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Bad Medicine: Court prevents Pfizer from manipulating subsidiary’s bankruptcy to serve its own agenda
Lending & Restructuring Alert
September 2010
Authors: Paul A. Rubin, Frederick E. Schmidt

A company facing a rash of tort lawsuits may try to use a dormant subsidiary's bankruptcy as a tool to limit its exposure. That's what Pfizer tried to do, and a New York bankruptcy judge sent them packing.  This case is a warning to corporate parents that courts will not allow them to manipulate the process to use the bankruptcies of subsidiaries to further their own agendas. If you're a creditor you can use this case as ammunition in reorganization disputes to show bad faith. Read on for a quick summary of what happened in the Pfizer case, and what you can learn from it.

The Plan

A Pfizer subsidiary named Quigley manufactured asbestos-containing products. Quigley sold substantially all of its assets in 1992, and was dormant from then until right before its 2004 bankruptcy filing. During that interval, however, Quigley and Pfizer were  named as defendants in numerous asbestos personal injury cases. Pfizer was sued based on the products it manufactured and for injuries which allegedly resulted from products Quigley had sold (this second category of lawsuits became known as "derivative claims"). 

For years, Pfizer settled these lawsuits by obtaining releases for itself and Quigley. But in 2003, Pfizer devised a new settlement strategy: it resurrected Quigley with the aim of putting it into bankruptcy.  Pfizer began to enter into agreements that settled only its own liabilities and did not release Quigley. Although the settlements left Quigley open to liability, the monetary value of the settlements was the same as if Quigley were also being released. But 50% of the new settlements' payment was contingent on the confirmation of a bankruptcy plan for Quigley that would include a "channeling injunction" that would release Pfizer from derivative claims. Plaintiffs who settled with Pfizer agreed to take a 90% haircut on their claims against Quigley, retaining only a "stub" claim against it. This essentially made the settling plaintiffs unsecured creditors of Quigley. Therefore, the settling plaintiffs had an incentive to vote for the Quigley bankruptcy plan in order to recover the second half of the Pfizer settlement payments.

In short, Quigley's bankruptcy plan limited the recourse of asbestos claimants to a trust (which Pfizer, among others, funded) and barred each claimant from taking further action against Pfizer and others. A settling creditor, seeking more money out of Pfizer, had to rely on its status as an unsecured creditor to get it from the Quigley bankruptcy estate. The majority of the settling plaintiffs voted to confirm the plan, but a committee of non-settling asbestos claimants objected, arguing that Pfizer manipulated the voting process to escape liability for the derivative claims.

The Holding

The bankruptcy court refused to confirm Quigley's plan. It ruled that Pfizer manipulated the voting and plan process to ensure confirmation, and therefore held that the plan was not proposed in good faith. The court remarked that the case was "a Quigley bankruptcy in name only." The court further noted that Pfizer—as the only source of funding of the Quigley chapter 11 case and the plan—was the architect of the settlement strategy, which it designed to ensure that it would receive the benefits of a channeling injunction. Accordingly, the court deemed Pfizer—rather than Quigley—to be the "real" proponent of the plan. The Court also found that Pfizer "bought enough votes to assure that any plan would be accepted." It cited the requirement that settling plaintiffs take a 90% haircut claim as evidence of Pfizer's voting manipulation, because this ensured that in settling they would remain creditors of Quigley and have a financial incentive to vote for a Quigley plan. Accordingly, the Court disqualified the votes of the settling claimants, finding that their votes were procured in bad faith by Pfizer's manipulation.

What This Means to You:

The bankruptcy process is designed to help debtors get back on their feet while returning as much value as possible to their creditors. It's not a tool for non-debtor parent companies to use to get out from under their own liabilities. This case also demonstrates that creditors opposing plan confirmation may be able to highlight the conduct of controlling shareholders and parents to attribute their bad faith to debtors. 

For more information on these issues or other lending & restructuring matters, please contact Paul Rubin at (212) 592-1448 or prubin@herrick.com or  Frederick Schmidt at (212) 592-5941 or fschmidt@herrick.com.

Copyright © 2010 Herrick, Feinstein LLP. Lending & Restructuring Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm