In re Quigley Company, Inc.: New York Bankruptcy Court Denies Confirmation of Proposed Chapter 11 Asbestos Plan, Jones Day Business Restructuring Review
The early 2000s witnessed a wave of chapter 11 filings by entities with liability for asbestos personal-injury claims. The large number of filings was matched by the variety of legal strategies that companies pursued to address their asbestos liabilities in chapter 11. The chapter 11 case of Quigley Company, Inc. ("Quigley"), was one of the last large asbestos cases to file in the 2000s and represents one of the more interesting strategies for dealing with asbestos liabilities in chapter 11. The bankruptcy court for the Southern District of New York, however, recently struck down this strategy and denied confirmation of the debtor's proposed chapter 11 plan.
The Quigley Asbestos Strategy
Founded in the early part of the 20th century, Quigley manufactured various products throughout its history, including certain products that contained asbestos. The company was acquired by Pfizer, Inc. (the "Parent"), in 1968, and the transfer of its assets out of the company in the early 1990s made it essentially a nonoperating shell company for more than a decade. By the time it filed for chapter 11 in September 2004, Quigley had faced approximately 411,000 asbestos personal-injury claims, of which about 212,000 were pending or threatened. The Parent was also a defendant in approximately 280,000 of the actions that had been filed against Quigley, in most cases simply because it was Quigley's parent company.
Prior to 2003, the Parent typically settled asbestos claims against Quigley and procured a release for itself in connection with such settlements for little or no additional consideration. During 2003, with Quigley's insurance diminishing and litigation increasing, the Parent adjusted its approach. The Parent undertook to settle its own derivative liability for asbestos claims against Quigley and made its settlement payments contingent upon confirmation of a chapter 11 plan for Quigley that protected the Parent from all future derivative liability under section 524(g) of the Bankruptcy Code.
Section 524(g) establishes a procedure for dealing with future personal-injury asbestos claims against a chapter 11 debtor. The procedure entails the creation of a trust to pay future claims and the issuance of an injunction to prevent future claimants from suing the debtor and, under certain circumstances, other entities. All claims based upon asbestos-related injuries are channeled to the trust. The statute contains detailed requirements governing the nature and scope of any injunction issued under section 524(g) in connection with the confirmation of a chapter 11 plan under which a trust is established to deal with asbestos claims.
The Parent's new approach culminated in the execution of global settlement agreements (the "Settlement Agreements") with a variety of asbestos plaintiff firms representing about 175,000 clients, primarily in August 2004. The aggregate amount of the settlements was approximately $500 million. The Parent agreed to pay 50 percent of the settlement amount on the earlier of December 1, 2005, and confirmation of Quigley's chapter 11 plan. The second 50 percent was also due at confirmation. However, if Quigley solicited votes on its chapter 11 plan prior to December 1, 2005, and asbestos claimants did not provide the necessary voting support for the plan, the second payment was eliminated. The Settlement Agreements settled the Parent's liability, but not Quigley's. The settling asbestos claimants, however, agreed that under Quigley's chapter 11 plan they would receive only 10 percent of the payment that they otherwise would be due from the asbestos trust created by such plan.
When Quigley, after filing for chapter 11 protection in New York on September 3, 2004, later solicited votes for its chapter 11 plan, the settling asbestos claimants provided the necessary votes to confirm the plan. However, three law firms that had not executed Settlement Agreements objected. These firms argued that the plan had been proposed in bad faith and that votes of the settling claimants should not be counted on the basis that the Parent had acquired such votes in connection with the Settlement Agreements. These firms also asserted that the plan should not be confirmed for a variety of other reasons, as discussed below.
