Second Circuit Allows Asbestos Claims to Proceed Against Pfizer

For decades, Quigley Co., Inc. (“Quigley”) developed, produced and marketed a range of refractories and related products to customers in the iron, steel and glass industries, among others. Two of Quigley's products, Insulag and Panelag, contained asbestos. In 1968, Pfizer acquired Quigley and, thereafter, various marketing materials for Quigley products began to utilize the Pfizer name, logo, and trademark. Once the harmful effects of asbestos became known, over 160,000 parties commenced litigation against Quigley, asserting claims related to the asbestos-containing products. In addition, many of the suits brought claims against Pfizer, as a defendant. Importantly, Quigley and Pfizer share a number of insurance policies and funds in an insurance trust where the parties are joint beneficiaries. The policies and trust cover claims against the parties “on a first billed, first paid basis, irrespective of amounts previously billed by or paid to Pfizer or Quigley.” In re Quigley, Inc., No. 11-2635 (2d Cir. April 10, 2012) (the “Second Circuit Decision”).

Quigley commenced its Chapter 11 case on Sept. 3, 2004, and immediately sought an injunction pursuant to 11 U.S.C. ” 105(a) and 362(a) enjoining all parties from commencing or continuing asbestos-related litigation against Pfizer during the course of Quigley's bankruptcy case. Id. at 4. The injunction was intended to prevent diminution of the insurance policies and trust so as to allow Quigley to effectively reorganize. However, the Original Preliminary Injunction (“OPI”) issued by the bankruptcy court provided that a party who maintained an asbestos-related claim solely against Pfizer for products unrelated to Quigley could apply to the bankruptcy court for relief from the injunction, so long as the insurance policies and trust were not diminished by prosecution of the claim or used “to satisfy any portion of the defense costs, settlements or judgments[.]” OPI at 6. In 2007, the bankruptcy court modified the OPI to conform to ' 524(g)(4)(A)(ii) of the Bankruptcy Code, which enjoins plaintiffs from bringing asbestos-related causes of action against non-debtor third parties in certain situations, as follows:

[A ' 524(g)] injunction may bar any action directed against a third party who is identifiable from the terms of such injunction (by name or as part of an identifiable group) and is alleged to be directly or indirectly liable for the conduct of, claims against, or demands on the debtor to the extent such alleged liability of such third party arises by reason of '

(I) the third party's ownership of a financial interest in the debtor, a past or present affiliate of the debtor, or a predecessor in interest of the debtor;

(II) the third party's involvement in the management of the debtor or a predecessor in interest of the debtor; or service as an officer, director or employee of the debtor or a related party;

(III) the third party's provision of insurance to the debtor or a related party; or

(IV) the third party's involvement in a transaction changing the corporate structure, or in a loan or other financial transaction affecting the financial condition, of the debtor or a related party, including but not limited to '

(aa) involvement in providing financing (debt or equity), or advice to an entity involved in such a transaction; or

(bb) acquiring or selling a
financial interest in an entity as part of such a transaction.

11 U.S.C. ' 524(g)(4)(A)(ii).

Notably, like the OPI, the amended injunction (the “API”) enjoined asbestos-related claimants from commencing or continuing a claim against Pfizer if the liability arose by reason of:

(I) Pfizer's ownership of a financial interest in Quigley, a past or present affiliate of Quigley, or a predecessor in interest of Quigley;

(II) Pfizer's involvement in the management of Quigley or a predecessor in interest of Quigley; or service as an officer, director or employee of Quigley or a related party;

(III) Pfizer's provision of insurance to Quigley or a related party;

(IV) Pfizer's involvement in a transaction changing the corporate structure, or in a loan or other financial transaction affecting the financial condition, of Quigley or a related party, including but not limited to '

(aa) involvement in providing financing (debt or equity), or advice to an entity involved in such a transaction; or

(bb) acquiring or selling a financial interest in an entity as part of such a transaction.

Second Circuit Decision at 6 (quoting API at 2-3).

