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Duro Dyne - Brief of DOJ in Opposition To FCR
Duro Dyne - Brief of DOJ in Opposition To FCR
No. 3:18-cv-15563-MAS
Before the Honorable Michael A. Shipp, United States District Court Judge
v.
TABLE OF CONTENTS
INTRODUCTION .....................................................................................................1
STATEMENT OF THE ISSUES...............................................................................4
STANDARD OF REVIEW .......................................................................................6
A. Duro Dyne, Mr. Fitzpatrick (who was being paid by Duro Dyne), and
lawyers representing present asbestos claimants craft a pre-negotiated
bankruptcy plan before a case is filed. ....................................................9
B. Duro Dyne files for chapter 11 relief and asks the bankruptcy court to
appoint Mr. Fitzpatrick as the FCR. ......................................................11
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ARGUMENT ...........................................................................................................24
II. The Court Below Also Erred as a Matter of Law by Considering Only
Whether Mr. Fitzpatrick Had a Disabling Conflict While Refusing to
Consider His Actions and Relationships in Other Cases. .........................32
III. The Court Below Erred by Applying Conflict Criteria That Govern Other
Code Provisions But Not Section 524(g), an Error That Caused It to
Ignore the Even Higher Standards That Apply to Fiduciaries Who
Represent Absent Parties When Deciding Mr. Fitzpatrick’s Eligibility to
Act as the FCR. ..........................................................................................36
A. Section 524(g)’s text and the Code’s structure establish the court used
the wrong conflicts standard. .................................................................36
B. Section 524(g)’s evident purpose confirms that the traditional standards
applicable to fiduciaries who represent absent parties must be used to
determine an applicant’s eligibility to represent absent asbestos
claimants. ...............................................................................................39
IV. Mr. Fitzpatrick Should Not Have Been Appointed as FCR under Either
Standard Because He Is Not an Independent Fiduciary under the Facts of
This Case....................................................................................................41
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CONCLUSION ........................................................................................................54
CERTIFICATE OF COMPLIANCE .......................................................................55
ADDENDUM ..........................................................................................................56
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TABLE OF AUTHORITIES
Page(s)
Cases
Abramski v. United States,
573 U.S. 169 (2014) ............................................................................................27
ACandS Inc. v. Travelers Cas.,
No. 04-cv-00123-JJF (D. Del.) ...........................................................................34
In re ACandS, Inc.,
311 B.R. 36 (Bankr. D. Del. 2004) ...............................................................33, 34
Collie v. Fergusson,
281 U.S. 52 (1930) ..............................................................................................39
In re Combustion Eng’g,
391 F.3d 190 (3d Cir. 2004), as amended (Feb. 23, 2005) ....................26, 40, 41
In re Congoleum,
426 F.3d 675 (3d Cir. 2005) ...............................................................................43
iv
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In re Downing’s Estate,
162 Pa. Super. 354, 57 A.2d 710 (Pa. 1948) ......................................................46
Eagan v. Jackson,
855 F. Supp. 765 (E.D. Pa. 1994) .......................................................................46
Hansberry v. Lee,
311 U.S. 32 (1940) ............................................................................31, 39, 47, 48
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In re Johns-Manville Corp.,
36 B.R. 743 (Bankr. S.D.N.Y. 1984)..................................................................31
In re Johns-Manville Corp.,
551 B.R. 104 (S.D.N.Y. 2016) ...........................................................................26
Kollsman v. Cohen,
996 F.2d 702 (4th Cir. 1993) ..............................................................................39
Larson v. Dumke,
900 F.2d 1363 (9th Cir. 1990) ............................................................................39
In re Leslie Controls, Inc.,
437 B.R. 493 (Bankr. D. Del. 2010) .............................................................51, 52
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Professional Ins. Mgmt. v. Ohio Cas. Grp. of Ins. Cos. (In re Prof’l
Ins. Mgmt.),
285 F.3d 268 (3d Cir. 2005) .................................................................................6
Prosser v. Gerber (In re Prosser),
777 F.3d 154 (3d Cir. 2015) ................................................................................. 7
Rome v. Braunstein,
19 F.3d 54 (1st Cir. 1994) ...................................................................................46
vii
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In re UNR Industries,
46 B.R. 671 (Bankr. N.D. Ill. 1985) .............................................................31, 37
In re Vouzianas,
259 F.3d 103 (2d Cir. 2001) ...............................................................................28
Statutes
11 U.S.C. § 101(14) ..........................................................................................passim
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Other Authorities
Fed. R. Bankr. P. 8002(a)(1) ......................................................................................1
H.R. Rep. No. 95-595 (1977), reprinted in 1978 U.S.C.C.A.N. 5963 ...................... 9
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The bankruptcy court had jurisdiction under 28 U.S.C. §§ 157(a) and (b),
and 1334(a), over the chapter 11 bankruptcy cases filed by Duro Dyne National
Corp. and related entities. The bankruptcy court’s October 17, 2018, order
Blue Hills Bank, 135 S. Ct. 1686, 1692 (2015) (“Orders in bankruptcy cases may
and Fed. R. Bankr. P. 8002(a)(1) on October 31, 2018. This Court has jurisdiction
to hear this appeal under 28 U.S.C. § 158(a)(1), which grants district courts
bankruptcy judges.
INTRODUCTION
fiduciary to represent people who used the debtors’ asbestos products and will later
become sick from them. Congress enacted section 524(g) of the Bankruptcy Code
to address the unique nature of asbestos bankruptcies like this one. Under it,
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Congress gives the Duro Dyne debtors the substantial benefit of extinguishing all
their asbestos-related liabilities, including claims from people who are not yet sick.
the extraordinary relief that section 524(g) grants, it is the only provision in the
Bankruptcy Code where Congress requires the court and not the parties to identify
The court erred here by simply deferring to the debtors’ and present
claimants’ (those already suffering from asbestos exposure) FCR choice, Mr.
accepted their choice despite their interests being adverse to the future claimants
the FCR would represent. The text, structure, and evident purpose of section
524(g) make plain this was an error of law. It was the court’s responsibility to
identify and select the best candidate, but it did not solicit other candidates or
invite others to make recommendations. Its actions do not satisfy the independent
2
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Mr. Fitzpatrick might be an appropriate FCR in another case, but not in this
one. Here, Mr. Fitzpatrick lacks necessary independence because he had been
retained and paid by the debtors for pre-bankruptcy asbestos work relating to their
committed in advance to support a bankruptcy plan the debtors and the present
claimants wanted. That plan guarantees Mr. Fitzpatrick future employment by the
Due process dictated that the absent future claimants have their interests
protected by an independent fiduciary. They are sheet metal workers and others
who work in the heating and cooling trades. They are not yet sick. Their
independent fiduciary must press the debtors to make larger plan contributions to
better cover future claims. He must press the present claimants (and their lawyers)
overpaying current claimants. If, as has been the case in other asbestos
bankruptcies, the debtors pay too little into the trust or present claimants exhaust it
1
These concerns are not hypothetical. “[A]lthough trusts are established on the
promise to pay all current and future victims equitably, this promise has already
3
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On remand, the court can protect future claimants by expanding its search to
identify a person who does not have Mr. Fitzpatrick’s entanglements with the
debtors and the present claimants. Selecting such an independent fiduciary will
provide future claimants the due process protections they have the right to receive.
for people who will become sick from the debtors’ asbestos products, but who are
not yet sick. Given the obligation placed on the court to make the selection
independently, as section 524(g)’s and the Bankruptcy Code’s text, structure, and
evident purpose provide, did the court err by limiting its consideration to a single
been broken at all but a few trusts.” S. Todd Brown, How Long is Forever This
Time? The Broken Promise of Bankruptcy Trusts, 61 Buff. L. Rev. 537, 538–39
(2013). According to one recent study, between 2008 and 2017, 60% of asbestos
trusts were forced to reduce their 2008 “payment percentages,” which determine
the actual payment that a claimant with a particular disease or settlement will
receive. See Peter Kelso & Marc Scarcella, U.S. Chamber Inst. for Legal Reform,
Dubious Distribution: Asbestos Bankruptcy Trust Assets and Compensation at 9
(Mar. 2018). For those trusts, the net recovery in 2014 represented a 46%
reduction compared to claim payments in 2008. Id. This erosion of trust assets—
which disproportionately prejudices future claimants—is the precise harm that the
future claims representative was intended to prevent.
