In Re Johns-Manville Corp.
9 Collier Bankr. Cas. 2d 1179, 36 B.R. 727, 1984 Bankr. LEXIS 6384 (1984)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A financially solvent corporation's Chapter 11 filing, motivated by the need to manage massive and potentially overwhelming future tort liabilities, does not constitute a bad faith filing justifying dismissal, as the Bankruptcy Code promotes open access to reorganization for viable businesses facing threats to their long-term survival.
Facts:
- Johns-Manville Corp. ('Manville') was a large, financially successful industrial corporation and a member of the 'Fortune 500'.
- For many years, Manville manufactured and sold products containing asbestos, a substance that caused lethal diseases in individuals exposed to its dust.
- As a result of its asbestos products, Manville was facing approximately 16,000 asbestos-related health lawsuits at the time of its bankruptcy filing.
- Manville commissioned epidemiological studies which projected that it would face a staggering number of additional lawsuits over the next 20-30 years from individuals who had been exposed but had not yet manifested symptoms ('future asbestos claimants').
- Based on these projections, Manville's management and consultants determined the company faced a potential liability of at least $1.9 billion.
- Manville's insurance carriers had generally disavowed liability on policies covering these asbestos-related claims.
- Manville was advised by its accountants that, pursuant to Financial Accounting Standards Board No. 5 (FASB-5), it had to book a reserve of at least $1.9 billion, an action that would trigger acceleration clauses on approximately $450 million of its debt.
Procedural Posture:
- Johns-Manville Corp. and its affiliated companies filed a voluntary petition for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court on August 26, 1982.
- The Committee of Asbestos-Related Litigants and/or Creditors ('the Asbestos Committee') filed a motion to dismiss the petition for 'cause' under Section 1112(b), alleging the filing was made in bad faith.
- Three other parties—M.J. Whitman & Co., GAF Corporation, and a group of co-defendant corporations from asbestos litigation—also filed separate motions to dismiss the petition.
- The movants argued, among other things, that Manville was not in financial distress and that the claims of future victims were not dischargeable in bankruptcy, thus nullifying the purpose of the filing.
- The Bankruptcy Court held oral arguments on all four motions to dismiss.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a financially solvent corporation's filing for Chapter 11 reorganization, motivated by the need to manage massive present and future tort liabilities, constitute a bad faith filing that provides 'cause' for dismissal under Section 1112(b) of the Bankruptcy Code?
Opinions:
Majority - Lifland, J.
No. A financially solvent corporation's filing for Chapter 11 reorganization, motivated by the need to manage massive present and future tort liabilities, does not constitute a bad faith filing providing 'cause' for dismissal under Section 1112(b). The Bankruptcy Code does not contain an insolvency requirement for a voluntary Chapter 11 petition. The 'good faith' of a debtor is primarily a requirement for plan confirmation under Section 1129, not a threshold for filing, unless the petition represents an abuse of the court's jurisdiction. An abuse of jurisdiction occurs in cases involving shams, entities created solely to file bankruptcy, or petitions with no economic reality, none of which apply to Manville. Manville is a real business with real creditors and a crushing real debt that threatens its existence. The Code's policy of 'open access' encourages financially beleaguered debtors to seek reorganization before their economic situation is beyond repair to avoid liquidation, which would be detrimental to all creditors, including present and future tort claimants.
Analysis:
This landmark decision fundamentally shaped modern corporate reorganization by validating the use of Chapter 11 by a financially solvent company to address overwhelming mass tort liabilities. It established that bankruptcy could be a proactive strategic tool for survival, rather than a last resort for the insolvent. The ruling opened the door for other companies facing similar mass tort crises (e.g., asbestos, Dalkon Shield) to use bankruptcy to establish structured compensation systems for victims. By shifting the 'good faith' inquiry from the filing stage to plan confirmation, the court reinforced the Bankruptcy Code's 'open access' policy and prioritized the goal of rehabilitation over premature dismissal.
Unlock the full brief for In Re Johns-Manville Corp.