“Fair and Equitable” Under §524(g) Is Distinct; §1123 Preempts Anti‑Assignment: The W.R. Grace Confirmation Decision

Introduction

In a landmark, 228-page amended memorandum opinion, the United States District Court for the District of Delaware (Buckwalter, S.J.) affirmed the Bankruptcy Court’s approval of (i) a comprehensive insurance settlement between W.R. Grace & Co. and the CNA Companies and (ii) the confirmation of Grace’s deeply negotiated, §524(g) asbestos reorganization plan. The decision resolves multi-faceted objections from state sovereigns (Montana), a national railroad (BNSF), asbestos personal injury claimants from Libby, Montana, a co-defendant manufacturer (Garlock), objecting insurers (AXA Belgium, GEICO, Republic), a property-damage class (AMH), and unsecured bank lenders.

The opinion is significant for several doctrinal clarifications that will reverberate through asbestos and other mass-tort reorganizations:

“Fair and equitable” in §524(g) is a distinct, context-specific test and does not import the absolute priority rule of §1129(b).
Section 1123(a)(5)(B) expressly preempts anti‑assignment clauses in insurance policies when the debtor transfers insurance rights to a §524(g) trust.
§524(g) channeling injunctions may enjoin only claims derivative of the debtor’s liability; independent insurer‑wrongdoing claims remain outside the injunction absent a concrete controversy.
Indemnity and contribution claims are “claims” and “demands” under the Code (applying Grossman’s) and are properly channeled to the trust.
Trust distribution procedures that cap jury awards at scheduled or maximum values are compatible with the Seventh Amendment and §1411(a).
Unsecured lenders were not entitled to post‑petition default interest absent a qualifying default and in light of countervailing federal bankruptcy policies.

Summary of the Opinion

The Court, applying abuse‑of‑discretion review to the Rule 9019 settlement and clear‑error/de novo review to confirmation issues, affirmed:

CNA Settlement: The settlement infused up to $84 million into the PI Trust, resolved decades of costly coverage litigation, and provided substantial non‑monetary benefits. The Court held the agreement satisfies the four Martin factors.
§524(g) Plan Confirmation: The dual‑trust plan (PI and PD Trusts), supported by contributions exceeding $1.8 billion (including Sealed Air and Fresenius settlements), met all confirmation requirements. Objections concerning good faith, classification, feasibility, equality of treatment, best interests, channeling scope, and releases were rejected.
Channeling Injunction Scope: Properly extends to derivative claims but not to independent tort claims against insurers. BNSF was denied the injunction’s protection.
Anti‑Assignment: The plan’s assignment of insurance rights to the PI Trust is valid notwithstanding anti‑assignment provisions; §1123(a) preempts contrary state law.
Lender Default Interest: No contractual default occurred post‑petition; ipso facto and reporting‑breach theories failed; federal policies (§§ 362, 502(b)(2), 1123) foreclose default interest; lenders receive a rate above the federal judgment rate and non‑default contract rate.
Jury‑Trial Rights: The TDP’s “lesser‑of” cap (Maximum Value or jury award) does not violate the Seventh Amendment or §1411(a).
Standing: Garlock lacked standing to object; its claims were alternatively rejected on the merits.

