U.S. Court of Appeals for the Third Circuit, September 15, 2021

W.R. Grace & Co. (Grace) operated an asbestos mining and processing facility in Montana from 1963 to 1990. After declaring Chapter 11 bankruptcy, Grace emerged and reorganized. Its reorganization plan included the establishment of an asbestos personal-injury trust, through which all asbestos-related personal injury claims against Grace were to be enjoined and channeled. The question before the U.S. Court of Appeals for the Third Circuit panel involved the Grace insurers and whether they could be held liable for the asbestos diseases sustained by the plaintiffs, individuals who worked at the mine operated by Grace. Stated differently, if the insurers were to be shielded from liability, the plaintiffs’ claims would be channeled into the asbestos trust created as part of the reorganization plan.

Section 524(g) of the bankruptcy code “enables bankruptcy courts to establish a trust for further claimants as part of a debtor company’s reorganization plan, and, through the resulting channeling injunction, diverts all claims against the debtor to the trust.” In certain cases, third parties are also protected from liability due to the section 524(g) channeling injunction. The statute provides the following three requirements: (1) the claims must be “directed against a third party who is identifiable from the terms of such injunction”; (2) the third party must be “alleged to be directly or indirectly liable for the conduct of, claims against, or demands on the debtor” and (3) “such alleged liability must arise by reason of one of four statutory relationships, including, as is relevant here, the third party’s provision of insurance to the debtor or a related party.”

The panel agreed with insurer that the claims at issue met the derivative liability requirement; however, it remanded the case to the bankruptcy court to develop the record as to whether the insurer provided services beyond those included in its provision of insurance to Grace. According to the panel, if the plaintiffs “made a prima facie showing under Montana law that the insurer provided services beyond [the scope of insurance]” then the claims would not meet the statutory relationship requirement. Conversely, if the plaintiffs failed to make this showing, the claims would satisfy the requirements of section 524(g) and would be barred by the channeling injunction.

Read the full decision here.