The Angelos Suits and the Bankruptcy Court Decision

Of the various suits initiated against Quigley were those commenced by the Law Offices of Peter G. Angelos (“Angelos”), which filed multiple lawsuits against Pfizer in Pennsylvania on behalf of plaintiffs harmed by exposure to asbestos. Angelos, on behalf of his clients, was a member of the ad-hoc committee of tort victims that appeared in the Quigley bankruptcy case. In some, but not all, of the lawsuits, Angelos sought to hold Pfizer liable under an “apparent manufacturer” theory for products manufactured by Quigley that were ultimately found to contain asbestos. Under the “apparent manufacturer” theory, “[o]ne who puts out as his own product a chattel manufactured by another is subject to the same liability as though he were its manufacturer.” Restatement (Second) of Torts, ' 400 (1965).

Thereafter, Angelos moved for partial summary judgment against Pfizer on the issue of liability, and Pfizer sought enforcement of the API against Angelos in the bankruptcy court. In response, Angelos countered that the suits were not barred by the API, as it was Pfizer's own conduct that caused it to be liable, in that it allowed its labels to be placed on Quigley's products which contained asbestos, and permitted the use of its name in advertising for such products. The bankruptcy court (former Chief Judge Stuart M. Bernstein) agreed with Pfizer, finding that the fact that Quigley would not have marked its products with Pfizer's name and logo but for Pfizer's ownership of Quigley led to the conclusion that the API covered the Angelos suits.

The District Court Reverses

Angelos appealed to the district court, which ultimately disagreed with the reasoning adopted by the bankruptcy court, concluding that the injunction did not bar the suits from proceeding. Unlike the bankruptcy court, the district court “viewed the relevant inquiry as whether the liability Angelos seeks to impose on Pfizer arises, as a legal matter, from its ownership of Quigley.” Second Circuit Decision at 9. The District Court denied Quigley's motion for reconsideration, and Quigley and Pfizer appealed to the Second Circuit.

Bankruptcy Court Jurisdiction to Enjoin Claims Against Non-Debtor Third Parties

After confirming, on its own initiative, its own jurisdiction to consider the appeal from the District Court, the Second Circuit turned its attention to the issues of whether: 1) the Bankruptcy Court's exercise of jurisdiction contravened Article III of the Constitution in light of the United States Supreme Court's decision in Stern v. Marshall, 131 S. Ct. 2594 (2011); and 2) the bankruptcy court lacked jurisdiction to enjoin the Angelos suits even under the Bankruptcy Code. With respect to Stern v. Marshall, the Second Circuit, noting the Supreme Court's own disclaimer regarding the narrow nature of the Stern holding, concluded that Stern had no application to the Quigley appeal in light of the fact that the injunctions (and orders entered in aid thereof) concerned the stay of litigation during the pendency of the bankruptcy case, unlike the entry of the final tort judgment at issue in Stern. Next, the Second Circuit dealt with bankruptcy court jurisdiction over third-party non-debtor claims and held, as it did in In re Johns-Manville Corp., 517 F.3d 52 (2d Cir. 2008), that such jurisdiction is appropriate where the claims “directly affect the rest of the bankruptcy estate.” Because the continuation of the litigation of the Angelos suits against Pfizer would almost certainly result in the drawing down of the insurance policies that are part of Quigley's estate, the Second Circuit correctly concluded that the bankruptcy court indeed had jurisdiction to enjoin the suits against Pfizer.

The Second Circuit Affirms

Turning finally to the merits of the appeal, the Second Circuit addressed whether the Angelos suits fell within the scope of the API and were therefore enjoined. As previously discussed, ' 524 of the Bankruptcy Code enjoins plaintiffs with asbestos-related claims from bringing or continuing an action against a non-debtor third party when the action arises “by reason of” one of the four situations listed in ' 524(g)(4)(A)(ii). On the one hand, Pfizer argued “that liability arises 'by reason of' any of the four enumerated relationships when that relationship is a 'but for,' factual cause of the liability in question.” Second Circuit Decision at 28. In other words, Pfizer argued that but for its ownership interest in Quigley, the latter would not have applied its name and logo to the offending products, and therefore, its potential liability arises “by reason of” its ownership interest in Quigley, and it is entitled to the benefits of the channeling injunction. On the other hand, Angelos argued that in order to gain the benefit of the ' 524(g)(4)(A)(ii) injunction, the alleged liability “must arise as a legal consequence of one of the four enumerated relationships”. Id. (emphasis in original).

