Extent of Non-Debtor Parent Exposure Under Channeling Injunctions

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Originally published in New York Law Journal - Volume 247—NO. 85, Thursday, May 3, 2012.

On April 10, 2012, the U.S. Court of Appeals for the Second Circuit in In re Quigley issued an opinion adopting a narrow interpretation of Section 524(g)(4) of the Bankruptcy Code, which allows a bankruptcy court to enter an injunction that bars certain actions brought by plaintiffs against non-debtor third parties, such as a non-debtor parent company. Quigley reminds solvent corporate parent companies that there are limits to bankruptcy courts’ injunctive powers to insulate such parent companies from potential claims when their subsidiaries file for bankruptcy to restructure asbestos-related tort liabilities.

Channeling Injunctions

Section 524(g) of the Bankruptcy Code was enacted to address the unique issues that arise in bankruptcies involving numerous tort claims related to exposure to asbestos, which was prevalent in numerous industrial products and processes in decades past. Because some claimants exposed to asbestos do not experience symptoms until many years after exposure, they may not know that they have a claim against a debtor until after the debtor’s estate has been depleted by claimants whose symptoms became apparent years earlier. Section 524(g) solves this problem by allowing a bankruptcy court to enter an injunction in connection with a plan of reorganization in addition to the general Chapter 11 discharge injunction that channels certain classes of claims to a trust established pursuant to such plan. Such a future claimant trust is structured to make distributions to both present and future claimants.

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