Analysis

Precedents Cited and Their Influence

Myers v. Martin (IN RE MARTIN), 91 F.3d 389 (3d Cir. 1996): Provided the four‑factor test for approving the CNA settlement (probability of success, collection difficulties, litigation complexity/cost, and paramount interests of creditors). The Court found each factor weighed heavily in favor of approval.
IN RE COMBUSTION ENGINEERING, INC., 391 F.3d 190 (3d Cir. 2004): Framed §524(g)’s purpose and scope; emphasized that channeling injunctions can include third parties only where liability is derivative and falls within §524(g)(4)(A)(ii)’s four enumerated relationships. Guided the denial of BNSF’s request for injunction protection.
Jeld–Wen, Inc. v. Van Brunt (In re Grossman’s Inc.), 607 F.3d 114 (3d Cir. 2010) (en banc): Clarified that a “claim” arises upon pre‑petition exposure to a harmful product or conduct. The Court extended this to indirect indemnity/contribution claims, classifying Montana and Canada’s claims as “claims” and “demands” under §§ 101(5), 524(g)(5).
ACandS, Inc. v. Travelers Cas. & Sur. Co., 435 F.3d 252 (3d Cir. 2006): Confirmed that liability policies and their proceeds are property of the estate—undercutting the Libby Claimants’ demand to carve out insurance proceeds from the estate.
Travelers Indem. Co. v. Bailey, 557 U.S. 137 (2009): Distinguished because the Manville injunction predated §524(g). The Court read Bailey narrowly and reaffirmed that §524(g) channeling is confined to derivative claims.
In re Federal–Mogul Global, Inc., 684 F.3d 355 (3d Cir. 2012): Decided weeks before Grace; held §1123(a) preempts state anti‑assignment clauses in insurance policies when implementing a Chapter 11 plan. The Court applied Federal–Mogul to sustain Grace’s insurance assignments to the PI Trust.
IN RE PPI ENTERPRISES (U.S.), INC., 324 F.3d 197 (3d Cir. 2003): Informed the impairment analysis—impairment must flow from the plan, not the Code. Lenders’ alleged impairment failed because any limit on interest is a function of §§ 362/502/1123, not plan design.
IN RE DOW CORNING CORP., 198 B.R. 214 (Bankr. E.D. Mich. 1996) and 244 B.R. 678 (Bankr. E.D. Mich. 1999): Influenced the Court’s reasoning on vesting expectations, mass‑tort settlement finality, and the equal‑treatment analysis in high‑volume tort contexts.
In re Quigley Co., Inc., 676 F.3d 45 (2d Cir. 2012): Reinforced a narrow reading of “by reason of” in §524(g)(4)(A)(ii), aligning with the Third Circuit’s requirement that third‑party liability be legally derivative of the debtor.

Key Legal Reasoning and Holdings

1) Rule 9019 Settlement: CNA Agreement

Applying Martin, the Court highlighted the extraordinary litigation history (three decades), the complexity of 19 policies and mixed coverages, the high costs of continued coverage litigation, collection uncertainty, and the immediate benefits to claimants: cash to the PI Trust, waiver of CNA defenses and indirect claims, and global peace. The settlement easily cleared the “lowest point in the range of reasonableness.”

2) Property of the Estate and Claimants’ Insurance Theories

Libby Claimants’ assertions of “vested” state‑law rights to policy proceeds failed. Under Third Circuit law, liability policies and proceeds are estate property. Montana’s automobile‑liability statute (freezing liability upon injury) is inapposite to general liability policies. Without judgments against Grace or direct‑action statutes, third parties lacked independent rights to Grace’s insurance proceeds. The Court echoed Dow Corning: pre‑judgment expectations do not vest into property rights.

3) Channeling Injunction: Scope, Specificity, and Parties Covered

Rule 65(d) clarity: Grace’s injunction specifically lists covered claims (Asbestos PI Claims) and protected parties (including settling insurers), satisfying specificity while accommodating future claim variability.
Independent insurer wrongdoing: Such claims are not automatically channeled; deciding their status in the abstract would be an impermissible advisory opinion. If and when such claims arise, a court can determine whether they are derivative or independent.
No BNSF protection: BNSF’s indemnity contracts do not qualify under the §524(g)(4) categories; it neither owned a financial interest in Grace, managed it, insured it, nor triggered the debtor‑restructuring transactional prong. No contribution made to the trust; extension denied.
Fair and equitable under §524(g)(4)(B)(ii): A holistic evaluation of the plan’s consideration—particularly CNA’s $84 million, earlier carrier settlements, and third‑party contributions—supported fairness to current and future claimants, including those asserting non‑products claims.

