Eric D. Green, James L. Patton, Jr. & Edwin J. Harron, Future Claimant Trusts and "channeling Injunctions" to Resolve Mass Tort Environmental Liability in Bankruptcy: the Met-coil Model

• Publication year: 2011

FUTURE CLAIMANT TRUSTS AND "CHANNELING INJUNCTIONS" TO RESOLVE MASS TORT ENVIRONMENTAL LIABILITY IN BANKRUPTCY: THE MET-COIL MODEL^*

Eric D. Green, Esquire^**James L. Patton, Jr., Esquire Edwin J. Harron, Esquire^***

INTRODUCTION

This Article describes a new legal model for resolving mass tort claims against a company as a result of environmental contamination. The new model involves the use of a future claimant trust and a channeling injunction in a chapter 11 bankruptcy proceeding. The model, adapted from the commonly- employed 11 U.S.C. Sec. 524(g) asbestos future claimant trust, offers significant advantages to companies and claimants in other mass tort situations in which the universe of future claims is uncertain but potentially overwhelming.

After spending more than $18 million on a rash of personal injury litigation brought by residents in the neighborhoods surrounding one of its facilities (the "Lockformer Site") where trichloroethylene ("TCE") was spilled onto the soil, allegedly contaminating the groundwater supply in the area,¹Met-Coil

Systems Corporation ("Met-Coil" or the "Debtor") filed for bankruptcy, with numerous lawsuits pending. After less than a year of negotiations among the Debtor, its parent, Mestek, Inc. ("Mestek"), and a court-appointed legal representative for future claimants, Eric D. Green (the "FCR"),²the Bankruptcy Court for the District of Delaware approved Met-Coil's plan of reorganization (the "Plan").³The Plan provided funding for the clean-up of the contaminated area, the costs associated with connecting area residents to a municipal water supply,⁴and a personal injury trust (the "TCE PI Trust") to compensate future personal injury claimants who, over the next forty-five years, allege their exposure to TCE released from the Debtor's facility is the cause of cancer or other diseases.⁵

The Plan also included as its keystone a "channeling injunction," which protects the reorganized Met-Coil, Mestek, and other related parties (namely insurers) from personal injury liability arising from the TCE allegedly emanating from the Lockformer Site.⁶The bankruptcy court issued Met-Coil's channeling injunction pursuant to 11 U.S.C. Sec. 105(a), which authorizes the court to issue "any order, process, or judgment that is necessary or appropriate to carry out the provisions" of the U.S. Bankruptcy Code ("Code").⁷

The Plan and TCE PI Trust were modeled after the plans of reorganization and future claimant trusts first developed in the context of asbestos claims⁸and other mass torts.⁹The Met-Coil Plan adapted these earlier models to create a future claimant trust that fits the problem of environmental contamination.¹⁰

The Met-Coil Plan provides a viable and equitable model for dealing with environmental contamination through bankruptcy.

In discussing the Met-Coil model, this Article will: (1) outline the process by which the Met-Coil Plan was developed, (2) briefly discuss the history of future claimant trusts in bankruptcy on which the Met-Coil plan and trust was based, (3) examine subsequent opinions that have shaped and will continue to shape the conduct of mass-tort bankruptcies, and (4) discuss the potential future applications of future claimant trusts in bankruptcy.

I. "TOXIC TORT BANKRUPTCY"-AN OVERVIEW OF THE PROCESS

A. Liabilities Driving the Decision to File for Bankruptcy

In 1976, Congress passed the Toxic Substances Control Act ("TSCA"),¹¹which authorizes the Environmental Protection Agency ("EPA") to catalog "chemical substances and mixtures which present an unreasonable risk of injury to health or the environment, and to take action with respect to chemical substances and mixtures which are imminent hazards."¹²The EPA has cataloged approximately 75,000 chemicals that fall into the category of posing an "imminent hazard" to the environment.¹³These industrial chemicals are generally used for a wide variety of purposes.¹⁴Thirty years after the passage of TSCA, however, very little is known about the environmental risks of the vast majority of these chemicals.¹⁵

For companies that used potentially toxic chemicals, the risk those chemicals will cause significant personal injury is a costly one. As further scientific inquiry and epidemiological study reveals the effects of exposure to these chemicals, the likelihood that injured individuals will seek recovery from the companies increases. Toxic tort litigation, and the looming threat of future litigation, can cripple a business. The costs of settlements and jury awards, not to mention the accompanying transaction and litigation costs, can be exponential.¹⁶Equally challenging in assessing potential future mass-tort or other environmental liability is identifying who the individual claimants may be and when each claimant may manifest injuries. Both issues may factor into a company's calculation and financial reporting of the present value of such litigation liabilities.

