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IN RE: BESTWALL LLC,1 Debtor. Bestwall LLC, Plaintiff, v. Those Parties Listed on Appendix A to Complaint and John and Jane Does 1-1000, Defendants.2
MEMORANDUM OPINION AND ORDER GRANTING THE DEBTOR'S REQUEST FOR PRELIMINARY INJUNCTIVE RELIEF
On November 9, 2018 and January 24, 2019, the Court convened hearings on the Debtor's Motion for an Order (I) Preliminarily Enjoining Certain Actions Against Non-Debtors, or (II) in the Alternative, Declaring that the Automatic Stay Applies to Such Actions and (III) Granting a Temporary Restraining Order Pending a Full Hearing on the Motion [Adv. Docket No. 2] (the “Motion”). The Motion was filed contemporaneously with the Debtor's Complaint for Injunctive and Declaratory Relief (I) Preliminarily Enjoining Certain Actions Against Non Debtors, or (II) in the Alternative, Declaring That the Automatic Stay Applies to Such Actions and (III) Granting a Temporary Restraining Order Pending a Full Hearing on the Motion [Adv. Docket No. 1] (the “Complaint”). For the reasons set forth below, the Court grants the Motion.
On November 2, 2017 (the “Petition Date”), Bestwall LLC (“Bestwall” or the “Debtor”) filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in this district, initiating the above-captioned Chapter 11 case to resolve mass asbestos claims through a section 524(g) trust. Concurrently with its Chapter 11 petition, Bestwall initiated this adversary proceeding by filing the Complaint. In connection with the Complaint, Bestwall also filed the Motion, asking the Court to prohibit and enjoin the Defendants from filing or continuing to prosecute any “Bestwall Asbestos Claims”3 against the “Protected Parties.”4 On November 8, 2017, the Court entered a temporary restraining order [Adv. Docket No. 18] (the “TRO”) granting the requested relief pending a further hearing on the Motion.
Shortly after the Petition Date on November 16, 2017, this Court approved the appointment of the Official Committee of Asbestos Claimants (the “Committee”) to represent the asbestos claimants in the Chapter 11 case and thereafter has approved modifications to the Committee [Docket Nos. 97, 335, 348, 666, and 690]. On February 23, 2018, the Court appointed Sander L. Esserman as Legal Representative for Future Asbestos Claimants (the “FCR”) [Docket No. 278].
On December 7, 2017, the Court entered an order agreed upon by the Committee and the Debtor which, among other things, prohibited and enjoined the Defendants from filing or continuing to prosecute any Bestwall Asbestos Claims against the Protected Parties [Adv. Docket No. 30] through and including March 26, 2018.
Subsequently, the Court, by agreement of Bestwall, the Committee, the FCR (once appointed), and New GP (as applicable), entered a series of orders [Adv. Docket Nos. 32, 33, 36, 41, 91, 125, 136, 141, 152, 157, 160, and 162] that continued the injunction against the filing or continued prosecution of Bestwall Asbestos Claims against the Protected Parties through and including July 31, 2019.
On August 15, 2018, the Committee and the FCR each objected to the Motion. Bestwall, New GP,5 the Committee, and the FCR fully briefed the matter 6 and presented oral arguments at the hearing conducted before this Court on November 9, 2018.
In connection with the Court's consideration of the Motion, the parties stipulated to the admission into evidence of the Debtor's Submission in Lieu of Live Testimony [Adv. Docket No. 104] (the “Submission”). See Submission, pp. 2, 26; see also Transcript of Proceedings Before the Honorable Laura Turner Beyer, United States Bankruptcy Judge (November 9, 2018) (the “November Transcript”), p. 42. The Debtor also submitted the Declaration of Gregory M. Gordon [Adv. Docket No. 95] (the “Gordon Declaration”) into evidence, and no objections were made to its admission. See November Transcript, p. 42.
Old GP, the predecessor to Bestwall, had a decades-long history of asbestos litigation that derived from its acquisition of Bestwall Gypsum Co. (“Old Bestwall”). Submission at ¶¶ 22-23. Old Bestwall manufactured and sold certain asbestos-containing products, principally joint compound, and Old GP continued to manufacture and sell those products following the acquisition. Id. The magnitude and projected continuation of that litigation through at least 2050 ultimately led Old GP to undertake a corporate restructuring on July 31, 2017 (the “2017 Corporate Restructuring”). Id. at ¶ 13.
a) Bestwall (the debtor in this case), which received certain assets and liabilities of Old GP, including (i) Old GP's asbestos liabilities (with the exception of claims made under a workers' compensation statute or similar laws) and (ii) certain assets related to the historical Old Bestwall business; and
b) Georgia-Pacific LLC (“New GP”), which received the other businesses, assets, and liabilities of Old GP, most of which are unrelated to Old Bestwall's historical business.
Id. at ¶ 14.
As of September 30, 2017, there were approximately 64,000 asbestos-related claims pending against Bestwall, and Bestwall projected that tens of thousands of additional claims would continue to be filed or asserted against it every year through at least 2050. Submission at ¶¶ 23, 29.
From the 2017 Corporate Restructuring, Bestwall received, among others, the following tangible assets:
a) three bank accounts with approximately $32 million in cash at the time of the transaction;
b) all contracts of Old GP related to its asbestos-related litigation;
c) certain real estate in Mt. Holly, North Carolina; and
d) all equity interests in non-debtor GP Industrial Plasters LLC, a North Carolina limited liability company (“PlasterCo”), which owns certain assets of Old Bestwall's historical business, is projected to generate annual cash flow (EBITDA) of $18 million starting in 2019, and whose equity was valued at approximately $145 million prior to the petition date.
