LEGAL NEWSLINE

PHILADELPHIA (Legal Newsline) - The U.S. Court of Appeals for the Third Circuit has held that former members of a group designed to resolve asbestos-related personal injury claims are permitted to raise breach of contract claims against a bankrupt company for its alleged failure to pay contractually obligated settlements and expenses exceeding $250 million.

Circuit Judge Michael Fisher delivered the opinion on June 17. Circuit Judge Anthony J. Scirica and Judge Robert D. Mariani of the US. District Court for the Middle District of Pennsylvania concurred.

United States Gypsum Company and Quigley Company filed the appeal as former members of the Center for Claims Resolution in an effort to receive compensation for the additional payments they were required to make to cover for G.I. Holdings' failure to maintain its obligations.

The appeals court ruled in favor of the former members, vacating the district court's decision affirming the bankruptcy court's order granting summary judgment in GI Holdings' favor. It added that the case should be remanded back to the bankruptcy court for further proceeding.

In response to a growing number of asbestos-related personal injury claims in the 1980s, a group of manufacturers of asbestos and asbestos-containing products joined together to form the Center for Claims Resolution in order to "more effectively" defend the manufacturers in lawsuits.

The center was formed as a non-profit, non-stock Delaware corporation in September 1988 and was tasked with administering and arranging "for the evaluation, settlement, payment and defense of asbestos related bodily injury claims," Fisher wrote.

The members of the center negotiated and formed the Producer Agreement Concerning Center for Claims Resolution, establishing the center's purpose, defining the mechanics of the center and the obligations of the members.

According to the agreement, the members "believe it is important to establish an organization that will, on behalf of all participating producers, resolve meritorious asbestos-related claims in a fair and expeditious manner and, where necessary, defend asbestos-related claims efficiently and economically."

A five-person Board of Directors governs the center.

Membership with the center may be terminated by a member's written notice, bankruptcy or by resolution of the board. However, despite termination, former members "continue to have and to honor all of the obligations incurred by it [under the Producer Agreement] or on its behalf as a member prior to the effective date of its membership termination," the agreement states.

After an asbestos-related case is settled or resolved on behalf of the members, the center then bills and collects each member's allocated share of liability payments and expenses based on a formula in the agreement.

If a member fails to pay its share of liability in a timely manner, the board may enforce payment of the obligations.

Quigley, US Gypsum and the predecessor-in-interest of GI Holdings were among the roughly 20 manufacturers to sign the agreement.

GI Holdings is the successor-in-interest to GAF Corporation. Its membership with the center was terminated in January 2000 when the board found that it had breached the agreement by failing to pay its share of settlements and expenses.

Following termination, the center informed GI Holdings that it owed roughly $250 million and enforced payment of the settlements and expenses. However, that enforcement was stayed when GI Holdings filed for bankruptcy in January 2001, causing the center to collect its share in the fees by seeking additional payments from the remaining members.

Quigley withdrew its membership in February 2001, and US Gypsum filed for bankruptcy in June 2001.

They both alleged they were obligated to make additional payments to the center to satisfy GI Holding's failure to pay.

During GI Holdings' bankruptcy proceeding, the court gave parties until Oct. 15, 2008, to submit all proofs of claim against any interest in the debtor.

The center filed a proof of claim on Oct. 9, 2008, alleging GI Holdings was liable for a total of $254.7 million for breaching the agreement.

As part of that debt, the center claimed it paid out $29.5 million to asbestos claimants on behalf of GI Holdings before it stopped paying out the manufacturer's share of settlements.

Both Quigley and US Gypsum filed proof of claim forms seeking to recover what they paid to cover GI Holdings' obligations.

Only US Gypsum's additional payments were mentioned in the opinion. It paid approximately $6.3 million to satisfy the unpaid obligations.

The center and GI Holdings settled its claim seeking $254.7 million for a cash payment of $9.9 million.

Then, in September 2009, GI Holdings moved for approval of the settlement agreement in the bankruptcy court.

US Gypsum and Quigley objected to the settlement and sought clarification that it would not affect or release their own claims against the bankrupt company. The bankruptcy court made the clarification to the order and approved the settlement agreement.

