## Facts

- Combustion Engineering, Inc. (CE) faced extensive asbestos-related personal-injury liability and pursued Chapter 11 reorganization in the District of Delaware.
- Before filing, CE implemented a settlement structure using a prepetition trust that paid many then-current asbestos claimants a substantial percentage of claim value, leaving unpaid “stub” portions to be addressed in the bankruptcy plan.
- CE proposed a prepackaged plan that created a § 524(g) asbestos personal-injury trust and a channeling injunction to route asbestos claims to the trust.
- The plan sought to extend the channeling injunction not only to CE, but also to certain nondebtor affiliates (including Basic, Inc. and Lummus Global) and related insurers.
- Objections were filed by malignant-disease asbestos claimants and multiple insurers, arguing the plan unfairly favored certain claimant groups and unlawfully insulated nondebtors from liability.
- Some claims against the nondebtor affiliates were alleged to be independent (based on the affiliates’ own conduct), not merely derivative of CE’s liability.
- The bankruptcy court confirmed the plan and issued the injunctions; the district court affirmed, and objectors appealed.

## Issues

1. Whether the appeals were equitably moot due to substantial consummation of the confirmed plan.
2. Whether § 524(g) authorizes a channeling injunction that protects nondebtor affiliates from asbestos claims that are independent and non-derivative of the debtor’s liability.
3. Whether the bankruptcy court had subject-matter jurisdiction to enjoin direct claims against nondebtor entities and their insurers.
4. Whether the plan’s structure satisfied § 524(g), including the requirement that similar present and future asbestos demands be addressed in substantially the same manner.

## Decision

- The Third Circuit held the appeals were not equitably moot because effective relief could be granted without unwinding the entire reorganization.
- The court reversed the district court’s order affirming confirmation to the extent it upheld the channeling injunction’s protection of nondebtor affiliates and related insurers.
- The court vacated the § 524(g) channeling injunction and related provisions insofar as they barred independent, non-derivative claims against the nondebtors.
- The case was remanded for further proceedings consistent with the opinion.

## Legal Principles

- Equitable mootness is a prudential doctrine, applied cautiously; substantial consummation does not bar appellate review when targeted relief remains feasible.
- Section 524(g) permits asbestos channeling injunctions for nondebtors only within narrow statutory limits, principally when the protected party’s liability is derivative of the debtor’s asbestos liability.
- Section 524(g) does not authorize extinguishing independent, non-derivative tort claims against nondebtor affiliates.
- Bankruptcy courts lack unlimited equitable power; subject-matter jurisdiction requires, at minimum, a sufficient “related to” connection between the enjoined dispute and the bankruptcy estate.
- “Related to” jurisdiction cannot be established merely by tangential financial connections (including generalized insurance or settlement structures) when the claims are direct against nondebtors.

## Conclusion

The Third Circuit curtailed the use of § 524(g) and bankruptcy jurisdiction to achieve broad third-party protection, holding that a channeling injunction cannot bar independent asbestos claims against nondebtor affiliates and their insurers, and remanding for restructuring consistent with those limits.


In re Combustion Eng’g, Inc., 391 F.3d 190 (3d Cir. 2004)