Introduction

Imerys Talc American, Inc. (“Imerys”) filed bankruptcy in response to crushing liability imposed by mounting asbestos and talc personal injury claims to take advantage of Bankruptcy Code § 524(g) which, among other things, requires that the bankruptcy court appoint a legal representative for the purpose of protecting the rights of future claimants.  The Future Claims Representative (“FCR”) is a significant participant in asbestos bankruptcy cases as well as any cases where section 524(g) is utilized.  The Third Circuit recently adopted the standard that bankruptcy courts should use in appointing an FCR[1]:

An FCR must be able to act in accordance with a duty of independence from the debtor and other parties in interest in the bankruptcy, a duty of undivided loyalty to the future claimants and an ability to be an effective advocate for the best interests of the future claimants.[2]

Historical Background

Many claimants who suffer harm from asbestos exposure traceable to a bankrupt debtor may not manifest those injuries until long after a reorganization has concluded.  Chapter 11 normally affects only the rights of current creditors.  Accordingly, a reorganization plan that fails to account for future asbestos liabilities is of limited utility to the debtor and would fail to provide adequately for claims of future claimants.

Bankruptcy Code section 524(g)

Because there is an inherent conflict between those who make a claim on the trust now and those who will manifest injuries in the future, Congress amended the Bankruptcy Code in 1994 by adding § 524(g), which allows for resolution of asbestos liability claims against a debtor, including potential future asbestos claims, through a trust-based system.  Section 524(g) allows a debtor to establish a trust pursuant to a Chapter 11 plan with a channeling injunction that requires present and future mass-tort claimants to look to the trust as the exclusive source of compensation for their injuries.   

Section 524(g) directs the bankruptcy court to appoint a FCR for the purpose of protecting the rights of future claimants.[3]  The FCR can participate in the negotiation of the reorganization plan and object to terms that unfairly disadvantage future claimants.  However, Congress did not specify the standard the bankruptcy court should use in appointing the FCR. 

The Standard Applicable to FCR Appointments

Absent a clear standard to apply to the appointment of a FCR, some courts adopted the “disinterested” standard set forth in section 327 for the trustee’s (or debtor in possession’s) employment of professional persons, which requires the court to disqualify a professional for employment if there is an actual conflict of interest. The Imerys Bankruptcy Court rejected the “disinterestedness” standard and held that “a legal representative under section 524 . . . must be independent of the debtors and other parties-in-interest in the case and must be able to act with undivided loyalty to demand holders.” 4

The Third Circuit found useful an analogy to a creditors committee, which serves to represent the interests of its constituents, the entire body of unsecured creditors. Courts have long required that each committee member not only be free of conflicts of interest but also fulfill fiduciary duties to the committee’s constituents, including duties of undivided loyalty and honesty. 

For an FCR who functions, in effect, as a “creditors’ committee” of one, that fiduciary standard is equally appropriate.  In view of the Third Circuit’s long-standing application in that similar context and the text of the Bankruptcy Code itself, the Third Circuit adopted the same fiduciary standard applied to committee members:

For the reasons set forth below, we agree with the Bankruptcy Court and the Trustee that the FCR standard requires more than disinterestedness.  An FCR must be able to act in accordance with a duty of independence from the debtor and other parties in interest in the bankruptcy, a duty of undivided loyalty to the future claimants, and an ability to be an effective advocate for the best interests of the future claimants. We reach this conclusion after considering (1) the Bankruptcy Code itself; (2) the parties’ arguments concerning legislative history and legislative acquiescence; (3) the standards governing creditors’ committees, which we see as playing an analogous representational role in the bankruptcy process; and (4) the administrability of the fiduciary standard we adopt in the bankruptcy context.5

Conclusion

Based on the Third Circuit’s standard for appointing an FCP in In re Imerys Talc Am., Inc. v. Cyprus Historical Excess Insurers, plan proponents should ensure that their proposed FCP is not simply “disinterested,” but is also able to act independently from the debtor and any other constituency, to exercise undivided loyalty to the future claimants, and  to advocate effectively for the best interests of the future claimants.

[1] In re Imerys Talc Am., Inc. v. Cyprus Historical Excess Insurers, 38 F.4th 361, 365 (3d Cir. 2022).

[2] Id.

[3] 11 U.S.C. §524(g)(4)(B)(i).

4 38 F.4th 361, 374 (3d Cir. 2022).

5 Id. at 374-75.

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