However, the bankruptcy court later approved the Eighth Amended Joint Plan of Reorganization in November 2009, where GI Holdings asserted that US Gypsum's and Quigley's claims were derivative of the center's settled claim, and should therefore be considered settled.

GI Holdings then filed for summary judgment on the former members' claims in July 2010, which was granted in August 2012.

"The bankruptcy court concluded that the Center was authorized to resolve GI's breach by nonpayment," Fisher explained, "and the producer agreement barred the former members from pursuing claims, including for breach of contract, against GI."

US Gypsum and Quigley appealed to the United States District Court for the District of New Jersey, where Judge Dennis M. Cavanaugh affirmed the summary judgment in June 2013. He held that the "language reserving rights of action for breach to the members did not create a right to bring breach of contract claims."

US Gypsum and Quigley both appealed the decision, asserting that the district court erred when it concluded that the agreement bars members from pursuing a breach of contract claim against GI Holdings and that their claims are independent from the Center's claim.

Addressing the breach of contract issue introduced by the former members, Fisher wrote that a meaning from a certain portion of an agreement does not control the meaning of the entire agreement.

Citing Section X, titled "Third-Party Rights," of the agreement, the opinion states that signatories reserve the right to bring action for breach of the agreement.

He explained that once the former members were required to make additional payments to cover GI Holding's shortfall, they suffered damages appropriate for a breach of contract lawsuit.

"[B]ecause the producer agreement does clearly provide for such a suit," Fisher wrote, "we should not lightly overlook Section X as it is the most relevant provision to the issue at hand."

Relying upon the title of Section X, GI Holdings argued that it bars unnamed parties from filing claims.

The appeals court disagreed, stating, "Unless the language of Section X regarding breach of contact actions is irreconcilably inconsistent with the producer agreement's purpose, other provisions, or overall contractual scheme, we should give effect to the 'clear and unambiguous' language reserving the former members' right to bring a breach of contract action against GI."

Fisher added that the purpose of the agreement is to create a constructive relationship between the members to resolve cross and counter-claims that they may have against each other in asbestos-related personal injury lawsuits.

However, he explained that if the agreement sought to avoid all litigation - as the bankruptcy and district courts concluded - then the agreement would have referred to any claims rather than any cross or counter claims.

Taking the former members' damages into consideration, Fisher wrote that as soon as US Gypsum and Quigley had to make additional payments, the center's harm was remedied and damages were transferred to the members.

"Before the former members were required to cover the shortfall, the harm GI caused fell upon the Center, as the Center was unable to collect payments and therefore fulfill its settlement obligations to asbestos plaintiffs," he wrote.

Specifically, the agreement allows the center to enforce payments before members are required to cover the settlements and expenses, but members are permitted to bring a breach of contract lawsuit after they have been forced to satisfy the obligations.

Addressing GI Holdings' argument that the former members' claims are derivatives of the center's claim, Fisher wrote that generally, only the corporation may bring a suit when the cause of action belongs to that corporation. But the court sees no reason why the derivative inquiry should apply here, it stated.

Fisher added that the members' claims became separate when they were forced to pay beyond what was contractually required.

"Once the former members were required to make additional payments to cover the shortfall in amounts due to asbestos plaintiffs caused by GI's nonpayment, the former members suffered damages and had a straightforward breach of contract claim," Fisher wrote.

Additionally, the bankruptcy court held that allowing US Gypsum and Quigley to bring their breach of contract suits would result in a double recovery against GI Holdings.

The appeals court disagreed, stating that the settlement only covers GI Holdings' liability to the Center and its current members for its unpaid obligations.

Because US Gypsum and Quigley are former members at the time of the settlement, they are not included.

"The Center's recovery for its own claims and claims it brought on behalf of present members of the Center have no bearing on the former members' claims, particularly when they were explicitly excluded from the settlement agreement between the Center and GI," Fisher wrote.

From Legal Newsline: Reach Heather Isringhausen Gvillo at asbestos@legalnewsline.com