In re W.R. Grace & Co.

• Decision Date: 13 April 2007
• Docket Number: Bankruptcy No. 01-01139 (JKF).,Adversary No. 01-771.
• Parties: In re W.R. GRACE & CO., et al., Debtor(s). W.R. Grace & Co., et al., Plaintiffs, v. Margaret Chakarian, Robert H. Locke, Jackie Ellison, Marcia Ellison, Cary Youpee, Rupple K. Perry, The State of Michigan, Alice Smokier, Home Savings Termite Control, Gloria Munoz, Exxon Mobile Corporation et al., and John Does 1-1000, Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

366 B.R. 295

In re W.R. GRACE & CO., et al., Debtor(s) W.R. Grace & Co., et al., Plaintiffs, v. Margaret Chakarian, Robert H. Locke, Jackie Ellison, Marcia Ellison, Cary Youpee, Rupple K. Perry, The State of Michigan, Alice Smokier, Home Savings Termite Control, Gloria Munoz, Exxon Mobile Corporation et al., and John Does 1-1000, Defendants.

Bankruptcy No. 01-01139 (JKF).

Adversary No. 01-771.

United States Bankruptcy Court, D. Delaware.

April 13, 2007.

Kathleen M. Miller, Smith, Katzenstein & Furlow LLP, Wilmington, DE, for Debtor.

David W. Carickhoff, Jr., James E. O'Neill, Laura Davis Jones, Timothy P. Cairns, Pachulski Ziehl Stang Ziehl Young Jones, Wilmington, DE, Paula Ann Galbraith, Chicago, IL, Scotta Edelen McFarland, Pachulski Stang Ziehl Young Jones, Los Angeles, CA, for Plaintiffs.

Margaret Chakarian, pro se.

John Does, pro se.

Sherry Ruggiero Fallon, Tybout, Redfearn & Pell, Kerri K Mumford, Landis Rath & Cobb LLP, Wilmington, DE, Michael Seth Etkin, Lowenstein Sandler P.C., Roseland, NJ, for Defendants.

MEMORANDUM OPINION¹

JUDITH K. FITZGERALD, Bankruptcy Judge.

The matter before the Court is the Debtors' Motion to Expand Their Preliminary Injunction to Include Actions Against the State of Montana (the "Expansion Motion"),² which seeks to add within the scope of the preliminary injunction 120³ actions currently pending against the State of Montana in Montana state courts (the "State Court Actione).⁴ The State of Montana has filed a proof of claim in an unliquidated amount asserting indemnification/contribution from Debtors relating to the State Court Actions. The preliminary injunction was issued in this adversary to prevent the filing or continued prosecution of actions against third parties that arise from alleged exposure to asbestos indirectly or directly caused by Debtors.⁵ The claimants involved in the State Court Actions ("Montana Plaintiffs") filed an objection to the Expansion Motion.⁶ The Official. Committee of Unsecured Creditors submitted a joinder⁷ to the Expansion Motion and the State of Montana filed a response stating it did not object to the relief sought unless the relief affects certain of its rights.⁸

On April 2, 2001 (the "Petition Date"), Debtors filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Soon after, the United States Trustee appointed the Property Damage Committee,. the Official Committee of Asbestos Personal Injury Claimants, the Official Committee of Unsecured Creditors, and the Official Committee of Equity Holders. Debtors continue in possession of their property and the management of their businesses as debtors-in-possession pursuant to §§ 1107 and 1108 of the Bankruptcy Code.

The preliminary injunction at issue in this proceeding was entered on May 3, 2001, barring the prosecution of currently pending actions against various affiliated entities and third parties whose purported liability was solely derivative of Debtors. Adversary No. 01-771, Doc. No. 32. On January 22, 2002, the court entered an order modifying the preliminary injunction to include certain additional affiliates and to reinstate the bar against the commencement of new actions against affiliates arising from alleged exposure to asbestos whether indirectly or directly caused by Debtors.⁹ On February 4, 2002, certain Montana Plaintiffs attempted to modify the injunction in order to pursue an alleged direct cause of action claim against Maryland Casualty Company ("MCC"), one of Debtors' insurers.¹⁰ This court denied the motions and was affirmed by the U.S. Circuit Court of Appeals for the Third Circuit. In re W.R.. Grace & Co. (Gerard v. W.R. Grace & Co.), 115 Fed. Appx. 565, 2004 WL 2404546 (3d Cir.2004). The Montana Plaintiffs next attempted to pursue their asbestos personal injury claims arising out of Debtors' mining operations in Libby, Montana, by commencing suit against Montana Vermiculite Company ("MVC"), the former owners of Debtors' mining operations.¹¹ This court amended the injunction to stay the actions against MVC on February 25, 2005.¹²

The various State Court Actions relate to claims arising from the mining and processing of vermiculite containing asbestos within the State of Montana. Most plaintiffs allege periods of employment with Debtors and/or their predecessors from 1947 through 1993. At least 21 of the 120 State Court Actions were filed first only against Debtors and were amended, after Debtors filed bankruptcy, to include the State of. Montana. The others were filed against the State of Montana after Debtors were in bankruptcy, at which time actions in state court against Debtors were precluded by the automatic stay. The Montana Plaintiffs assert the same cause of action (negligence in failing to take sufficient action to protect and to warn the plaintiffs about alleged asbestos hazards) against both Debtors and the State of Montana.

