In G-I Holdings Inc. v. Bennet (In re G-I Holdings Inc.),² the U.S. District Court for the District of New Jersey faced an issue of first impression that called upon the court to address the tension between §524(g) of the Bankruptcy Code and the Federal Declaratory Judgment Act, 28 U.S.C. §2201, et seq. In particular, the court considered the issue of whether a legal representative of future asbestos claimants could be conscripted to defend the interests of its constituency in a declaratory judgment action brought by the debtor seeking a declaration that its nondebtor subsidiary is not liable for any asbestos-related personal injury claims under theories of successor liability or "alter ego," or both.³ In short, the court held that the debtor could not circumvent the procedural mechanisms set forth in §524(g) of the Code by attempting to resolve its future asbestos liabilities through a declaratory judgment action.4

Background of In re G-I Holdings Inc.

G-I Holdings Inc. is a holding company and successor-in-interest to GAF Corp., an entity named in approximately 500,000 asbestos-related lawsuits.⁵ G-I Holdings was primarily forced to file for bankruptcy protection due to the overwhelming number of asbestos-related personal injury lawsuits filed against the company.⁶ Building Materials Corp. of America (BMCA), a leading manufacturer of roofing and building products, is an indirect subsidiary of G-I Holdings Inc. as well as the company's primary operating subsidiary and principal asset.⁷ Approximately 10 years ago, BMCA "received substantially all the assets of GAF's roofing products business and expressly assumed $204 million of asbestos liability, with G-I Holdings Inc. indemnifying BMCA against any additional asbestos liability."⁸ At the time G-I Holdings filed for bankruptcy protection, approximately 2,500 state law actions had been filed against BMCA alleging asbestos-related claims under theories of successor liability or "alter ego" status between G-I Holdings and BMCA.⁹ Shortly after the filing of its bankruptcy petition, the bankruptcy court appointed a legal representative to represent the interests of any "future claimants"; namely, those individuals currently unknown to the debtor and BMCA who have not yet manifested an asbestos-related injury, but who may hold future claims.¹⁰ BMCA has not filed for bankruptcy protection.

G-I Holdings and BMCA subsequently commenced an adversary proceeding under the Federal Declaratory Judgment Act against six individual asbestos claimants "on behalf of themselves and all others similarly situated, including all future asbestos claimants," seeking a declaration that BMCA is not liable for any asbestos claims under the legal theories of successor liability or "alter ego" status, or both.¹¹ The legal representative thereafter filed a motion for judgment on the pleadings under Federal Rule of Civil Procedure 12(c), arguing that G-I Holdings's reliance upon the Declaratory Judgment Act to resolve its future asbestos liabilities would "significantly undermine the protections for creditors built into the Code."¹² In other words, the legal representative maintained that the debtor and BMCA's utilization of the federal Declaratory Judgment Act could not be wielded to repudiate the statutory remedy specifically provided by Congress to future asbestos claimants in §524(g) of the Code. As a consequence, the objection by the legal representative directly pitted §524(g) of the Code against the federal Declaratory Judgment Act.

Federal Declaratory Judgment Act

28 U.S.C. §2201(a) provides in relevant part as follows: "[i]n a case of actual controversy within its jurisdiction...any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought."¹³ The Declaratory Judgment Act permits prospective defendants to initiate a lawsuit to establish their "nonliability."¹⁴ Indeed, a declaratory judgment action allows an adjudication "of the parties' rights and obligations on a matter in dispute regardless of whether claims for damages or injunctive relief have yet arisen."¹⁵ By filing a declaratory judgment action, a party who is reasonably at legal risk because of an unresolved dispute can obtain a judicial determination of the dispute without having to await the commencement of legal action by the other side.¹⁶ Generally, the granting of declaratory relief is proper only "where the judgment will serve a useful purpose in clarifying and settling the legal relations in issue" or "when it will terminate and afford relief from the uncertainty, insecurity and controversy giving rise to the proceedings."¹⁷ In light of the policy underpinning the Declaratory Judgment Act of alleviating uncertainty with respect to legal rights and obligations, the Act is liberally construed in order to effectuate this remedial purpose.¹⁸

Despite this liberal construction, however, a party proceeding under the Declaratory Judgment Act must demonstrate an "actual controversy" between the parties before a federal court will exercise jurisdiction over an action for a declaratory judgment.¹⁹ The presence of an actual controversy within the meaning of the Declaratory Judgment Act depends on "whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment."²⁰ Even if a party demonstrates the presence of an "actual controversy," a court is "not required to exercise declaratory judgment jurisdiction, but has substantial discretion to decline that jurisdiction."²¹ Finally, a court must articulate "well-founded reasons" for declining to adjudicate a declaratory judgment action.²²

