In re Combustion Engineering

After decades of battling asbestos claims, Combustion Engineering, Inc. (CE) (debtor) was becoming insolvent. CE formed a prepackaged bankruptcy plan to cleanse itself of its asbestos liability and reorganize. Before CE filed the plan with the bankruptcy court, it created a settlement trust that made partial payments to current asbestos claimants (creditors). The settlement trust paid an average of 59 percent of a claim’s value and sometimes as much as 95 percent. CE stated that the partial payments were necessary to keep those claimants from forcing CE into involuntary bankruptcy while it tried to reorganize. The remaining, unpaid portion of the claims, known as stub claims, gave the claimants rights as impaired creditors to vote for or against CE’s prepackaged reorganization plan. An overwhelming majority of creditors voted for the plan, and CE filed it with the court. Under the plan, a court injunction would channel all current and future asbestos claims against CE and two affiliated entities into a personal-injury trust. Some asbestos claims against the affiliated entities were related to claims against CE, and some were unrelated. The personal-injury trust would be created during the bankruptcy and would likely pay around 18 percent of an asbestos claim’s value. The bankruptcy and district courts both approved the plan, with modifications. A group of creditors with malignant-cancer injuries, along with several insurance companies, appealed the approval to the Third Circuit.