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  • Writer's pictureKirk Hartley

Appeal Confirms Rejection of Asbestos Bankruptcy Plan as Collusive and In Bad Faith

As described in this prior post of a little less than a year ago, a bankruptcy judge in Pennsylvania last year wrote a cogent opinion that thoroughly reviewed – and trashed – the Skinner chapter 11 plan. Why ? Because the Skinner plan boiled down to keeping alive a corporate body that was financially dead unless someone clever could find an artificial means to cause the corporate body’s insurance policies to remain alive to generate cash for asbestos and other creditors. The corporate death had occurred without the debtor having paid even one asbestos claim prior to filing its chapter 11 petition. But, lawyers for asbestos claimants found a way to try to work around that little problem. To incentivize all creditors to favor asbestos recoveries and vote for a chapter plan, the plan proposed that 20% of all asbestos judgments would be paid to the non-asbestos creditors that otherwise would get nothing. In short, a "win-win" that would keep the corporate body alive for the benefit of all creditors, and would hurt only the insurance companies paying the judgments. So, the court rejected the plan as not possibly being in good faith and converted the case to a chapter 7 proceeding.

Happily, a friend just sent along a March 29 opinion in which the district court has now rejected the appeal pursued by the asbestos claimants. The affirming opinion, by Chief Judge Gary Lancaster, minces no words in explicitly affirming all the reasoning of the bankruptcy court, and rejecting the bona fides of the plan for all the reasons explained by the bankruptcy judge, including "collusion." The court also bluntly noted that the entire affair was even worse because it had generated some $ 2 million in legal and consulting fees for the bad faith plan. Who knows – maybe there will be a spring miracle and the US Trustee’s office will move to recoup the fees and costs wasted on a bad faith plan ?

Will the asbestos creditors in Skinner seek an appeal to the 3rd Circuit ? My belief is: no. Why ? Because the 3rd Circuit has under advisement an opinion in an asbestos bankruptcy case with facts not so very different. The case is commonly known as NARCO/GIT. The case is described in a prior post, and also in this post regarding 19 state attorney’s general opposing the plan. The facts in GIT are not exactly the same, but do involve creating far more claiming in bankruptcy than had ever happened in the real world of the tort system. IN the real world outside of bankruptcy. less than 200 silica claims before chapter 11, but then over 4,500 were filed in the chapter 11 case. Thus, it’s easy to see some parallels, and so one doubts the plaintiffs want to help the 3rd Circuit see other examples of the unseemly goings on in too many (but not all) of the asbestos chapter 11 cases. To make life easier for those on hand-held devices, set out below are two points from the prior post about the issues on appeal in GIT:


"Second, Hartford points out that the "silica trust" is not funded by the debtor, and instead is to be funded only by monies paid out from some $ 500 million of GIT insurance policies that contain "asbestos exclusions." The asbestos exclusions render the policies unable to pay asbestos claims. Hartford Brief at 9-10. As Hartford argues, it certainly is illogical to argue in an asbestos bankruptcy that is "necessary" to resolve silica claims to be paid from insurance policies that can not be used to pay asbestos claims.

Third, Hartford contrasts silica claiming facts before the chapter 11 petition was filed to the silica claiming facts after the petition was filed. Prior to the petition, GIT had been sued in less than 200 silica cases, GIT had not paid out any money on silica claims, and its insurers had only paid out $ 312,000 for silica claims. Hartford Brief at 8. In contrast, after the petition was filed, silica claims were soon submitted in droves (over 4,500). As Hartford points out, the sudden spate of claims was a win-win for everyone but the insurers since the spate of claims gave GIT votes needed to approve its plan under section 524(g), and payments by the trust on the claims would over time generate money for claimants and their lawyers, with the claims judged by the trust under a limp "proof" standard. Hartford Brief at 9-14. Thus, everyone would be happy except the insurers called on to pay the silica claims after approval by the trust."

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