Section 524(g) of the Code

Enacted by Congress as part of the Bankruptcy Reform Act of 1994, §524(g) of the Code contains provisions for supplemental "channeling injunctions" to debtors facing liability as a result of mass exposure to asbestos or asbestos-containing products. The procedures contained in §524(g) involve the establishment of a trust to pay future asbestos-related personal injury claimants, together with an injunction to prohibit future claimants from suing the debtor.²³ Thus, the process of channeling asbestos-related claims to a personal injury trust "relieves the debtor of the uncertainty of future asbestos liabilities."²⁴ Section 524(g) authorizes the court to enter an injunction against any entity taking legal action "to collect a claim or demand that is to be paid in whole or in part by a trust created through a qualifying plan of reorganization."²⁵ Significantly, a §524(g) channeling injunction can provide the debtor with protection against future claimants, even if the "demand"²⁶ did not constitute a claim in the bankruptcy case, so long as the future demand arises out of the same or similar conduct or events that gave rise to the claims addressed by the injunction.²⁷

A §524(g) channeling injunction can only be issued if certain conditions are satisfied. First, a court can enter an injunction to supplement the injunctive effect of a discharge only in connection with an order confirming a reorganization plan and only after notice and a hearing.²⁸ Second, in accordance with an approved reorganization plan, the established trust must assume the liabilities of the debtor "at the time of entry of the order for relief" as a result of the debtor being named as a defendant in numerous tort actions seeking the recovery of damages allegedly caused by the presence of, or exposure to, asbestos or asbestos-containing products.²⁹ Third, the trust must be funded in whole or in part by the securities of one or more debtors involved in the confirmed reorganization plan "and by the obligation of such debtor or debtors to make future payments, including dividends."³⁰ Fourth, the trust must own, or be entitled to become the owner of, a majority of the voting shares of each debtor, the parent corporation of each debtor and any subsidiary of each debtor that is also a debtor in bankruptcy.³¹ Fifth, the court must make several preliminary determinations. The court must find that (1) the debtor is likely to be subject to substantial future demands for payment as a result of asbestos-related claims;³² (2) the actual amounts, numbers and timing of the future demands cannot be determined;³³ (3) the pursuit of the asbestos-related demands outside of the procedures established by the reorganization plan "is likely to threaten the plan's purpose to deal equitably with claims and future demands;"³⁴ (4) after describing the terms of the injunction in the plan and disclosure statement, a separate class of claimants whose claims form the subject of the injunction is established, and the class votes, by at least 75 percent of those voting, in favor of the plan;³⁵ and (5) the trust will operate in a manner so as to provide reasonable assurance that it will both value and be in a position to pay present claims and future demands involving similar claims "in substantially the same manner."³⁶ Sixth, as part of approving the supplemental injunction and reorganization plan, the court must appoint a legal representative for the purpose of protecting the rights of future holders of asbestos-related demands.³⁷ Seventh, the court must determine that with respect to future claimants, the injunction is both "fair and equitable" in light of the "benefits provided, or to be provided" to the trust on behalf of each debtor protected by the supplemental injunction.³⁸ Once the court approves the reorganization plan incorporating the trust and enters the supplemental injunction, it controls the future litigation of all asbestos-related claims against the entity or entities it protects.³⁹

The In re G-I Holdings Inc. Decision

Based on the fundamental purposes behind the enactment of the Declaratory Judgment Act—namely, to adjudicate the parties' rights and obligations to determine if any liability exists—it would initially appear that the debtor's declaratory judgment action was a well-founded effort to resolve many uncertainties concerning its prospect of reorganization with respect to the company's future asbestos-related liabilities. However, under the circumstances, the court could not harmonize the Declaratory Judgment Act with §524(g) of the Code as it pertained to future asbestos claimants. Appreciating the need to protect the due-process rights of future claimants, the court observed that the purpose of the declaratory judgment action was not intended to bind the legal representative for purposes of crafting a channeling injunction, but to bypass §524(g) altogether by obtaining a ruling that BMCA has no successor liability to the asbestos-related claims of G-I Holdings or GAF Corp.⁴⁰ In so finding, the court rejected the argument advanced by the debtor and BMCA "that the legal representative acts as a guardian ad litem for the future claimants whose virtual representation of his constituents will properly bind them" to the determination of successor liability.⁴¹ Rather, while recognizing that a complete determination on the potential successor liability of BMCA would "aid in reorganizing [G-I Holdings] to maximize value without a cloud of future claims,"⁴² the court ultimately concluded that the attempt to bind the legal representative and the constituency of future asbestos-related claimants through a utilization of the federal Declaratory Judgment Act distorted the statutory function of a legal representative under §524(g) of the Code.⁴³ Consequently, while the federal Declaratory Judgment Act may provide an available remedy for a party to pursue in a given dispute, the decision in In re G-I Holdings Inc. clarifies that such relief is improper in a situation where a comprehensive statutory scheme has been established by Congress and a particular remedy has been prescribed, such as in §524(g).

