Discharge Applied to Bar Unknown Claims
Reprinted with permission from the December 15, 2016 issue of The Legal Intelligencer. © 2016 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
The golden ring sought at the end every Chapter 11 is a discharge from all claims known or unknown that existed prior to plan confirmation. Discharge generally involves a two-step process; first a bar date must be established which requires claimants to timely file their claim with the bankruptcy court; and second, the plan must be confirmed. The process of identifying claims for purposes of providing notice of a bar date can run from the very simple to the extremely complex. Trade creditors holding claims against the debtor are relatively simple to identify since their name and address should exist in the debtor's books and records. However, claims arising out of exposure to toxic chemicals sold or distributed by a debtor years or even decades prior present an entirely different challenge. Those challenges were recently addressed in the Chemtura bankruptcy proceeding pending in the Southern District of New York, In re Chemtura, Case No. 09-11233 (Bankr. S.D.N.Y Nov. 23, 2016).
On March 18, 2009, Chemtura Corp. and several of its affiliates commenced their voluntary Chapter 11 bankruptcy proceedings. Although Chemtura was a "specialty chemical company," the case was not identified as a mass tort bankruptcy. Nevertheless, there were a significant number of personal injury claimants seeking damages related to the prior sale or distribution of asbestos, coal tar, vinyl chloride, diacetyl and benzene.
In recognition of the diverse claims base, the debtors, with court approval, established an extensive bar date notice program which included direct mail notice to all known claimants as well as publication notice in the New York Times, USA Today, and site specific advertising in approximately 112 separate periodicals in varying regions around the country. The publication notice itself disclosed the names and addresses of locations where environmental or chemical exposure might have occurred along with the toxins potentially involved. Benzene was identified as being present at 14 of the suspected locations.
On Nov. 3, 2010, the bankruptcy court confirmed Chemtura's plan of reorganization. The confirmation order set forth broad (but somewhat typical) discharge language with respect to all "claims, interests and causes of action of any nature whatsoever ... whether known or unknown" that existed prior to the plan's effective date. Additionally, the confirmation order included an injunction prohibiting the assertion of discharged claims.
During 2015 and 2016, six actions were filed in the Philadelphia Court of Common Pleas against Chemtura alleging damages related to the use of benzene contained within mineral spirits sold by Kendall Refining Co., which was merged into Witco Corp. in 1966 and which itself was dissolved in 1996 by Chemtura. The claimants argued that Chemtura was the successor to Witco, an allegation the debtor denied. As a result of the Philadelphia civil actions, Chemtura moved in the bankruptcy court for enforcement of the discharge injunction pursuant to Sections 105(a), 524 and 1141 of the Bankruptcy Code, Bankruptcy Rules 3020(d), 9014 and 9020, and 28 U.S.C. Section 1927. In response, the benzene claimants argued among other things, that they had not received sufficient notice of the bar date and thus were not discharged under the Chemtura plan; that some of the claimants' benzene-related claims did not arise until after the bankruptcy proceeding had finished and thus were not discharged; and, that they should be allowed to proceed in any event against the debtors' insurance policies.
In order to be discharged, the court recognized that the claim must have arisen pre-petition and the benzene claimants received adequate notice of the bar date. The court noted that all of the benzene claimants alleged that exposure occurred prior to the Chemtura bankruptcy. The claimants argued that because the pre-petition exposure did not give rise to injury until after plan confirmation, such claims could not be discharged. The Chemtura court, however, identified several decisions from the Southern District of New York, which had previously held to the contrary, in In re Johns Manville, 552 B.R. 221 (Bankr. S.D.N.Y. 2016); In re Chateaugay, No. 8-11270, 2009 Bankr. LEXIS 275, 2009 WL 367490 (Bankr. S.D.N.Y. Jan. 14, 2009); and In re Quigley, 383 B.R. 19 (Bankr. S.D.N.Y. 2008). In response the benzene claimants argued that a conflicting line of cases, particularly those arising in the U.S. Court of Appeals for the Third Circuit would hold to the contrary in In re Frenville, 744 F.2d 332 (3d Cir. 1984) and in Wright v. Owens Corning, 679 F.3d 101 (3d Cir. 2012). The Chemtura court distinguished each of the Third Circuit decisions and ultimately rested upon those cases which had been decided in the Southern District.
With respect to whether appropriate bar date notice was provided, the court determined that the benzene claimants were "unknown" and thus, the publication notice was sufficient since "the debtors' had no knowledge of any potential benzene exposure claims relating to Witco mineral spirits used by Safety-Kleen." The court also noted that "It is undisputed that the Benzene lawsuits were the first lawsuits ever filed against the reorganized debtors or their predecessors relating to any Safety-Kleen products." Thus, from the court's perspective, the bar date notice constituted "Reasonably diligent efforts" as required under U.S. Supreme Court precedent in Mullane v. Central Hanover Bank & Trust, 339 U.S. 306, 70 S. Ct. 652, 94 L. Ed. 865 (1950). The claimants argued that because the Bar Date Notice failed to adequately identify benzene as a component of the Witco mineral spirits, was not published in the states where the benzene claimants were located; and did it mention Kendall Refining or Witco, it was deficient under applicable due process standards. The court on the other hand found the bar date notice program to be comprehensive and was "fully vetted" among the debtors, the unsecured creditors and other toxic tort claimants. Thus, the court ruled that the claims were sufficiently ripe to be discharged and the bar date notice sufficiently robust to provide claimants with adequate notice.
The benzene claimants also sought authority from the bankruptcy court to proceed for purposes of establishing liability against Chemtura's insurer. In 2006, approximately three years prior to the Chemtura bankruptcy, the debtor entered into a cost sharing agreement with its insurer pursuant to which the debtor retained an ongoing obligation to pay defense costs in connection with any claim covered by the policies. The bankruptcy court found that to allow the claimants to pursue the insurer would somehow impair its "fresh start" because it will be obligated by those agreements to pay defense costs associated with the benzene law suits. Interestingly, the cost sharing agreement obligated the insurer to perform even if Chemtura failed to do so. Despite the fact that the debtors assumed the cost sharing agreement during the bankruptcy, this was not found to be a waiver of the discharge nor did it equitably stop the debtor from refusing to honor its obligations under the cost sharing agreement. Thus, as a result of the ongoing obligation to pay defense costs, the court denied the claimants' right to seek recovery from the insurance policies.
The Chemtura decision represents the strict enforcement of the discharge provisions within the Bankruptcy Code as they relate to unknown claimants exposed pre-bankruptcy to toxic chemicals who did not manifest diseases as a result until well after plan confirmation. Bankruptcy courts sitting in the Southern District of New York appear willing to provide broad protection to reorganized debtors despite the near practical impossibility of a claimant being aware that a claim should be asserted or that its rights are being affected, if the debtor has taken steps to provide broad mail and publication notice. However, as demonstrated by the U.S. Court of Appeals for the Second Circuit in the recent GM decision, there are limits to the extent the debtor has some information that a group of claimants might reasonably exist. In the Third Circuit, it is less clear as to whether discharge of the benzene claimants would have occurred in light of the Frenville decision, which although highly criticized, appears to have at least some ongoing viability. With respect to the Chemtura court's insurance ruling, that decision presents a close question given the Bankruptcy Code's general policy of not impairing claims against nondebtor third parties. Therefore, it is possible that courts in other jurisdictions around the country might disagree.
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