The Bottom Line

In the wake of asbestos bankruptcies brought on by mass tort liabilities, reorganization plan structures, like that in Johns-Mansville, often funneled asbestos-related claims into a settlement trust, while a “channeling injunction” largely barred claims against the debtor and, in some cases, against certain third parties that had contributed funds to the trust. Congress enacted Section 524(g) of the Bankruptcy Code in order to provide additional clarity regarding the propriety of these channeling injunctions, codifying the required elements for a valid channeling injunction. In a recent Third Circuit decision arising out of the W.R. Grace bankruptcy proceedings, In re W.R. Grace & Co. (Continental Casualty Co. v. Carr), 900 F.3d 126 (3d Cir. 2018), the Third Circuit has provided additional guidance regarding statutory requirements that must be met in order to properly direct claims pursuant to a channeling injunction in accordance with Section 524(g), specifically with respect to insurance companies that have provided insurance to a debtor. The Court, in vacating the Bankruptcy Court’s decision that certain asbestos claims brought against W.R. Grace’s insurers may be enjoined, held that the Bankruptcy Court must consider applicable state law principles in connection with a determination as to whether claims fall within the permissible scope of an injunction under Section 524(g)(4).

What Happened?

Following the bankruptcy filing of W.R. Grace, a settlement trust (the “Asbestos PI Trust”) was established to compensate asbestos claimants, and a related injunction (the “Injunction”) was approved by the Bankruptcy Court that effectively funneled asbestos claims to the trust and barred claimants from seeking compensation directly from the debtor and certain other identified parties. In connection with the W.R. Grace plan of reorganization, two of W.R. Grace’s insurance providers, Continental Casualty Company and Transportation Insurance Company (referred to collectively as “CNA”) and W.R. Grace entered into a settlement agreement that called for CNA to contribute $84 million over six years to the Asbestos PI Trust, a portion of which could be reimbursed to CNA for expenditures CNA makes on account of personal injury asbestos claims that are not channeled to the Asbestos PI Trust.

By way of background, Section 524(g)(4) provides, among other things, that in connection with a plan of reorganization, claims against certain third parties, like insurers, may be enjoined if certain specified conditions are met. Specifically, Section 524(g)(4)(A)(ii) provides, in relevant part:

[A third-party-claims channeling] injunction may bar any action directed against a third party who is identifiable from the terms of such injunction . . . and is alleged to be directly or indirectly liable for the conduct of, claims against, or demands on the debtor to the extent such alleged liability of such third party arises by reason of [ ] the third party’s provision of insurance to the debtor or a related party.

In the instant case, the Injunction, which applied “only to the extent[] provided by [S]ection 524(g),” stated in relevant part:

[T]he sole recourse of the Holder of an Asbestos [Personal Injury] Claim . . . shall be to the Asbestos PI Trust . . .[,] and such Holder shall have no right whatsoever at any time to assert its Asbestos PI Claim . . . against . . . any other Asbestos Protected Party . . . . [A]ll such Holders permanently and forever shall be stayed, restrained, and enjoined from taking any and all legal or other actions or making any Demand against any Asbestos Protected Party . . . for the purpose of, directly or indirectly, claiming, collecting, recovering, or receiving any payment, recovery, satisfaction, or any other relief whatsoever on, of, or with respect to any Asbestos PI Claims . . . other than from the Asbestos PI Trust . . . .

A group of plaintiffs suffering from asbestos exposure (the “Plaintiffs”) sought to hold CNA liable under various Montana state law negligence theories. Under the governing insurance documents, CNA was granted the right to inspect certain of W.R. Grace’s facilities and the equipment and machinery housed in the facilities. The Plaintiffs argued, among other things, that CNA thereby undertook a duty of care, which it allegedly breached by negligently failing to properly inspect Grace’s Libby operations and otherwise to provide proper warnings and other industrial hygiene services to the Plaintiffs. CNA, in response, sought to bar the Plaintiffs' claims through the enforcement of the channeling injunction contained in the W.R. Grace plan of reorganization, as CNA was effectively defined as an “Asbestos Protected Party” under the Injunction.