4) The “Fair and Equitable” Standard: §524(g) vs. §1129(b)

The Court drew a clear doctrinal line: “fair and equitable” in §524(g) addresses fairness to current and future asbestos claimants (and those with future demands) in light of plan contributions; it is not the cramdown standard of §1129(b), which polices distributions across dissenting impaired classes and invokes absolute priority. Because all impaired classes accepted the plan, §1129(b) was not even triggered.

5) Classification and Equality of Treatment

Classification (§1122): Montana and Canada’s contribution/indemnity (failure‑to‑warn) claims were properly classified with other PI claims (Class 6) because their legal effect on the estate is the same: they seek trust distributions on account of Grace’s asbestos liability.
Equal treatment (§1123(a)(4)): All PI claims follow the same TDP process, the same pro‑rata payment percentage, and the same opportunity (Expedited vs. Individual Review), with scheduled and maximum values designed to approximate tort recoveries. Indirect claimants step into the shoes of the direct claimant; no superior rights for co‑defendants.
Libby‑specific arguments rejected: Category IV‑B criteria and requirement structure were not discriminatory; individual review provides a safety valve; extraordinary claim multipliers (up to 8x) account for predominant Grace exposure; nationwide values ensure consistency.

6) Feasibility (§1129(a)(11))

Based on detailed expert testimony (Pamela Zilly) and robust record evidence (EBITDA growth, doubled sales, conservative projections, exit financing, reserve setting), the Court found a reasonable probability of successful performance. Hypothetical mega‑claims from Montana were too speculative; claims will be paid through the trust post‑reorganization.

7) Best Interests of Creditors (§1129(a)(7))

The Court concluded that recoveries under the plan exceed Chapter 7 liquidation outcomes. Chapter 7 would delay distributions indefinitely (latent disease claims), exhaust assets through a “free‑for‑all” against vital estate insurance, and lack §524(g)’s equitable mechanisms. Libby Claimants failed to show, with concrete policy terms and coverage proofs, that direct insurer recoveries in Chapter 7 would yield more than trust distributions.

8) Jury‑Trial Rights (Seventh Amendment; 28 U.S.C. §1411)

The TDP’s “lesser‑of” cap (jury verdict or Maximum Value) is a permissible legislative‑policy limit on remedies and does not “re‑examine” jury fact‑finding. Claimants retain the option to try cases (after exhausting TDP steps) and to seek de novo jury determination of liability and damages; the cap simply harmonizes uniform treatment and fund protection for future claimants. Section 1411’s preservation of jury rights is honored because Title 11 procedures neither bar jury access nor dictate fact findings.

9) Unsecured Bank Lenders: Default Interest, Impairment, and Absolute Priority

No post‑petition default: Ipso facto enforcement is barred; reporting breaches not specified as defaults; §362 barred unilateral payment changes; no acceleration notices. Even if a default had occurred, federal interests (§§ 362, 502(b)(2), 1123(a)(5)(G)) would trump state default‑rate claims.
Interest: Lenders receive 6.09% (then floating Prime) — higher than both non‑default contract rate and federal judgment rate. Under PPI, any “impairment” must be plan‑created, not Code‑created; here, §502(b)(2)’s ban on unmatured interest governs.
Solvency/absolute priority: Solvency was not established; absolute priority not triggered (no cramdown); even in solvent cases, PPI does not compel default‑rate interest to render claims unimpaired.

10) Insurance Transfers: Anti‑Assignment Preemption

Relying on Federal–Mogul, the Court held that §1123(a)(5)(B)’s “notwithstanding any otherwise applicable nonbankruptcy law” clause preempts anti‑assignment provisions in Grace’s excess liability policies. The assignment of “Asbestos Insurance Rights” and proceeds to the PI Trust is valid and enforceable against insurers, a keystone for funding §524(g) trusts.

11) Garlock: Standing and Merits

Garlock lacked Article III and §1109(b) standing—no concrete, imminent injury traceable to Grace’s plan (and Garlock was itself under the protection of §362). On the merits (addressed alternatively), the Court rejected Garlock’s claims: the TDP treats indirect claims on parity with direct claims; confidentiality aligns with common settlement protections (with subpoena access preserved); no need for a separate “co‑defendant representative”—the PI FCR adequately represents interests in demands arising from the same conduct.