4
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claimants’ candidate, did the court err—given section 524(g)’s and the Code’s text,
structure, and evident purpose—by considering only whether Mr. Fitzpatrick had a
disabling conflict of interest while refusing to consider the entanglements and the
standard (11 U.S.C. § 101(14)) that expressly applies elsewhere in the Bankruptcy
Code but not in section 524(g). Did it violate section 524(g)’s and the Code’s text,
structure, and evident purpose by applying that standard rather than the traditional
parties?
appointing Mr. Fitzpatrick as that fiduciary given that, among other things:
(a) Mr. Fitzpatrick was paid by the debtors to provide them pre-bankruptcy
services directly related to this bankruptcy case;
(b) before there even was a bankruptcy case, Mr. Fitzpatrick committed to
support the plan the debtors and present claimants sought to put forward;
and
among the debtors, the lawyers representing present claimants, and Mr.
prevented the government from cross-examining Mr. Fitzpatrick about his pre-
bankruptcy interactions with parties whose interests were adverse to the future
STANDARD OF REVIEW
Hechinger Inv. Co. of Del., 298 F.3d 219, 224 (3d Cir. 2002). So too is its
court’s findings of basic or historical facts are reviewed for clear error. Universal
Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102 (3d Cir. 1981). “Factual
evidence, lack adequate evidentiary support in the record, are against the clear
weight of evidence[,] or where the [trial] court has misapprehended the weight of
the evidence.” United States v. 6.45 Acres of Land, 409 F.3d 139, 145 n.10 (3d
Decisions left to the bankruptcy court’s discretion are reviewed for abuse.
Professional Ins. Mgmt. v. Ohio Cas. Grp. of Ins. Cos. (In re Prof’l Ins. Mgmt.),
6
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285 F.3d 268, 282–83 (3d Cir. 2005). A court abuses its discretion when it “bases
F.3d 154, 161 (3d Cir. 2015) (internal quotation omitted). A bankruptcy court’s
evidentiary rulings are reviewed for abuse of discretion. General Elec. Co. v.
I. Statutory Framework
A. Section 524(g) and asbestos bankruptcies
Section 524(g) of the Bankruptcy Code permits a debtor, its insurers, and
other non-debtor affiliates to eliminate all their current and future asbestos-related
enjoins future “demands” that arise after the bankruptcy case has concluded. See
11 U.S.C. § 524(g)(5). For a court to approve such an asbestos plan, the trust
created by the plan must value and pay “present claims and future demands . . . in
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Because people who have not yet become sick have their future claims
discharged and channeled to the trust for payment, constitutional due process and
protect and advocate for these unknown, absent, and especially vulnerable parties.
U.S.C. § 101(14).
333(a)(2)(A).
2
The chapter 11 debtor typically runs the bankruptcy estate. 11 U.S.C. § 1101(1).
Under 11 U.S.C. §§ 1104(a)(1) and (d), the court may, “for cause,” appoint a
disinterested person as trustee to perform the debtor’s duties. See also 11 U.S.C.
§§ 1104(c) and (d) (appointment of examiners).
8
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U.S.C. § 524(g)(4)(B)(i).
prevent fraud, dishonesty, and overreaching in the bankruptcy arena.” H.R. Rep.
end, the United States Trustee has standing to appear and be heard on any issue in
Duro Dyne West Corp., and Duro Dyne Midwest Corp. (collectively, “Duro Dyne”
or “the debtors”) manufacture sheet metal accessories and equipment for the
heating, ventilating, and air conditioning industry. A82. 3 Over the years, Duro
3
“A[page number(s) of Appendix]” refers to Appellant’s Appendix.
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Two years after they first discussed that, the Lawyers for present claimants
pre-bankruptcy work for it, with the intention that the bankruptcy court would later
appoint him as FCR under section 524(g) once Duro Dyne filed for bankruptcy.
4
Transcripts are cited as “Tr. at [page:line(s)].”
5
The Lawyers included Brayton Purcell LLP; Cooney and Conway; Early,
Lucarelli, Sweeney & Meisenkothen; Ferraro & Associates, P.A.; Gori Julian &
Associates, P.C.; Simmons Hanley Conroy; and Weitz & Luxenberg, P.C. A87.
The Lawyers retained Caplin & Drysdale, Chartered as their counsel. Id.
6
Entries on the bankruptcy case docket for In re Duro Dyne National Corp., Case
No. 18-27963 (MBK) (Bankr. D.N.J.), are cited as “DE[docket entry number(s)].”
10
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A87; A598, Tr. at 20:21–25; A599, Tr. at 21:1-5; A639, Tr. at 61:19-25; A644, Tr.
at 66:7-10. Mr. Fitzpatrick then retained a law firm that had represented him in
Mr. Fitzpatrick and his personal counsel could charge Duro Dyne up to $25,000
per month without any additional approval. A383‒A384. Although the Lawyers
for the present claimants were not a party to the engagement letter, the letter stated
that Duro Dyne and the Lawyers had both asked Mr. Fitzpatrick to serve as the
FCR once the case was filed, A382, and it obligated Duro Dyne to seek Mr.
Before the bankruptcy case was filed and before the court had appointed Mr.
Fitzpatrick to represent future claimants, he agreed to the plan that Duro Dyne and
the Lawyers for the present claimants had drafted. A110; A617, Tr. at 39:1–13.
Their plan proposed to establish a section 524(g) asbestos trust and give Mr.
Fitzpatrick a position at the trust after the bankruptcy case ended. A140; A6,
B. Duro Dyne files for chapter 11 relief and asks the bankruptcy
court to appoint Mr. Fitzpatrick as the FCR.
On September 7, 2018, Duro Dyne simultaneously filed:
(b) the reorganization plan it had pre-negotiated with Mr. Fitzpatrick and
the Lawyers for the present claimants; and
Four days later, the debtors filed a motion (the “FCR Motion”) asking the
The debtors’ FCR Motion asserted that Mr. Fitzpatrick was the debtors’ and
the Lawyers’ first choice to serve as the FCR based on his “experience,”
person” as defined in section 101(14) of the Bankruptcy Code, A372, and that he
had no connection with the Lawyers, except in connection with this case. A371‒
A372. The FCR Motion disclosed that the debtors had paid Mr. Fitzpatrick and his
7
The “disclosure” statement is a document setting forth important information
about the debtor and the proposed chapter 11 plan, which must be transmitted to
holders of claims and interests. 11 U.S.C. § 1125. In most cases, the bankruptcy
court must approve the disclosure statement before votes on the plan may be
solicited.
