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The strategy of challenging the veracity and value of asbestos claims that bankrupt Babcock & Wilcox Co. is attempting in two New Orleans courtrooms was a tactical failure almost 20 years ago and lawyers watching the case don’t think it has much chance in succeeding now. Virtually all of the 30-odd companies and their attorneys facing asbestos-related claims in the past two decades ultimately have chosen to settle rather than face painstaking and costly efforts involved in challenging individual claims. Not Chicago law firm Kirkland & Ellis and its two asbestos liability-laden bankruptcy clients, B&W and W.R. Grace & Co., which are trying to reverse the nearly two-decade trend and aggressively challenge the claims against them. “The real issue is whether you can separate out the legitimate claims from the chaff since litigation is very expensive and very time consuming,” said Harvey Miller, head of restructuring at Weil, Gotshal & Manges in New York. “It’s absolutely worth the effort if there’s a way to do it, but that scorched-earth policy of fighting was started with Johns Manville in 1982 and they ultimately decided it was too expensive, too time-consuming and too diverting.” But David Bernick, B&W’s lead attorney at Kirkland & Ellis, believes his client’s circumstances are different. “Babcock & Wilcox is different from previous asbestos debtors because it never claimed any liability in its pre-petition settlements and only settled those claims as a sound business practice,” he said. “It has a clean slate once it filed for bankruptcy and we’re seeking to challenge the claims on that basis.” Kirkland & Ellis is challenging thousands of claims to B&W and Grace in an effort to keep the debtors viable enough to retain control instead of relinquishing majority control to a settlement trust. Those trusts assume at least a 51 percent control of the post-bankruptcy debtor and have often led to greater control. “In the past, you literally filled out a form in five minutes that stated the claimant had a note from the doctor saying he was coughing and had other symptoms and showed that he worked at the site,” said John Donley, another Kirkland & Ellis attorney representing B&W. “It took five to 10 minutes to fill out the form that would routinely lead to checks for thousands of dollars. That’s what we’re fighting.” But one New York attorney who worked on some early asbestos-related filings but asked not to be named is skeptical. He believes Kirkland & Ellis is seeking to parlay the success it had in the Dow Corning Corp. breast implant-related bankruptcy case — when it was able to fight a sufficient number of claims by showing that they might be based on questionable scientific claims — into a winning strategy for clients with asbestos liabilities. “Kirkland & Ellis won a settlement that let management keep control of the company because the breast-implant plaintiffs feared they were vulnerable to having their claims thrown out of court,” he said. The ability to challenge asbestos-related claims is considerably more difficult, the lawyer said. Only two viable defenses in such cases thus far have surfaced. One is that state statutes of limitations ranging from four years to seven years have run out for claimants to file their claim. The second is proving the plaintiff didn’t actually work where the debtor handled the asbestos. “Otherwise, the defendant always loses and I can’t see how anything would suddenly change that,” the attorney said. The settlement in Dow-Corning’s Chapter 11 filing was directly tied to the so-called Daubert defense, which gives the bankruptcy judge the right to determine whether an expert witness is making legitimate scientific claims or is merely professing “junk science,” said the New York partner. “The junk science defense has been tried one-by-one and failed in federal trials because it’s just not there in asbestos cases, where good scientific evidence has shown a clear connection between asbestos and disease,” he said. B&W and Kirkland & Ellis have turned to the Daubert defense in trying to get expert testimony rejected. They argue that workers had only a peripheral experience with asbestos and, thus, “based on a sample, about two-thirds of claimants cannot even meet the most basic requirement on proof of claim,” the company claimed in documents filed Oct. 18 in U.S. District Court in New Orleans. The district court is adjudicating the tort matters in the case. Meanwhile, Judge Jerry Brown in the U.S. Bankruptcy Court in New Orleans heard arguments Monday by B&W on two fronts. First, that the asbestos claims shouldn’t be valued 100 cents on the dollar based on past, settled claims, and second, that because of that discounted value, B&W wasn’t insolvent at the time that it transferred $622 million in assets to its parent, New Orleans-based McDermott International Inc., several months before it filed for Chapter 11. Creditors claim B&W was insolvent and thus committed a fraudulent conveyance. Brown’s decision will likely influence the proceedings in the district court case. More than $10 billion in claims have been filed against B&W both before and after its Chapter 11 filing on Feb. 22, 2000. “There’s a negotiating dynamic in all these [asbestos] cases and Kirkland & Ellis is challenging these claims at the outset to put pressure on the plaintiffs’ lawyers in what might ultimately lead to a better settlement,” said a second New York attorney with experience on large asbestos-related Chapter 11 filings. “The key to playing out an aggressive strategy is knowing when to cut a deal, however, and that may indeed be the strategy here.” Chapter 11 bankruptcy protection is usually the best vehicle for companies seeking to fight huge claims, he said, because it gives the debtor the chance to consolidate its defenses under a single bankruptcy judge, he said. But if B&W, Grace and their lawyers want to buck convention, he thinks they’d have a better chance before judges by attacking the high contingency fees that lawyers are charging to represent claimants. “I would be targeting plaintiffs’ contingency fees for my client if I were at Kirkland & Ellis because they’re generally up to 30 percent or 40 percent of the total recovery on asbestos and other mass tort cases,” the attorney said. Copyright (c)2001 TDD, LLC. All rights reserved.

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