Third Circuit Remands W.R. Grace Decision Concerning Plan Channeling Injunction And Insurance Providers, Providing Additional Insights For Third Parties And Claimants

The Bottom Line

In the wake of asbestos bankruptcies brought on by mass tort liabilities, reorganization plan structures, like that in Johns-Mansville, often funneled asbestos-related claims into a settlement trust, while a "channeling injunction" largely barred claims against the debtor and, in some cases, against certain third parties that had contributed funds to the trust. Congress enacted Section 524(g) of the Bankruptcy Code in order to provide additional clarity regarding the propriety of these channeling injunctions, codifying the required elements for a valid channeling injunction. In a recent Third Circuit decision arising out of the W.R. Grace bankruptcy proceedings, In re W.R. Grace & Co. (Continental Casualty Co. v. Carr), 900 F.3d 126 (3d Cir. 2018), the Third Circuit has provided additional guidance regarding statutory requirements that must be met in order to properly direct claims pursuant to a channeling injunction in accordance with Section 524(g), specifically with respect to insurance companies that have provided insurance to a debtor. The Court, in vacating the Bankruptcy Court's decision that certain asbestos claims brought against W.R. Grace's insurers may be enjoined, held that the Bankruptcy Court must consider applicable state law principles in connection with a determination as to whether claims fall within the permissible scope of an injunction under Section 524(g)(4).

What Happened?

Following the bankruptcy filing of W.R. Grace, a settlement trust (the "Asbestos PI Trust") was established to compensate asbestos claimants, and a related injunction (the "Injunction") was approved by the Bankruptcy Court that effectively funneled asbestos claims to the trust and barred claimants from seeking compensation directly from the debtor and certain other identified parties. In connection with the W.R. Grace plan of reorganization, two of W.R. Grace's insurance providers, Continental Casualty Company and Transportation Insurance Company (referred to collectively as "CNA") and W.R. Grace entered into a settlement agreement that called for CNA to contribute $84 million over six years to the Asbestos PI Trust, a portion of which could be reimbursed to CNA for expenditures CNA makes on account of personal injury asbestos claims that are not channeled to the Asbestos PI Trust.

By way of background, Section 524(g)(4) provides, among other things, that in connection with a plan of reorganization, claims against certain third...