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fiduciary for the future claimants.”8 A424‒A425. The opposition argued that the
claimants.” A394. The objection argued that the FCR appointment process should
explained that Mr. Fitzpatrick was conflicted due to his work with the debtors and
the Lawyers. A417‒A424. And it noted the “powerful personal inducement for
Mr. Fitzpatrick to support the plan” because it gave him work with the post-
8
Several insurance companies independently opposed the FCR Motion, arguing
that an FCR is held to a higher standard than disinterestedness. A21‒A23, DE103;
DE108; DE114. The insurers contended the proper standard is the “appearance of
impropriety” standard that is “customarily applied to court officers and fiduciaries
acting on behalf of an absent party,” such as a guardian ad litem. A533–A534, Tr.
at 76:23-77:2; A534, Tr. at 77:1-2.
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The debtors replied that section 524(g) does not preclude a chapter 11 debtor
from proposing a potential FCR, A436, but acknowledged that their “proposal of
Mr. Fitzpatrick to be appointed as the FCR in the bankruptcy case[s] puts his
prepetition services before the Court, making him answerable to the Court for
Committee”)9 argued it should be heard on the FCR’s appointment “as the interests
of present and future claimants are closely aligned,” A452, an assertion the United
United States Trustee asked the court to allow discovery on four points. 10
9
The Official Committee was appointed on September 27, 2018, by the United
States Trustee pursuant to 11 U.S.C. § 1102. A22; DE107. It employed the
Lawyers’ counsel, Caplin & Drysdale, to represent it under 11 U.S.C. § 1103. Id.;
see also A45, DE 225; A51, DE258.
10
Those were “[i] the circumstances surrounding Mr. Fitzpatrick’s selection,
including how he was brought to [Duro Dyne’s] attention, [ii] what Mr. Fitzpatrick
did during the prepetition period during which he was engaged to portray a future
claims representative, [iii] the terms of Mr. Fitzpatrick’s employment including
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The court denied most of the requested discovery. It ruled that the issue
before it was not the “qualifications of Mr. Fitzpatrick.” A536, Tr. at 79:1-5.
Instead, the court saw the relevant issues as turning on “concrete narrow discr[ete]
Congress made the appointment of a chapter 11 trustee under section 1104 subject
objected to most of the government’s discovery, even as limited by the court and
refused to produce most of the documents based on the “joint defense privilege,”
heavily redacted the few documents they did produce. A557; see also A36,
The United States Trustee deposed Duro Dyne’s CEO, A715‒A772, who
testified that:
what constituted cause to terminate him, and the parameters of the cap on his fees,
. . . and [iv] the circumstances of Mr. Fitzpatrick’s hiring in other cases in which he
served as a future claims representative including whether his hiring was required
by any of the personal injury firms that constitute[d] the ad hoc committee.”
A504, Tr. at 47:7‒19.
15
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• the only criteria Duro Dyne used in selecting an FCR was “experience doing
what we wanted him to be doing for us or the trust” and “being in New Jersey,”
A735‒A736, Tr. at 21:25‒22:9;
• Mr. Fitzpatrick was the only candidate Duro Dyne interviewed, A737‒A738,
Tr. at 23:19‒24:9;
• Duro Dyne did not consider or review the results of Mr. Fitzpatrick’s work on
behalf of future asbestos claimants in other cases, A768, Tr. at 54:20–24;
• he did not consider Mr. Fitzpatrick to be Duro Dyne’s adversary, A744, Tr. at
30:10–12; and
• he thought he could fire Mr. Fitzpatrick like any other professional hired by
Duro Dyne, A747, Tr. at 33:16–20, for reasons such as lack of progress toward
a consensual plan, A770, Tr. at 56:4–12.
The United States Trustee also deposed Mr. Fitzpatrick, A579‒A693, who
conceded that:
• he had agreed before the case was even filed to support confirmation of the
debtors/Lawyers’ proposed plan, A618, Tr. at 40:1–6; A619, Tr. at 41:1–5;
• he did not intend to do any further due diligence or renegotiate the plan on
behalf of his constituency, A620‒A621, Tr. at 42:18‒43:8; and
• he could not recall any specific changes he caused to be made to the plan, or
other documents, A651, Tr. at 73:1–8; A663, Tr. at 85:5–8; A666‒A667, Tr. at
88:25‒89:11; A668‒A669, Tr. at 90:2‒91:12.
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hearing. A850‒A993 (transcript of October 15, 2018, hearing). At the hearing, the
interest” privilege among Mr. Fitzpatrick, Duro Dyne, and the Lawyers for the
current claimants. A890, Tr. at 41:2–12. The bankruptcy court sustained the
objection, thereby truncating any inquiry into what Mr. Fitzpatrick did prepetition
In his testimony, Mr. Fitzpatrick did not recall taking any positions that
would be “unpopular with the plaintiffs’ bar” to which the Lawyers belonged or
that were adverse to the Lawyers’ positions on behalf of the current claimants.
A886‒A887, Tr. at 37:24‒38:25; A889, Tr. at 40:4–9. And he did not recall any
specific changes made to the plan or other documents as a result of his prepetition
11
The insurers also filed a supplemental objection. A36, DE172; DE173.
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participation. A889, Tr. at 40:16–20; A896, Tr. at 47:16–22. He also testified that
the plan and trust documents in this case were substantially similar to those in prior
cases where he served as FCR. A872, Tr. at 23:1–4. Mr. Fitzpatrick testified that
it was “typical” for the FCR to subsequently serve in the post-bankruptcy trust.
October 16, 2018, decision). The court “s[aw] no reason to retard the process by
appointing a different FCR.” A1016, Tr. at 23:9–12. Therefore, the court never
solicited nominations from other parties, it never notified anyone that they could
apply to become the FCR, and never considered candidates on its own.
In granting the motion, the court ruled that the section 101(14) “disinterested
should apply when deciding whom to appoint as FCR because Congress elsewhere
bankruptcy court concluded that “[b]ased on the existing record,” Duro Dyne
carried its burden to prove that Mr. Fitzpatrick was disinterested. A1009, Tr. at
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16:20–23. It held that the objecting parties had not “produced evidence of
The court further found that “Mr. Fitzpatrick does not hold a material interest
adverse to the future claimants” for purposes of section 101(14)(C), based either on
“his service as a prepetition FCR for the debtors or his service as an FCR in other
“during the prepetition period negotiated effectively and can effectively represent
the interest of the future claimants going forward.” A1009‒A1010, Tr. at 16:24‒
17:2.
• “Mr. Fitzpatrick has been working in the field of asbestos personal injury
and property claims recovery for approximately 38 years,” A1003, Tr. at
10:10–15;
• “Mr. Fitzpatrick testified and the Court finds credible that at the time he
was [originally] retained [by Duro Dyne, pre-bankruptcy,] . . . there was
no deal in place with the debtors and the [Lawyers] and that he engaged
in substantial negotiations and worked towards modifications of the
[then] existing and initial term sheet that had been presented,” A1005, Tr.
at 12:9–14;
secure the highest level of funding from the debtor[s] and [their]
insurers,” A1006, Tr. at 13:2–5;
• “Mr. Fitzpatrick confirm[ed] and the Court again finds credible that he
never demanded nor requested appointment as a post-confirmation FCR,
the practice [of giving him the post-bankruptcy position] was just
followed in a way that had been done in the past in prior cases,” A1006‒
A1007, Tr. at 13:23‒14:2; and
The debtors seek to rid themselves of their asbestos liability in this chapter
future asbestos victims to the assets of a trust established under 11 U.S.C. § 524(g).
