Mass Torts/Environmental - Agreeing With Insurers, Court Rejects Congoleum’s Bankruptcy Plan To Resolve Asbestos Liability
In re Congoleum Corporation, Bankruptcy Case No. 03-51524, United States Bankruptcy Court, District of New Jersey (decided February 1, 2007).
Granting insurers’ motions for summary judgment on the point, federal bankruptcy Judge Kathryn Ferguson has rejected Congoleum’s latest bankruptcy plan, deeming it “not confirmable as a matter of law.” Ross,
Dixon & Bell, LLP represents an insurer in the case and took a lead role in the briefing. Congoleum’s proposed plan – its tenth – was designed to rid itself of its asbestos liability, but insurers have denounced
the plan as the product of a collusive scheme between Congoleum and claimants’ counsel.
Addressing Congoleum’s plan, Judge Ferguson concluded that it impermissibly treated asbestos claimants disparately, according some claimants better treatment than others. This, she wrote, “violated the Code’s
bedrock principle of equality of distribution” and “renders the Plan unconfirmable as matter of law.” She observed that in November 2005, she warned Congoleum that it “appeared to be moving in the wrong
direction with regard to addressing the preferential treatment,” but the latest plan “could not be stronger evidence of the direction [Congoleum has] chosen, and this court’s ruling … clearly indicates
that the court believes the … chosen path is a dead end.”
Underscoring the point, Judge Ferguson concluded that discrimination in favor of certain asbestos claimants could not be part of any plan: “[N]o plan that recognizes those preferential security interests can be confirmed.
For any plan to be confirmable, the preferred claimants will have to forego their security interests voluntarily, or those interests will have to be avoided completely in the adversary proceeding.… In this case, the fact that
[Congoleum] granted pre-petition security interests to certain favored creditors and then purposefully waited more than 90 days to file in order to protect those security interests evinces a scheme designed to circumvent the Code’s
equal distribution requirements. As a result, confirmation of a plan that in any way recognizes those pre-petition security interests is not permissible.”
The judge also questioned the relationship between Congoleum and claimants’ counsel Joseph Rice and Perry Weitz because they would be members of the Plan Trust Advisory Board, charged with claim oversight: “The
Court questions the possible efficacy of erecting ‘Chinese walls’ to protect individual settlement decisions when the security interests themselves as well as the Claimant Agreement were the by-product of negotiations
with Messrs. Weitz and Perry.” Going further, Judge Ferguson noted her “serious concerns about the independence of judgment being exercised when it comes to Messrs. Rice and Weitz,” who each received $1 million
from Congoleum to facilitate the deal.
Also criticized were exculpation provisions that protected, among others, Messrs Rice and Weitz, with the judge observing that “the claimants representatives were the architects of the Claimants Agreement, which provided for
uneven treatment of asbestos creditors and created many of the confirmation problems that have plagued this case. …”
Judge Ferguson also concluded that the contributions of Congoleum’s parent, American Biltrite, Inc., to the bankruptcy plan were insufficient as a matter of law to satisfy the “fair and equitable” requirements
of the Bankruptcy Code, observing, “[F]or a small cash infusion ABI would be able to retain its majority interest in Congoleum, which will be a more valuable enterprise post-confirmation because it will have been scrubbed
clean of its asbestos liabilities.”
Judge Ferguson also declined Congoleum’s request to reinstate the “exclusivity period”— which would have allowed Congoleum the exclusive right to negotiate with creditors to present a plan. By declining
to reinstate the period of exclusivity, the judge left open to the insurers and others the ability to propose bankruptcy plans.