W.R. Grace, Solvency Findings, Asbestos Liability Estimates, and Injunctions that Bind Others
Today’s post follows up on this August 13 post regarding asbestos plaintiff’s lawyers asking the Court to order the rest of the world not give any effect to whatever the Court finds on Grace’s solvency, and item 4 of this prior post of May 12 regarding Nobel prize winner James Heckman’s expert report in Grace in which he and the non-asbestos creditors indicted bankruptcy court estimation proceedings as having no scientific validity.
The topic today is Grace’s August 7 trial brief asserting that it is impossible for the Court to determine whether Grace is solvent or insolvent, and that instead it should just find that Grace will be solvent and viable if the plan is confirmed. Grace’s brief [Docket 22732] is available through PACER or here.
Key quotes from the Grace brief are below. The gist is that estimates of its “personal injury liability” range from a low end of $ 200 million (from Grace’s expert, Tom Florence) to $ 6.2 billion (plaintiff’s expert Mark Peterson). In addition, its “property damage liability” is estimated by some at about $ 3-5 billion, with one calculation suggesting $ 82 billion. The facts, as argued by Grace, are set out below. The question I pose is this:
In tort cases, we say that good science must be applied. In business litigation, the general rules is that damages must be proved with reasonable certainty. Given those rules, why would it be socially useful and/or constitutional for bankruptcy courts to issue world-wide injunctive orders without making actual factual findings on key issues when the factual claims are so extremely different as they are in the Grace case, and the answer on solvency plainly could come out on either side of the solvency question?
In posing that question, I recognize that Grace and others will and do say that what we need most are deals that end litigation and that courts should accept deals. But, isn’t it also fair to say that individual case settlements are much different because, unlike Grace’s desired confirmation order, those other settlements do not include sweeping injunctions purporting to bar and limit the manner of future prosecution of tens or hundreds of thousands of present or future claims to be asserted by personal injury claimants, and that also will enjoin cross-claims or subrogation claims to be asserted by underlying case co-defendants and/or insurers in those same hundreds or thousands of future personal injury claims?
The Grace brief states the following, at 12-14:
“Among the most significant hurdles that the Committee and the Lenders must overcome before they even get to the analysis under section 1129 is the requirement that they prove the Debtors are solvent. This they cannot do. The most significant component of Debtors’ liabilities, the Asbestos PI Claims, has never been agreed upon or adjudicated. The estimation proceeding, which was designed specifically to estimate the value of the Asbestos PI Claims,was not completed. And there has never been an agreed upon or adjudicated resolution of Debtors’ potential property damage asbestos claims. Without such adjudication, the liabilities cannot be established, and the Lenders and Committee cannot prove that the Debtors are solvent.
The incomplete estimation proceeding only highlights the fact that, absent the Plan, there is an enormously wide range of estimated values of the Debtors’ asbestos liabilities. For example, the Debtors’ estimation expert, Dr. Tom Florence, estimated that value of Debtors’asbestos personal injury claims ranged between $200 million and $989 million with a median value of $468 million. But Dr. Denise Martin, another one of Debtors’ experts, determined that at the standard 95% confidence interval for scientific reliability, Dr. Florence’s estimates could range from $4.6 million to $6.3 billion. The PI Committee’s expert, Dr. Mark Peterson, could offer no more definite estimates of Debtors’ asbestos liabilities. He opined that Debtors’ potential liabilities for asbestos personal injury claims were “between $4.7 and $6.2 billion and most likely between $5.4 and $6.2 billion.” See Expert Report of Dr. Mark Peterson in Connection with the Asbestos Personal Injury Estimation Hearing, dated June 20, 2007 at ES-5 (Dkt. 16113, Ex. A).
Likewise, the value of the Zonolite Attic Insulation (“ZAI”) claims is also highly uncertain and disputed. While the Plan provides between $54.5 million and $58 million to ZAI (and potential additional contract payments), ZAI made substantially higher demands. For example, ZAI claimants have previously stated that ZAI could potentially be in 11 million homes5 with a value of$5,000 to $7,500 per home,6 for a total of up to $82.5 billion. Even using the claimants’ lower estimates of 1 million homes7 at a value of $3,000 to $5,000 per home, the total liability would be $3 billion to $5 billion. The range of non-ZAI Propert Damage liability is also entirely uncertain. While the Plan provides $ 49.3 million for non-ZAI Property Damage claims, the potential claim was much greater. Together, the total potential Property Damage liability, absent a Plan, reaches at least $3.149 billion to $5.149 billion and may be much greater.
B. The liability disputes foreclose any demonstration of solvency. The Plan disposes of that liability and therefore cannot be relied on to prove solvency.
As described above, there has never been an adjudication of Debtors’ asbestos liabilities, and estimates of those liabilities vary greatly. There is simply no estimation method that can accurately measure the Debtors’ asbestos liabilities. Without a binding determination of Debtors’ potential asbestos liabilities, there cannot be a final and binding determination that Debtors are solvent. Zily Aff. ~ 4.9
As discussed infra, the Lenders’ new expert, Robert 1. Frezza, relies on estimates from the never-completed estimation hearing to attempt to “determine” Debtors’ solvency. This attempt is unavailing. Indeed, the only way that Mr. Frezza can even begin to argue Debtors’ solvency is by relying upon the Plan, the very one to which the Committee and the Lenders now object. Absent the Plan, there is no cap on Debtors’ asbestos liabilities. As already noted, the Proposed Asbestos Settlement, which forms the basis of the Plan, does not represent an adjudication of the Debtors’ asbestos liabilities. Rather, it represents a compromise that disposes of the need to adjudicate those liabilities. Without the Plan, all that is left are potentially enormous amounts of asbestos liabilities, the adjudication of which would determine whether Debtors are solvent. In other words, the Plan does not prove solvency; it paves the way for solvency from and after the Effective Date.”