Before the bankruptcy court may do that, it must appoint an independent fiduciary
absent, unknown, and especially vulnerable group. Acting as their protector, the
FCR must negotiate with the debtors and the present claimants to craft a plan that
creates a trust that will fairly compensate future claimants when they eventually
become sick.
This appeal will determine whether the court below misapplied section
524(g) when it chose Mr. Lawrence Fitzpatrick to be the independent fiduciary for
this vulnerable group. Like all questions of statutory construction, this will be
determined by the text, structure, and evident purpose of section 524(g) and the
Bankruptcy Code. See In re Channel Home Centers, Inc., 989 F.2d 682, 687 (3d
Cir. 1993) (when interpreting a statute courts should look to text, structure, and
evident purpose).
The text, structure, and evident purpose of section 524(g) and the
Bankruptcy Code establish that the court below violated section 524(g) in three
First, section 524(g)’s text obligates the court—rather than a party—to pick
an FCR. The Bankruptcy Code’s structure reflects that section 524(g) is unique in
this regard because all other Code provisions require parties to pick bankruptcy
evident purpose reveals why Congress treated FCR selections differently. Here,
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the future claimants are not yet sick, so they are not a constituency that can identify
its own FCR who will be independent from the debtors and present claimants and
effectively protect their interests. Given this, due process requires the appointment
of an independent FCR by the court and not one selected by the competing parties
in the case.
The court’s actions fell short here. It simply appointed the FCR selected by
the future claimants’ adversaries—the debtors and the Lawyers who represent
considering anyone else. This did not fulfill the independent responsibility that
Second, text, structure, and evident purpose also establish that the court
FCR in other cases establish that he would act as an independent fiduciary here.
Third, in determining that Mr. Fitzpatrick has no disabling conflict, the court
have applied the more demanding fiduciary standards that apply to those who wish
to become a fiduciary for absent parties. This is an error of law because section
524(g) does not mention disinterestedness and the Bankruptcy Code’s structure
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applies to appointments under sections 327, 332, 333 and 1104—but not under
section 524(g). Unlike those other sections, section 524(g) nowhere mentions or
certainly be disinterested. But section 524(g)’s evident purpose reveals that the
court should have applied broader fiduciary standards that apply when the
standard or the standards for those who represent absent parties. Mr. Fitzpatrick’s
(a) paid prepetition work for the debtors in this very bankruptcy case, (b)
commitment to the debtors’ and the present claimants’ plan, even before the case
was filed, and (c) agreement to the debtors and the present claimants crafting the
chapter 11 plan to give him a post-bankruptcy job with the trust establish that he
ruling that kept out significant, probative evidence at the FCR evidentiary hearing.
At that hearing, the court sustained an objection based upon the common interest
privilege among the debtors, the Lawyers, and Mr. Fitzpatrick that precluded the
23
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interactions with the debtors and the Lawyers for the present claimants. The facts
behind Mr. Fitzpatrick’s retention by the debtors and his actions were relevant to
whether he has interests that hinder his ability to act as an independent fiduciary
ARGUMENT
case—those who have not yet developed an asbestos-related illness and may not
even realize they have been exposed. Nor do they realize that one day they will
have claims against the debtors. Because of the section 524(g) asbestos injunction,
their rights—including the amount they will recover, the procedures they must
plan that will be confirmed long before they became ill and which they had no
ability to negotiate. See In re W.R. Grace & Co., 729 F.3d 311, 323 (3d Cir. 2013)
(noting that future asbestos victims “lack the ability to protect their own interests
24
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The Duro Dyne future claimants are especially vulnerable for another
reason: during the bankruptcy case, their interests are adverse to those of every
other stakeholder. The debtor, its affiliates, and its insurers will seek to discharge
their liability for future claims. The debtors will want to pay as little as possible.
And present asbestos claimants naturally favor trust procedures that pay present
claims fully and rapidly, which will reduce the amount left in the fund to pay
future claimants because there is no source of payment once the trust is depleted.
preserve trust assets for future claims. Similarly, first-in-line present claimants
may be unconcerned with whether the trust pays fraudulent or invalid claims—
because these payments are unlikely to affect their own distributions—but the
denied if the trust were depleted before they manifest injury and assert claims. For
Quigley Co., Inc., No. 04-15739, 2009 WL 9034027, at *5 (Bankr. S.D.N.Y. Apr.
24, 2009); see also Amchem Prods. v. Windsor, 521 U.S. 591, 626 (1997)
(providing that the goal of generous immediate payments “tugs against the interest
future”).
25
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due process protections. In re Combustion Eng’g, 391 F.3d 190, 234 n. 45 (3d Cir.
Del., 601 F.2d 76, 84–85 (3d Cir. 1979) (discussing purported class action on
To provide future claimants these necessary due process protections for the
loss of their claims in the bankruptcy case (beyond what goes into the trust),
representative for the purpose of protecting the rights of persons that might
Johns-Manville Corp., 551 B.R. 104, 114 (S.D.N.Y. 2016) (noting that a trust
mechanism that did not provide future claimants with adequate representation
Combustion Eng’g, 391 F.3d at 237, the FCR’s role differs fundamentally from
that of any other bankruptcy fiduciary. Unlike those, the FCR owes duties to
people who are unknown and absent. And future claimants cannot seek a
26
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replacement should the FCR abandon his duties or fail to represent their interests
effectively. 12 For this reason, the selection and appointment of the FCR demands
vacuum, but with reference to the statutory context, ‘structure, history, and
purpose.’” Abramski v. United States, 573 U.S. 169, 179 (2014) (quoting Maracich
v. Spears, 133 S. Ct. 2191, 2209 (2013)). See also General Dynamics Land
Systems, Inc. v. Cline, 540 U.S. 581, 600 (2004) (reversing court of appeals where
“the text, structure, purpose, and history of the ADEA, along with its relationship
to other federal statutes, [] show[ed] that the statute does not mean to stop an
12
The bankruptcy court based its decision to apply the section 101(14)
disinterestedness standard, in part, on its belief that it would be “incongruous” to
apply a higher standard than that which governs trustee appointments. A1002, Tr.
at 9:24–25; A1003, Tr. at 10:1–4. Trustees also act as fiduciaries, but the persons
to whom they owe their duties are existing creditors who can monitor their
performance.
27
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on the court. The court’s failure to solicit candidates other than Mr. Fitzpatrick
enabled the debtors and the Lawyers to exercise a degree of control over the FCR
By simply taking the debtors’ pick, subject only to possible disapproval for
selection of its own counsel or the United States Trustee’s selection of a trustee or
examiner. See In re Vouzianas, 259 F.3d 103, 108 (2d Cir. 2001) (“[o]nly in the
rarest cases should the trustee be deprived of the privilege of selecting his own
fundamental difference between the way other professionals and fiduciaries are
appointed and how FCRs are appointed. In the case of trustees, examiners, and
estate professionals, the Bankruptcy Code expressly authorizes a party other than
examiner). In contrast, section 524(g) reserves the power to appoint the FCR to
28
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the bankruptcy court alone—and given the due process concerns underlying
Once the bankruptcy court concluded that Mr. Fitzpatrick was eligible, it
terminated its inquiry, without considering whether any other candidates might
provide future claimants with superior representation. The court justified its
refusal to consider others based on a single factor: a new FCR would need to
“retain professionals, engage in his or her own due diligence, only to reach the
same point of review to which Mr. Fitzpatrick assents at this present time.”