Id. at ¶ 15.
As part of the 2017 Corporate Restructuring, Bestwall also became party to a funding agreement with New GP (the “Funding Agreement”). Id.; see Gordon Declaration at ¶ 7, Ex. A. Without any corresponding repayment obligation by Bestwall, the Funding Agreement requires New GP to provide funding to pay for all costs and expenses of Bestwall incurred in the normal course of its business either (a) in the absence of a bankruptcy case or (b) during the pendency of any Chapter 11 case, including the costs of administering Bestwall's Chapter 11 case, in both cases to the extent that any cash distributions received by the Debtor from its subsidiaries are insufficient to pay such costs and expenses. Submission at ¶ 17.
In addition, and again in the absence of any corresponding repayment obligation by the Debtor, the Funding Agreement requires New GP to fund any amounts necessary or appropriate to satisfy the Debtor's asbestos-related liabilities in the absence of a bankruptcy case and also obligates New GP, in the event of a Chapter 11 filing, to provide the funding for a section 524(g) asbestos trust in the amount required by a confirmed plan of reorganization for the Debtor to the extent that the Debtor's assets are insufficient to provide the requisite trust funding. Id.
I. Subject Matter Jurisdiction
The Committee and the FCR assert that this Court lacks subject matter jurisdiction to enjoin Bestwall Asbestos Claims against New GP. The Court disagrees. The Fourth Circuit's test for “related to” jurisdiction under 28 U.S.C. § 1334(b) confirms that the Court has authority to issue the requested injunction.
The Fourth Circuit has adopted the Pacor test for determining whether a proceeding is sufficiently related to a bankruptcy case for this Court to have jurisdiction under section 1334(b) of title 28 of the United States Code. See Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984); see also A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 1002, n. 11 (4th Cir. 1986) (adopting the Pacor test).
The Pacor test examines whether the outcome of a proceeding “could conceivably have any effect on the estate being administered in bankruptcy.” Pacor, 743 F.2d at 994. In the asbestos context, courts have made clear that this standard applies whether any claims against a third party are alleged to be “direct” or “derivative.” See In re Quigley Co., Inc., 676 F.3d 45, 56-57 (2d Cir. 2012). Although evaluating whether a claim is allegedly “direct” or “derivative” may help inform “whether it has the potential to affect the bankruptcy” estate, “the touchstone for bankruptcy jurisdiction remains ‘whether its outcome might have any “conceivable effect” on the bankruptcy estate.’ ” Id. at 57 (citations omitted).
Failing to grant the injunction could conceivably have an effect on Bestwall's bankruptcy estate.
(1) Discontinuing the Injunction Would Defeat the Very Purpose of Section 524(g)
Failure to maintain the injunction would defeat the very purpose of section 524(g) and the Debtor's Chapter 11 case. See Submission at ¶¶ 42, 44. Section 524(g) allows a debtor to address in one forum all potential asbestos claims against it, both current and future, as well as current and potential future claims against third parties alleged to be liable on account of asbestos claims against the debtor. Piecemeal attempts by plaintiffs to seek to hold New GP liable for Bestwall Asbestos Claims outside of Chapter 11 would defeat that fundamental purpose. Id.
(2) Discontinuing the Injunction Would Distract Bestwall's Personnel
If the Defendants are permitted to commence or continue Bestwall Asbestos Claims against the Protected Parties, personnel who play key roles in the Debtor's reorganization efforts, such as Mr. Mercer, who serves as Chief Legal Officer of Bestwall, and his team, will be called upon to spend substantial time managing and directing all the activities involved in the day-to-day defense of these lawsuits. Submission at ¶ 47. These activities consumed many of the same personnel prior to the Chapter 11 case and, if resumed, would consume them again and, therefore, impair the ability of the Debtor to address tasks necessary to pursue a plan of reorganization pursuant to section 524(g) of the Bankruptcy Code. Id.
(3) Bestwall Has Indemnity Obligations That Would Make Judgments Against New GP Tantamount to Judgments Against Bestwall
Failure to enjoin litigation of Bestwall Asbestos Claims against the Protected Parties would affect the Debtor because the Debtor has indemnity obligations that would make judgments against the Protected Parties on the Bestwall Asbestos Claims tantamount to judgments against the Debtor. See Submission at ¶ 45. The Committee and the FCR allege that these indemnity obligations are “contrived” and “circular.” But the obligations are neither. First, pursuant to the terms of the Plan of Merger (Gordon Declaration, Ex. Z), responsibility for the Bestwall Asbestos Claims was allocated to the Debtor. Id. at ¶¶ 14-15. Thus, it makes sense that the Debtor would, and the Debtor has agreed to, indemnify its affiliates against those claims. Second, the Funding Agreement acts only as a backstop and requires New GP to provide funds to an asbestos trust under a plan for the Debtor only to the extent that the Debtor's own assets are insufficient.9 Submission at ¶ 17. Paying the indemnity claims would deplete the assets the Debtor has available to fund the section 524(g) asbestos trust and, therefore, have an effect on the Debtor's bankruptcy estate.