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Footnotes

¹ The author is currently serving a judicial clerkship with Hon. Donald H. Steckroth of the U.S. Bankruptcy Court for the District of New Jersey. He is also pursuing an LL.M. in Bankruptcy from St. John's University School of Law, where he was recently named the ABI Scholar. In addition, Mr. Sousa is an adjunct professor of law at Seton Hall University School of Law and an assistant adjunct professor at New York University, where he teaches a course on bankruptcy and business reorganization. Mr. Sousa is also a contributing editor for ABI's Third Circuit Decisions Update. Return to article

² 328 B.R. 691 (D. N.J. 2005). Return to article

³ Id. at 693. Return to article

⁴ Id. at 698. Return to article

⁵ In re G-I Holdings Inc., 323 B.R. 583, 587-88 (Bankr. D. N.J. 2005). Return to article

⁶ 328 B.R. at 693. Return to article

⁷ 323 B.R. at 588. Return to article

⁸ Id. Return to article

⁹ 328 B.R. at 693. Return to article

¹⁰ Id. Return to article

¹¹ Id. Return to article

¹² Id. at 694 (citing Ortiz v. Fibreboard Corp., 527 U.S. 815, 860 n.34, 119 S.Ct. 2295, 144 L.Ed.2d 715 (1999)). Return to article

¹³ 28 U.S.C. §2201(a) (West 2005). Return to article

¹⁴ Beacon Theatres Inc. v. Westover, 359 U.S. 500, 504, 79 S.Ct. 948, 3 L.Ed.2d 988 (1959). Return to article

¹⁵ Dep't. of Transp. v. Heavy Vehicle Elec. License Plate Inc., 198 F. Supp. 2d 1202, 1206 (D. Or. 2002). See, also, Channel Master Corp. v. JFD Elecs. Corp., 263 F. Supp. 7, 8 (E.D.N.Y. 1967) (noting that the fundamental purpose of the Declaratory Judgment Act is "to avoid accrual of avoidable damages to one not certain of his [or her] rights and to afford him [or her] an early adjudication without waiting until his [or her] adversary should see fit to begin suit, after damage has accrued") (citation omitted). Return to article

¹⁶ Elecs. for Imaging Inc. v. Coyle, 394 F.3d 1341, 1345 (Fed. Cir. 2005) (citing BP Chems. Ltd. v. Union Carbide Corp., 4 F.3d 975, 977 (Fed. Cir. 1993)). See, also, Downington Indus. & Agric. Sch. v. Commonwealth of Pa., 172 B.R. 813, 819 (E.D. Pa. 1994) (noting that the Declaratory Judgment Act allows a court to settle the parties' respective rights even before there is a "violation of law, exercise of right or breach of duty"). Return to article

¹⁷ Maryland Cas. Co. v. Rosen, 445 F.2d 1012, 1014 (2d Cir. 1971) (citation omitted); Alliant Energy Corp. v. Alltel Corp., 344 F.Supp.2d 1176, 1192 (S.D. Iowa 2004). Return to article

¹⁸ Sears Roebuck & Co. v. Zurich Ins. Co., 299 F.Supp. 518, 519 (N.D. Ill. 1969) (citation omitted); Akzona Inc. v. E.I. du Pont de Nemours & Co., 662 F.Supp. 603, 615 (D. Del. 1987) ("The Declaratory Judgment Act does have a broad remedial purpose and, therefore, should be construed liberally") (citation omitted). Return to article

¹⁹ Teva Pharm. USA Inc. v. Pfizer Inc., 395 F.3d 1324, 1331 (Fed. Cir. 2005) (citing EMC Corp. v. Norand Corp., 89 F.3d 807, 810 (Fed. Cir. 1996)). Return to article

²⁰ Md. Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270, 273, 61 S.Ct. 510, 85 L.Ed. 826 (1941) (citing Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 239-42, 57 S.Ct. 461, 81 L.Ed. 617 (1937)). In In re G-I Holdings Inc., the legal representative also objected to the declaratory judgment action on the ground that the dispute between the debtor, BMCA and the future asbestos claimants did not involve a controversy of "sufficient immediacy." 328 B.R. at 694. The district court, however, did not reach this issue. Although the question of whether the claims of future asbestos plaintiffs, when measured against the reorganization efforts of a debtor, are within the "actual case or controversy" requirement for purposes of standing and federal court jurisdiction is intriguing, it is beyond the scope of this article. Return to article