A1015, Tr. at 22:7–10. But this reasoning would require a court to defer to a
outcome that would delegate the bankruptcy court’s statutory duty to appoint under
Even if the bankruptcy court had treated the nomination of Mr. Fitzpatrick as
a mere recommendation, it was error under section 524(g) for the court to accede
to the preferences of the debtors and the Lawyers without any attempt to solicit
other candidates. Cf. In re Busy Beaver Bld. Ctrs., Inc., 19 F.3d 833, 841-42 (3d
Cir. 1994) (explaining that even when Code provisions merely provide for the
court to approve parties’ fee requests, the court still has an independent obligation
29
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to scrutinize them and alter as appropriate). Here, the bankruptcy court had a
range of options; it could have sought applicants, asked all parties to suggest
candidates, or asked the United States Trustee. Then the court would have taken
who would best represent the future claimants in this particular case. At the end of
the day, it was the court’s duty to identify and select the best candidate, and it took
Allowing the debtors and the future claimants to select their adversary is just
allowing the holder of a disputed claim to appoint the trustee against whom it will
litigate. See, e.g., In re TBR USA, Inc., 429 B.R. 599, 629 (Bankr. N.D. Ind. 2010)
(explaining “Congress did not intend to allow creditors who had disputed claims
against the estate to participate in a[] [trustee’s] election and choose their
opponent.”); In re Williams, 277 B.R. 114, 118 (Bankr. C.D. Cal. 2002) (noting
that “any creditor with a disputed claim would love to select her future opponent”).
fiduciary. The notion that parties should not be allowed to select their own
30
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the due process rights of absent parties. See Hansberry v. Lee, 311 U.S. 32, 45
(Bankr. S.D. Tex. July 20, 2011) (explaining “[t]he primary role of a representative
Even in the earliest asbestos cases, courts were sensitive to the danger that the
committee for present claimants and finding that “an independent representative
13
Neither Johns-Manville nor UNR Industries, 46 B.R. 671 (Bankr. N.D. Ill.
1985)—two early cases involving an FCR—allowed the debtor or the present
claimants to select the FCR. In Johns-Manville, the court apparently selected the
FCR directly, while in UNR, the court directed the United States Trustee to prepare
a list of candidates from which the court would make its selection. See Johns-
Manville, 36 B.R. at 758; UNR, 46 B.R. at 674–75. Nor was any such role later
incorporated into section 524(g), which was enacted after the decisions in Johns-
Manville and UNR. See Fed. Ins. Co. v. W.R. Grace, No. 04-844, 2004 WL
5517843 (D. Del. Nov. 22, 2004) (the court selected the FCR based on a procedure
that mirrored UNR and Johns-Manville).
31
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II. The Court Below Also Erred as a Matter of Law by Considering Only
Whether Mr. Fitzpatrick Had a Disabling Conflict While Refusing to
Consider His Actions and Relationships in Other Cases.
The scope of the bankruptcy court’s review of Mr. Fitzpatrick’s
for an FCR, the court focused its inquiry of the debtors’ choice to determining
The court’s truncated analysis did not consider whether Mr. Fitzpatrick was
the best possible appointee, but only whether the court believed he was subject to
Entertainment Group, Inc., 140 F.3d 463, 476 (3d Cir. 1998). The court also
factor. A536, Tr. at 79:2-5. This led the court to treat the debtors’ and the
Had the court considered other factors relevant to whether Mr. Fitzpatrick
was the best choice, such as his actions and entanglements in this and other cases,
the court may well have reached a different conclusion. In this case, Mr.
Fitzpatrick has consented to broad secrecy provisions in the proposed plan and
32
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trust distribution procedures (TDP) negotiated with him by Duro Dyne and the
Lawyers prepetition, secrecy that would facilitate the filing of fraudulent claims
and inhibit investigations of fraud to the detriment of deserving present and future
Moreover, despite the discovery shield over this case, the public record
shows that Mr. Fitzpatrick’s performance as FCR in other cases has drawn scrutiny
and provides reason to look more closely at Mr. Fitzpatrick’s suitability to be the
FCR in this particular case. For example, in In re ACandS, Inc., 311 B.R. 36, 43
(Bankr. D. Del. 2004), it appears that Mr. Fitzpatrick, as FCR, sided with current
claimants over the interests of the future claimants he was actually representing. In
that case, the debtors and certain influential plaintiffs’ firms negotiated a pre-
bankruptcy agreement in which the bulk of the debtors’ insurance assets were
diverted to those firms and their clients, to the exclusion of all other claimants—
including, by definition, all future claimants. See id. at 40. Although it would be
who was appointed as the FCR on the motion of the debtors, as he was in Duro
Dyne—supported the plan and “vouch[ed] for its fairness.” Id. at 41.
The bankruptcy court viewed matters differently and refused to confirm the
plan, specifically finding that it did not satisfy section 524(g)(2)(B)(ii)(V) because
33
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it discriminated against future claimants and would not pay present and future
claims in the same manner. Id. at 42. The court found the plan to be so
fundamentally unfair that it lacked good faith. Id. at 43. Despite these findings in
immediately joined the debtors and the present claimants’ committee in filing a
notice of appeal against the bankruptcy court’s ruling. See ACandS Inc. v.
reorganization that presumably mooted the appeal of the bankruptcy court’s ruling.
Case No. 04-00123-JJF, Docket Entry 35 (D. Del. Jul. 17, 2007). But for future
claimants, the damage had already been done; a newly-diagnosed asbestos victim
who filed a claim in 2010 would have been entitled to a payout of 5.8 cents on the
dollar—among the lowest payment percentages among all major asbestos trusts.
See Lloyd Dixon, Geoffrey McGovern & Amy Coombe, RAND Institute for Civil
with Detailed Reports on the Largest Trusts, 56 (2010) (the “RAND Report”).
Mr. Fitzpatrick also was among the parties who opposed unsealing certain
Seeking Access to 2019 Statements, 585 B.R. 733, 738 & n.4 (D. Del. 2018), notice
34
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of appeal filed sub nom. In re ACandS, Inc., et al., No. 18-1951 (3d Cir.). The
would have benefitted from stopping an investigation into possible fraud by other
asbestos claimants. 14
Given this, the court below erred in not considering the candidate’s
Duro Dyne will never know what went on here between the three linked parties:
14
There is a growing body of evidence that asbestos trusts are particularly
susceptible to abusive or fraudulent claims, arguably due in part to the lack of
transparency and divided interests under which such trusts operate. See Lester
Brickman, Fraud and Abuse in Mesothelioma Litigation, 88 Tul. L. Rev. 1071,
1126 (2014) (noting “numerous apparent anomalies” in a study of asbestos claims
to one trust, including thousands of claims by plaintiffs who alleged occupational
exposure to asbestos before their twelfth birthday); U.S. Chamber Inst. for Legal
Reform, Insights & Inconsistencies: Lessons from the Garlock Trust Claims (Feb.
2016) (discussing facially inconsistent representations made in a sample of trust
claims). Notably, much of this abuse has only come to light in recent years after
discovery was permitted into a limited number of trust claims in connection with
the bankruptcy case of In re Garlock Sealing Technologies, LLC, 504 B.R. 71
(Bankr. W.D.N.C. 2014).
