville, New Jersey. Lake is one of Manville's co-defendants in these cases.¹ In September 1982 the United States District Court, District of New Jersey, severed the direct claims and cross-claims against Manville in the Manville plantworker cases. While that Court subsequently ordered that the plantworker cases proceed to trial in early 1983, the trials were stayed by the Court of Appeals for the Third Circuit pending determination of a petition brought in that Court by one of Lake's co-defendants.

In November 1982 Lake applied for an order clarifying the extent of the stays issued by the Bankruptcy Court pursuant to §§ 105 and 362 of the Bankruptcy Code. Lake sought a ruling from Judge Lifland that neither the statutory stay nor the accompanying stay order issued by the Bankruptcy Court prohibit it from obtaining pre-trial discovery of documents and by deposition, as well as trial testimony from Manville, for its own use in those suits from which Manville has been severed. Also in November 1982, Manville initiated an adversary proceeding in Bankruptcy Court seeking, among other things, to enjoin various co-defendants, including Lake, in pending asbestos lawsuits throughout the country, from seeking discovery against and trial testimony from Manville's past and present officers, directors and employees. Lake subsequently moved to dismiss Manville's complaint insofar as it sought to enjoin discovery. In December 1982 Lake joined in a motion for partial summary judgment made by another co-defendant to dismiss the counts of Manville's complaint in the Bankruptcy Court which sought to enjoin discovery against Manville and its employees.

On January 10, 1983 Judge Lifland issued two decisions determining the Lake application, the Manville proceeding, and several additional consolidated proceedings involving interpretation of the stay and the stay order. Decision No. 1 denied motions made by co-defendants in the pending asbestos litigation to have the § 362 stay extended to them or, alternatively, modify the stay to permit pending litigation to proceed through discovery to trial, but without entry of judgment against Manville. 26 B.R. 405 (Bkrtcy.). Decision No. 2 was designated by Judge Lifland as "Omnibus Decision on the Various Proceedings, Motions and Cross-Motions Brought Regarding Whether the Automatic Stay Applied to Manville's Employees, Agents and Other Related Entities." 26 B.R. 420 (Bankr.S.D.N.Y.1983). In this decision, from which appellant's present appeal is taken, Judge Lifland held, in part, that co-defendant Keene's motion, in which Lake had joined, for partial summary judgment dismissing portions of Manville's complaint, was denied, and that the stay against those Manville employees named parties in the litigation and whose continuing efforts were vital to plan and carry out Manville's reorganization were covered by the stay. In addition, the Court held that the stay operated to protect Manville's current non-party employees, 26 B.R. at 424, 434. With regard to Lake's request for clarification of the automatic stays, the court elected to treat Lake's request for discovery from Manville's non-party employees "for all practical purposes" as a "request for modification of the Section 362 stay." 26 B.R. at 424. The court then held that "to a large extent, the relief requested by Lake and Occidental is disposed of in the accompanying decision on the co-defendants' stay extension proceedings." Id. In the accompanying decision, Decision No. 1, supra, the Court refused at that time to modify the stay so as to permit the asbestos lawsuits to proceed on the merits through verdict but not to the point of judgment against Manville. On April 15, 1983, Judge Lifland entered an order pursuant to Decision No. 2 which provided, in part, that:

"Apart from discovery authorized by this Court pursuant to the Bankruptcy Rules, all entities are hereby stayed, restrained and enjoined from commencing and conducting discovery proceedings against or directed to any current Employees, Agents and others who have not been named in their individual capacity as a party to a suit." Court Order on Decision No. 2—April 15, 1983, p. 5.

Prior to the entry of Judge Lifland's supplemental order, Lake joined, on January 26, 1983, in a motion for reargument of the court's ruling that § 362 precludes the discovery and trial testimony which Lake had requested from Manville. Reargument was granted, and at a hearing held February 25, 1983, Judge Lifland reaffirmed his determination that the stay extends to Lake's proposed discovery, and held that none of the co-defendants had demonstrated sufficient cause to lift the stay. Familiarity is assumed with all of the foregoing proceedings below.

Appellants² contend that the automatic stay provision of § 362 simply does not apply to the testimony or discovery sought here. They argue that since they do not seek discovery or other trial participation by Manville as a party opponent (the claims against Manville in the Manville plantworker cases having been severed), discovery from its employees as non-party witnesses cannot be construed as "proceedings against the debtor" which are subject to stay by § 362. Stressing that in enacting the Bankruptcy Reform Act Congress intended to broaden protection for the Debtor against any and all actions and proceedings brought by creditors or other parties, Manville counters that § 362 does indeed apply automatically to stay discovery and trial testimony from the Debtor, including that which may be sought from his current employees. Manville cites a number of cases in support of its contention that the automatic stay was intended to have sufficient breadth to stay discovery of the debtor, its records and employees in all cases. However, as Lake correctly notes in its reply brief, the cases so cited involved situations in which the discovery sought arose in a proceeding against the debtor. (E.g., In re Penn-Dixie Industries, Inc., 6 B.R. 832 Bkrtcy. S.D.N.Y. 1980). In that situation, it would be anomalous indeed if burdensome and expensive pre-trial discovery were allowed to proceed when trial of the same action for which the discovery is sought has been stayed. The stay of discovery in such a situation does not govern a case like the instant one, where Lake does not seek discovery to prosecute any claim against Manville, but seeks it to defend itself from liability to third parties.

In support of its contention that § 362 does not automatically ban a discovery request such as the one made here, Lake cites, inter alia, Teledyne Industries, Inc. v. Eon Corp., 373 F.Supp. 191 (S.D.N.Y. 1974). In Teledyne, plaintiff brought suit against a corporation and several of its directors in their individual capacities. The defendant corporation filed for bankruptcy under the then applicable Bankruptcy Act of 1898, and an order staying further action against the corporation was issued pursuant to § 314 of the Act. Electing to sever and continue its lawsuit against the bankrupt's directors, plaintiff in Teledyne moved to compel discovery of the corporation. The court ruled that the...