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In re Johns-Manville Corp.

decided: September 10, 1986.

IN RE JOHNS-MANVILLE CORPORATION ET AL., NOS. 82 B 11656 THROUGH 11676; MANVILLE CORPORATION, PLAINTIFF-APPELLEE,
v.
THE EQUITY SECURITY HOLDERS COMMITTEE, A.F. INVESTMENTS AND BANKERS NATIONAL LIFE INSURANCE COMPANY AND CENTERRE TRUST COMPANY OF ST. LOUIS AND CLAYTON & DUBILIER INC. AND LEON B. DUBIN AND THE INDEPENDENT INSURANCE GROUP, INC. AND BERTRAND A. MCKITTRICK AND SHLOMO NUTOVIC AND RAYTHEON FINANCIAL CORPORATION AND LEONARD STAROBIN (STARR) AS MEMBERS OF THE EQUITY SECURITY HOLDERS COMMITTEE, DEFENDANTS-APPELLANTS, COMMITTEE OF UNSECURED CREDITORS, COMMITTEE OF ASBESTOS HEALTH RELATED CLAIMANTS AND/OR CREDITORS ("ASBESTOS HEALTH COMMITTEE"), SECURITIES AND EXCHANGE COMMISSION AND LEON SILVERMAN, THE LEGAL REPRESENTATIVE, PARTIES IN INTEREST



Appeal from a judgment of the United States District Court for the Southern District of New York, Goettel, J., affirming the decision of the bankruptcy court to enjoin appellants from pursuing an action in state court and to grant summary judgment in favor of appellees. Reversed and remanded.

Author: Mahoney

Before: OAKES, ALTIMARI and MAHONEY, Circuit Judges.

MAHONEY, Circuit Judge:

This action, one segment in a long-running Chapter 11 reorganization proceeding, arose in consequence of the competing interests of creditors, stockholders, and the board of directors in the development of rehabilitation plans for appellee, the Manville Corporation ("Manville"), formerly Johns-Manville Corporation. Appellants are the Equity Security Holders Committee and individual members of that committee (collectively the "Equity Committee"), appointed by the bankruptcy court to represent the interests of stockholders in Manville's reorganization.*fn1 The Securities and Exchange Commission, although technically an appellee, shares the interests of the Equity Committee in the matter at hand.*fn2 Manville is aligned for purposes of this appeal with the Committee of Asbestos Health Related Claimants and/or Creditors (the "Asbestos Health Committee"), which represents the interests of the victims of diseases resulting from exposure to asbestos who have presently existing claims in tort against Manville, and with the Legal Representative, who represents the interests of future claimants who have not yet manifested such diseases.

The instant conflict arises in part because each of the committees representing the various interests in Manville must depend upon the Manville board of directors to advance those interests in the bankruptcy court at this stage of the rehabilitation proceedings. As debtor, Manville had the exclusive right under the Bankruptcy Code to file rehabilitation plans for the first 120 days of reorganization, and the bankruptcy court in these proceedings has granted Manville several extensions prolonging its exclusive filing period. See 11 U.S.C. § 1121(b), (d) (1982 & Supp. III 1986). Therefore, although in theory each of the committees may one day have the opportunity to submit a rehabilitation plan to the bankruptcy court if Manville's own proposals are rejected or if a trustee is appointed to replace the Manville board, see id. § 1121(c), Manville has for three or four years enjoyed the exclusive right, after negotiating with the committees, to file proposed plans. And although any of the committees may decline to accept a plan submitted to the bankruptcy court for confirmation, the power to formulate such plans in the first instance or at least to exercise a voice in their formulation is clearly a desideratum under the program laid down by the Bankruptcy Code, because the bankruptcy court may confirm a plan with or without the acquiescence of all classes of claims. If any impaired class*fn3 rejects Manville's proposed plan, the court will nevertheless confirm it, upon Manville's request, so long as at least one impaired class has accepted the plan and so long as the court determines that the plan "does not discriminate unfairly" and is "fair and equitable" to each impaired class that has not accepted it. 11 U.S.C. § 1129(b)(1) (1982 & Supp. III 1986).