Bankruptcy Court Denies Confirmation of the Quigley Plan
The bankruptcy court agreed with the nonsettling firms and denied confirmation of the Quigley plan. The court found that the chapter 11 case was a Quigley bankruptcy "only in name." According to the court, the Parent had arranged the proceedings to protect itself from derivative liability for asbestos claims against Quigley and only incidentally to reorganize Quigley. Further, the court found that the Parent had acquired the votes it needed to confirm the Quigley plan through the Settlement Agreements and that, as such, those votes had not been procured in good faith. The court concluded that the asbestos claimants voted for the plan to obtain their payments for settling the Parent's liability under the Settlement Agreements, rather than as creditors of Quigley. Therefore, the court ruled both that the plan was not proposed in good faith, as required by section 1129(a)(3) of the Bankruptcy Code, and that the votes of the settling claimants should not be counted, as not having been procured in good faith under section 1126(e). This caused the plan to fail.
The bankruptcy court also denied confirmation on a variety of other grounds. Section 524(g) of the Bankruptcy Code provides that a court can issue an injunction under a chapter 11 plan protecting a "third party," such as the Parent, from future derivative liability for asbestos claims against a debtor if the injunction is "fair and equitable" in light of contributions to the plan made by or on behalf of the third party. The court found that for such an injunction to be "fair and equitable," the contributions must have some equivalence to the estimated liability enjoined. After a lengthy financial analysis, the court determined that the present value of the Parent's contribution was approximately $216 million but that it was being protected from a liability with a present value of approximately $613 million. In the court's view, therefore, the proposed injunction under the Quigley plan to protect the Parent was not "fair and equitable."
The bankruptcy court also concluded that the Quigley plan violated the Bankruptcy Code's "best interest of creditors" test and the prohibition against disparate treatment of similar claims. Under the best-interests test, which is set forth in section 1129(a)(7), each impaired creditor under a plan that does not vote for the plan must receive or retain under the plan at least as much as it would receive in a hypothetical chapter 7 liquidation of the debtor. Since the nonsettling asbestos claimants were required under the plan to release the Parent from its derivative liability, the court found that such creditors would fare better in chapter 7, where they would not be enjoined from pursuing the Parent on their claims. Similarly, the court found that nonsettling claimants were being treated differently from settling claimants. Settling claimants had already released the Parent under the Settlement Agreements, whereas nonsettling claimants had not. As such, the court determined that nonsettling claimants were giving up additional consideration in exchange for the same distributions as settling claimants and thus were being treated differently.
Finally, the court concluded that the Quigley plan was not "feasible," as required by section 1129(a)(11). That section provides that the court must find that "confirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor," except as proposed in the plan. Prior to its bankruptcy filing, Quigley had been a nonoperating entity. However, before the petition date, the Parent transferred to Quigley the operations that were being used to settle asbestos claims against the Parent and Quigley. This was done to satisfy the "ongoing business requirement" of section 524(g) of the Bankruptcy Code, and the court agreed that such requirement was satisfied. Under the Quigley plan, the Parent also agreed to pay Quigley $5 million per year for five years to continue to process asbestos claims for the Parent. Quigley would also perform claims-handling work for the asbestos trust created under its chapter 11 plan, although such work could be terminated by the trust after five years.
Given these facts, the court found that Quigley would remain a viable, operating entity for five years. According to the court, however, Quigley did not demonstrate that it would have a viable business thereafter. Therefore, the court found that its plan did not meet the feasibility requirement of section 1129(a)(11) of the Bankruptcy Code.
The bankruptcy court's decision in Quigley struck down a unique strategy pursued in asbestos bankruptcy cases. However, chapter 11 cases for distressed subsidiaries of parent companies are not unique, and Quigley serves as a reminder that courts may closely scrutinize the chapter 11 plans of such subsidiaries if the plan is perceived to have been formulated by, and for the primary benefit of, the parent company. The feasibility holding of the court also may have general applicability. Case law is sparse regarding the length of time that a debtor must demonstrate it will be able to operate for it to meet the feasibility requirement of the Bankruptcy Code. Quigley provides one court's view on that issue, at least in the unique circumstances of the case.
In re Quigley Co., Inc., 437 B.R. 102 (Bankr. S.D.N.Y. 2010).