²¹ Teva Pharm. USA Inc. v. Pfizer Inc., 395 F.3d 1324, 1331 (Fed. Cir. 2005) (citation omitted); Beacon Constr. Co. v. Matco Elec. Co., 521 F.2d 392, 397 (2d Cir. 1975) (noting that the Declaratory Judgment Act "confers a discretion on the courts' to grant or deny declaratory relief ‘rather than an absolute right upon the litigant'") (quoting Pub. Serv. Comm'n v. Wycoff Co., 344 U.S. 237, 241, 73 S.Ct. 236, 97 L.Ed. 291 (1952). In deciding whether to exercise discretion and entertain a declaratory judgment action, the courts generally consider the following factors: (1) whether the judgment would settle the controversy, (2) whether the declaratory judgment action would serve a useful purpose in clarifying the legal relations at issue, (3) whether the declaratory remedy is being used merely for the purpose of "procedural fencing" or "to provide an arena for a race for res judicata," (4) whether the use of a declaratory action would increase the friction between [the] federal and state courts and improperly encroach on state jurisdiction and (5) whether there is an alternative remedy that is better or more effective. Northland Ins. Co. v. Stewart Title Guar. Co., 327 F.3d 448, 453 (6th Cir. 2003) (citation omitted). See, also, Bell Helicopter Textron Inc. v. Heliqwest Int'l. Ltd., 385 F.3d 1291, 1299 (10th Cir. 2004) (utilizing the same criteria). Return to article

²² Capo Inc. v. Dioptics Med. Prods. Inc., 387 F.3d 1352, 1355 (Fed. Cir. 2004) (citing Pub. Affairs Assocs. Inc. v. Rickover, 369 U.S. 111, 112, 82 S.Ct. 580, 7 L.Ed.2d 604 (1962)). Return to article

²³ See, generally, 11 U.S.C. §524(g) (West 2005). Return to article

²⁴ In re Combustion Eng'g. Inc., 391 F.3d 190, 234 (3d Cir. 2004). Return to article

²⁵ 4 Collier on Bankruptcy ¶524.07[1] (15th ed. rev. 2005). Return to article

²⁶ Section 524(g)(5) of the Code defines a "demand" as a "demand for payment, present or future...." See 11 U.S.C. §524(g)(5) (West 2005). Return to article

²⁷ 11 U.S.C. §524(g)(5) (West 2005); 4 Collier on Bankruptcy ¶524.07[1] (15th ed. rev. 2005). Return to article

²⁸ 11 U.S.C. §524(g)(1)(A) (West 2005). Return to article

²⁹ 11 U.S.C. §524(g)(2)(B)(i)(I) (West 2005). Return to article

³⁰ 11 U.S.C. §524(g)(2)(B)(i)(II) (West 2005). Return to article

³¹ 11 U.S.C. §524(g)(2)(B)(i)(III) (West 2005). "This provision is to ensure that if there are not sufficient funds in the trust otherwise, the trust may obtain control of the debtor company." 4 Collier on Bankruptcy ¶524.07[2] (15th ed. rev. 2005) (quoting 140 Cong. Rec. H10,765 (daily ed. Oct. 4, 1994)). Return to article

³² 11 U.S.C. §524(g)(2)(B)(ii)(I) (West 2005). Return to article

³³ 11 U.S.C. §524(g)(2)(B)(ii)(II) (West 2005). Return to article

³⁴ 11 U.S.C. §524(g)(2)(B)(ii)(III) (West 2005). Return to article

³⁵ 11 U.S.C. §524(g)(2)(B)(ii)(IV) (West 2005). Return to article

³⁶ 11 U.S.C. §524(g)(2)(B)(ii)(V) (West 2005). Return to article

³⁷ 11 U.S.C. §524(g)(4)(B)(i) (West 2005). Return to article

³⁸ 11 U.S.C. §524(g)(4)(B)(ii) (West 2005); 4 Collier on Bankruptcy ¶524.07[2] (15th ed. rev. 2005). Return to article

³⁹ 4 Collier on Bankruptcy ¶524.07[3] (15th ed. rev. 2005). Return to article

⁴⁰ 328 B.R. at 697. Return to article

⁴¹ Id. at 695. Return to article

⁴² Id. at 698. Return to article

⁴³ Id. Return to article