Court Dismisses Congoleum Bankruptcy, Harshly Criticizing Plan Proponents
On February 26, 2009, in In re Congoleum Corporation, the United States Bankruptcy Court for the District of New Jersey granted the non-settling insurers’ summary judgment against Congoleum, the debtor, as well as the other plan proponents. This was the Court’s third summary judgment order finding Congoleum’s Chapter 11 plans unconfirmable as a matter of law. The Court held that, despite its prior opinions, the Plan Proponents “have still submitted a facially unconfirmable plan,” and dismissed Congoleum’s bankruptcy, effective March 18. (The decision has been appealed, and the Bankruptcy Court has granted a stay of its ruling pending appeal.)
In 2002, Congoleum reached a global settlement with asbestos claimants purportedly worth more than $500 million and pursued a “prepackaged” bankruptcy as the means to implement that settlement over its insurers’ objections. In separate insurance coverage litigation, a New Jersey state court held there was no coverage for that settlement because it was unreasonable, collusive, and did not legally obligate Congoleum to pay for those claims. In bankruptcy, however, Congoleum attempted to reach a new settlement with its primary creditors -- the asbestos claimants -- through a Chapter 11 plan that would establish a trust fund to pay asbestos claims according to pre-set criteria. Congoleum was seeking to compel its insurers to fund the trust.
Initially, and over the objections of Congoleum and the asbestos claimants committee, the Court held that the moving insurers had standing to object to the plan. In any event, the Court also explained that -- even if the insurers lacked standing to object -- the Court “finds the Amended Joint Plan unconfirmable separate and apart from any objection of any party.”
The Court agreed with the insurers that two substantive defects rendered the plan unconfirmable. First, the Court rejected the plan’s treatment of $2 million in prepetition payments that Congoleum made to prominent asbestos claimants’ attorneys Perry Weitz and Joe Rice. As the Court explained, “these payments have been called everything from ‘facilitation fees’ to ‘payoffs’” that Congoleum made to ensure that Weitz and Rice would support its prepackaged bankruptcy plan. The Court’s prior opinions denying confirmation had “highlighted the problematic nature of these payments,” and the Court now complained that its previous conclusion “still was not enough to get the message through that multi-million dollar payments to adversaries in connection with a bankruptcy case, even if made pre-petition, must be subject to court review.” The Plan Proponents’ repeated failure to include a sufficient provision to allow the Court to review these payments “demonstrates a callous disregard for conservation of estate assets,” as well as “gamesmanship” underscoring “the ease with which the [Plan Proponents] believe they can evade rulings of this Court with which they disagree.”
Second, the Court concluded that the proposed plan violated bankruptcy law by failing to treat similarly situated creditors equally. Shortly before filing the prepackaged bankruptcy, Congoleum settled with certain asbestos claimants who each received both cash payments and the right to obtain additional sums from the insurance-funded trust that the bankruptcy would establish. Weitz’s firm represented two of these claimants, and Brayton & Purcell LLP (another prominent asbestos claimants’ firm) represented the third. The plan proposed that all asbestos claimants who received pre-petition payments would return those payments and pursue their claims with the trust exclusively -- except for the three Weitz/Brayton claimants, who would have a unique and more financially advantageous option to keep their pre-petition payments rather than pursue claims with the trust. The Plan Proponents argued that the cash portion of the settlements was consummated entirely pre-petition, which would make them irrelevant to the equal treatment issue. The Court found this position “not intellectually defensible” because “[e]ach settlement arose from a single alleged injury from exposure to asbestos in a Congoleum product; therefore, there was not separate consideration for the pre and post-petition parts of the claims.” The fact that only the Weitz/Brayton claimants had an option with respect to their pre-petition payments “render[ed] the plan unconfirmable.”
Having concluded that both the direct payments to Weitz and Rice and the special treatment afforded the Weitz/Brayton claimants made the plan “unconfirmable as a matter of law,” the Court considered whether to dismiss Congoleum’s Chapter 11 bankruptcy or convert it to a Chapter 7 liquidation. The Court expressed extreme frustration with the Plan Proponents, whose prior proposed plans had the same defects as the current iteration. Rather than accept the Court’s prior summary judgment decisions, the Plan Proponents “largely ignored” them and asserted positions that the Court considered “patently ludicrous.” The Court stressed that “[t]he Debtors and the other Plan Proponents have shown a marked inability to change course in response to evolving case law or rulings of this Court.”
Ultimately, the Court ordered dismissal rather than liquidation, partly because that would enable the Plan Proponents to appeal immediately, and partly because of “the Court’s concern for the welfare of the Debtors’ employees[.]” According to the court, dismissal would also leave Congoleum “free to continue the ongoing coverage litigation in the state court” and begin new negotiations with asbestos claimants outside bankruptcy.
Troutman Sanders LLP represents two of the insurers that joined in filing the summary judgment motion that the Bankruptcy Court granted and who prevailed at trial in the pending state court insurance coverage litigation.