Power of the Bankruptcy Court to Enjoin Creditor Claims Against Nondebtor Parties in Light of 11 U.S.C. § 524(e): In re Dow Corning Corp., The

Brigham Young University Law Review, 2004 by Jardine, Jason J

I. INTRODUCTION

The litigation surrounding claims against Dow Corning Corporation, manufacturer of silicone-gel breast implants, may finally come to an end.1 Dow Corning, a subsidiary of Dow Chemical Company and Corning Glass, Inc., produced silicone-gel products for nearly three decades.2 Allegations that implants caused auto-immune disorders began a flood of litigation against Dow Corning.3 After an unexpected rush of new claimants, a proposed $4.255 billion settlement fell apart.4 Dow Corning then filed for Chapter 11 bankruptcy and sought a reorganization plan that would bring finality to the litigation.5 Eventually, the bankruptcy court approved a reorganization plan that was affirmed by the U.S. Court of Appeals for the Sixth Circuit.6

Usually, a bankruptcy court in a Chapter 11 bankruptcy proceeding may stay litigation against the debtor to allow the debtor to reorganize or liquidate.7 In addition to staying litigation against Dow Corning, however, the plan approved by the bankruptcy court included two potentially problematic provisions as a quid pro quo for sizeable monetary contributions to the fund. These provisions released Dow Coming's insurers and shareholders from further liability on personal injury claims and permanently enjoined parties from bringing action against Dow Coming's insurers, shareholders, or subsidiaries once the creditors' claims were satisfied as against Dow Corning.8 Generally, in a Chapter 11 proceeding, the bankruptcy court has authority to decide issues between debtors and creditors, but not claims between creditors and nondebtor third parties. Because of the unusual circumstances in this case-the large number of tort claims and the potential for indemnification that would nullify any settlement with Dow Corning-the bankruptcy court exercised unusual authority to enjoin creditor claims against specific nondebtor parties.

A potential impact of the Sixth Circuit's recent decision is that it may allow a bankruptcy court to have virtually unlimited power to release claims in future mass tort litigation. Although not explicitly provided in the language of the Bankruptcy Code (hereinafter, "the Code"), a bankruptcy court is endowed with broad equitable power under 11 U.S.C. § 105 to effectuate a successful reorganization plan for the debtor. This equitable power may be used to enjoin suits by creditors against nondebtor third parties, but should be used only in the unusual circumstances accompanying mass tort or complex litigation proceedings.

This Note concludes that a bankruptcy court does have broad equitable power that is not limited by 11 U.S.C. § 524(e)9 to issue third-party injunctions in favor of nondebtor parties. The Sixth Circuit's reasoning correctly limits a bankruptcy court's power through its use of an "unusual circumstances" test. Part II reviews the purpose and history of § 524(e) and subsequent court rulings interpreting this section. Part III introduces the attitude of the Sixth Circuit's consideration of In re Dow Corning and the argument that broad equitable powers and unusual circumstances justify the release and injunction of claims. Part TV concludes that the Sixth Circuit correctly analyzed the Dow Corning problem and provided a useful framework for resolving future mass tort litigation in the bankruptcy court. Part V offers a brief conclusion.

II. BACKGROUND: THE LIMITATIONS ON A BANICRUPTCY COURT'S POWER

A bankruptcy court has considerable discretion in structuring debtor reorganization and providing for maximum creditor satisfaction. Bankruptcy courts rely on provisions of the Code that grant bankruptcy courts the authority to control debtors' attempts to reorganize or liquidate assets and satisfy creditor demands. For example, all federal circuit courts of appeal recognize that § 105 grants bankruptcy courts broad equitable powers to effectuate solutions that are "necessary" or "appropriate" and comply with other sections of the Code.10

From its plain language, § 105 only functions to enforce other provisions of the Code.11 Thus, bankruptcy courts cannot exercise § 105 power in situations where it is deemed inconsistent with another provision of the Code.12 Even if a provision in the statute is not facially inconsistent, a reorganization plan must be either "necessary" or "appropriate" for § 105 to give adequate authority to enjoin third-party nondebtors.13 So, if the use of § 105 is inconsistent with other provisions of the Code or if the § 105 power is neither necessary nor appropriate for the reorganization, then bankruptcy courts will not have the requisite statutory power to enjoin claims in favor of nondebtor parties.14

Does a bankruptcy court's statutory grant of authority in § 105(a) extend to situations involving persons or entities that are involved in the litigation, but which are not debtors in bankruptcy? The Code does contain provisions that allow injunctions of claims between creditors and debtors, without which, the claims might prevent or adversely affect an otherwise successful reorganization.15 However, the Code contains no express grant of authority that allows a bankruptcy court to enjoin claims against nondebtor third parties, even if the reorganization might be affected.