35
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III. The Court Below Erred by Applying Conflict Criteria That Govern
Other Code Provisions But Not Section 524(g), an Error That Caused It
to Ignore the Even Higher Standards That Apply to Fiduciaries Who
Represent Absent Parties When Deciding Mr. Fitzpatrick’s Eligibility
to Act as the FCR.
A. Section 524(g)’s text and the Code’s structure establish the court
used the wrong conflicts standard.
The bankruptcy court erred when it considered Mr. Fitzpatrick’s eligibility
and suitability only under the “disinterested person” standard in section 101(14) of
the Bankruptcy Code, rather than also applying the fiduciary standards applicable
to fiduciaries who protect the rights of absent parties. A536–A537, Tr. at 79:15‒
statement that the “court appoints” the FCR for the absent asbestos victims, section
section 101(14) should fill the gap.15 A1002, Tr. at 9:15-23. But the Bankruptcy
15
In its rulings, the bankruptcy court said it adopted a disinterestedness standard
based upon the reasoning in In re Leslie Controls, Inc., No. 11-0013, 2011 WL
1226402 (D. Del. Mar. 25, 2011); W.R. Grace, 2004 WL 5517843; and In re
Thorpe Insulation Co., No. LA07-19271-BB (Bankr. C.D. Cal. Dec. 12, 2007).
A1002, Tr. at 9:22–23. But none of them supports the bankruptcy court’s ruling.
36
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Code’s structure belies that. See Channel Home Ctrs, Inc., 989 F.2d at 687 (when
interpreting a statute, courts should look to text, structure and “evident purpose” of
§ 101(14). It does not explain when that matters. Id. Instead, Congress inserted
example, section 327(a) provides that a trustee may employ attorneys, accountants
In Thorpe, the bankruptcy court expressly conceded that “I don’t think [section
101(14)] applies per se,” and declined to adopt the disinterested person standard
for FCRs, describing disinterestedness instead as a “minimum” qualification that
must be met. See DE125, tab 29, Tr. at 47:2–4. Leslie Controls never applied or
even mentioned the disinterested person standard, but instead focused on whether
the FCR had provided adequate representation. Leslie Controls, 2011 WL
1226402 at *5. The FCR in Grace was selected by the court based on a procedure
that mirrored UNR. Although the court characterized the standard for the court-
selected FCR as one of disinterestedness, it also rejected the argument that the
court should apply the same standards as it would to appointment of an estate
professional selected by the debtor under section 327. Grace, 2004 WL 5517843
at *9.
37
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one section of a statute but omits it in another section of the same Act, it is
generally presumed that Congress acts intentionally and purposely in the disparate
inclusion or exclusion.” Russello v. United States, 464 U.S. 16, 23 (1983) (internal
quotation omitted). Accord In re Federal-Mogul Glob. Inc., 684 F.3d 355, 373 (3d
Cir. 2012) (“[W]here the legislature has inserted a provision in only one of two
statutes that deal with closely related subject matter, it is reasonable to infer that
the failure to include that provision in the other statute was deliberate rather than
inadvertent.”).
Unlike sections 327, 332, 333, and 1104, section 524(g) does not adopt a
disinterestedness standard for FCRs. Given that Congress knew how to insert a
responsibility to absent parties requires more—he must also satisfy the more
38
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represent absent parties. See Collie v. Fergusson, 281 U.S. 52, 55 (1930) (statutory
language should be interpreted “in the light of the evident purpose” of the statute).
The standards for absent-party fiduciaries are even higher than the
Although fiduciaries for absent parties are rare in bankruptcy cases, they
are well known in other areas of law. See, e.g., Kollsman v. Cohen, 996 F.2d 702,
representative, due process requires that the representative must “have the capacity
to vigorously and conscientiously prosecute” those parties’ rights and “be free
from economic interests that are antagonistic to the interests of the class.” Larson
v. Dumke, 900 F.2d 1363, 1367 (9th Cir. 1990). See also Hansberry, 311 U.S. at
45 (the representatives of an absent party should not hold an interest that conflicts
39
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IAS Warranty, Inc., No. 17-12704, 2018 WL 4352692, at *6 (E.D. Mich. Sept. 12,
Given absent parties’ inability to protect themselves, courts have ruled that
under common law cannot ignore even a potential conflict or the appearance of
impropriety. See Kayes v. Pac. Lumber Co., 51 F.3d 1449, 1465 (9th Cir. 1995)
(representation of absent class members “does not permit even the appearance of
divided loyalties”); Williams v. Super. Ct., 54 Cal. Rptr. 3d 13, 23 (Cal. Ct. App.
Eng’g, 391 F.3d at 234 n.45 (explaining that section 524(g) was “specifically
tailored to protect the due process rights of future claimants”); W.R. Grace, 729
40
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F.3d at 323 (“Congress enacted § 524(g) to protect the due process rights of the
Here, the court below solely applied the narrower disinterestedness standard.
That error limited its analysis to the question of whether Mr. Fitzpatrick had a
materially adverse interest and led it not to examine whether his appointment gave
18–19. See Marvel, 140 F.3d at 476 (holding that court need not disqualify a
fiduciaries, reflects its choice not to dilute the familiar standards for appointing a
IV. Mr. Fitzpatrick Should Not Have Been Appointed as FCR under Either
Standard Because He Is Not an Independent Fiduciary under the Facts
of This Case.
Future claimants “must be adequately represented throughout the process.”
In re Combustion Eng’g, Inc., 391 F.3d at 245. That did not happen in this case,
and the court below erred in appointing Mr. Fitzpatrick as the future claimants’
fiduciary. As Mr. Fitzpatrick freely conceded, he had agreed before the case was
even filed to support confirmation of the debtors’ and the Lawyers’ proposed plan.
41
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A618, Tr. at 40:1–6; A619, Tr. at 41:1–5. He even said he would not perform any
That pro-opponent, narrow view of his role was a natural outgrowth of Mr.
Fitzpatrick and his law firm having been on the debtors’ payroll. A36, DE173-3.
The debtors (at the Lawyers’ suggestion 16) retained him with the expectation that
the bankruptcy court would appoint him as the section 524(g) FCR once Duro
Dyne filed for bankruptcy. A87; A738, Tr. at 24:5–7. Indeed, the debtors’
retention letter said they and the Lawyers expected him to stop working for the
debtor and become the FCR once the case filed. A382. It even went so far as to
16
Most asbestos trust plans have historically been negotiated between debtors and
a small group of the same lawyers for the present claimants. See RAND Report at
11. These law firms, in turn, nominate the same individuals to serve as FCR and
the same law firms to serve as FCR counsel—with the result that asbestos
bankruptcies often involve a closed circle of the same fiduciaries and the same
professionals in the same roles. Id. That is what happened here. But this creates a
powerful incentive for the FCR and the FCR’s professionals to be subservient to
the law firms representing present claimants: should the FCR displease those firms,
the FCR and his or her counsel might lose their place in the circle and be deprived
of a valuable source of future employment. See William P. Shelley, Jacob C. Cohn
& Joseph A. Arnold, The Need For Transparency Between the Tort System and
Section 524(g) Asbestos Trusts, 17 J. Bankr. L. & Prac. 2 Art. 3 n.19 (April 2008)
(“In practice, the FCR is nominated by the claimant and debtor constituencies.”).