Faced with the Plaintiffs' negligence claims, CNA filed a complaint in the Bankruptcy Court seeking a declaration that the negligence claims must be channeled to the Asbestos PI Trust on account of the Injunction. The Bankruptcy Court ultimately ruled in favor of CNA, denying the Plaintiffs’ motion to dismiss CNA’s complaint and granting summary judgment in favor of CNA.

The Third Circuit, in analyzing the issues presented, focused its attention on two primary questions: Whether the Injunction applied to the Plaintiffs’ negligence claims against CNA, and whether under Section 524(g)(4), the negligence claims were barred by the Injunction.

With respect to the issue whether the Injunction, by its terms, applied to claims brought against CNA, the Plaintiffs argued that the Injunction did not bar the negligence claims against CNA because the CNA workers' compensation and employer’s liability policies were not expressly included among the policies identified by the Injunction. The Court, however, looked to the applicable catch-all provision providing that the Injunction covered all “known and unknown policies” provided by CNA to W.R. Grace, and determined that the Injunction did indeed apply to the negligence claims.

Turning next to the issue whether under Section 524(g)(4) the negligence claims were properly barred by the Injunction, the Court looked to the three-pronged test set forth in its decision in Combustion Engineering. In Combustion Engineering, the Court determined that under Section 524(g), three prongs must be satisfied in order to permit a channeling injunction to bar actions against third parties. The three-prong test looks to (i) whether the third party is identified as protected in the injunction, (ii) whether the claims brought against the third party seek to hold that third party “directly or indirectly liable for the conduct of, claims against, or demands on” the debtor, and (iii) whether the third party’s alleged liability “arises by reason of” one of four identified relationships in Section 524, including the provision of insurance to a debtor.

The first prong (identification) was not contested by the parties, as CNA was expressly identified in the Injunction as a covered party.

On the issue whether the negligence claims brought by the plaintiffs seek to hold CNA “directly or indirectly liable” for W.R. Grace’s conduct, the Court looked to whether the insurer’s liability was “wholly separate” from W.R. Grace’s liability or instead “depends on it.” This question, according to the Third Circuit, requires a court to analyze the relevant claims and defenses under applicable state law. Noting that the parties had not submitted any briefing (either in the lower court or before the Third Circuit) regarding which state’s law applied or what the relevant examination should be under the applicable state law, the Third Circuit remanded this issue back to the Bankruptcy Court for further briefing and determinations regarding the applicable state law principles on the direct-indirect liability of CNA. The Third Circuit, however, expressly recognized the underlying policy embedded in Bankruptcy Code Section 524 of incentivizing insurers to contribute to personal injury trusts in order to reduce uncertainty about continuing liability and obligations regarding future personal injury claimants.

With respect to the final prong, whether the insurer’s alleged liability “arises by reason of” its provision of insurance to W.R. Grace, CNA argued that the Plaintiffs' must establish a “but-for” causational relationship between the provision of insurance and the Plaintiffs claims, whereas the Plaintiffs argued that they need only establish that the liability arose from the “legal consequence” of the insurers relationship with W.R. Grace (in other words, that “the relationship, in light of the debtor’s conduct or the claims asserted against it, [is] a legal cause of or a legally relevant factor to the third party’s alleged liability”). Again, the Third Circuit concluded that the Bankruptcy Court is required to look to applicable state law “to determine the relationship’s legal relevance to the third-party’s alleged liability.” Accordingly, the Third Circuit remanded this issue as well so that the Bankruptcy Court may analyze, with the benefit of briefing, the elements of the Plaintiffs’ negligence claims, and determine whether CNA’s relationship with W.R. Grace, grounded in the provision of insurance, is sufficient to meet the elements required under state law.

Why This Case Is Interesting

The Third Circuit’s decision addresses a relatively unusual situation: a suit against a debtor’s insurer not to recover from its insurance policies for the debtor’s liability, but instead to hold the insurer independently liable for its own misconduct. Claims of this sort, the court of appeals ruled, require careful consideration of the law (usually state law) governing Plaintiffs’ claims against the insurer. Only by determining whether the insurer’s alleged liability is “wholly separate” from the debtor’s liability or instead at least partly “depends on it” can the court determine whether the claims sought to be enjoined meet the requirements of Section 524(g) — in particular, the requirements that these claims (i) seek to hold the insurer “directly or indirectly liable” for the debtor’s conduct and (ii) “arise[] by reason of” the provision of insurance to the debtor.