The claims of asbestos injury claimants were significantly diluted for the purposes of voting on a debtor’s chapter 11 plan to ensure that the votes the settling claimants received were commensurate with their economic interest.
The United States Bankruptcy Court for the Southern District of New York held that in estimating claims of asbestos personal injury claimants for the purpose of determining whether debtor’s plan had been accepted, the court would dilute the claims of certain asbestos injury claimants that settled pre-petition with debtor’s parent company by 90 percent. See In re Quigley Co., Inc., 346 B.R. 647 (Bankr. S.D.N.Y. 2006).
At all times prior to 1992, Quigley Co., Inc. ("Quigley") was in the business of developing, producing and marketing a broad range of refractories and related products, some of which contained asbestos. In 1992, Quigley’s corporate parent, Pfizer, Inc. ("Pfizer") sold substantially all of Quigley’s assets to Minteq International, Inc. Under the terms of the sale agreement, Quigley and Pfizer retained all liability stemming from Quigley’s distribution and use of asbestos-containing products.
Prior to Quigley’s petition date (Sept. 3, 2004), a number of Quigley’s asbestos creditors asserted claims against Pfizer, alleging Pfizer’s derivative liability for Quigley’s liabilities. In contemplation of Quigley’s imminent bankruptcy filing, Pfizer and more than 80 percent of those holding asbestos-related personal injury claims (the "Settling PI Claimants") reached a settlement, whereby Pfizer agreed to pay approximately $430 million to be divided among the Settling PI Claimants based on disease category and exposure, in exchange for a release of claims against Pfizer (but not Quigley).
The Plan was a central feature of pre-petition settlement negotiations, and contemplated the creation of a Trust to be funded with approximately $645 million contributed by Pfizer and Quigley. The Trust would administer and pay the current and future asbestos claims under the Plan’s Trust Disbursement Procedures (the "TDP"), and the Plan provided that all current and future asbestos personal injury claims asserted against Quigley and Pfizer would be channeled to the Trust.
Notably, the Settling PI Claimants also agreed that if the Trust’s assets proved insufficient to satisfy 100 percent of the value attributed to the current and estimated future claims under the TDP, each Settling PI Claimant would reduce its claim against the Trust by 90 percent.
Quigley’s Plan divided all of the estate’s creditors into several classes, with all unsecured asbestos personal injury claimants ("Asbestos PI Claimants") classified as "Class 4." The bankruptcy court ordered all Class 4 claimants with unliquidated claims to withhold from filing proof of claims in the case, reasoning that claims-management should be undertaken by the Trust. The court further observed that because it appeared that the Trust would not be able to pay 100 percent on such claims, the 90 percent dilution provision therefore was applicable.
On Aug. 17, 2005, Quigley asked the bankruptcy court to estimate the unliquidated Asbestos PI Claims at $1.00 for purposes of voting to accept or reject the Plan, only. The Ad-Hoc Committee of Tort Victims (the "Ad-Hoc Committee"), which is comprised of a group of Asbestos PI Claimants who did not settle with Pfizer pre-petition, argued that the Asbestos PI Claimants’ votes should be weighed based on the severity of their impairments, as indicated in the Plan’s TDP; in particular, the Ad Hoc Committee asserted that the use of values derived from an examination of Quigley’s historical records and the settlement history of law firms representing each Asbestos PI Claimant would best reflect the actual economic and legal viability of the Asbestos PI Claims. Moreover, the Ad Hoc Committee argued that the votes of the Settling PI Claimants should be diluted to reflect the voluntary 90 percent reduction of their claims against the Trust.
On Jan. 23, 2006, the bankruptcy court ordered each holder of an Asbestos PI Claim to designate on its ballot the disease or impairment on which the claim was based; and to indicate whether he was a Settling PI Claimant. Quigley thereafter solicited the votes of the Asbestos PI Claimants, and asserted that after tabulation of the ballots, 85 percent of the Class 4 Asbestos PI Claimants who voted accepted the Plan, while 15 percent voted to reject it.
In determining whether the Plan had been accepted by Class 4, the bankruptcy court observed that more than 50 percent of the votes cast by a class must vote to accept a plan; in addition, the accepting votes must account for at least two-thirds, in amount, of the votes cast. The bankruptcy court also stressed that when a plan (such as that proposed by the debtor) contains a section 524(g) channeling injunction, the plan must be accepted by at least 75 percent of those voting if their claims will be addressed by a trust.
