The United States Court of Appeals for the Third Circuit held that a channeling injunction entered in the Chapter 11 bankruptcy proceeding of W.R. Grace & Co. (Grace) protected one of its insurers, Continental Casualty Company and Transportation Insurance Company (CNA), from claims that CNA was independently liable for asbestos-related injuries because it was negligent in providing industrial hygiene services in conjunction with worker’s compensation and employer’s liability policies it issued to Grace.
Mass-tort liability drove Grace into Chapter 11 bankruptcy reorganization. The Bankruptcy Code allows a court to supplement a confirmed plan of reorganization by entering an injunction that channels a debtor’s liability into a trust set up to compensate persons injured by the debtor’s asbestos. The bankruptcy court issued such an injunction in Grace’s bankruptcy.
The plaintiffs attempted to make an end-run around the injunction by alleging that CNA was independently negligent when it failed to warn Grace’s workers or recommend additional safety measures to Grace when CNA’s industrial hygienists inspected Grace’s operations. The plaintiffs further argued that the channeling injunction did not apply because it contained an exception for rights and obligations that pertained solely to worker’s compensation benefits.
The Third Circuit disagreed. It held that the channeling injunction covered liability both directly and indirectly related to exposure to Grace’s asbestos. However, the court cautioned that involvement of the debtor’s asbestos alone was not dispositive; courts should review the law applicable to the claims being raised against the third party (here, CNA) to determine whether the third-party’s liability is wholly separate from the debtor’s liability or instead depends on it. CNA would not have been liable but for Grace’s asbestos liability. As a result, the channeling injunction applied, and plaintiffs’ claims were properly dismissed.