B. The Bankruptcy Process-Resolving Future Claims Through Equitable

Channeling Injunctions-In re Johns-Manville

Bankruptcy provides a means by which companies saddled with potential future liabilities-liabilities that by their nature are not capable of being known with any certainty-can address these liabilities in a comprehensive and equitable manner and obtain a "fresh start."¹⁷Chapter 11 reorganizations are generally preferable to chapter 7 liquidations,¹⁸especially from the perspective of future claimants in mass tort contexts.¹⁹To provide a true "fresh start," however, the bankruptcy process must provide companies with a means to create a plan that resolves all of their current liability and provides some assurance that no future liability is carried past the conclusion of the bankruptcy case.

To encourage capital contributions into a reorganized enterprise, investors must be confident their financial commitments will not be threatened by future liability arising from prepetition activity. Without a quantifiable and fixed measure of liability, principals and investors in the reorganized enterprise would continue to operate under the specter of future claims destroying the company, and therefore would be reluctant to contribute to a reorganized enterprise or a settlement trust for future claimants.²⁰

The business objective of discharging liabilities for future claims, however, can conflict with notions of due process.²¹A party holding a claim against a debtor on account of trade receivables, for example, has an opportunity to fully participate in the bankruptcy process, and if the debtor attempts to discharge the creditor's claim, the creditor must be given notice.²²Future claims are unlike existing claims because the debtor is unable to give the future claimants notice; obviously, the identity of the future claimants is unknown. Indeed, the discharge provisions of the Code do not operate to resolve liabilities that have yet to ripen into a "claim" (under state law).²³

In the context of a bankruptcy reorganization involving future claims, were the debtor to simply continue operations outside of bankruptcy and defend itself against litigation as it arose, later tort claimants risk litigating against a company with depleted or nonexistent resources. Similarly, were a company to liquidate its assets in bankruptcy, individuals with no present claims against the debtor at the time of liquidation might have no recourse. Thus, reorganization strikes an equitable balance between current and future claimants by eliminating the inequity that results from a piecemeal dismemberment through inexorable litigation or outright liquidation of a company, processes which favor earlier claimants over later claimants.²⁴

The competing goals of (1) providing companies with a comprehensive resolution of their liabilities and (2) protecting the interests of future claimants can both be satisfied by an injunction that channels future claims not subject to discharge away from the debtor (and potentially the debtor's affiliates and insurers) into a trust that resolves the claims. This mechanism of establishing a trust for future claimants, referred to as a "channeling injunction," was first employed in the context of bankruptcy proceedings in 1986 in In re Johns-

Manville Corp.²⁵

Johns-Manville expected thousands of future victims of asbestos exposure would have claims far exceeding the estimated net worth of the existing company.²⁶The Bankruptcy Court for the Southern District of New York was determined to treat both present and future asbestos claims in the same manner.²⁷By establishing two future claimant trusts, the Johns-Manville plan sought to compensate more potential victims than would have been possible had the company not declared bankruptcy.²⁸Through the use of channeling injunctions, the Johns-Manville plan preserved a healthy, functioning company, which in turn provided additional value for the trusts (which owned the stock of the reorganized company) and future claimants.²⁹

To preserve the value of the reorganized company, the Johns-Manville court issued an injunction that "effectively channel[ed] all asbestos related claims and obligations away from the reorganized entity and target[ed] it towards the [trusts] for resolution."³⁰The Johns-Manville court relied on its equitable powers for authority to issue the channeling injunction³¹and

Id. specifically recognized that Sec. 105 of the Code "codified" the court's "equitable power" and "allow[ed] a bankruptcy court to enjoin proceedings in other courts to ensure the efficient administration of an estate."³²

Apart from the question of statutory authority, the Johns-Manville court also grappled with due process concerns arising from the plan's proposed treatment of future claimants.³³Because the plan limited suits against the reorganized debtor by those who would discover, post-confirmation, that they had developed an asbestos-related illness, objectors argued that the injunction would "unconstitutionally bind future claimants to an...