Even absent a contractual indemnification obligation, the Debtor believes that it is likely the Protected Parties may have common law indemnity claims against the Debtor because any finding that a Protected Party is liable for the Bestwall Asbestos Claims would necessarily allow claimants to hold the Debtor and the applicable Protected Party jointly and severally liable. Submission at ¶ 45; see Minn. Mining & Mfg. Co. v. Super. Ct., 206 Cal. App. 3d 1025, 1028, 253 Cal.Rptr. 908 (1988) (recognizing that the application of derivative liability theories such as alter ego creates joint and several liability). Joint and several liability is the touchstone for indemnification obligations under state common law. See, e.g., Ne. Solite Corp. v. Unicon Concrete, LLC, 102 F. Supp. 2d 637, 640 (M.D.N.C. 1999) (North Carolina common law recognizes equitable or implied indemnification, which is an equitable right of recovery by a party held vicariously liable for the tort of another).10
The Committee and FCR further argue that this Court lacks subject matter jurisdiction to enjoin Bestwall Asbestos Claims against New GP on the basis that New GP is “directly” liable for the Bestwall Asbestos Claims and, thus, it is not clear whether New GP would be eligible to be the beneficiary of a channeling injunction under section 524(g). It is not necessary for the Court to conclude whether claims against New GP would be direct or derivative. See 11 U.S.C. § 524(g)(4)(A)(ii) (providing that a non-debtor is entitled to protection under section 524(g) if it 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” one or more specified circumstances);11 see also W.R. Grace & Co. v. Carr, 900 F.3d 126, 138 (3d Cir. 2018).
Bestwall Asbestos Claims brought against New GP would not be independent, wholly separate, or in any way distinguishable from liability asserted against the Debtor. The liability being asserted against New GP and Bestwall would be identical and co-extensive in every respect. Both sets of claims involve the same plaintiffs, the same asbestos-containing products, the same alleged injuries, the same legal theories and causes of action, the same time periods, the same markets, and the same alleged damages resulting from the same alleged conduct. The Court thus concludes that it has jurisdiction to continue the preliminary injunction.
The Court further concludes that (a) this is a core proceeding pursuant to 28 U.S.C. § 157(b); and (b) venue in this Court is proper pursuant to 28 U.S.C. §§ 1408 and 1409.
II. Due Process
The Committee argues that the 2017 Corporate Restructuring violated the due process rights of asbestos claimants and seems to imply, based thereon, that the restructuring should not be respected and New GP should be deemed the entity liable for the Bestwall Asbestos Claims. The Court disagrees.
First, the Court is not aware of any law, and the Committee has not cited any law, that would have required Old GP as the Committee asserts, to have either consulted with the asbestos claimants or solicited their vote before it engaged in the 2017 Corporate Restructuring.
Second, the claimants will be afforded due process in this case as a result of the requirements of the Bankruptcy Code and, in particular, section 524(g). Section 524(g) contemplates the active participation and support of the Committee, requires the affirmative vote of at least 75% of asbestos claimants in connection with confirmation of a plan seeking the benefits of that section (see 11 U.S.C. § 524(g)(2)(B)(ii)(IV)(bb)), and calls for approval of the plan of reorganization by both this Court and the District Court (see 11 U.S.C. § 524(g)(3)(A)). These claimant protections further support the Court's conclusion that no due process violation occurred.
The Committee argues that Old GP's use of the Texas divisional merger statute to effectuate the 2017 Corporate Restructuring is “preempted” by section 524(g) of the Bankruptcy Code. The Court disagrees.
Preemption typically falls into three categories: express, conflict, and field preemption. There is a “strong presumption against inferring Congressional preemption in the bankruptcy context.” Integrated Sols., Inc. v. Serv. Support Specialties, Inc., 124 F.3d 487, 493 (3d Cir. 1997) (citation omitted). And “[t]his presumption is strongest when Congress legislates ‘in a field which the States have traditionally occupied’ ” — such as the field of corporate organization, which is the province of Texas state law. S. Blasting Servs., Inc. v. Wilkes Cty., NC, 288 F.3d 584, 590 (4th Cir. 2002) (quoting Medtronic, Inc. v. Lohr, 518 U.S. 470, 485, 116 S.Ct. 2240, 135 L.Ed.2d 700 (1996)).
The Committee concedes that express preemption does not apply in this case. Committee's Objection at 21, n. 23. The Court concludes that neither conflict preemption nor field preemption applies here. The Texas statute and section 524(g) concern completely different subjects and work readily in tandem, including in the context of this Chapter 11 case.
A. Conflict Preemption
Conflict preemption occurs “when compliance with both federal and state regulations is a physical impossibility, or when state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” S. Blasting Servs., 288 F.3d at 590 (4th Cir. 2002) (quoting Hillsborough Cty. v. Automated Med. Labs., Inc., 471 U.S. 707, 712, 105 S.Ct. 2371, 85 L.Ed.2d 714 (1985)).
The Committee concedes that “[f]acially there is no conflict between” the Texas divisional merger provision and section 524(g). Committee's Objection at 30. The former — which has been law for nearly 30 years and predates section 524(g) — is simply part of a general law of corporate organization (including the assignment of assets and liabilities as part of a reorganization); it has nothing to do with section 524(g), a provision for discharging and channeling asbestos claims in connection with a Chapter 11 plan.
The Committee nevertheless claims that conflict preemption applies because the Debtor's use of the Texas divisional merger statute enabled Old GP to replace the assets against which asbestos creditors had a claim with a much smaller subset of assets by effecting a restructuring of asbestos-related liabilities outside of section 524(g). The Court disagrees with the Committee's argument for several reasons. First, because of the Funding Agreement, the Debtor's ability to pay valid Bestwall Asbestos Claims after the 2017 Corporate Restructuring is identical to Old GP's ability to pay before the restructuring. Submission at ¶ 16.
