On January 7, the Bankruptcy Court for the District of Delaware issued an opinion that may have far reaching effects on cases involving asbestos liability.  Companies with potential asbestos liability, and actual and potential asbestos claimants, would be well advised to consider the Court’s opinion.

By way of background, in 1982, both Johns-Manville Corp. and UNR Industries filed for bankruptcy protection due to burgeoning asbestos claims pending against the companies as producers of asbestos products. Since that time, over 100 companies have filed for bankruptcy in part to address asbestos litigation and claims.  However, the bankruptcy law was not ideally suited to provide relief to these companies and their current and future claimants.  Because asbestos-related injuries may take up to 50 years to manifest, the companies had no way to ensure that they could emerge from bankruptcy and effectively discharge the total asbestos liability hanging over their heads, while the future claimants ran the very real risk of developing a disease at a point in the future when their defendant might not exist or have any resources left with which to pay them.

To handle these concerns, Johns-Manville confirmed a reorganization plan that included an injunction requiring the company’s asbestos-related liabilities, present and future, to be channeled to the “Manville Personal Injury Settlement Trust” (the “Manville Trust”).  This channeling injunction was designed to protect the reorganized company from future liability by unknown claimants, while providing a source of recovery for those future claimants.  The Manville Trust established a claims protocol as part of its trust procedures for processing, evaluating and paying present and future asbestos personal injury claims.

Thereafter, the Johns-Manville trust procedures were essentially codified in 11 U.S.C. § 524(g), which was enacted as part of the Bankruptcy Reform Act of 1994.   Many trusts were established in the early years of the asbestos filings, and since 2006 more than 30 additional asbestos trusts have been created through bankruptcy reorganization.  The primary goal of these trusts is to evaluate claims and propose payments on account of those claims in a manner that ensures that future claimants will have a source of recovery that is equivalent to the recovery achieved by current claimants.

Of course, there are far more than 100 companies that utilized asbestos in some manner in the development of their products, the maintenance of their facilities, or for other reasons.  These companies often face some measure of asbestos liability as well, and while the asbestos liability is not the driver behind their financial issues, they still need to handle these asbestos claims as part of their bankruptcy cases.

Such is the reality of Energy Future Holdings Corp. (“EFHC”), which, along with numerous of its affiliates, filed a Chapter 11 petition on April 29, 2014.  The EFHC cases are being closely followed, but what may not be well known about EFHC is that it has asbestos liability.  In recent years, EFHC has paid out a small, but consistent, amount of money annually to settle asbestos-related claims.  EFHC scheduled 392 asbestos-related cases, including 121 cases that are being defended and approximately 270 cases where the debtors rejected indemnification demands.  Nevertheless, EFHC believes that its asbestos liability is not substantial, and estimates their annual expenses at only about $3 million (less than .05% of the debtors’ consolidated annual revenues).  See In re Energy Future Holdings Corp., et al., Bk. No. 14-10979 (CSS) (Bankr. D. Del. Jan. 7, 2015) (DE 3183) (the “Opinion”) at p. 4-5, 29. Though EFHC’s restructuring is not being driven by asbestos claims or the need for a channeling injunction under § 524(g), EFHC still must determine a mechanism for dealing with these known and yet unknown asbestos claims.  As a result, on July 23, 2014, the debtors filed a motion seeking to establish a bar date for prepetition claims (the “Bar Date Motion”) and seeking authority to serve the known and unknown asbestos claimants via publication.

Multiple asbestos personal injury law firms filed an objection to the Bar Date Motion, arguing that a bar date should not apply to unmanifested claims, which are unknown to even the future claimants themselves, and that an asbestos trust must be established.  On January 7, the Court rejected these arguments and granted the Bar Date Motion.  The Court succinctly identified the heart of the issue as follows:  “whether the discharge of the Debtors’ liability for [unmanifested asbestos claims] would be consistent with due process.” Id. at p. 10.  The Court held that the formation of an asbestos trust was not required under the Bankruptcy Code, but that Bankruptcy Rule 3003(c)(3) mandated that the Court set a bar date for filing claims, and further that publication notice of the deadline to submit asbestos-related claims would satisfy due process and would allow for the discharge of the unmanifested asbestos claims.  Id. at p. 27-29.

It will be interesting to follow this aspect of the EFHC case as its bankruptcy progresses, and to see whether future claimants are actually held to the bar date set by the Court.  For now, though, for anyone with an interest in the dilemma facing debtors with asbestos liabilities, the holding in the EFHC case is a “must read.”