Ten Tips for Traversing the Terrain of Asbestos Bankruptcies

Bankruptcy has emerged as a dominant avenue for resolving mass product liability cases and, in particular, asbestos liability cases. Plaintiffs already have filed hundreds of thousands of asbestos claims, with many experts surmising that the peak of asbestos litigation is not yet in sight. Asbestos encompasses a family of naturally occurring fibrous materials that have superior insulation and tensile strength properties. Manufacturers began to exploit the flame-retardant and insulating properties of asbestos in heavy industrial use in the 1940s and incorporated asbestos into as many as 3000 products by the early 1970s, when industrial usage peaked. From automotive applications, such as gaskets and brakes, to home uses, such as roof shingles and attic insulation, the use of asbestos for commercial applications proliferated throughout most of the 20th century and still continues today at a decreased rate. The United States still consumes approximately 16,000 metric tons of asbestos each year.

Although asbestos is abundant, cheap and useful, it is also extremely hazardous. The United States Department of Health and Human Services classifies all types of asbestos as carcinogenic when in their airborne or “friable” state. Inhalation of asbestos fibers can cause mesothelioma, lung cancer, asbestosis and pleural thickening of the lungs. Between 1940 and 1979, more than 27 million workers in the United States were exposed to significant amounts of asbestos dust in the workplace, and countless others encountered asbestos in their everyday lives. Because of the long latency period of asbestos-related disease, cancer claims arising from the peak usage years of the 1970s have yet to be brought. It is estimated that more than 85% of U.S. industries face, or will face, asbestos claims.

For many victims, the bankruptcy court is the forum in which their claims are resolved. The Supreme Court has disapproved proposed mandatory class action settlement of asbestos claims, and Congress has been unable to muster a consensus for proposed legislation creating a mandatory administrative compensation scheme. As a result, bankruptcy has emerged as the only ready means for companies to limit their asbestos liabilities. Approximately 80 companies now have filed for bankruptcy at least partly due to asbestos claims.

In 1994, Congress adopted a special set of bankruptcy provisions designed to facilitate the reorganization of businesses with large asbestos liabilities. The special asbestos bankruptcy provisions of Chapter 11 provide a mechanism for companies to discharge their present and future personal injury and property damage claims by channeling those claims to a trust or trusts. The Bankruptcy Code requires that the bankruptcy court appoint a future claimants' representative to negotiate on behalf of future personal injury claimants; that present and future personal injury claimants must be treated “in substantially the same manner”; that at least half of the reorganized firm's equity potentially go to the trust; and that at least 75% of claimants vote to approve the reorganization plan.

The Bankruptcy Code, with its overlay of special provisions for asbestos bankruptcies, is tricky terrain for the uninitiated. Given the number of people potentially injured by exposure to asbestos, it is likely that every product liability lawyer in the country may, at some time, be hired to wage war on the asbestos battlefield. To be sure that you are prepared for the battle, we offer you Ten Tips for Traversing the Terrain of Asbestos Bankruptcies.

1) Asbestos Claimants' Committee. Virtually every asbestos-driven Chapter 11 bankruptcy will utilize an asbestos claimants' committee (the “Committee”), appointed pursuant to 11 U.S.C. ' 1102. The Committee will represent the collective interests of asbestos claimants and will negotiate and appear in court on their behalf. The Committee's professionals are paid for by the debtor. Committees are appointed by the United States Trustee at the beginning of a bankruptcy case, and a position on the Committee carries both power and responsibility, as the Committee is a central party to the bankruptcy process that ultimately shapes the outcome for asbestos claimants. Attorneys representing asbestos claimants should immediately consider whether to seek appointment to the Committee for themselves or their clients in every Chapter 11 bankruptcy case.