42
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This was disqualifying under any standard. See In re Congoleum, 426 F.3d
675, 690 (3d Cir. 2005) (finding actual conflict of interest where proposed counsel
for asbestos debtor had performed work for claimants against the debtor
prepetition); In re South Station, LLC, 464 B.R. 46, 56 (Bankr. D. Utah 2011) (law
firm whose prepetition retainer was paid by creditors was not “disinterested” and
could not represent debtor in chapter 11 case); In re Hathaway Ranch P’ship, 116
B.R. 208, 219 (Bankr. C.D. Cal. 1990) (professional who accepts payment from
The future claimants had no say in what Mr. Fitzpatrick was doing. It was
engage and pay him for prepetition work. The only entities participating in those
(still) secret prepetition negotiations to whom Mr. Fitzpatrick could have provided
services were the debtors and the Lawyers—both of whom had interests that
the bankruptcy begins and a different, adverse party during the bankruptcy. 426
F.3d at 690. Here the bankruptcy court cited no findings and offered no analysis
for its determination that Mr. Fitzpatrick’s prepetition engagement did not create a
43
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Worse, before that case was filed, the debtors and the Lawyers inserted a
provision in the plan, see A110; A617, Tr. at 39:1–13, that provides him
A211; A6, DE19-1 at §§ 6.1‒6.5. The debtors and the Lawyers have put Mr.
without risking the loss of guaranteed future employment. 17 Standing alone, this is
disqualifying, both under the Bankruptcy Code’s disinterestedness test and the law
governing fiduciaries representing absent parties. Cf. Young v. Higbee Co., 324
have benefitted the entire stockholder class after they resigned from the
17
The danger that the attorneys of present claimants will use their leverage over
subsequent appointments to control FCR performance has been frequently noted.
In the words of one commentator, “much like the [asbestos plaintiffs’] attorneys
that control their appointment, legal representatives are repeat performers in
asbestos bankruptcies . . . in addition to case-specific incentives, legal
representatives for future victims have strong global incentives against taking
positions in any one case that may alienate these same attorneys.” S. Todd Brown,
Section 524(g) Without Compromise: Voting Rights and the Asbestos Bankruptcy
Paradox, 2008 Columbia Bus. Law Rev. 841, 900; see also Marc C. Scarcella &
Peter R. Kelso, A Reorganized Mess: The Current State of the Asbestos Bankruptcy
Trust System, 14 Mealey’s Asbestos Bankruptcy Report at 15 (Feb. 2015)
(describing present claimants’ influence over FCR selection as a “fox guarding the
henhouse” problem).
44
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committee). See also In re Mountain States Power Co., 118 F.2d 405, 407 (3d Cir.
Rivers Elec. Corp., 355 F.3d 415, 433 (6th Cir. 2004) (section 1104 examiner may
not “in the slightest degree . . . have some interest or relationship that would color
Massachusetts Fin. Servs. Co., 320 F. Supp. 3d 252, 259 (D. Mass. 2018) (holding
that under common law “the duty of loyalty prohibits a fiduciary from engaging in
between the trustee’s fiduciary duties and personal interests”) (internal citations
omitted).
of the FCR that a plan be approved since the FCR’s fees, after approval, are
33 Hofstra L. Rev. 833, 880 (2005). Here, the debtors, the Lawyers, and Mr.
Fitzpatrick cut that deal even before the case was filed.
Fitzpatrick’s acceptance of a benefit under the plan did not create an adverse
interest based on Mr. Fitzpatrick’s testimony that the future appointment “was not
45
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testimony that such provisions are customary. A1012, Tr. at 19:13–21. But it was
not necessary for the court to find that Mr. Fitzpatrick acted in bad faith to deny his
appointment. See Rome v. Braunstein, 19 F.3d 54, 58 (1st Cir. 1994) (holding that
the Bankruptcy Code test for disinterestedness “is neither subjective, nor
good faith’”).
Similarly, the bankruptcy court’s apparent belief that this interest would not
disqualifying interest “need not be such as ‘did affect his judgment’ but merely
such as ‘might affect his judgment.’” In re Downing’s Estate, 162 Pa. Super. 354,
57 A.2d 710, 712 (Pa. 1948); see also Eagan v. Jackson, 855 F. Supp. 765, 779
(E.D. Pa. 1994) (“It is unnecessary to show that the fiduciary succumbed to this
temptation, that he acted in bad faith, that he gained an advantage, fair or unfair,
[or] that the beneficiary was harmed. . . . [T]he fiduciary is punished for allowing
The parties’ actions after the United States Trustee opposed the FCR Motion
underscores the depth of the unacceptable entanglements among the debtors, the
46
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Lawyers, and Mr. Fitzpatrick. When the government sought discovery about Mr.
Fitzpatrick’s relationship with these adverse parties, they claimed they need not
common interest privilege. A786-A808. When the government sought to ask Mr.
Official Committee objected on the ground there was a common interest privilege
among Mr. Fitzpatrick, the debtors, and the Lawyers. A890, Tr. at 41:2-9. The
bound to his or her adversaries that the interactions among them cannot even be
retained, paid, and later nominated by adversaries who will benefit if his
. . for the fraudulent and collusive sacrifice of the rights of absent parties.”
Hansberry, 311 U.S. at 45. See also In re Dalkon Shield IUD Prods. Liab. Litig.,
693 F.2d 847, 855 (9th Cir. 1982), as amended (July 15, 1982) (“Adequacy of
Carlisle & Jacquelin, 391 F.2d 555, 562 (2d Cir. 1968) (before finding adequate
47
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For this reason, courts have not hesitated to find a due process violation
when the representative for the absent parties has been selected by a party with an
adverse interest in the case. The Supreme Court held in Hansberry that absent
uphold a racially restrictive covenant when the nominal defendants in the first
lawsuit were actually aligned with the plaintiffs and shared their interest in
enforcing the covenant. 311 U.S. at 45 (noting that “it does not appear that
establishing its validity”); see also Williams, 54 Cal. Rptr. 3d at 23 (parent who
had actual or potential conflict of interest with child could not select child’s
guardian ad litem); Gray v. Gladney Ctr., 79 Ark. App. 165, 176, 87 S.W.3d 797,
804 (Ark. Ct. App. 2002) (Hart, J., concurring) (noting that in adoption proceeding,
it would be “troubling” for person selected and paid by adoption agency to act as
guardian ad litem for minor mother). The same reasoning applies with equal force
here. Both the debtors and the attorneys representing present asbestos claimants
have interests that are in actual conflict with those of future claimants, and they
48
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should not be allowed to select the fiduciary who will represent those adverse
future claimants.
The Supreme Court has made clear all bankruptcy fiduciaries are held to
high standards. See, e.g., Woods v. City National Bank & Trust Co., 312 U.S. 262,
268 (1941) (holding that “[o]nly strict adherence to . . . equitable principles [of
fiduciary law] can keep the standard of conduct for [committee member]
fiduciaries ‘at a level higher than that trodden by the crowd’”) (citing Cardozo,
C.J., in Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (1928))
(emphasis supplied)). See also Mosser v. Darrow, 341 U.S. 267, 271 (1951)
(trustees are subject to “strict prohibitions”). Thus, the court below needed to deny
standard applied.
sustained the Committee’s objection and blocked inquiry by the government into
49
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Litig., 594 F.2d 1106, 1124 (7th Cir. 1979) (holding that where conduct of
privilege applies only if the parties invoking it share a “substantially similar legal
interest” in the communication being disclosed. Teleglobe, 493 F.3d at 365. The
party invoking the privilege bears the burden of proving the existence of a common
legal interest. In re Simplexity, LLC, 584 B.R. 495, 498 (Bankr. D. Del. 2018).
