Recent Developments In Bankruptcy Law, January 2023

• Jurisdiction: United States,Federal
• Law Firm: Jenner & Block
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Author: Mr Richard Levin
• Published date: 16 February 2023

1. AUTOMATIC STAY

1.1 Covered Activities

1.1.a Court declines to enjoin third party claims against the debtor's jointly liable parent corporation. The debtor manufactured earplugs for many years. A major multinational corporation acquired it. Two years later, it transferred its earplug manufacturing operation to its parent. Although the parent continued to manufacture and sell the earplugs, 80% of the sales occurred before the transfer. The earplugs were ineffective, resulting in hundreds of thousands of product liability actions against the debtor and the parent in both state and federal court, with the federal actions consolidated under an MDL procedure. The debtor and the parent entered into a funding agreement, which provided that the parent would fund up to $1 billion to a plaintiffs' recovery trust and up to $240 million for the debtor's chapter 11 fees and expenses, and the debtor would indemnify the parent for any claims against the parent but could draw funding from the parent to pay any indemnification claims, with no repayment obligation (in effect, a circular transaction). In addition, the debtor and parent shared insurance policies that would cover a substantial amount of claims. Upon filing its petition, the debtor sought to apply the automatic stay to, or to affirmatively enjoin, the prosecution of the product liability actions against the parent. Section 362(a)(1) enjoins only litigation against the debtor, not third parties, unless (in some circuits) there is such an identity of interest that a judgment against the third party would amount to a judgment against the debtor or would cause the debtor irreparable harm. Circuit authority here does not extend the (a)(1) stay, so the court declines to apply it. Section 362(a)(3) stays acts to obtain possession of or exercise control over property of the debtor. Here, because the parent, under the funding agreement, will ultimately fund any liability imposed on the debtor, the tort litigation will not affect the debtor's property or its ability to pay claims. Section 105(a) permits the court to issue any order necessary to carry out the provisions of title 11, but the court must first have jurisdiction. A court has jurisdiction over an action if it is related to the title 11 case, that is, if the outcome could have any conceivable effect on the case, the debtor's assets, or claims. Because of the debtor's ability to access funds under the funding agreement, the tort litigation would not have any...