The bankruptcy court recognized that two estimation approaches have emerged in asbestos cases. The valuation of unliquidated claims at $1.00 for voting purposes, Quigley’s asserted position, is supported by Kane v. Johns-Manville Corp. (In re Johns-Manville Corp.), 843 F.2d 636, 646 (2d Cir 1988). In Manville, in all, 52,440 claimants voted and 95.8 percent accepted the plan. One creditor challenged the voting procedures, arguing that the $1.00 estimate was arbitrary, deprived him of the opportunity to vote the amount indicated in his claim, and discouraged those with large claims from opposing the plan.
The Manville court, overruling the creditor’s objection, held that in light of the overwhelming acceptance of the plan, none of the alternative procedures advocated by the objecting creditor would change the outcome of the vote.
The bankruptcy court also examined Menard-Sanford v. Mabey (In re A.H. Robins Co.), 880 F.2d 694 (4th Cir.), cert. denied, 493 U.S. 959 (1989). In Robins, the court presiding over the bankruptcy case estimated each claim in the same amount for voting purposes, and approximately 140,000 of 195,000 personal injury claimants voted to accept the plan in that case. Overruling a creditor challenge to estimation procedure, the U.S. Court of Appeals for the Fourth Circuit noted that in view of the outcome of the vote, the challenged procedure at most was harmless error.
Citing the reasoning of the Manville and Robins courts, the bankruptcy court determined that given the percentage of Asbestos PI Claimants that voted to accept the Plan, the methodology of estimation would affect only the "two-thirds in amount" test. The bankruptcy court further decided that weighted voting, such as taking into account the severity of the Asbestos PI Claimants’ impairments and diseases, also resulted in acceptance by at least two-thirds in amount because of the fluctuating values accorded the various impairments cited in the TDP and disclosure statement.
Reasoning that the results are the same using either the estimation of $1.00 per vote or the TDP values, the bankruptcy court concluded that the use of the former constituted "harmless error" at most.
The bankruptcy court then turned to the issue of discounting the Settling PI Claimants’ votes. The Ad Hoc Committee asserted that dilution of the Settling PI Claimants’ votes was mandated by In re Combustion Eng’g, Inc., 391 F.3d 190 (3d Cir. 2004), while the Plan proponents argued that a plain reading of the Bankruptcy Code led to the opposite result.
In Combustion Engineering, the debtor entered into certain pre-petition settlements with its asbestos creditors as part of a pre-packaged bankruptcy plan. The debtor funded the settlement by transferring most of its assets into a pre-petition trust. Each settling claimant in that case received between 37.5 percent and 95 percent of his claim from the trust, with each claimant retaining a so-called "stub claim" (a claim for the unpaid portion of their claim) to assert in the bankruptcy case.
The plan was overwhelmingly accepted, with most of the votes cast belonging to the stub claimants. The U.S. Court of Appeals for the Third Circuit reversed and remanded the plan confirmation, stating, inter alia, that the transfers to the pre-petition trust may have constituted voidable preferences and violated the principle of equality of distribution among creditors.
After discussing Combustion Engineering, however, the bankruptcy court in Quigley distinguished the case, noting that in Combustion Engineering, the debtor used its own assets to pay settling claimants. This action arguably led to a preference of the settling claimants, and certainly diminished that amount remaining for the nonsettling claimants. The bankruptcy court noted that in the instant case, Pfizer–Quigley’s corporate parent–used its own funds to settle; the bankruptcy court further observed that the amount of assets available to Quigley’s creditors was more, rather than less, as a result of the settlements.
The court found that the Bankruptcy Code supported its conclusion. The Plan proponents asserted that section 1126(c) imposes a "mechanical test" under which each creditor is entitled to vote on its allowed claim. The Plan proponents further argued that the only exception is designation under section 1126(e), which requires a finding of bad faith. Rejecting the Plan proponents’ arguments, the bankruptcy court stressed that the only current question before it was whether the bankruptcy court should consider the Settling PI Claimants’ concession of 90 percent of their claims under the Pfizer settlement in estimating the value of their claims for voting purposes.
The bankruptcy court concluded that the concession was relevant, and thus considerable, because it ensured voting power that is commensurate with the Settling PI Claimants’ economic interests and the economic realities of the case. The bankruptcy court reasoned that the Settling PI Claimants agreed that whenever their claims were liquidated by the Trust, they would accept 10 percent of that amount. As such, the bankruptcy court concluded, there was no reason to treat the Settling PI Claimants’ settlement of their unliquidated claim differently from the settlement of a liquidated (and "allowed") amount.
Having reached this conclusion, the bankruptcy court summarily calculated that dilution of the Settling PI Claimants’ vote by 90 percent resulted in rejection of the Plan by Class 4.
This article is presented for informational purposes only and is not intended to constitute legal advice.