According to one of the State Court Actions, Orr v. State of Montana, 324 Mont. 391, 106 P.3d 100 (2004), Montana's State Board of Health ("BOH") inspected the Libby mine on a regular basis beginning in 1956.

During each State inspection between 1956 and 1974, the State inspectors found unsanitary and unhealthful conditions. The State notified Zonolite¹³, and later Grace, of the dangerous conditions after each inspection, explaining the seriousness of asbestosis and its likely fatal outcome, but did not inform the Mine workers, including the Miners, of the dangers. With the exception of identifying the hazardous conditions and telling the Mine's owner/managers to correct the problems, the State took no steps to ensure that the Mine's owners/managers responded in a manner that provided a safe working environment.

106 P.3d at 104. In the Nineteenth Judicial District Court of Montana (Lincoln County), the State of Montana obtained dismissal of the Orr claim on the basis that the State did not owe a duty to the plaintiffs. On appeal, the Supreme Court of Montana reversed the trial court's dismissal, concluding that the State had a legal duty to the Libby Mine workers,¹⁴ and remanded the case for determination of whether the State of Montana breached that duty.

Debtors assert that the motion to include Montana within the injunction in this case should be granted because the State of Montana and Debtors share an identity of interest such that a suit against the nondebtor is essentially a suit against the Debtors and the State Court Actions will have an adverse impact on the Debtors' ability to accomplish reorganization.¹⁵ The Montana Plaintiffs make two arguments against including the State in the injunction: (1) the court lacks subject matter jurisdiction to enjoin their separate and independent tort claims against the State of Montana because the State Actions are not related to the bankruptcy within the meaning of 28 U.S.C. § 1334(b), and (2) the Expansion Motion fails to establish grounds for entry of an injunction against a third-party litigant under the stringent standards established by case law.

The U.S. Court of Appeals for the Fifth Circuit explained that:

Subject matter jurisdiction and power [under § 105 of the Bankruptcy Code] are separate prerequisites to the court's capacity to act. Subject matter jurisdiction is the court's authority to entertain an action between the parties before it. Power under Section 105 is the scope and forms of relief the court may order in an action in which it has jurisdiction.

Matter of Zale Corp., 62 F.3d 746, 751 (5th Cir.1995) (citing In re American Hardwoods, Inc. (American, Hardwoods, Inc. v. Deutsche Credit Corp.), 885 F.2d 621, 624 (9th Cir.1989)). While aspects of the § 105(a) analysis may be relevant to "related-to" jurisdiction, the two inquiries are analytically distinct. In re Combustion Engineering, Inc., 391 F.3d 190, 224-25 (3d Cir.2004). Section 105(a) "does not provide an independent source of federal subject matter jurisdiction." Id. at 225. Therefore, this court must establish subject matter jurisdiction before considering the merits of a § 105(a) injunction.

Section 1334(b) provides that "... the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). Section 157(a) of title 28 of the United States Code permits the district court to refer "any or all proceedings arising under title 11 or arising in or related to a case under title 11 ... to the bankruptcy judges for the district." Celotex Corp. v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995).

The generally accepted test for determining whether a bankruptcy court has subject matter jurisdiction over litigation between nondebtor third parties is whether "the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy." Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984). However, as exhibited by Pacor itself, application of this test has proven to be most difficult with cases involving indemnification and contribution.

In Pacor, John and Louise Higgins initially brought suit against Pacor, a distributor of chemical supplies, in Pennsylvania state court, seeking damages allegedly caused by Mr. Higgins' work-related exposure to asbestos supplied by Pacor. Pacor, in turn, filed a third party complaint impleading the Johns-Manville Corporation, which soon after filed a chapter 11 bankruptcy petition. In determining whether the bankruptcy court had subject matter jurisdiction, the U.S. Court of Appeals for the Third Circuit held that the primary action between the third parties, Higgins and Pacor, would have no effect on the bankruptcy estate.

At best, it is a mere precursor to the potential third party claim for indemnification by Pacor against Manville.... Even if the Higgins-Pacor dispute is resolved in favor of Higgins (thereby keeping open the possibility of a third ...