2) Future Claimants' Representative. Because Chapter 11 provides a final resolution of asbestos liability for the debtor at a time when many claims have not yet become manifest, the Bankruptcy Code provides for the appointment of a Future Claimants' Representative (“FCR”) in asbestos-driven Chapter 11 cases. The FCR may be involved in all aspects of the case, but is pre-eminent with respect to resolution of issues concerning preservation of assets for distribution to future claimants. The FCR's primary task is to negotiate provisions for the funding and distribution of compensation to asbestos claimants in a manner that will ensure that adequate funds remain to pay future claimants amounts equivalent to the distributions received by individuals with existing asbestos claims.

3) Involuntary Bankruptcies. The Bankruptcy Code, at 11 U.S.C. '  303, allows three or more creditors whose claims aggregate at least $10,775 (except those whose claims are contingent or subject to a bona fide dispute) to place a company into bankruptcy involuntarily. Plaintiffs with unsatisfied asbestos judgments qualify as petitioning creditors. Asbestos plaintiffs are increasingly considering and using the remedy of an involuntary bankruptcy in order to force a company to deal with its mounting asbestos liabilities in a fair and organized manner.

4) Prepackaged Bankruptcies. Prepackaged bankruptcies are surfacing as the remedy of choice for asbestos-laden companies that want to deal quickly with their asbestos liabilities and preserve the going concern value of their business. Recently, Combustion Engineering (the U.S. subsidiary of the Swiss mega corporation ABB Ltd.) and Congoleum Corp. have followed the prepackaged bankruptcy route. In a prepackaged bankruptcy, the company will select an FCR and an ad hoc committee of asbestos claimants with whom to negotiate a plan. The company will solicit acceptances of its plan even before filing for bankruptcy. The company will then file its plan contemporaneous with the filing of its bankruptcy petition and seek confirmation of that plan within 30 to 60 days.

5) Trust Distribution Procedures. Johns-Manville Corporation, the largest producer of asbestos insulation, was the first major asbestos reorganization in 1982 and set the pattern for the special asbestos provisions of the Bankruptcy Code and for subsequent asbestos bankruptcies. Key to the Manville reorganization was the creation of the asbestos claimants' trust and the procedures governing distributions from the trust. The basic procedures developed by the Manville trust have remained the cornerstones of every trust for the past 20 years. The trust distribution procedures are based on a prediction of the number of future claims and adoption of a schedule of liquidated values, categorized by disease (ie, mesothelioma $200,000, lung cancer $60,000, pleural disease $12,000). The trust does not contest liability as long as the claimant accepts the scheduled compensation. Claimants typically need only show sufficient exposure to asbestos that is traceable to the company and document injury and damages. The intent of the trust distribution procedures is to keep down transaction costs. Negotiation of the trust distribution procedures, though, is often a long, arduous process among the various categories of asbestos claimants.

6) Channeling Non-Debtor Affiliate Claims. In a growing trend, debtors are trying to use their own bankruptcies to channel independent asbestos claims against affiliated non-debtor companies to a trust, thereby absolving the affiliates of asbestos liability without subjecting them to the rigors of Chapter 11. There is no consensus as to whether these efforts comport with the Bankruptcy Code, but, to date, they have met with some success. This approach raises many issues, but first and foremost, it emphasizes the importance of carefully reviewing a debtor's plan of reorganization in order to determine whether the plan has an impact on claims against asbestos defendants other than the debtor. A thorough review of the debtor's plan is the only way to be sure of all of the entities that will be absolved of asbestos liability if the plan is confirmed.

7) Co-Defendant Transfer Motions. Many asbestos cases are filed against numerous defendants. When one defendant files for bankruptcy, the nonbankrupt co-defendants may try to use the bankruptcy filing to lever the entire asbestos lawsuit into a federal court venue that they view as more favorable. The statutory bases for these efforts are an assertion of the “related to” jurisdiction of the district court in which the bankruptcy is pending as set forth at 28 U.S.C. '  1334(b) combined with the provisions of 28 U.S.C. '  157(b)(5), which provides for trial of personal injury claims against a debtor in the district court rather than through the more streamlined bankruptcy court claim objection process available for resolution of other claims. While these efforts typically do not succeed if opposition is put forth, all parties need to be aware of this potential opportunity for shifting venue.

