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THREE YEARS INTO what was meant to be a quick trip to bankruptcy court, a federal judge in Trenton, N.J., shot down Congoleum Corp.’s “prepackaged” Chapter 11 reorganization plan as a “dead end” that scarcely satisfies the intent of the law. The plan drafted by the Mercerville, N.J.-based manufacturer and the principals of two national asbestos plaintiffs’ powerhouses-Joseph F. Rice of Motley Rice in Mount Pleasant, S.C. and Perry Weitz of Weitz & Luxemburg in New York-proposed a trust funded by the company’s insurers to which the two plaintiffs’ firms’ clients would receive first preference. In addition, the company, freed from its asbestos liability, was to contribute no equity. But U.S. Bankruptcy Judge Kathryn C. Ferguson said that her ruling on summary judgment “clearly indicates that the court believes [Congoleum's] chosen path is a dead end.” In re Congoleum Corp., No. 03-51524 (Bankr. D.N.J.). Ferguson rejected the company’s strategy and also noted her “serious concerns” as to the “independence of judgment” of Rice and Weitz in helping to navigate through bankruptcy proceedings a company against which they also have claims. The court said the plan did not satisfy the funding requirements of Chapter 11, Section 524(g), was not “fair and equitable” and did not provide similar treatment of creditors, among other things. Neither Rice nor Weitz returned calls seeking comment. Richard L. Epling of Pillsbury Winthrop Shaw Pittman’s New York office, who represents Congoleum, did not return a call for comment. Lawyers representing Congoleum’s insurers, which claimed that they would have been left holding the bag under that plan, praised what they called Ferguson’s important decision. John R. “Jack” Gerstein of Ross, Dixon & Bell in Washington, a lawyer for Continental Casualty Co. in the bankruptcy case, said, “Judge Ferguson has given Congoleum a strong dose of reality. The points she made in her opinions are points the insurers have been pressing for years.” The pair of opinions “send a message to a small group of lawyers who put together these prepackaged asbestos bankruptcies that they can’t circumvent the law,” Gerstein said. Tancred V. Schiavoni of O’Melveny & Myers’ New York office, who represented Century Indemnity Co. in this and related litigation, said that these cases “really blew the top off how these asbestos bankruptcies were organized. “Trenton’s a down-to-earth place and this is a smart judge who saw through all the nonsense and basically said, ‘The policyholders that have been arranging these bankruptcies with other people’s money have got to put their own skin on the table.’ “ A prepackaged bankruptcy is a case filed after a debtor’s proposed Chapter 11 reorganization plan is accepted by the majority of creditors required for the court’s confirmation of that plan. As such, it makes the process more efficient and economical for debtors. It has been popular among asbestos defendants because it sets up a trust to resolve their exposure to asbestos claims while preserving companies’ assets and letting them stay in business. In an earlier ruling in this matter, the 3d U.S. Circuit Court of Appeals already disqualified another firm, Gilbert, Heintz & Randolph of Washington, that Congoleum brought in as special insurance counsel, for a conflict of interest. In re Congoleum Corp., No. 04-3609 (3d Cir.). Gilbert Heintz had acted as prepetition counsel for Congoleum in negotiating settlement arrangements with asbestos injury claimants represented by attorneys who were co-counsel with it in insurance matters for those same claimants. On remand, Ferguson ordered Gilbert Heintz to disgorge $9.7 million in fees it had received for its work on the case. Also, Congoleum endured an eight-month bench trial against its insurers last year in New Jersey state court for rejecting a $465 million global settlement that the company had reached as part of its prepackaged asbestos bankruptcy. Congoleum alleged that the insurers breached their obligation by not honoring the agreement. The parties await a decision on the trial. Congoleum Corp. v. ACE American Insurance, No. MID-L-8908-01 (Middlesex Co., N.J., Super. Ct.). http://pdfserver.amlaw.com/nlj/Congoleum B Ct opinion finding 10th plan unconfirmable.pdf http://pdfserver.amlaw.com/nlj/Congoleum B Ct opinion finding CNA plan unconfirmable.pdf http://pdfserver.amlaw.com/nlj/Congoleum B Ct order finding 10th plan unconfirmable.pdf http://pdfserver.amlaw.com/nlj/Congoleum B Ct order finding CNA plan unconfirmable.pdf

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