The existence of a “Common Interest Agreement” among parties “does not create
raising the “common interest privilege” objection at the evidentiary hearing was In
18
The common interest (or community-of-interest) privilege is the modern
successor to the “joint-defense privilege” that developed to enable criminal co-
defendants with separate counsel to coordinate their defenses. See In re Teleglobe
Commc’ns Corp., 493 F.3d 345, 363 (3d Cir. 2007).
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re Leslie Controls, Inc., 437 B.R. 493 (Bankr. D. Del. 2010). A890‒A895, Tr. at
available to pay asbestos claims, and the court therefore upheld the privilege
insurance coverage issues that the debtor’s counsel shared with the committee and
the FCR. Id. at 495, 503. In Simplexity, by contrast, because one of the parties
invoking the privilege had “no legal exposure” relating to the communications for
which discovery was sought, the parties had no common legal interest, only a
common financial interest. 584 B.R. at 501. As a result, the common interest
privilege did not apply, and the requested discovery was required to be produced.
Id.
The same ruling should have been made here. The government sought to
determine whether the debtors’ and the Lawyers’ interactions with Mr. Fitzpatrick
prevented him from being appointed as the independent fiduciary for future
interest privilege “requires the party invoking [it] to establish that the
437 B.R. at 497. But the privilege did not apply to Mr. Fitzpatrick’s prepetition
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debtors and the present asbestos claimants rather than an ally. As Leslie Controls
omitted).
Because Mr. Fitzpatrick and the other parties did not share a legitimate
common legal interest with regard to the communications the government sought
to discover, Mr. Fitzpatrick should have been required to disclose them. Without
knowing how Mr. Fitzpatrick carried out his prepetition duties, the court had no
way to determine whether Mr. Fitzpatrick was subject to conflicts of interest that
interfered with his ability to act post-petition as an independent fiduciary for future
affiliations.” In re Star Broad., Inc., 81 B.R. 835, 839 (Bankr. D.N.J. 1988)
with the debtors, personal injury law firms, and present asbestos claimants in other
asbestos trust matters fall within this definition, as do all facts relating to the
mutual decision of the debtors and the Lawyers to retain him in the course of their
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different cases. See Brown, 2008 Columbia Bus. Law Rev. at 900. Cross-
examination about them should have taken place. If, however, the court properly
sustained the claim of common interest privilege—that is, if the legal interests of
the debtors, the Lawyers, and Mr. Fitzpatrick are so intertwined that prepetition
appointment as FCR for the absent asbestos claimants under any standard.
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CONCLUSION
For these reasons, the United States Trustee respectfully asks this Court to
February 8, 2019
Respectfully submitted,
ANDREW R. VARA
ACTING UNITED STATES TRUSTEE
REGION 3
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CERTIFICATE OF COMPLIANCE
I certify that the foregoing brief complies with the type-volume limitations
set forth in Federal Bankruptcy Rule 8015(a)(7)(B) in that the brief contains
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ADDENDUM
• 11 U.S.C. § 524(g)
• 11 U.S.C. § 101(14)
• 11 U.S.C. § 327(a)
• 11 U.S.C. § 332(a)
• 11 U.S.C. § 333(a)
• 11 U.S.C. § 1104(d)
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11 U.S.C. § 524(g)
(g)(1)(A) After notice and hearing, a court that enters an order confirming a plan
of reorganization under chapter 11 may issue, in connection with such order, an
injunction in accordance with this subsection to supplement the injunctive effect of
a discharge under this section.
(B) An injunction may be issued under subparagraph (A) to enjoin entities from
taking legal action for the purpose of directly or indirectly collecting, recovering,
or receiving payment or recovery with respect to any claim or demand that, under a
plan of reorganization, is to be paid in whole or in part by a trust described in
paragraph (2)(B)(i), except such legal actions as are expressly allowed by the
injunction, the confirmation order, or the plan of reorganization.
(2)(A) Subject to subsection (h), if the requirements of subparagraph (B) are met
at the time an injunction described in paragraph (1) is entered, then after entry of
such injunction, any proceeding that involves the validity, application,
construction, or modification of such injunction, or of this subsection with respect
to such injunction, may be commenced only in the district court in which such
injunction was entered, and such court shall have exclusive jurisdiction over any
such proceeding without regard to the amount in controversy.
(B) The requirements of this subparagraph are that—
(i) the injunction is to be implemented in connection with a trust that,
pursuant to the plan of reorganization—
(I) is to assume the liabilities of a debtor which at the time of entry of
the order for relief has been named as a defendant in personal injury,
wrongful death, or property-damage actions seeking recovery for
damages allegedly caused by the presence of, or exposure to, asbestos or
asbestos-containing products;
(II) is to be funded in whole or in part by the securities of 1 or more
debtors involved in such plan and by the obligation of such debtor or
debtors to make future payments, including dividends;
(III) is to own, or by the exercise of rights granted under such plan
would be entitled to own if specified contingencies occur, a majority of
the voting shares of—
(aa) each such debtor;
(bb) the parent corporation of each such debtor; or
(cc) a subsidiary of each such debtor that is also a debtor; and
(IV) is to use its assets or income to pay claims and demands; and
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11 U.S.C. § 101(14)
***
11 U.S.C. § 327(a)
(a) Except as otherwise provided in this section, the trustee, with the court's
approval, may employ one or more attorneys, accountants, appraisers, auctioneers,
or other professional persons, that do not hold or represent an interest adverse to
the estate, and that are disinterested persons, to represent or assist the trustee in
carrying out the trustee's duties under this title.
11 U.S.C. § 332(a)
(a) If a hearing is required under section 363(b)(1)(B), the court shall order the
United States trustee to appoint, not later than 7 days before the commencement of
the hearing, 1 disinterested person (other than the United States trustee) to serve as
the consumer privacy ombudsman in the case and shall require that notice of such
hearing be timely given to such ombudsman.
11 U.S.C. § 333(a)
(a) (1) If the debtor in a case under chapter 7, 9, or 11 is a health care business, the
court shall order, not later than 30 days after the commencement of the case, the
appointment of an ombudsman to monitor the quality of patient care and to
represent the interests of the patients of the health care business unless the court
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finds that the appointment of such ombudsman is not necessary for the protection
of patients under the specific facts of the case.
(2) (A) If the court orders the appointment of an ombudsman under paragraph
(1), the United States trustee shall appoint 1 disinterested person (other than the
United States trustee) to serve as such ombudsman.
(B) If the debtor is a health care business that provides long-term care, then
the United States trustee may appoint the State Long-Term Care Ombudsman
appointed under the Older Americans Act of 1965 for the State in which the
case is pending to serve as the ombudsman required by paragraph (1).
(C) If the United States trustee does not appoint a State Long-Term Care
Ombudsman under subparagraph (B), the court shall notify the State Long-
Term Care Ombudsman appointed under the Older Americans Act of 1965 for
the State in which the case is pending, of the name and address of the person
who is appointed under subparagraph (A).
11 U.S.C. § 1104(d)
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CERTIFICATE OF SERVICE
TRUSTEE, via the CM/ECF Electronic Filing system and Electronic Mail on the
following:
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