Without destroying viable companies and depleting their insurance resources in the process.
Ten years later, the tides seem to be turning. A newly constituted Roberts/Alito Supreme Court already giving strong indications of a pro-business stance and a federal appellate court showing company favor are influencing insurers to become more proactive in these mass/tort bankruptcy proceedings--where traditionally they've been left holding the bag and haven't always had meaningful participation.
In fact, three recent federal circuit court decisions in Philadelphia--my hometown--directly affect insurers' role in mass tort scenarios and point to this trend.
In the first, Combustion Engineering, which manufactures asbestos-insulated boilers, defended asbestos claims for 40 years before finding itself in 2002 nearly insolvent and with significant insurance coverage issues. CE, like others before it, attempted to shed permanently its asbestos claim exposure by filing a prepackaged Chapter 11 bankruptcy reorganization.
The bankruptcy court approved the reorganization plan, but the federal district court modified the plan in a way such that insurers believed their prepetition protection was being diminished. However, the district court ruled the insurers had no "standing" to object to those modifications. On appeal, the federal circuit court reversed and held the insurers had standing after all. The district court's modifications were vacated, and the original plan, as approved by the bankruptcy court, was reinstated, preserving the insurers' preferred, pre-petition position regarding payouts.
In the second case, Congoleum was facing nearly 100,000 asbestos claims and exhaustion of its primary liability insurance, and filed suit in New Jersey in 2001 against its excess carriers. The company also sought bankruptcy protection to channel all asbestos claims to a trust funded by it and its insurers.
Congoleum retained a law firm to advise it regarding terms of the prepackaged bankruptcy reorganization plan. However, the outside counsel had a conflict of interest, as it had previously represented asbestos claimants against Congoleum. Congoleum's liability insurers objected to the law firm's engagement by Congoleum.
While the bankruptcy court and the federal district court overruled those objections, the federal circuit court ultimately disagreed and reversed. The reorganization plan, to which insurers had objected, was vacated and the case sent back for further consideration.
The third involved the $400 million settlement of thousands of asbestos claims involving plaintiffs from both Northern and Southern states and almost 20 asbestos defendants. These plaintiffs' law firms had agreed on a series of formulas for calculating their contingent fees. Some of the Southern lawyers did not have to share their fees in "Southern" settled cases but did have to split fees in "Northern" settled cases.
After the global settlement, some Northern plaintiffs sued some Southern lawyers claiming that Northern settlements were smaller so that the Southern lawyers could obtain larger fees. The federal district court dismissed the claim. On appeal, the federal appellate court reversed and found that the Northern plaintiffs might have a claim against the Southern lawyers after all. This reversal meant that the nature and the amount of the attorneys' fees would have to be scrutinized again, possibly meaning savings for insurers.
What does this all mean? Insurers, who often are the real stakeholders, have been sent a strong message: their participation is essential and needed in these complicated, mass tort/bankruptcy proceedings.
PHILIP G. KIRCHER is co-chairman of the commercial litigation department at the law firm of Cozen O'Connor.
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September 1, 2007
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