G-I Holdings, Inc., etc., et. al. v. Bennet, Jr., et. al.,

This decision reinforces the power of the channeling injunction provided by Bankruptcy Code 524(g), as well as the role of the legal representative for present and future claimants (the “Legal Representative”) in non-bankruptcy related proceedings. The Court held that parties to asbestos-related bankruptcy litigation cannot bypass the channeling injunction of Bankruptcy Code 524(g) to bind future claimants because it would deny the claimants due process rights.

The Debtor, G-I Holding, Inc., and it’s non-bankruptcy subsidiaries (the “Plaintiffs”), sought declaratory judgment that the subsidiaries were not successors to the liabilities of the Debtor, and that the subsidiaries were not an alter ego of the Debtor. In the initial complaint, the Plaintiffs named six individual asbestos claimants. The Plaintiff’s amended the complaint to add the Bankruptcy Court appointed Legal Representative as a defendant. Subsequently, the Legal Representative filed a motion for judgment on the pleadings, pursuant to Federal Rule of Civil Procedure 12(c), alleging that Bankruptcy Code 524(g) already provided for the specific relief requested.

In it’s decision, the Court granted the Legal Representative’s motion, holding that the declaratory judgment sought by the Plaintiffs was an attempt to avoid the provisions of Bankruptcy Code 524(g) by hoping to bind future claimants to the declaratory judgment. If this were allowed, the Court held that claimants due process rights ensured by Bankruptcy Code 524(g) would be violated. Further, the Court held that the Plaintiffs could have solved this due process problem by pursuing a class action, via Federal Rule of Civil Procedure 23. The Court noted that although a class action was begun, the Plaintiffs withdrew the class action law suit to add the Legal Representative so that it might bind future claimants in the bankruptcy proceeding. The Court held that this approach was essentially trying to by-pass the safeguards of Federal Rule of Civil Procedure Rule 23 and Bankruptcy Code 524(g), which protects the due process rights of future claimants.

The importance of this decision is that bankruptcy asbestos claimants due process rights trump any efficiencies or savings that potential parties to a Bankruptcy Code 524(g) channeling injunction may seek. Further, the Legal Representative may not be forced to participate in ceratin non-bankruptcy actions. The Court noted that the Legal Representative may be named as a party in other bankruptcy-related actions where the Legal Representative acts for the benefit of the estate, such as in fraudulent transfer actions. However, the Court distinguished these types of actions, citing that the matter at bar was primarily a non-bankruptcy issue.