This Wall Won’t Hold: Preventing Foreign Claims on Asbestos Trusts

By: George Calhoun

Bankruptcy continues as a favored vehicle for the resolution of mass-tort claims, particularly asbestos-based claims.  In two recent cases in Delaware, an often-overlooked issue has raised a red flag concerning the fairness of the trusts proposed in many of these cases.  The plan proponents in those cases proposed asbestos trusts that provided that foreign claimants were not eligible for payment.  It is a foundational principle of U.S. bankruptcy law, however, that the bankruptcy courts do not discriminate against claimants based on the origin of their claims.  The motivation behind these exclusions appears to be a claimant-driven desire to limit competition, but that motivation is incompatible with the Bankruptcy Code.  The result has been, at least in the Imerys talc bankruptcy, months of delay and the possible denial of a plan after nearly six years in bankruptcy.   

Section 1123(a)(4) of the Bankruptcy Code requires that a plan provide “the same treatment for each claim or interest of a particular class, unless the holder of a particular claim agrees to a less favorable treatment of such particular claim or interest.”  This rule “embodies the principle that all similarly situated creditors in bankruptcy are entitled to equal treatment.”  See Energy Future Holding Corp. v. Delaware Trust Co., 648 F.App’x. 277, 283 (3d Cir. 2016). Once foreign and domestic claims are placed in the same class (e.g., general unsecured tort claims), they must be treated equally. 

A debtor cannot pay U.S. claimants more than foreign claimants in the same class—or create different procedural hurdles—unless the class is subdivided and allowed to vote separately.  That is precisely what was done in early asbestos cases where foreign claims were placed in separate classes that could then vote for or against the treatment proposed for their specific claims.  

U.S. bankruptcy courts regularly consider equality of treatment between foreign and domestic claims when evaluating foreign insolvency proceedings.  See Vertiv, Inc. v. Wayne Burt PTE, Ltd., 92 F.4th 169, 181 (3d Cir. 2024) (quoting Finanz AG Zurich v. Banco Economico S.A., 192 F.3d 240, 249 (2d Cir. 1999)) (listing non-discrimination and equality of distribution as “indicia of procedural fairness” consistent with the United States’ policy of equality); Remington Rand Corp.-Del. v. Bus. Sys. Inc., 830 F.2d 1260, 1271 (3d Cir. 1987)(warning that U.S. Courts must “guard against forcing American creditors to foreign proceedings in which their claims will be treated in some manner inimical to this country’s policy of equality.”). Congress enshrined this principle when it enacted Chapter 15 of the Bankruptcy Code.   

Although Chapter 15 provides for U.S. bankruptcy proceedings ancillary to foreign proceedings (the Bankruptcy Code’s cross-border insolvency framework), § 1513 expressly prohibits discrimination against foreign claims under any chapter of the Bankruptcy Code.   Section 1513(b)(1) provides: “The court may not give a foreign creditor under sections 507 or 726 a lower priority than that of general unsecured claims without priority solely because the holder of such claim is a foreign creditor.” This provision ensures that foreign creditors are not subordinated in payment priority simply due to their foreign status. Assigning a foreign claim a zero value is equivalent to assigning a lower priority to similar domestic claims that are eligible for payment.   

This seems to be nothing other than basic bankruptcy law.  Why then have sophisticated debtor and creditors’ committee lawyers proposed plans where foreign claims are “ineligible for payment”?  It appears that the answer is nothing other than a desire by domestic creditors not to face competition from foreign claims or to have trust resources spent on evaluating such claims.  But an overlooked consequence of such an action is that foreign courts could give less respect to U.S. bankruptcy decrees when creditors from their home countries are frozen out of the U.S. bankruptcy process.  The risk to the system, in my view, outweighs any inconvenience caused by the need to evaluate a foreign claim.   

Nor is it any answer to say that the bankruptcy courts are not discriminating against foreign claims because the discrimination is taking place within a trust system outside of court.  The courts are responsible for approving those trusts, and, if discrimination is built into the system, the courts should not use a settlement trust as an end-around controlling law.   Even where a foreign claim is allowed to participate, the current system creates a tension in that the trust distribution procedures rarely describe a process that is easily accessible to foreign claims or foreign law.  Moreover, there are often issues with the notice given to foreign claims.  As a result of these and similar issues, there are significant questions about whether these practices constitute a violation of § 1123(a)(4) in substance, if not in form.  

As cross-border mass tort litigation continues, bankruptcy courts, fiduciaries, and plan proponents will face increasing pressure to ensure that foreign claimants are not excluded through design, default, or neglect. Equal justice requires more than formal inclusion—it requires access, fairness, and enforceability.