Debtor’s Motion for Preliminary Injunction Granted

Jurisdiction: United States Bankruptcy Court for the District of New Jersey

Whittaker, Clark & Daniels Inc. and its affiliates (Debtors) initiated this bankruptcy action with the Federal District Court of New Jersey. They previously filed for Chapter 11 bankruptcy to address and resolve existing and future claims alleging injuries from exposure to products containing talc, asbestos, or chemical compounds processed or distributed by the debtors or their predecessors in interest. As a result of this litigation, debtors are defendants in 638 lawsuits across more than 30 different jurisdictions. Much of the litigation also includes claims against Brenntag North America and its related entities (Brenntag), which, in 2004, purchased substantially all the debtors’ operating assets, including indemnification rights against certain debtors.

After dispositive motion practice, the federal court issued a decision by holding any tort claim that seeks to establish non-debtor entities’ liability on any grounds including, without limitation, that such entities are successors to, or alter egos of, the debtors — such as Brenntag — is property of the bankruptcy estate. The court, therefore, continued the existing Temporary Restraining Order (TRO), but required the debtors to enter into a settlement to fully and address all tort claims by a date certain.

Debtors heeded the court’s instruction and, thereafter, filed a settlement motion seeking approval of an agreement between and among the debtors, Brenntag, NICO, and DB US Holding Corp. (DBUS) that purports to resolve all bankruptcy estate causes of action against the contributing parties and their related parties (including Successor Liability Claims) in exchange for $535 million and mutual releases.

Debtors then filed a motion to amend the complaint — which the court granted — and a motion to extend the automatic stay and/or preliminarily enjoin certain actions against non-debtors pending a final decision of the debtors’ settlement motion. The court also granted the latter motion and entered an order enforcing the automatic stay and temporarily restraining certain actions against non-debtors (October TRO), which identified the restrained actions.This decision followed a final hearing regarding the October TRO.

Debtors’ motion sought a determination that all 683 lawsuits listed in the schedule are subject to the stay because: (1) they include express successor liability claims; (2) they contain a bifurcation stipulation in which the plaintiff acknowledges Brenntag as successor to debtor(s); or (3) they allege pre-2004 exposure, rendering them effective successor liability claims and/or necessarily impacting debtors’ rights and defenses and creating the potential for application of res judicata and collateral estoppel, as well as record taint, under 11 U.S.C. § 362(a) and binding case precedent. The court found it was beyond dispute that a majority of the lawsuits are subject to the stay because they include express successor liability claims and because of the bifurcation stipulation pursuant to § 362(a). The remaining 21 actions – which allege pre-2004 exposure – must also fall within § 362(a) or, in the alternative, must have “unusual circumstances” presented as defined by case precedent.

Third Circuit jurisprudence permits extension of the automatic stay to nonbankrupt codefendants where “unusual circumstances” exist. McCartney, 106 F.3d at 510 (citing A.H. Robins, 788 F.2d at 999; see also In re Philadelphia Newspapers, LLC, 423 B.R. at 104)). The McCartneycourt explained that such unusual circumstances may be found “where ‘there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor.” Id. Unusual circumstances have also been found where a third-party action will have an adverse impact on the debtor’s ability to reorganize effectively, or where a debtor faces potential indemnification obligations. See, e.g., In re Philadelphia Newspapers, LLC, 407 B.R. 606, 616 (E.D. Pa. 2009). Third Circuit precedent also does not require “absolute” indemnity or that it be “automatic” or an “inevitable certainty” to warrant extension of the stay. See In re LTL MANAGEMENT, LLC, 638 B.R. at 312. As an illustration, however, the court highlighted the fact that in McCartney, the Third Circuit cited a Delaware bankruptcy case for the proposition that extension of a stay is appropriate where indemnification obligations exist. See American Film Technologies v. Taritero (In re American Film Technologies), 175 B.R. 847 (Bankr. D. Del. 1994) In this case, the bankruptcy court extended the stay where the obligation to indemnify was far from established. Id.

Assuming arguendothat the pre-2004 exposure allegations are not already subject to the automatic stay, the court found cause to extend the stay to preclude these actions. In support of this finding, the court noted the pre-2004 exposure allegations trigger Debtor(s)’ potential liability.Evidence of debtors’ conduct and culpability will be introduced, and findings will be rendered that may have future implications for debtors — either through findings of liability or through indemnification obligations. Thus, debtors will be faced with the Hobson’s choice of either standing idly by while their rights and defenses are not protected, or, alternatively, expending what little estate resources remain to prevent findings and/or judgments that may be employed against them in the future. These distractions will impede reorganizational efforts. Moreover, debtors’ indemnification obligations owing to Brenntag are not in dispute. The indemnity provision in question declared that debtors must indemnify Brenntag for any “damages . . . allegedly caused by asbestos, asbestiform minerals and/or asbestos-containing products allegedly mined, manufactured, distributed, sold, used, installed, maintained, or possessed by [Debtors].” While the extent and scope of debtors’ indemnification obligation remain unknown at this juncture (judgments have not been rendered), it is conceivable that any action in which a finding of liability could be bottomed on pre-2004 exposure may trigger the referenced indemnification clause. The court therefore would not require the bankruptcy estate to bear such risks.As such, the court found the automatic stay should be continued to all 638 lawsuits pursuant to § 362(a) or, in the alternative, that “unusual circumstances” were presented that warranted a continuation of the automatic stay. Id.

To the extent that § 362(a) does not serve as an independent basis for extension of the stay to non-debtor parties, the court determines that a preliminary injunction under 11 U.S.C. § 105(a) to continue the stay is appropriate. In determining whether a preliminary injunction is appropriate, the court considers the following factors: (1) whether the movant has shown a reasonable probability of success on the merits; (2) whether the movant will be irreparably injured by denial of the relief; (3) whether granting preliminary relief will result in even greater harm to the nonmoving party; and (4) whether granting the preliminary relief will be in the public interest. See McTernan v. City of York, Pa., 577 F.3d 521, 527 (3d Cir. 2009) (quoting United States v. Bell, 414 F.3d 474, 478 n.4 (3d Cir. 2005)); see also ADP, Inc. v. Levin, No. 21-2187, 2022 U.S. App. LEXIS 10990, 2022 WL 1184202, at *1 (3d Cir. Apr. 21, 2022). “A preliminary injunction is an ‘extraordinary remedy, which should be granted only in limited circumstances.’ ” Kos Pharms., Inc. v. Andrx Corp., 369 F.3d 700, 708 (3d Cir. 2004) (quoting Instant Air Freight Co. v. C.F. Air Freight, Inc., 882 F.2d 797, 800 (3d Cir. 1989)). The court concluded the debtors had satisfied all factors. Id. In view of the above, the court ultimately held that the 368 actions are subject to the automatic stay under § 362 or, in the alternative, that “unusual circumstances” exist warranting an extension of the automatic stay to Brenntag under § 362(a). In the alternative, the court determined a preliminary injunction extending the stay was appropriate pursuant § 105(a).