Richards Layton & Finger
 

Delaware Bankruptcy Court Approves Debtors' Request to Establish Bar Date for Unmanifested Asbestos Claims

January 9, 2015

On January 7, 2015, the United States Bankruptcy Court for the District of Delaware issued an opinion in In re Energy Future Holdings Corp., Case No. 14-10979 (CSS) [D.I. 3183] (the “Opinion”), approving the Debtors’ request to establish a bar date for unmanifested asbestos claims. The decision is significant because the asbestos plaintiffs’ bar has typically resisted the establishment of any bar date applicable to unmanifested asbestos claims in chapter 11 cases.

Soon after the commencement of the Debtors’ chapter 11 cases, the Debtors filed a motion for entry of an order establishing a bar date for pre-petition claims [D.I. 1682] (the “Bar Date Motion”). The Bar Date Motion sought to establish a bar date for all pre-petition claims, including any asbestos-related claims that may have arisen in connection with the Debtors’ power generation business and the use of asbestos-laden insulation.1 Certain asbestos personal injury law firms (the “PI Firms”) filed objections to the Bar Date Motion, arguing that asbestos-related injuries are latent and may not be diagnosed until as many as 50 years following initial exposure. The PI Firms argued that the Debtors could not provide asbestos claimants—who may not know currently that they have a claim—with notice sufficient to meet the requirements of due process.

The Court first held that the PI Firms lacked standing under Section 1109(b) of the Bankruptcy Code. Though Section 1109(b) permits a party-in-interest to be heard on any issue in a bankruptcy case, the Court noted that standing was limited to a party asserting its own legal interests—not the interests of another party. Because the PI Firms did not currently represent any unmanifested asbestos claims, they lacked standing to object to the Bar Date Motion. Indeed, their current clients, who had known claims, presumably would be served with a notice of bar date. Notwithstanding the Court’s ruling, the Court proceeded to discuss and address the propriety of establishing an asbestos bar date given the significance of the due process concerns at stake.

The Court noted that the heart of the issue before it was whether discharge of unmanifested asbestos claims was consistent with due process. The Court then surveyed and summarized case law from the Second, Third and Fifth Circuits on the issue. Ultimately, the Court explained that “[a]lthough the case law reaches disparate conclusions, the weight of the developing authority holds that publication notice may be sufficient to satisfy due process and, thus, would allow for the discharge of [unmanifested asbestos claims].” As a result, the Court turned to whether a bar date could be established in these particular chapter 11 cases.

The Court held that a bar date not only could be set, but must be set. First, the Court distinguished the Bar Date Motion from what the Court referred to as a “look back” case. The Court explained that, in the case law surveyed, the issue was a retrospective evaluation of whether due process was given to claimants with unmanifested asbestos claims sufficient to validate a discharge of such claims. In contrast, the Bar Date Motion sought only to establish a bar date. The Court highlighted that no plan has yet been filed and no discharge is being sought currently. Second, the Court examined the language used in Rule 3003 of the Federal Rules of Bankruptcy Procedure. The Court explained that a plain reading of the statute was unambiguous: Rule 3003(c)(3) states that “the court shall fix...the time within which proofs of claim...may be filed.” Accordingly, the Court noted that Rule 3003(c)(3) “does not say that establishment of a bar date is discretionary altogether.” Third, the Court quickly dispatched the PI Firms’ argument that a Section 524(g) channeling injunction and trust was the only proper method to handle unmanifested asbestos claims. The Court explained that Section 524(g)—like Bankruptcy Rule 3003(c)(3)—is unambiguous, stating that “a court that enters an order confirming a plan...may issue...an injunction.” Thus, the formation of a Section 524(g) trust is permissible only in connection with plan confirmation and is in a court’s discretion, so it cannot be the exclusive method of addressing such claims. Fourth, and finally, policy dictated that a bar date be established. The Court highlighted that exclusivity was still in place and that the Debtors are entitled to propose a plan “that meets their needs and concerns.” Accordingly, neither the Court nor the PI Firms were entitled to dictate plan terms, such as proposing or requiring a Section 524(g) injunction in lieu of a bar date. If they were so permitted, it would be contrary to the concept of exclusivity. Thus, the Court held that “a bar date must be established for all claims, including [unmanifested asbestos claims], even though the Court may later extend such bar date for cause shown.”

Whether unmanifested asbestos claims may be barred if not asserted by the bar date has been an issue of seminal importance in many chapter 11 cases. The Court’s Opinion in the Energy Future Holdings case will provide needed guidance for future cases, particularly in the District of Delaware.





1 The Opinion only addresses the requested bar date for asbestos claims because the Court previously had bifurcated the Bar Date Motion and approved it with respect to non-asbestos claims.