Second, Texas has adopted the Uniform Fraudulent Transfer Act (Tex. Bus. & Com. Code §§ 24.001, et seq.) and fraudulent transfer law is also a part of the Bankruptcy Code (see, e.g., 11 U.S.C. § 548). If a debtor used the Texas statute to commit a fraudulent transfer — creating the harm that the Committee complains of — such law would be available to address such acts.
Third, regardless of how the Debtor was formed in the 2017 Corporate Restructuring, the Debtor is subject to all of the requirements of section 524(g), and the claimants are correspondingly entitled to all of that section's benefits and protections. The goal of this bankruptcy proceeding is to permanently and globally resolve the Bestwall Asbestos Claims, and the 2017 Corporate Restructuring did not accomplish or determine that resolution. There is no conflict.
B. Field Preemption
Field preemption is rare and requires a showing that Congress has “regulat[ed] so pervasively that there is no room left for the states to supplement federal law,” or that “there is a ‘federal interest ․ so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject[.]’ ” U.S. v. South Carolina, 720 F.3d 518, 528-29 (4th Cir. 2013) (quoting Arizona v. U.S., 567 U.S. 387, 399, 132 S.Ct. 2492, 183 L.Ed.2d 351 (2012)); see also Hillsborough, 471 U.S. at 713, 105 S.Ct. 2371.
Here, there is no ongoing federal regulation of any relevant field. The Committee suggests that a “field of asbestos-related corporate reorganizations” exists. But section 524(g) of the Bankruptcy Code is the only federal provision that is allegedly filling this field. The Committee has failed to explain how one subsection of one statute can establish a pervasive regime or reflect a dominant federal interest. See South Carolina, 720 F.3d at 532.
Moreover, section 524(g) does not regulate corporate organizations or reorganizations at all, as does the Texas statute. Instead, section 524(g) provides the method for obtaining a discharge and channeling injunction of asbestos-related claims as part of a larger Chapter 11 restructuring and, consistent with the Bankruptcy Code more generally, it takes a debtor's corporate structure as it comes under background state law. See, e.g., In re Blackwell ex rel. Estate of I.G. Servs. Ltd., 267 B.R. 732, 740 n. 12 (Bankr. W.D. Tex. 2001) (“As a general rule corporate forms are observed in bankruptcy unless there are clear state law grounds for piercing the corporate veil.”) (quoting David B. Young, Preferences and Fraudulent Transfers, in 22nd Annual Current Developments in Bankruptcy & Reorganization 2000, at 597 (Practising Law Institute Commercial Law and Practice Course Handbook Series, PLI Order No. A0-004D, 2000)).
In fact, section 524(g) expressly contemplates pre-filing corporate reorganizations — and provides that a channeling injunction may bar actions “directed against a third party” arising by reason of that party's “involvement” in such a transaction changing the corporate structure — without establishing any requirements for these reorganizations. 11 U.S.C. § 524(g)(4)(A)(ii)(IV) (referring to “a transaction changing the corporate structure, or ․ a loan or other financial transaction affecting the financial condition, of the debtor or a related party”). Thus, that subsection itself contemplates that state corporate law will bear on — not be displaced by — its operation.
Finally, if the Committee's posited field existed, it would not preempt the Texas divisional merger provision. That provision does not specifically concern “asbestos-related” reorganizations but instead creates a process available to any Texas “domestic entity” to modify its corporate structure. Tex. Bus. Orgs. Code Ann. § 10.001(a). Although the Committee concedes that no aspect of the Texas statute by itself is preempted, it argues “that the use of the statute to avoid asbestos liability is impermissible.” Committee's Objection at 23. But the Debtor is not seeking to avoid its liability for Bestwall Asbestos Claims. Rather, the Debtor is seeking to resolve the Bestwall Asbestos Claims, current and future, in the bankruptcy proceeding, in accordance with the terms of section 524(g). Submission at ¶ 32.
IV. Preliminary Injunction
Courts considering the propriety of an injunction under section 105(a) of the Bankruptcy Code apply the traditional four-prong test for injunctions, tailored to the unique circumstances of bankruptcy. See, e.g., Robins, 788 F.2d at 1008 (noting that the district court had applied the test for a grant of preliminary injunctive relief previously articulated by the Fourth Circuit and upholding the grant of a preliminary injunction). Accordingly, bankruptcy courts consider:
1. The debtor's reasonable likelihood of a successful reorganization;
2. The imminent risk of irreparable harm to the debtor's estate in the absence of an injunction;
3. The balance of harms between the debtor and its creditors; and
4. Whether the public interest weighs in favor of an injunction.
See, e.g., In re Excel Innovations, Inc., 502 F.3d 1086, 1095-1100 (9th Cir. 2007); In re Lyondell Chem. Co., 402 B.R. 571, 588-89 (Bankr. S.D.N.Y. 2009).
Each prong must be satisfied. See, e.g., Pashby v. Delia, 709 F.3d 307, 320 (4th Cir. 2013) (“Before the Supreme Court issued its ruling in Winter, this Court used a ‘balance-of-hardship-test’ that allowed it to disregard some of the preliminary injunction factors if it found that the facts satisfied other factors. However, in light of Winter, this [c]ourt recalibrated that test, requiring that each preliminary injunction factor be ‘satisfied as articulated.’ ”) (citations and internal quotation marks omitted); Smith v. Smith, No. 1:16-cv-00264-MOC-DLH, 2016 WL 4154938, at *2 (W.D.N.C. Aug. 4, 2016) (“Finally, there no longer exists any flexible interplay between the factors, because all four elements of the test must be satisfied.”).