The Second Circuit noted that the purpose of ' 524(g) is to enable the successful reorganization of a debtor while ensuring that holders of asbestos-related claims receive treatment similar to other claimants, and “barring the prosecution of claims bearing only an accidental nexus to an asbestos bankruptcy is less than tangentially related to that objective.” Id. at 32. Accordingly, the Second Circuit held that the phrase “by reason of” in ' 524(g)(4)(A)(ii) “requires that the alleged liability of a third party for the conduct of or claims against the debtor arises, in the circumstances, as a legal consequence of one of the four relationships between the debtor and the third party enumerated in subsections (I) through (IV).” Id. at 33. Because Pfizer's alleged liability in the Angelos suits did not turn on its ownership interest in Quigley, and “' 400 liability is not derivative in nature as a matter of Pennsylvania law”, the Second Circuit held that the API does not enjoin Angelos from continuing its suits against Pfizer. Id. at 33-34.

Conclusion

The Quigley decision serves as an important mechanism by which parents of bankrupt subsidiaries can assess their potential liability for asbestos-related claims. Essentially, a parent must determine whether the alleged liability flows as a result of one of the four ' 524(g)(4)(A)(ii) factors, or whether the plaintiff has asserted an independent legal basis on which the parent can be held liable. If the former, the parent may very well be entitled to the benefits of a channeling injunction. If the latter, it is likely that the independent legal basis will serve to carve the parent out of the injunction and expose the parent to continued litigation.

Steven B. Smith is a partner and Dana Gale Hefter is an associate in the Restructuring & Insolvency department at Edwards Wildman Palmer LLP in New York. Smith is a member of this newsletter's Board of Editors. They may be reached at [email protected] and [email protected], respectively.

In September 2004, the Quigley Company, a wholly owned subsidiary of Pfizer, filed for Chapter 11 relief in the United States Bankruptcy Court for the Southern District of New York, and advised the court in its first-day filings that it intended on filing a pre-negotiated Chapter 11 plan as soon as practicable that would establish a trust and provide for channeling injunctions in favor of, among others, Pfizer, a non-debtor third party, pursuant to 11 U.S.C. ' 524. Some parties-in-interest, including an ad-hoc committee of tort claimants that had organized and appeared early in the bankruptcy case, viewed Quigley's bankruptcy filing as a carefully orchestrated scheme by Quigley to shield its non-debtor parent from substantial exposure.

Fast-forward almost eight years to April 10, 2012, when the United States Court of Appeals for the Second Circuit, agreeing with the district court and disagreeing with the Quigley bankruptcy court, concluded that in fact the channeling injunction issued in favor of Pfizer did not bar the commencement or continuation of certain asbestos actions against Pfizer. This article addresses issues that the Second Circuit considered in reaching its conclusion, including: 1) whether the bankruptcy court had jurisdiction to enjoin the asbestos actions from going forward in light of the United States Supreme Court's opinion in Stern v. Marshall and under the Bankruptcy Code in general; and 2) whether the asbestos actions in question fell within the scope of the channeling injunction.

Background

For decades, Quigley Co., Inc. (“Quigley”) developed, produced and marketed a range of refractories and related products to customers in the iron, steel and glass industries, among others. Two of Quigley's products, Insulag and Panelag, contained asbestos. In 1968, Pfizer acquired Quigley and, thereafter, various marketing materials for Quigley products began to utilize the Pfizer name, logo, and trademark. Once the harmful effects of asbestos became known, over 160,000 parties commenced litigation against Quigley, asserting claims related to the asbestos-containing products. In addition, many of the suits brought claims against Pfizer, as a defendant. Importantly, Quigley and Pfizer share a number of insurance policies and funds in an insurance trust where the parties are joint beneficiaries. The policies and trust cover claims against the parties “on a first billed, first paid basis, irrespective of amounts previously billed by or paid to Pfizer or Quigley.” In re Quigley, Inc., No. 11-2635 (2d Cir. April 10, 2012) (the “Second Circuit Decision”).

