A New Jersey District Court recently addressed several issues in connection with the appointment of a future claims representative (“FCR”). In light of the recent increase in mass-tort bankruptcy cases, exploring these issues is timely.

Background

Prior to filing for bankruptcy, debtor Duro Dyne National Corporation, a manufacturer of products that allegedly contained asbestos, selected Lawrence Fitzpatrick to serve as the FCR for future asbestos personal injury claimants while negotiating a chapter 11 plan of reorganization that would include an injunction channeling all asbestos claims to an asbestos trust. Mr. Fitzpatrick had significant experience in asbestos litigation and served as an FCR in nine bankruptcy cases, had no relationship with the debtor prior to this engagement, and the engagement letter provided that his “sole responsibility and loyalty” was “to the future asbestos personal injury claimants.”

Within days of Duro Dyne’s bankruptcy filing, the debtors moved to appoint Mr. Fitzpatrick as the FCR. The relevant provision of the Bankruptcy Code at issue simply provides that one of the conditions for the issuance of a channeling injunction requires the bankruptcy court to appoint an FCR. The U.S. Trustee objected to Mr. Fitzpatrick’s appointment, and after the bankruptcy court approved the appointment, appealed the decision to the District Court.

Discussion

What is the Applicable Fiduciary Standard?

The U.S. Trustee argued that the bankruptcy court improperly applied the disinterested person standard for the appointment of the FCR, rather than the “appearance of impropriety” standard. According to the U.S. Trustee, the appointment of an FCR is similar to the appointment of fiduciaries who represent the interests of, and can bind, absent parties, such as guardian ad litem or class representatives in class actions. Due to this unique power, the U.S. Trustee asserted that the appointment of the FCR should require a high standard and accordingly the proposed FCR must not have an appearance of impropriety.

The District Court disagreed. The District Court found that the proper standard for analyzing the appointment of an FCR was the disinterested person standard. While the Bankruptcy Code does not provide a standard, section 524(g) established the FCR and effectively codified the procedures used in the Johns-Manville and UNR cases, wherein the appointment of an FCR is akin to a committee appointment, and the U.S. Trustee was permitted to “suggest a disinterested party” for the position.

Additionally, the asbestos trust trustee, not the FCR, possesses the power to bind future claimants. The asbestos trustee’s appointment itself is only subject to the disinterested person standard. Thus, the FCR who had no authority to bind absent parties should not be held to a higher standard than the asbestos trustee. Accordingly, the appointment of the FCR should be analyzed under the disinterested person standard.

Who May Nominate an FCR?

The U.S. Trustee argued that the bankruptcy court erred in appointing an FCR nominated by the debtor without soliciting or holding a hearing on other candidates. The U.S. Trustee claimed that the bankruptcy court must consider candidates other than those nominated by a debtor, and that the court erred by only considering the debtor-nominated candidate.

The District Court disagreed. The District Court concluded that any party in interest, including a debtor, may nominate an FCR and that the bankruptcy court may approve a debtor-nominated candidate. As the District Court explained, a “bankruptcy court is not required to solicit and evaluate additional nominees [on its own initiative] to select the best candidate, but neither may it simply rubber stamp a debtor’s nominee. A bankruptcy court must undertake a thorough evaluation and only appoint a nominee following a hearing.” Pointing to other precedents, the District Court noted that in one case the FCR was nominated by the debtor’s co-defendant and in another, the court appointed the FCR selected by the debtor since the U.S. Trustee declined to suggest a candidate.

Turning to the specific facts in the case, the District Court found that the bankruptcy court had considered Mr. Fitzpatrick’s qualifications and entanglements and appointed him as FCR without giving deference to the debtors and only after notice, discovery, and a hearing. Therefore, the bankruptcy court’s process in appointing the FCR was appropriate.

Implications

As a new wave of mass-tort bankruptcy may be upon us, the Duro Dyne opinion may serve as a useful road map for the selection and successful appointment of FCRs, as well as for dealing with objections to their appointments.