Injunctions of the type requested by the Debtor have previously and uniformly been issued in numerous other asbestos-related cases, including in this jurisdiction.12 This Court likewise will issue the requested injunction, as the Debtor meets each of the four requirements as described below.
A. The Debtor has a Realistic Possibility of a Successful Reorganization
In the context of bankruptcy proceedings, “success on the merits is to be evaluated in terms of the likelihood of a successful reorganization.” Sudbury, Inc. v. Escott, 140 B.R. 461, 466 (Bankr. N.D. Ohio 1992); see also In re Brier Creek Corp. Ctr. Assocs. Ltd., 486 B.R. 681, 696 (Bankr. E.D.N.C. 2013) (noting most courts apply the test of a realistic possibility of reorganization); In re Chicora Life Ctr., LC, 553 B.R. 61, 66 (Bankr. D.S.C. 2016) (same).
Establishing that a reorganization is likely to be successful is not intended to be a particularly high standard. See In re Eagle-Picher Indus., Inc., 963 F.2d 855, 860 (6th Cir. 1992) (“In view of the bankruptcy court's protection of [the debtor's] reorganization efforts, it is implicit in its decision that it believed [the debtor] had some realistic possibility of successfully reorganizing under Chapter 11.”). Indeed, the court “must make at least a rebuttable presumption that the [debtors] have made a good faith filing and are making a good faith effort to reorganize.” In re Gathering Rest., Inc., 79 B.R. 992, 1001 (Bankr. N.D. Ind. 1986); see also In re Hillsborough Holdings Corp., 123 B.R. 1004, 1015 (Bankr. M.D. Fla. 1990) (until it can be determined that debtors are not viable business entities incapable of achieving a successful reorganization, “it would be premature to conclude ․ that this reorganization process is doomed and that there is no legal justification for granting the injunctive relief sought”); In re Lahman Mfg. Co., 33 B.R. 681, 685 (Bankr. D.S.D. 1983) (injunction was proper against creditors of non-debtors because a debtor “must be allowed to present a plan” of reorganization).
The Court concludes that the Debtor has a realistic possibility of achieving a successful reorganization. In light of the Funding Agreement, which allows the Debtor to draw from New GP the amount of money necessary to pay the costs of this Chapter 11 case and to fund a section 524(g) trust, to the extent the Debtor's assets are insufficient to do so, there is no reason for the Court to conclude at this point that the Debtor does not have the ability to fully fund a section 524(g) trust, as well as the administrative costs of its Chapter 11 case. The Debtor's assets also include approximately $145 million in equity value in PlasterCo and cash, in addition to its access to funds through the Funding Agreement. See Submission at ¶ 14. Any issues and concerns with the Funding Agreement can be addressed in the confirmation process.
B. Failure to Enjoin Litigation of Bestwall Asbestos Claims Would Irreparably Harm the Debtor
The Court finds that the Debtor will be irreparably harmed unless the requested injunction is continued. The Debtor filed its Chapter 11 case to obtain a global and fair determination of all current and future Bestwall Asbestos Claims. See Submission at ¶ 32. It would defeat the purpose of the Chapter 11 case if those claims effectively continue to be prosecuted in the tort system notwithstanding the pendency of the Debtor's bankruptcy case. See id. at ¶¶ 42, 44.
(1) Indemnification Obligations
As noted, the Debtor has indemnity obligations that would make judgments against the Protected Parties on the Bestwall Asbestos Claims tantamount to judgments against the Debtor. Id. at ¶ 45. In particular, the Debtor (a) has a contractual obligation to indemnify New GP in the event that New GP is held liable for any Bestwall Asbestos Claims and (b) may have common-law indemnification obligations to other Protected Parties. Id.
Under these circumstances, an injunction is warranted because contractual and common law indemnification obligations would make the Debtor the real party in interest in any suit against New GP or other Protected Parties and effectively eliminate the protections of the automatic stay. See Robins, 788 F.2d at 999. Courts have enjoined actions against non-debtors where, as here, the debtor has an obligation to indemnify the non-debtor for liability deriving from conduct for which the debtor is responsible.13
Permitting claimants to indirectly establish claims against the Debtor through actions against third parties with indemnity rights is inconsistent with section 524(g)'s goal of consolidating and collectively resolving all asbestos claims, current and future, in the Chapter 11 case. Absent the requested injunction, Bestwall Asbestos Claims effectively would be liquidated outside of this Court through piecemeal litigation against the Protected Parties in the tort system. See Submission at ¶ 45. This state court litigation, if not stayed, would undermine the parties' and the Court's ability to achieve confirmation of a section 524(g) plan that treats all asbestos claimants, both current and future, fairly and equitably.
(2) Binding Effect of Findings and Judgments
If Bestwall Asbestos Claims against the Protected Parties are permitted to proceed, the Debtor faces the additional risk that findings and judgments against the Protected Parties would bind the Debtor, and effectively establish Bestwall Asbestos Claims against it, including under the doctrines of res judicata and collateral estoppel. Id. at ¶ 46. Accordingly, any rulings or findings regarding Bestwall Asbestos Claims could frustrate the Debtor's efforts to resolve the claims globally and equitably in this Chapter 11 case.