Impact and Significance

Doctrinal clarity on §524(g): Courts and practitioners gain a clear statement that “fair and equitable” in §524(g) is a bespoke fairness inquiry to claimants and future demand holders, distinct from §1129(b)’s cramdown equity rule.
Strengthening trust funding: By applying Federal–Mogul, the decision cements that §1123(a) allows debtors to transfer insurance rights free of anti‑assignment obstacles, an essential funding source in asbestos reorganizations.
Calibrating channeling scope: The Court polices a key boundary—only derivative claims are channeled; independent insurer wrongdoing claims are not enjoined by default, avoiding overbroad immunity and discouraging advisory rulings.
Grossman’s reach to indirect claims: Sovereigns and co‑defendants cannot evade channeling on the theory that indemnity/contribution is “different”; those claims are “claims” and “demands” born of the same conduct and properly routed to the trust.
Jury rights harmonized with uniform distribution: TDP caps survive constitutional scrutiny, reinforcing the balance between individualized adjudication and mass‑tort consistency/fund preservation.
Unsecured lender expectations in Chapter 11: The opinion reinforces that, absent solvency findings or plan‑driven impairment, lenders are not entitled to default‑rate post‑petition interest; federal bankruptcy policies govern.
Guidance for co‑defendants: Co‑defendants that neither fit §524(g)(4)’s derivative categories nor contribute to plan funding should not expect channeling protection; indirect claims will be reimbursed only to the extent of what the direct claimant would recover.

Complex Concepts Simplified

Channeling injunction (§524(g)): A special asbestos mechanism redirecting all current and future asbestos claims to a court‑supervised trust in lieu of suing the reorganized debtor (and limited third parties) in the tort system.
Derivative vs. independent liability: Derivative claims (e.g., indemnity based solely on the debtor’s wrongful conduct) can be channeled. Independent claims (e.g., an insurer’s own bad‑faith tort) are not channeled unless specifically shown to be derivative.
Indirect PI Trust Claim: A claim by a co‑defendant who paid a plaintiff and seeks reimbursement to the extent of what the plaintiff would have received from the trust—no more, no less.
Grossman’s “claim” test: A bankruptcy “claim” arises upon pre‑petition exposure to harmful conduct, even if injury manifests later. This includes contingent indemnity/contribution rights.
Legal rate under §726(a)(5): In liquidation comparisons, many courts use the federal judgment rate; here, lenders received a higher rate under the plan.
Ipso facto clause: A contract term making bankruptcy itself a default; generally unenforceable in bankruptcy.
Best interests test: Each dissenting creditor must receive at least as much value under the plan as in a hypothetical Chapter 7 liquidation on the plan’s effective date.
Feasibility: The plan must be workable and not likely to require liquidation or further reorganization; projections must be reasonable and supported.
Anti‑assignment preemption: §1123(a) allows a plan to transfer estate property (including insurance rights) regardless of state-law anti‑assignment contract terms.

Conclusion

The W.R. Grace decision is a comprehensive synthesis of asbestos‑bankruptcy doctrine, providing critical clarifications across settlement approval, channeling scope, insurance‑rights transfer, claim classification, jury‑trial harmonization, feasibility, and creditor interest-rate disputes. By distinguishing §524(g)’s fairness inquiry from §1129(b)’s cramdown rule, embracing §1123’s preemptive force over anti‑assignment clauses, and policing the derivative‑liability boundary for third‑party injunctions, the Court reinforces both statutory fidelity and practical workability in mass‑tort reorganizations. For future cases, the opinion confirms: fund the trust with all available sources (including assigned insurance), design TDPs that ensure uniformity and preserve the corpus, route both direct and indirect asbestos liabilities through §524(g), and expect federal bankruptcy policies to control over conflicting contract expectations. Grace’s confirmation thus stands as a template for balancing equitable compensation with the reorganization imperative.