In order to channel negotiations toward acceptable plans, the various factions interested in Manville's rehabilitation have formed ad hoc alliances when the occasion has called for them. The challenge all the committees have faced is to fashion a plan that will preserve Manville's capacity to generate enough revenue to pay existing creditors, to cover its liabilities to present and future tort claimants where liability is certain though its precise extent is unknown, and to satisfy Manville's shareholders. The seemingly strange bedfellows in the instant litigation, Manville and the committees representing present and future tort claimants, have long struggled to devise a reorganization plan acceptable to each. Along the way they have at times been antagonists rather than allies. For example, the Asbestos Health Committee opposed Manville's first proposed plan, sanctioned by the Equity Committee and filed on November 21, 1983. Other disputes, such as the Asbestos Health Committee's initial refusal to represent future tort claimants, which led to litigation over the appointment of the Legal Representative, see In re Johns-Manville Corp., 36 Bankr. 743, 749 n.3 (Bankr. S.D.N.Y.), appeal denied, 39 Bankr. 234 (S.D.N.Y. 1984), and the Asbestos Health Committee's motion to dismiss Manville's Chapter 11 petition, see In re Johns-Manville Corp., 36 Bankr. 727, 729-30 (Bankr. S.D.N.Y.), appeal denied, 39 Bankr. 234 (S.D.N.Y. 1984), which the Equity Committee opposed, also diverted the energies of all parties from negotiations that might earlier have led to an acceptable plan.

To their credit, Manville and the Legal Representative finally came to terms in August of 1985, formulating a plan that would earmark billions of dollars for payment to present and future asbestosis victims as well as to others damaged by the asbestos products that Manville once manufactured and sold. They have now received the blessing of the Asbestos Health Committee and apparently of the other creditor committees. Having reconciled their differences, however, they encountered opposition from the Equity Committee immediately following their breakthrough, on the eve of their submission of the plan to the bankruptcy court for confirmation. Under protest, the Equity Committee had been cut out of the negotiations that led to their plan, and if the product of Manville's new understanding with the tort claimants and other creditors is confirmed, equity may be diluted by 90% or more. In re Johns-Manville Corp., 60 Bankr. 842, 846 (S.D.N.Y. 1986). Displeased with that prospect, which the Equity Committee views as evidence of the Manville board's abdication of its responsibilities to the shareholders, the Equity Committee brought an action in Delaware state court seeking to compel Manville to hold a shareholders' meeting, pursuant to section 211(c) of Delaware's General Corporation Law.*fn4 The Equity Committee's avowed purpose was to replace Manville directors, so that new directors might reconsider submitting the proposed plan. 60 Bankr. at 852 n.20.

Manville countered with the instant action. At Manville's behest, the bankruptcy court issued an injunction prohibiting the Equity Committee from pursuing the Delaware action on the ground that the holding of a shareholders' meeting would obstruct Manville's reorganization. Denying the Equity Committee's motion for summary judgment, the bankruptcy court granted summary judgment to Manville sua sponte. In re Johns-Manville Corp., 52 Bankr. 879, 891 (Bankr. S.D.N.Y. 1985). The district court affirmed. In re Johns-Manville Corp., 60 Bankr. 842 (S.D.N.Y. 1986). On appeal, the Equity Committee argues that the district court erred in affirming the decision to enjoin, in affirming the grant of summary judgment to Manville, and in finding that the bankruptcy court had jurisdiction to issue the injunction.