8) Assignability of Insurance Policies and Proceeds. Insurance is central to any asbestos-driven Chapter 11 petition, and cases generally are structured so that a trust is created to pay asbestos claims; that trust is funded with assets, including insurance. The creation of an insurance-funded trust can prompt a number of arguments by affected insurers. Perhaps the most common dispute is whether an insurance policy or its proceeds may be assigned to a trust or whether such an assignment vitiates coverage. While courts ultimately are loathe to allow insurers to escape obligations to pay claims due to contractual technicalities, and the case law and Bankruptcy Code eliminate many obstacles to assignment, this issue still can gain traction in an asbestos bankruptcy and must be anticipated in order to be satisfactorily and quickly resolved.

9) Insurers' Payment Obligations. While assignability often emerges as the simplest insurance issue, insurers typically make a number of other arguments aimed at protecting their rights and/or minimizing or delaying their payment obligations. A common dispute is whether confirmation of a plan under Section 524(g) constitutes a judgment for purposes of requiring the insurers to pay policy limits or, alternatively, whether the insurers should be allowed to pay asbestos claims as they are resolved. Another common dispute is whether the creation of trust distribution procedures establishing a framework for claims resolution and payment conflicts with an insurer's right to participate in the defense and resolution of claims, thereby, again, vitiating coverage.

10) Preferences. The Bankruptcy Code gives extraordinary avoiding powers to debtors and trustees. Among the most widely used of these powers is the ability to recover payments made to creditors within the 90 days before the bankruptcy filing. The ability to recover these so-called “preferences” is not based on any wrongdoing or bad behavior by the recipient, but on the theory that all creditors should share equally. Asbestos claimants are not immune from a preference attack. If an asbestos claimant received payments within 90 days prior to the bankruptcy, or obtained a judgment lien, the asbestos claimant may have to pay back the money received and would likely lose any judgment lien.

Bankruptcy has emerged as a dominant avenue for resolving mass product liability cases and, in particular, asbestos liability cases. Plaintiffs already have filed hundreds of thousands of asbestos claims, with many experts surmising that the peak of asbestos litigation is not yet in sight. Asbestos encompasses a family of naturally occurring fibrous materials that have superior insulation and tensile strength properties. Manufacturers began to exploit the flame-retardant and insulating properties of asbestos in heavy industrial use in the 1940s and incorporated asbestos into as many as 3000 products by the early 1970s, when industrial usage peaked. From automotive applications, such as gaskets and brakes, to home uses, such as roof shingles and attic insulation, the use of asbestos for commercial applications proliferated throughout most of the 20th century and still continues today at a decreased rate. The United States still consumes approximately 16,000 metric tons of asbestos each year.

Although asbestos is abundant, cheap and useful, it is also extremely hazardous. The United States Department of Health and Human Services classifies all types of asbestos as carcinogenic when in their airborne or “friable” state. Inhalation of asbestos fibers can cause mesothelioma, lung cancer, asbestosis and pleural thickening of the lungs. Between 1940 and 1979, more than 27 million workers in the United States were exposed to significant amounts of asbestos dust in the workplace, and countless others encountered asbestos in their everyday lives. Because of the long latency period of asbestos-related disease, cancer claims arising from the peak usage years of the 1970s have yet to be brought. It is estimated that more than 85% of U.S. industries face, or will face, asbestos claims.

For many victims, the bankruptcy court is the forum in which their claims are resolved. The Supreme Court has disapproved proposed mandatory class action settlement of asbestos claims, and Congress has been unable to muster a consensus for proposed legislation creating a mandatory administrative compensation scheme. As a result, bankruptcy has emerged as the only ready means for companies to limit their asbestos liabilities. Approximately 80 companies now have filed for bankruptcy at least partly due to asbestos claims.

