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The Delaware Bankruptcy Insider is a premier blog designed to bring its readers a comprehensive analysis of the latest Delaware corporate bankruptcy news and rulings. Brought to you by Ashby & Geddes, P.A.
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- Judge Mary F. Walrath
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- Third Circuit Reversal Paves the Way For NextEra to Potentially Recover Administrative Expenses Incurred in Connection With Failed Merger
- Delaware District Court Disagrees with Bankruptcy Court’s Ruling and Holds That Committee’s Challenge Rights Survived Entry of the Sale Order and Consummation of Sale
- “Straddling the Line”: Delaware Bankruptcy Court Rules That Not All Tax Liabilities Incurred During a Debtor’s Petition Year are Eligible for Administrative Expense Priority
Insider’s Scoop: Judge Silverstein Imposes Heightened Standard Regarding Appointment of Future Claims Representative
In this Bench Ruling, Judge Silverstein departed from a long line of cases concerning the applicable standard of scrutiny when evaluating the candidacy of a proposed future claims representative (“FCR”).
Imerys Talc America, Inc. and certain of its affiliated entities (the “Debtors”) filed their chapter 11 petitions in the Delaware Bankruptcy Court on February 13, 2019. On February 27, the Debtors filed a motion to appoint James L. Patton, Jr. as the Legal Representative for Future Talc Personal Injury Claimants. On April 10, the Office of the United States Trustee (“UST”) filed an objection to the Debtors’ motion and also separately filed its own motion to appoint an FCR. On April 19, in addition to their previously filed objection to the Debtors’ motion, certain insurers (the “Excess Insurers”) filed a motion to, among other things, postpone the hearing to appoint an FCR. Both Debtors and the Official Committee of Tort Claimants (the “Committee”) filed a reply in support of the Debtors’ motion and an objection to the UST’s motion.
The parties disagreed regarding the standard applicable to the evaluation of an FCR candidate. The Debtors and Committee contended that the appropriate standard should be one of “disinterestedness” and pointed to other courts that have applied such a standard when evaluating the appointment of an FCR. The UST took the position that a heightened standard should be applied, whereby an FCR would be required to be disinterested, qualified, independent and free from entanglements with his or her adversaries. The Excess Insurers argued that an FCR candidate should be evaluated similarly to a guardian ad litem candidate and that any FCR candidate should be excluded from consideration upon an “appearance of impropriety.”
Judge Silverstein agreed with the Debtors and Committee that courts have used the “disinterestedness” standard in the past to evaluate the candidacy of a proposed FCR. However, Her Honor looked to the text of the Bankruptcy Code, noting that while the “disinterestedness” standard is explicitly set forth in many provisions of the Bankruptcy Code, section 524(g) does not incorporate such a standard. Judge Silverstein acknowledged that the FCR is the spokesperson for future claimants, and as such, the FCR is the substitute for the client in an attorney/client relationship. In bankruptcy terminology an FCR is most akin to a committee member, as he or she is tasked with performing the duties of a committee member as applicable to future claimants.
Judge Silverstein concluded that an FCR is much more like a guardian ad litem than those persons subject to the “disinterestedness” standard under the Bankruptcy Code and, therefore, refused to apply the “disinterestedness” standard. Judge Silverstein ruled that an FCR “must be independent of the debtors and other parties-in-interest in the case and be able to effectively speak for [his or her] constituency. [The FCR’s] loyalties must lie with the demand holders for whom [the FCR] acts as a fiduciary . . . .” Importantly, Judge Silverstein also noted that she would show no more or less preference to an FCR candidate due to the fact that he or she was proposed by a Debtor or any other party.
Takeaway: In reaching her decision, Judge Silverstein departed from a long line of cases in which bankruptcy courts have evaluated an FCR candidate under the “disinterestedness” standard. However, Her Honor noted that parties have only recently begun to challenge such standard. As such, courts have only begun to explore the appropriate standard in this context. Parties pushing, or opposing, the candidacy of a proposed FCR would be wise to keep this decision in mind moving forward.
*Judge Silverstein has since determined that Mr. Patton meets the above criteria and has entered an order appointing Mr. Patton as the FCR in these cases.