Courts have concluded that the risks of collateral estoppel and res judicata warrant a stay of third-party litigation because allowing that litigation to proceed would thwart the purposes of the automatic stay. Sudbury, 140 B.R. at 463 (granting injunctive relief after finding that debtor's liability “may be determined on collateral estoppel principles[,]” by fact determinations reached on the same fact issues “in Plaintiffs' actions” against non-debtors); Matter of Johns-Manville Corp., 26 B.R. 405, 426-29 (Bankr. S.D.N.Y. 1983) (concluding that risk of collateral estoppel would irreparably injure estates and thus issuance of a stay was warranted); In re Am. Film Techs., Inc., 175 B.R. 847, 850 (Bankr. D. Del. 1994) (staying claims against debtor's directors and holding that a potential finding of liability against such directors would be based on acts undertaken by directors as agents of the debtor and, thus, would expose the debtor to the risk of being collaterally estopped from denying liability for the directors' actions). The same concerns warrant an injunction in this case.
(3) Evidentiary Prejudice
Litigation of the Bestwall Asbestos Claims against the Protected Parties will create the additional risk that statements, testimony, and other evidence generated in proceedings against the Protected Parties will be used to try to establish Bestwall Asbestos Claims against the Debtor. See Submission at ¶ 46. Consequently, the litigation of Bestwall Asbestos Claims could force the Debtor to defend its interest in such litigation, thereby defeating the “breathing spell” intended by the automatic stay.
The burden of protecting against evidentiary prejudice was key to the court's grant of injunctive relief in Manville. In re Johns-Manville Corp., 40 B.R. 219, 225 (S.D.N.Y. 1984); see also In re W.R. Grace & Co., 386 B.R. 17, 34 (Bankr D. Del. 2008) (staying actions against non-debtor railroad asserting liability based on railroad's transportation of asbestos-containing material from the debtors' mining operations because, among other things, the possibility of collateral estoppel and “record taint” in such actions would compel the debtors' participation and impair the reorganization effort). These are consequences the Debtor should not be required to suffer (or be compelled to protect against).
(4) Diversion of Key Personnel
Litigation of the Bestwall Asbestos Claims against the Protected Parties would divert key personnel from the important tasks required to establish a section 524(g) trust. See Submission at ¶ 47. The Debtor would be compelled to participate in the defense of Bestwall Asbestos Claims, including formulating defense strategies, attending depositions, reviewing and producing documents, preparing witnesses, and engaging in any number of other litigation-related tasks. Id. As mentioned, Mr. Mercer and other personnel who play key roles in the Debtor's restructuring would be required to spend substantial time managing and directing all the activities involved in the day-to-day defense of these lawsuits. Id. These activities consumed many of the same personnel prior to the Chapter 11 case. Id.
C. The Balance of Harms Supports Maintaining the Injunction
The very purpose of the Debtor's Chapter 11 case would be defeated if litigation of the Bestwall Asbestos Claims against the Protected Parties is permitted. This outweighs any potential prejudice to the Defendants.
While certain of the claimants might argue that an injunction will delay their attempts to obtain compensation, that is not necessarily the case. The Debtor has noted that plaintiffs in asbestos-related suits typically name multiple defendants. See Submission at ¶ 48. Nothing about maintaining the injunction in this case prohibits the plaintiffs from continuing to proceed against any remaining defendants in state court.
Additionally, a section 524(g) trust will provide all claimants — including future claimants who have yet to institute litigation — with an efficient means through which to equitably resolve their claims. See In re Federal-Mogul Global, Inc., 684 F.3d 355, 357-62 (3d Cir. 2012) (explaining the background and purpose of section 524(g) as a solution to the inefficient resolution of asbestos claims in the traditional tort system and citing empirical research that suggests section 524(g) trusts are more efficient). And the process and timing to effectuate a section 524(g) trust are, to a large extent, within the control of the parties in this case.
Even if an injunction might cause delay for some Defendants, it is well established that mere delay is insufficient to prevent the issuance of an injunction. See In re United Health Care Org., 210 B.R. 228, 234 (S.D.N.Y. 1997) (finding delay to the enjoined party from pursuing remedies was heavily outweighed by potential harm to reorganization efforts).14 Further, the harm from any delay applicable to some Defendants is far outweighed by the harm that failure to issue the injunction would cause the Debtor. The entire purpose and goal of this proceeding would be defeated absent the requested injunction. Submission at ¶¶ 42, 44.
D. The Public Interest Supports Maintaining the Injunction
The public interest also favors the injunctive relief requested by the Debtor. Courts have consistently recognized the public interest in a successful reorganization. See, e.g., United States v. Whiting Pools, Inc., 462 U.S. 198, 204, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983); Sudbury, 140 B.R. at 465. As one bankruptcy judge observed: “ ‘[P]romoting a successful reorganization is one of the most important public interests.’ ” In re Gander Partners LLC, 432 B.R. 781, 789 (Bankr. N.D. Ill. 2010) (quoting In re Integrated Health Servs., Inc., 281 B.R. 231, 239 (Bankr. D. Del. 2002)); see also Manville, 26 B.R. at 428 (“[T]he goal of removing all obstacles to plan formulation [is] eminently praiseworthy and supports every lawful effort to foster this goal while protecting the due process rights of all constituencies.”). A successful reorganization particularly serves the public interest in the asbestos context, where “completing the reorganization process ․ [will] resolv[e] thousands of claims in a uniform and equitable manner.” W.R. Grace & Co., 386 B.R. at 36.