In 1994, Congress adopted a special set of bankruptcy provisions designed to facilitate the reorganization of businesses with large asbestos liabilities. The special asbestos bankruptcy provisions of Chapter 11 provide a mechanism for companies to discharge their present and future personal injury and property damage claims by channeling those claims to a trust or trusts. The Bankruptcy Code requires that the bankruptcy court appoint a future claimants' representative to negotiate on behalf of future personal injury claimants; that present and future personal injury claimants must be treated “in substantially the same manner”; that at least half of the reorganized firm's equity potentially go to the trust; and that at least 75% of claimants vote to approve the reorganization plan.

The Bankruptcy Code, with its overlay of special provisions for asbestos bankruptcies, is tricky terrain for the uninitiated. Given the number of people potentially injured by exposure to asbestos, it is likely that every product liability lawyer in the country may, at some time, be hired to wage war on the asbestos battlefield. To be sure that you are prepared for the battle, we offer you Ten Tips for Traversing the Terrain of Asbestos Bankruptcies.

1) Asbestos Claimants' Committee. Virtually every asbestos-driven Chapter 11 bankruptcy will utilize an asbestos claimants' committee (the “Committee”), appointed pursuant to 11 U.S.C. ' 1102. The Committee will represent the collective interests of asbestos claimants and will negotiate and appear in court on their behalf. The Committee's professionals are paid for by the debtor. Committees are appointed by the United States Trustee at the beginning of a bankruptcy case, and a position on the Committee carries both power and responsibility, as the Committee is a central party to the bankruptcy process that ultimately shapes the outcome for asbestos claimants. Attorneys representing asbestos claimants should immediately consider whether to seek appointment to the Committee for themselves or their clients in every Chapter 11 bankruptcy case.

2) Future Claimants' Representative. Because Chapter 11 provides a final resolution of asbestos liability for the debtor at a time when many claims have not yet become manifest, the Bankruptcy Code provides for the appointment of a Future Claimants' Representative (“FCR”) in asbestos-driven Chapter 11 cases. The FCR may be involved in all aspects of the case, but is pre-eminent with respect to resolution of issues concerning preservation of assets for distribution to future claimants. The FCR's primary task is to negotiate provisions for the funding and distribution of compensation to asbestos claimants in a manner that will ensure that adequate funds remain to pay future claimants amounts equivalent to the distributions received by individuals with existing asbestos claims.

3) Involuntary Bankruptcies. The Bankruptcy Code, at 11 U.S.C. '  303, allows three or more creditors whose claims aggregate at least $10,775 (except those whose claims are contingent or subject to a bona fide dispute) to place a company into bankruptcy involuntarily. Plaintiffs with unsatisfied asbestos judgments qualify as petitioning creditors. Asbestos plaintiffs are increasingly considering and using the remedy of an involuntary bankruptcy in order to force a company to deal with its mounting asbestos liabilities in a fair and organized manner.

4) Prepackaged Bankruptcies. Prepackaged bankruptcies are surfacing as the remedy of choice for asbestos-laden companies that want to deal quickly with their asbestos liabilities and preserve the going concern value of their business. Recently, Combustion Engineering (the U.S. subsidiary of the Swiss mega corporation ABB Ltd.) and Congoleum Corp. have followed the prepackaged bankruptcy route. In a prepackaged bankruptcy, the company will select an FCR and an ad hoc committee of asbestos claimants with whom to negotiate a plan. The company will solicit acceptances of its plan even before filing for bankruptcy. The company will then file its plan contemporaneous with the filing of its bankruptcy petition and seek confirmation of that plan within 30 to 60 days.