Jurisdiction

We turn first to the matter of the bankruptcy court's jurisdiction to issue the injunction. Injunctions are authorized under 11 U.S.C. § 105(a) (1982), which empowers the bankruptcy court to issue any order necessary or appropriate to carry out the provisions of the Code, including orders restraining actions pending elsewhere. See In re Davis, 730 F.2d 176, 183-84 (5th Cir. 1984) ("[A] bankruptcy court is authorized, once jurisdiction is established, to 'issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.' This provision includes the authority to enjoin litigants from pursuing actions pending in other courts that threaten the integrity of a bankrupt's estate.") Section 105(a) does not, however, broaden the bankruptcy court's jurisdiction, which must be established separately under 28 U.S.C. § 157 (Supp. II 1984)*fn5 11 U.S.C. § 105(c) (Supp. III 1986).

The bankruptcy court relied for jurisdiction on section 157(b)(2)(A), finding that the request for an injunction in this case was a "core" proceeding, encompassing "matters concerning the administration of the estate." In re Johns-Manville Corp., 52 Bankr. 879, 890 (Bankr. S.D.N.Y. 1985). If, as the Equity Committee argues, Manville's action was not "core," the bankruptcy court had jurisdiction only to hear the complaint and then submit proposed findings of fact to the district court. An action brought to restrain interference resulting from proceedings in conflict with reorganization clearly may by its nature be core, however, since it will likely affect the administration of the estate. See In re Lion Capital Group, 46 Bankr. 850, 854-55 (Bankr. S.D.N.Y. 1985) ("Since the stay of defendants from pursuing their actions in the district court is grounded on the harm to efficient administration of the debtor's estate that would likely occur absent a stay, the motion seeking such relief is undoubtedly a core proceeding within the meaning of the statute."). And in our view, if the bankruptcy court may ever use its equitable powers under section 105(a) to enjoin actions pursued in other courts as "concerning the administration of the estate" under section 157(b)(2)(A), it may exercise that power where there is a basis for concluding that rehabilitation, the very purpose for the bankruptcy proceedings, might be undone by the other action. We therefore conclude that the bankruptcy court had jurisdiction to issue the injunction.

The Injunction and the Grant of Summary Judgment

Turning, then, to the decision to enjoin, we first encounter the well-settled rule that the right to compel a shareholders' meeting for the purpose of electing a new board subsists during reorganization proceedings. See In re Bush Terminal Co., 78 F.2d 662, 664 (2d Cir. 1935); In re Saxon Industries, 39 Bankr. 49, 50 (Bankr. S.D.N.Y. 1984); In re Lionel Corp., 30 Bankr. 327, 330 (Bankr. S.D.N.Y. 1983). As a consequence of the shareholders' right to govern their corporation, a prerogative ordinarily uncompromised by reorganization, "a bankruptcy court should not lightly employ its equitable power to block an election of a new board of directors." In re Potter Instrument Co., 593 F.2d 470, 475 (2d Cir. 1979). In accordance with this rule, the parties and the lower courts agree that the Equity Committee's right to call a meeting may be impaired only if the Equity Committee is guilty of "clear abuse" in attempting to call one. See In re J.P. Linahan, Inc., 111 F.2d 590, 592 (2d Cir. 1940). The Equity Committee's principal argument is that the "clear abuse" standard was not satisfied. In addition, however, the Equity Committee seems to argue that the district court's analysis was incomplete; i.e., the Equity Committee contends that in reviewing the bankruptcy court's decision to issue the injunction, the district court should have required, in addition to a showing of clear abuse, the usual showing of irreparable injury.

An examination of both lower court decisions will clarify the analysis that follows. The bankruptcy court found that "any shareholder meeting and ensuring proxy fight has the potential to derail the entire Manville reorganization with devastating consequences or at least to delay or halt plan negotiations." In re Johns-Manville Corp., 52 Bankr. at 888. Reviewing the bankruptcy court's findings, the district court concluded that the Equity Committee intended either to "torpedo" the reorganization or to acquire a bargaining chip in aid of its negotiation power. In re Johns-Manville Corp., 60 Bankr. at 852. In ...


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