Quigley commenced its Chapter 11 case on Sept. 3, 2004, and immediately sought an injunction pursuant to 11 U.S.C. ” 105(a) and 362(a) enjoining all parties from commencing or continuing asbestos-related litigation against Pfizer during the course of Quigley's bankruptcy case. Id. at 4. The injunction was intended to prevent diminution of the insurance policies and trust so as to allow Quigley to effectively reorganize. However, the Original Preliminary Injunction (“OPI”) issued by the bankruptcy court provided that a party who maintained an asbestos-related claim solely against Pfizer for products unrelated to Quigley could apply to the bankruptcy court for relief from the injunction, so long as the insurance policies and trust were not diminished by prosecution of the claim or used “to satisfy any portion of the defense costs, settlements or judgments[.]” OPI at 6. In 2007, the bankruptcy court modified the OPI to conform to ' 524(g)(4)(A)(ii) of the Bankruptcy Code, which enjoins plaintiffs from bringing asbestos-related causes of action against non-debtor third parties in certain situations, as follows:

[A ' 524(g)] injunction may bar any action directed against a third party who is identifiable from the terms of such injunction (by name or as part of an identifiable group) and is alleged to be directly or indirectly liable for the conduct of, claims against, or demands on the debtor to the extent such alleged liability of such third party arises by reason of '

(I) the third party's ownership of a financial interest in the debtor, a past or present affiliate of the debtor, or a predecessor in interest of the debtor;

(II) the third party's involvement in the management of the debtor or a predecessor in interest of the debtor; or service as an officer, director or employee of the debtor or a related party;

(III) the third party's provision of insurance to the debtor or a related party; or

(IV) the third party's involvement in a transaction changing the corporate structure, or in a loan or other financial transaction affecting the financial condition, of the debtor or a related party, including but not limited to '

(aa) involvement in providing financing (debt or equity), or advice to an entity involved in such a transaction; or

(bb) acquiring or selling a
financial interest in an entity as part of such a transaction.

11 U.S.C. ' 524(g)(4)(A)(ii).

Notably, like the OPI, the amended injunction (the “API”) enjoined asbestos-related claimants from commencing or continuing a claim against Pfizer if the liability arose by reason of:

(I) Pfizer's ownership of a financial interest in Quigley, a past or present affiliate of Quigley, or a predecessor in interest of Quigley;

(II) Pfizer's involvement in the management of Quigley or a predecessor in interest of Quigley; or service as an officer, director or employee of Quigley or a related party;

(III) Pfizer's provision of insurance to Quigley or a related party;

(IV) Pfizer's involvement in a transaction changing the corporate structure, or in a loan or other financial transaction affecting the financial condition, of Quigley or a related party, including but not limited to '

(aa) involvement in providing financing (debt or equity), or advice to an entity involved in such a transaction; or

(bb) acquiring or selling a financial interest in an entity as part of such a transaction.

Second Circuit Decision at 6 (quoting API at 2-3).

The Angelos Suits and the Bankruptcy Court Decision

Of the various suits initiated against Quigley were those commenced by the Law Offices of Peter G. Angelos (“Angelos”), which filed multiple lawsuits against Pfizer in Pennsylvania on behalf of plaintiffs harmed by exposure to asbestos. Angelos, on behalf of his clients, was a member of the ad-hoc committee of tort victims that appeared in the Quigley bankruptcy case. In some, but not all, of the lawsuits, Angelos sought to hold Pfizer liable under an “apparent manufacturer” theory for products manufactured by Quigley that were ultimately found to contain asbestos. Under the “apparent manufacturer” theory, “[o]ne who puts out as his own product a chattel manufactured by another is subject to the same liability as though he were its manufacturer.” Restatement (Second) of Torts, ' 400 (1965).

Thereafter, Angelos moved for partial summary judgment against Pfizer on the issue of liability, and Pfizer sought enforcement of the API against Angelos in the bankruptcy court. In response, Angelos countered that the suits were not barred by the API, as it was Pfizer's own conduct that caused it to be liable, in that it allowed its labels to be placed on Quigley's products which contained asbestos, and permitted the use of its name in advertising for such products. The bankruptcy court (former Chief Judge Stuart M. Bernstein) agreed with Pfizer, finding that the fact that Quigley would not have marked its products with Pfizer's name and logo but for Pfizer's ownership of Quigley led to the conclusion that the API covered the Angelos suits.

The District Court Reverses

Angelos appealed to the district court, which ultimately disagreed with the reasoning adopted by the bankruptcy court, concluding that the injunction did not bar the suits from proceeding. Unlike the bankruptcy court, the district court “viewed the relevant inquiry as whether the liability Angelos seeks to impose on Pfizer arises, as a legal matter, from its ownership of Quigley.” Second Circuit Decision at 9. The District Court denied Quigley's motion for reconsideration, and Quigley and Pfizer appealed to the Second Circuit.