5) Trust Distribution Procedures. Johns-Manville Corporation, the largest producer of asbestos insulation, was the first major asbestos reorganization in 1982 and set the pattern for the special asbestos provisions of the Bankruptcy Code and for subsequent asbestos bankruptcies. Key to the Manville reorganization was the creation of the asbestos claimants' trust and the procedures governing distributions from the trust. The basic procedures developed by the Manville trust have remained the cornerstones of every trust for the past 20 years. The trust distribution procedures are based on a prediction of the number of future claims and adoption of a schedule of liquidated values, categorized by disease (ie, mesothelioma $200,000, lung cancer $60,000, pleural disease $12,000). The trust does not contest liability as long as the claimant accepts the scheduled compensation. Claimants typically need only show sufficient exposure to asbestos that is traceable to the company and document injury and damages. The intent of the trust distribution procedures is to keep down transaction costs. Negotiation of the trust distribution procedures, though, is often a long, arduous process among the various categories of asbestos claimants.

6) Channeling Non-Debtor Affiliate Claims. In a growing trend, debtors are trying to use their own bankruptcies to channel independent asbestos claims against affiliated non-debtor companies to a trust, thereby absolving the affiliates of asbestos liability without subjecting them to the rigors of Chapter 11. There is no consensus as to whether these efforts comport with the Bankruptcy Code, but, to date, they have met with some success. This approach raises many issues, but first and foremost, it emphasizes the importance of carefully reviewing a debtor's plan of reorganization in order to determine whether the plan has an impact on claims against asbestos defendants other than the debtor. A thorough review of the debtor's plan is the only way to be sure of all of the entities that will be absolved of asbestos liability if the plan is confirmed.

7) Co-Defendant Transfer Motions. Many asbestos cases are filed against numerous defendants. When one defendant files for bankruptcy, the nonbankrupt co-defendants may try to use the bankruptcy filing to lever the entire asbestos lawsuit into a federal court venue that they view as more favorable. The statutory bases for these efforts are an assertion of the “related to” jurisdiction of the district court in which the bankruptcy is pending as set forth at 28 U.S.C. '  1334(b) combined with the provisions of 28 U.S.C. '  157(b)(5), which provides for trial of personal injury claims against a debtor in the district court rather than through the more streamlined bankruptcy court claim objection process available for resolution of other claims. While these efforts typically do not succeed if opposition is put forth, all parties need to be aware of this potential opportunity for shifting venue.

8) Assignability of Insurance Policies and Proceeds. Insurance is central to any asbestos-driven Chapter 11 petition, and cases generally are structured so that a trust is created to pay asbestos claims; that trust is funded with assets, including insurance. The creation of an insurance-funded trust can prompt a number of arguments by affected insurers. Perhaps the most common dispute is whether an insurance policy or its proceeds may be assigned to a trust or whether such an assignment vitiates coverage. While courts ultimately are loathe to allow insurers to escape obligations to pay claims due to contractual technicalities, and the case law and Bankruptcy Code eliminate many obstacles to assignment, this issue still can gain traction in an asbestos bankruptcy and must be anticipated in order to be satisfactorily and quickly resolved.

9) Insurers' Payment Obligations. While assignability often emerges as the simplest insurance issue, insurers typically make a number of other arguments aimed at protecting their rights and/or minimizing or delaying their payment obligations. A common dispute is whether confirmation of a plan under Section 524(g) constitutes a judgment for purposes of requiring the insurers to pay policy limits or, alternatively, whether the insurers should be allowed to pay asbestos claims as they are resolved. Another common dispute is whether the creation of trust distribution procedures establishing a framework for claims resolution and payment conflicts with an insurer's right to participate in the defense and resolution of claims, thereby, again, vitiating coverage.

10) Preferences. The Bankruptcy Code gives extraordinary avoiding powers to debtors and trustees. Among the most widely used of these powers is the ability to recover payments made to creditors within the 90 days before the bankruptcy filing. The ability to recover these so-called “preferences” is not based on any wrongdoing or bad behavior by the recipient, but on the theory that all creditors should share equally. Asbestos claimants are not immune from a preference attack. If an asbestos claimant received payments within 90 days prior to the bankruptcy, or obtained a judgment lien, the asbestos claimant may have to pay back the money received and would likely lose any judgment lien.