After 12 failed attempts at a Chapter 11 reorganization plan that would set up a trust for tens of thousands of asbestos claims against Congoleum, a U.S. judge has reinstated the case and, in an unusual step, has withdrawn it from the bankruptcy court so he can handle the confirmation process himself.
A bankruptcy judge dismissed the Chapter 11 case earlier this year, fed up over the proponents' repeated failure to address concerns about unequal treatment of claimants and $2 million in "facilitation fees" for claimants' lawyers.
But U.S. District Judge Joel Pisano in Trenton, N.J., held Monday that the favored treatment of claimants who settled before the Dec. 31, 2003, bankruptcy filing did not preclude the plan's confirmation. He also required submission of a new plan that does not try to block judicial review of the facilitation fees.
Pisano directed the parties to brief certain issues before the confirmation hearing on the new plan: whether its treatment of the favored claimants would violate the Bankruptcy Code requirement of equal treatment of similarly situated creditors; the adequacy of funding and good faith of the trust distribution procedures; and the reasonableness of the fees to claimants' counsel.
Congoleum, based in Mercerville, N.J., manufactures floor tiles and vinyl products that contained asbestos until 1974 and 1983, respectively. Between 1981 and 2002, it settled 33,000 personal injury claims over asbestos exposure at a total cost of $13.5 million, exhausting its primary insurance policies.
In 2002, its excess carriers, which had brought a coverage action in state court, were refusing to pay any claims until it was resolved.
After Congoleum failed to get the carriers to agree to a settlement, it hired Gilbert Heintz & Randolph of Washington, D.C., to put together a pre-packaged bankruptcy plan. In April 2003, Gilbert Heintz reached a global settlement with Perry Weitz of Weitz & Luxenberg in New York and Joseph Rice of Motley Rice in Mount Pleasant, S.C. It provided for submission of claims to a trust set up as part of the contemplated bankruptcy, with 75 percent of each claim secured by an assignment of insurance and the other 25 percent treated as an unsecured claim. Most of the trust funding would come from insurance proceeds. The deal also provided for Congoleum itself to pay the $2 million to Weitz and Rice.
By October 2003, 79,000 claims had been submitted.
Shortly after, the Chapter 11 case was filed along with a pre-packaged reorganization plan that would treat claimants who had settled beforehand more favorably than others. Those who would benefit included two Weitz clients, Kenneth Cook and Richard Arseneault, who had agreed on Oct. 21, 2002, to settle for $8 million each, with $800,000 paid in cash and an assignment of insurance proceeds for the remaining $7.2 million.
Disfavored claimants, the insurers and the U.S. trustee objected.
The plan was withdrawn after the 3rd U.S. Circuit Court of Appeals held in In re: Combustion Engineering, Inc., 391 F.3d 190 (3d Cir. 2005), that a pre-packaged plan that gave better treatment to asbestos claimants who had settled pre-petition violated the Bankruptcy Code.
During the next few years, Congoleum presented a series of revised plans that were bounced by Bankruptcy Judge Kathryn Ferguson, who objected to their favorable treatment of Cook and Arseneault and their failure to provide for court approval of the $2 million in facilitation fees.
After Ferguson rejected the 11th attempt, she gave Congoleum a Dec. 31, 2008, deadline to file a confirmable plan, or face dismissal or conversion to a Chapter 7 liquidation case.
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