Third Circuit Sets Standard For Appointment Of Future Claims Representatives In Asbestos Bankruptcy Cases

• Published date: 30 September 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Jones Day
• Author: Mr Oliver Zeltner and Mark Douglas

Unlike professionals retained in a chapter 11 case by trustees, debtors, or official committees, the Bankruptcy Code provides little guidance regarding the appointment of a representative for "future claimants" in a chapter 11 case involving the establishment of a trust to pay the claims of asbestos creditors. Only a handful of court rulings have addressed this question, and until recently, no circuit court of appeals had weighed in on the issue.

The U.S. Court of Appeals for the Third Circuit considered the question as a matter of first impression in In re Imerys Talc America, Inc., 38 F.4th 361 (3d Cir. 2022). The court ruled that a future claims representative ("FCR") in an asbestos case must be more than merely a "disinterested person"'the standard applied to some other professional retentions in bankruptcy. Instead, like the members of official creditors' committees, an FCR must be not only free of conflicts of interest, but also fulfill fiduciary duties to future claimants, including duties of undivided loyalty and honesty.

Retention of Professionals in Bankruptcy Cases

Bankruptcy trustees or chapter 11 debtors-in-possession ("DIPs") are permitted to retain a wide variety of professionals, including lawyers, accountants, auctioneers, and investment bankers "that do not hold or represent an interest adverse to the estate, and that are disinterested persons" to represent them in connection with a bankruptcy case. 11 U.S.C. ' 327(a). A professional is not disqualified from such employment solely because the professional has represented a creditor, unless another creditor or the U.S. Trustee objects to the retention, and the court concludes that the professional has an actual conflict of interest. See 11 U.S.C. ' 327(c). Under section 327(e), a trustee or DIP may also retain a lawyer that has previously represented the debtor for a "special purpose" other than acting as general bankruptcy counsel (e.g., in connection with discrete litigation, real estate, or labor matters).

Section 101(14) provides that the term "disinterested person" means a person that'

(A) is not a creditor, an equity security holder, or an insider;

(B) is not and was not, within two years before the date of the filing of the petition, a director, officer, or employee of the debtor; and

(C) does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason.

Under section 328(c), a court may deny compensation for services if, during a professional's employment by the estate, the professional "is not a disinterested person, or represents or holds an interest adverse to the interest of the estate with respect to the matter on which such professional person is employed."

Pursuant to section 1103(a) of the Bankruptcy Code, official committees appointed in a chapter 11 case may also, with court approval, retain professionals to perform services on their behalf. Any such professional may not represent any other entity having an interest adverse in connection with the bankruptcy case. However, representing one or more of the committees' constituent creditors does not per se represent an adverse interest. See 11 U.S.C. ' 1103(b).

The Bankruptcy Code does not specify a standard to be applied to the retention of an FCR in a chapter 11 case involving the creation of a trust to pay present and future asbestos claims.

Asbestos Trusts in Bankruptcy

Section 524(g) of the Bankruptcy Code establishes a procedure for dealing with future personal injury asbestos claims against a chapter 11 debtor. The provision was added to the Bankruptcy Code in 1994 in the wake of the historic Johns-Manville and UNR Industries chapter 11 cases, where the courts, relying on various Bankruptcy Code provisions, including a bankruptcy court's broad equitable powers under section 105(a), implemented procedures upon which section 524(g) was later patterned. See In re Johns-Manville Corp., 36 B.R. 743 (Bankr. S.D.N.Y. 1984); In re UNR Indus., Inc., 46 B.R. 671 (Bankr. N.D. Ill. 1985). The provision was enacted in response to lawmakers' concerns that a mechanism established in bankruptcy to pay...