Bankruptcy Court Jurisdiction to Enjoin Claims Against Non-Debtor Third Parties

After confirming, on its own initiative, its own jurisdiction to consider the appeal from the District Court, the Second Circuit turned its attention to the issues of whether: 1) the Bankruptcy Court's exercise of jurisdiction contravened Article III of the Constitution in light of the United States Supreme Court's decision in Stern v. Marshall , 131 S. Ct. 2594 (2011); and 2) the bankruptcy court lacked jurisdiction to enjoin the Angelos suits even under the Bankruptcy Code. With respect to Stern v. Marshall, the Second Circuit, noting the Supreme Court's own disclaimer regarding the narrow nature of the Stern holding, concluded that Stern had no application to the Quigley appeal in light of the fact that the injunctions (and orders entered in aid thereof) concerned the stay of litigation during the pendency of the bankruptcy case, unlike the entry of the final tort judgment at issue in Stern. Next, the Second Circuit dealt with bankruptcy court jurisdiction over third-party non-debtor claims and held, as it did in In re Johns-Manville Corp., 517 F.3d 52 (2d Cir. 2008), that such jurisdiction is appropriate where the claims “directly affect the rest of the bankruptcy estate.” Because the continuation of the litigation of the Angelos suits against Pfizer would almost certainly result in the drawing down of the insurance policies that are part of Quigley's estate, the Second Circuit correctly concluded that the bankruptcy court indeed had jurisdiction to enjoin the suits against Pfizer.

The Second Circuit Affirms

Turning finally to the merits of the appeal, the Second Circuit addressed whether the Angelos suits fell within the scope of the API and were therefore enjoined. As previously discussed, ' 524 of the Bankruptcy Code enjoins plaintiffs with asbestos-related claims from bringing or continuing an action against a non-debtor third party when the action arises “by reason of” one of the four situations listed in ' 524(g)(4)(A)(ii). On the one hand, Pfizer argued “that liability arises 'by reason of' any of the four enumerated relationships when that relationship is a 'but for,' factual cause of the liability in question.” Second Circuit Decision at 28. In other words, Pfizer argued that but for its ownership interest in Quigley, the latter would not have applied its name and logo to the offending products, and therefore, its potential liability arises “by reason of” its ownership interest in Quigley, and it is entitled to the benefits of the channeling injunction. On the other hand, Angelos argued that in order to gain the benefit of the ' 524(g)(4)(A)(ii) injunction, the alleged liability “must arise as a legal consequence of one of the four enumerated relationships”. Id. (emphasis in original).

The Second Circuit noted that the purpose of ' 524(g) is to enable the successful reorganization of a debtor while ensuring that holders of asbestos-related claims receive treatment similar to other claimants, and “barring the prosecution of claims bearing only an accidental nexus to an asbestos bankruptcy is less than tangentially related to that objective.” Id. at 32. Accordingly, the Second Circuit held that the phrase “by reason of” in ' 524(g)(4)(A)(ii) “requires that the alleged liability of a third party for the conduct of or claims against the debtor arises, in the circumstances, as a legal consequence of one of the four relationships between the debtor and the third party enumerated in subsections (I) through (IV).” Id. at 33. Because Pfizer's alleged liability in the Angelos suits did not turn on its ownership interest in Quigley, and “' 400 liability is not derivative in nature as a matter of Pennsylvania law”, the Second Circuit held that the API does not enjoin Angelos from continuing its suits against Pfizer. Id. at 33-34.

Conclusion

The Quigley decision serves as an important mechanism by which parents of bankrupt subsidiaries can assess their potential liability for asbestos-related claims. Essentially, a parent must determine whether the alleged liability flows as a result of one of the four ' 524(g)(4)(A)(ii) factors, or whether the plaintiff has asserted an independent legal basis on which the parent can be held liable. If the former, the parent may very well be entitled to the benefits of a channeling injunction. If the latter, it is likely that the independent legal basis will serve to carve the parent out of the injunction and expose the parent to continued litigation.

Steven B. Smith is a partner and Dana Gale Hefter is an associate in the Restructuring & Insolvency department at Edwards Wildman Palmer LLP in New York. Smith is a member of this newsletter's Board of Editors. They may be reached at [email protected] and [email protected], respectively.