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Keywords

statuteequityappealbankruptcychapter 11 bankruptcy
equityappealbankruptcy

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Official Committee of Equity Sec. Holders v. Mabey, 832 F.2d 299, 56 USLW 2282, 17 Collier Bankr.Cas.2d 1210, 16 Bankr.Ct.Dec. 1109, Bankr. L. Rep. P 72,013

Facts

A.H. Robins Co. filed for Chapter 11 bankruptcy due to numerous civil actions from women claiming injuries from the Dalkon Shield intrauterine device. The district court ordered the establishment of a $15 million emergency treatment fund to assist claimants with tubal reconstructive surgery or in-vitro fertilization. This fund was to be set up before the claims were allowed or a reorganization plan was confirmed, leading to the appeal by the Official Committee of Equity Security Holders.

Robins sought refuge in Chapter 11 because of a multitude of civil actions filed against it by women who alleged they were injured by use of the Dalkon Shield intrauterine device.

Issue

Did the district court violate the Bankruptcy Code by establishing an emergency treatment fund for Dalkon Shield claimants prior to the allowance of their claims and confirmation of a reorganization plan?

Did the district court violate the Bankruptcy Code by establishing an emergency treatment fund for Dalkon Shield claimants prior to the allowance of their claims and confirmation of a reorganization plan?

Rule

The Bankruptcy Code does not permit distributions to unsecured creditors in a Chapter 11 proceeding except under a confirmed plan of reorganization, as outlined in 11 U.S.C. § 1121 and related sections.

The Bankruptcy Code does not permit a distribution to unsecured creditors in a Chapter 11 proceeding except under and pursuant to a plan of reorganization that has been properly presented and approved.

Analysis

The court determined that the establishment of the emergency treatment fund would provide preferential treatment to certain unsecured claimants over others, violating the Bankruptcy Code's provisions. The court emphasized that the equitable powers under § 105(a) do not allow for disregarding the clear language of the bankruptcy statutes, and that pre-confirmation payments to unsecured creditors are not authorized.

We find that the establishment and funding of the Program would benefit only certain unsecured holders of Dalkon Shield claims and that the program would afford preferential treatment to such claimants over other similarly situated unsecured Dalkon Shield claimants and over general unsecured creditors.

Conclusion

The court reversed the district court's order establishing the emergency treatment fund, concluding that it violated the Bankruptcy Code by allowing pre-confirmation payments to certain unsecured claimants.

We, therefore, reverse the district court.

Who won?

The Official Committee of Equity Security Holders prevailed in the appeal because the court found that the establishment of the fund was not authorized under the Bankruptcy Code.

The Official Committee of Equity Security Holders prevailed in the appeal because the court found that the establishment of the fund was not authorized under the Bankruptcy Code.

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