Permitting the litigation of Bestwall Asbestos Claims against the Protected Parties would impede the Debtor's ability to confirm a plan of reorganization that will establish a section 524(g) trust to globally and equitably resolve all current and future asbestos claims. See In re Congoleum Corp., 362 B.R. 198, 201 (Bankr. D.N.J. 2007) (“Section 524 was created to provide a comprehensive resolution to asbestos liabilities both present and future.”); see also Submission ¶¶ 42, 44. Instead, many of the claims effectively would be liquidated through continued litigation in state courts.
Finally, extending the injunction at this point does not allow either Bestwall, New GP, or any other Protected Party to escape any alleged asbestos liabilities, as the Committee and the FCR have argued. Any liabilities will be resolved and channeled only if Bestwall succeeds in confirming a plan of reorganization that contains a channeling injunction that extends to those Protected Parties.
V. Automatic Stay
Because the Court is granting the requested relief for a preliminary injunction under section 105 of the Bankruptcy Code, it need not, and does not, address the Debtor's request for declaratory relief that the protections of the automatic stay under section 362 of the Bankruptcy Code extend to the Protected Parties.
For the reasons presented in this Memorandum Opinion and Order, and for the reasons stated in the Court's oral ruling on the record at the January 2019 hearing, it is hereby ORDERED as follows (the “Order”):
1. The Debtor's Motion is GRANTED as set forth herein.
2. Defendants are prohibited and enjoined, pursuant to section 105 of the Bankruptcy Code, from filing or continuing to prosecute any Bestwall Asbestos Claim against the Protected Parties on any theory for the period this Order is effective pursuant to paragraph 10 below. This injunction includes, without limitation: (a) the pursuit of discovery from the Protected Parties or their officers, directors, employees, or agents; (b) the enforcement of any discovery order against the Protected Parties; and (c) further motions practice.
3. This Order is entered without prejudice to Bestwall's right to request, on motion and after notice and an opportunity for a hearing, that this Court extend the relief granted herein to include other entities or persons not previously identified in Appendix A or Appendix B hereto, or to seek relief from any of the provisions of this Order for cause shown.
4. Any Defendant or Defendants may seek relief from any of the provisions of this Order at any time for cause shown.
5. Notwithstanding anything to the contrary in this Order and without leave of court, any party asserting Bestwall Asbestos Claims (including any party enjoined by this Order from initiating litigation) may take reasonable steps to perpetuate the testimony of any person subject to this Order who is not expected to survive the duration of this Order or who is otherwise expected to be unable to provide testimony if it is not perpetuated during the duration of this Order. Notice shall be provided to Bestwall by notifying Bestwall's bankruptcy counsel of the perpetuation of such testimony. Bestwall shall have the right to object to the notice on any grounds it would have had if it were a party to the underlying proceeding and not subject to the terms of this preliminary injunction, and Bestwall may raise any such objection with this Court. The use of such testimony in any appropriate jurisdiction shall be subject to the applicable procedural and evidentiary rules of such jurisdiction. All parties reserve and do not waive any and all objections with respect to such testimony. Defendants or other individuals asserting Bestwall Asbestos Claims may not seek to perpetuate the testimony of representatives, including directors, officers, and employees, of Bestwall without the consent of Bestwall or an order of the Court.
6. Pursuant to Rule 7065 of the Federal Rules of Bankruptcy Procedure, Bestwall is relieved from posting any security pursuant to Rule 65(c) of the Federal Rules of Civil Procedure.
7. This Order shall be immediately effective and enforceable upon its entry.
8. This Order shall toll any applicable nonbankruptcy law, any order entered in a nonbankruptcy proceeding, or any agreement that fixes a period under which an enjoined Defendant is required to commence or continue a civil action in a court other than this Court on any Bestwall Asbestos Claim asserted against Bestwall or any of the Protected Parties until the later of: (a) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or (b) 30 days after notice of the termination or expiration of the preliminary injunction issued by this Order.
9. Bestwall shall serve a copy of this Memorandum Opinion and Order on counsel for the Defendants and the Bankruptcy Administrator within 3 business days from its entry.
10. This Memorandum Opinion and Order shall be promptly filed in the Clerk's office and entered in the record, and this Order shall remain effective for the period through 30 days after the effective date of a confirmed plan of reorganization that is no longer subject to appeal or discretionary review.
11. This Court retains exclusive jurisdiction over this Order and any and all matters arising from or relating to the implementation, interpretation, or enforcement of this Order.
3. For purposes of this Memorandum Opinion and Order, “Bestwall Asbestos Claims” refers to any asbestos-related claims against the Debtor, including all former claims against the former Georgia-Pacific, LLC (“Old GP”) related in any way to asbestos or asbestos-containing materials, except for asbestos-related claims for which the exclusive remedy is provided under workers' compensation statutes and similar laws.
4. The “Protected Parties” are listed on Appendix B hereto. They include Old GP, Georgia-Pacific, LLC (“New GP”), and the non-debtor affiliates of New GP and the Debtor.
5. With the approval of the Court, New GP participated in the briefing and oral argument for this matter and moved to intervene in this adversary proceeding, which intervention was approved by an order of the Court dated April 5, 2019 [Adv. Docket No. 156].
6. The parties filed the following briefs in support of or in opposition to the Motion: an objection filed by the Committee [Adv. Docket No. 47] (the “Committee's Objection”); an objection filed by the FCR [Adv. Docket No. 49] (the “FCR's Objection”); a reply filed by Bestwall [Adv. Docket No. 94]; a reply filed by New GP [Adv. Docket No. 97]; a sur-reply filed by the Committee [Adv. Docket No. 109]; and a sur-reply filed by the FCR [Adv. Docket No. 110].
7. See Tex. Bus. Orgs. Code § 1.002(55)(A).
8. See Gordon Declaration at ¶ 28, Ex. Z.
9. See Funding Agreement, attached as Exhibit A to the Gordon Declaration, definition of “Permitted Funding Use.”
10. The rights of the Committee and the FCR to argue that there is no applicable common law indemnity are reserved.
11. One of those specified circumstances is the non-debtor's “involvement in a transaction changing the corporate structure” of a predecessor in interest of the debtor. See 11 U.S.C. § 524(g)(4)(A)(ii)(IV). The Debtor contends that any alleged liability of New GP with respect to Bestwall Asbestos Claims would arise entirely out of New GP's involvement in the 2017 Corporate Restructuring and, thus, any alleged liability of New GP arises by reason of this circumstance making New GP entitled to the protection of a channeling injunction based on the explicit language of § 524(g)(4)(A)(ii)(IV). See Submission at ¶ 14.
12. See, e.g.:• In re Kaiser Gypsum Co., Inc., Case No. 16-31602, Adv. No. 16-03313 (Bankr. W.D.N.C. Oct. 7, 2016);• In re Garlock Sealing Techs. LLC, Case No. 10-31607, Adv. No. 10-03145 (Bankr. W.D.N.C. June 7, 2010);• In re Leslie Controls, Inc., Case No. 10-12199, Adv. No. 10-51394, 2010 WL 6982169 (Bankr. D. Del. July 14, 2010);• In re Specialty Prods. Holding Corp., Case No. 10-11780, Adv. No. 10-51085 (Bankr. D. Del. June 4, 2010);• In re Quigley Co., Inc., Case No. 04-15739, Adv. No. 04-04262 (Bankr. S.D.N.Y. Dec. 17, 2004);• In re Combustion Eng'g, Inc., Case No. 03-10495, Adv. No. 03-50839 (Bankr. D. Del. Mar. 7, 2003);• In re W.R. Grace & Co., Case No. 01-01139, Adv. No. 01-00771 (Bankr. D. Del. May 3, 2001);• In re Harbison-Walker Refractories Co., Case No. 02-2080, Adv. No. 02-02080 (Bankr. W.D. Pa. Feb. 14, 2002);• In re Mid Valley, Inc., Case No. 03-35592-JKF, Adv. No. 03-3296-JKF (Bankr. W.D. Pa. Dec. 17, 2003);• In re ACandS, Inc., Case No. 02-12687-PJW, Adv. No. 02-5581-PJW (Bankr. D. Del. Sept. 27, 2002);• In re G-I Holdings, Inc., Case No. 01-30135-RG, Adv. No. 01-3013-RG (Bankr. D.N.J. Feb. 22, 2002); and• In re The Babcock & Wilcox Co., Case No. 00-10992-JAB, Adv. No. 00-1029-JAB (Bankr. E.D. La. Apr. 17, 2000).
13. See In re W.R. Grace & Co., Case No. 01-01139, 2004 WL 954772, at *4 (Bankr. D. Del. Apr. 29, 2004) (applying automatic stay to litigation between two non-debtor parties where one of the parties was entitled to contractual indemnity from the debtor on account of such claims and amending preliminary injunction order to include such actions); In re Lomas Fin. Corp., 117 B.R. 64, 68 (S.D.N.Y. 1990) (affirming grant of preliminary injunction and applying automatic stay to suits against officers and directors where corporate charter of debtor required indemnification of such officers and directors); In re Family Health Servs., Inc., 105 B.R. 937, 942–43 (Bankr. C.D. Cal. 1989) (issuing a preliminary injunction pursuant to section 105 of the Bankruptcy Code and applying automatic stay to collection actions against non-debtor members of debtor HMO because judgments against non-debtors would trigger claims for indemnification against the debtor HMO); see also Queenie, Ltd. v. Nygard Int'l, 321 F.3d 282, 287-88 (2d Cir. 2003) (identifying indemnification obligations as an example of where extending stay is warranted and citing authority extending the stay because of those obligations).
14. See also W.R. Grace & Co., 386 B.R. at 35 (finding that delay of compensation for asbestos claimants and potential loss of witness testimony did not outweigh potential harm to reorganization efforts); In re Lazarus Burman Assocs., 161 B.R. 891, 901 (Bankr. E.D.N.Y. 1993) (concluding that delay was not sufficient harm to justify denial of injunction because “[t]he preliminary injunction will not invalidate the rights of [the creditor]” but rather “will merely delay the enforcement of those rights”); In re Am. Film Techs., Inc., 175 B.R. at 849 (defendants are “not being asked to forego [their] prosecution against the individual defendants, only to delay it”); In re PTI Holding Corp., 346 B.R. 820, 831-32 (Bankr. D. Nev. 2006) (holding that delay of pursuit of guaranty did not constitute sufficient harm to justify denial of injunction).
Laura T. Beyer, United States Bankruptcy Judge
Response sent, thank you
Docket No: Case No. 17-31795
Decided: July 29, 2019
Court: United States Bankruptcy Court, W.D. North Carolina,
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