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Johns-Manville Corp. once defined how corporations would deal with massive asbestos claims lodged against them — file for bankruptcy protection, set up a trust to segregate the liabilities, give claimants control for a number of years, and regroup operationally. But that paradigm is shifting. From a group of railroads taking their case to the U.S. Supreme Court to bankrupt Babcock & Wilcox bucking legal convention in bankruptcy court in New Orleans to Delaware asbestos cases being consolidated under one U.S. District judge in Newark, N.J., the entire way massive and still-growing asbestos liabilities are being managed is being reconsidered. The number of asbestos claims filed against U.S. corporations has skyrocketed. The number of new filings made annually has risen sharply, from 20,000 in the early 1990s to 90,000 in 2001, according to Tillinghast-Towers Perrin, a consulting firm. As many as 1 million claims could be filed before litigation ends, it added. Even smaller asbestos producers are being targeted. Philadelphia-based Crown Cork & Seal Co. Inc. has been sued for asbestos exposure from an insulation company it inherited as part of a $7 million acquisition of a bottle-cap maker in 1963. Through last September, it has paid out $350 million in asbestos settlements. “Companies that were paying out 95 percent of the settlement costs are bankrupt, so their money is off the table for the time being,” says Patrick Hanlon of Shea & Gardner in Washington, D.C., who represents USG Corp. in its asbestos-related bankruptcy. “As a result, the plaintiff will turn to the company that normally paid only 5 percent of the settlement.” But more and more, businesses aren’t just looking for cover. Companies in bankruptcy are now challenging claims. Nonbankrupt companies are seeking ways to either guard themselves from being a lone, deep-pocketed target for claimants or to protect themselves from forums where those litigants have had the upper hand. Indeed, three other approaches besides the one taken by Johns-Manville have emerged in recent months. There’s the B&W tack, which calls for challenging in bankruptcy court the validity and value of claims. The Honeywell International Co. strategy, which is being deployed by Honeywell and Halliburton Co. and was attempted by the Big Three automakers, involves staying out of bankruptcy but attaching asbestos claims to companies that are in Chapter 11. And finally, there’s the approach being taken by three railroads — CSX Transportation, Norfolk Southern Railway and Conrail. They are challenging claimants who are worried about getting asbestos-related diseases even though they aren’t ill. The Supreme Court has agreed to hear their case. Lawyers credit bankrupt Babcock & Wilcox the most for trying to change the standard corporate thinking on asbestos. The New Orleans-based maker of power plants had been settling asbestos claims for 20 years until it shifted gears. “It really started 26 months ago with Babcock & Wilcox. That’s when the new wave of asbestos bankruptcies started,” says Leonard Goldberger of White and Williams, which represents insurance companies in numerous asbestos-related bankruptcies. Others have fallen in step, such as W.R. Grace Co., a Columbia, Md.-based specialty chemicals manufacturer and USG, a Chicago-based building materials company. These companies’ common mission: to use the bankruptcy court to weed out invalid claims and pay only the valid ones. By doing so they hope the ultimate cost to current shareholders and to the company will be a lot lower than under the old system. B&W, represented by Kirkland & Ellis’ David Bernick, has taken the most aggressive stance of the three. Its most dramatic and novel move so far has been to ask the federal bankruptcy court judge on the case in New Orleans to allow it to ask all asbestos plaintiffs to fill out a form listing information such as the type of injuries they’ve suffered due to asbestos exposure and their work histories. The company has also asked the court to set a bar date for claims by asbestos plaintiffs. “B&W is a leader in having what I would call a litigating bankruptcy,” says Shea & Gardner’s Hanlon. The point of that laborious process is to determine the validity and value of the claims. “What we said is that, to determine the scope of B&W’s actual legal liability, the court should ask claimants very specific questions about the nature of their claims and then should address issues that carry across large groups of claimants,” Bernick explains. “In that fashion, the court would resolve the question of which claims are valid.” That method of sifting through all the claims is completely new, say bankruptcy lawyers. “B&W is really the first one to try to do this in a systematic way. They think that many people don’t have a cognizable injury, can’t produce evidence of it or can’t produce evidence of exposure to B&W asbestos,” says Hanlon. USG is taking the same basic approach in its bankruptcy, but has asked the U.S. Bankruptcy Court in Wilmington, Del., to approve a faster method of figuring out how many of the asbestos claims against it are valid or not, says Hanlon, bankruptcy counsel for USG. “Our substantive objective is the same [as B&W and Grace], to test whether or not the company is really liable in a lot of these cases,” he says. In the past, such thinking was impractical. The approach taken by Johns-Manville — which was acquired by Berkshire Hathaway in 2001 — became the benchmark. Manville was only the fourth asbestos-related bankruptcy when it filed in 1982, but, as a maker of insulation and building materials, it was the largest producer of asbestos in the United States. A trust was set up in 1986 with certain Manville assets to compensate plaintiffs up to that point and going forward. The company survived, the litigants were paid. And the Manville model grew entrenched. But the claims only kept coming. Since 1976, there’ve been 62 asbestos-related bankruptcies, with 20 since 2000, according to Lehman Brothers. Even Manville wasn’t immune. In 1998, the Manville trust received 29,500 claims, the next year, 31,700. In 2000, 58,000 new claims were filed. Last year, the figure was 91,000. Filing for bankruptcy isn’t necessarily the solution now. Neither CSX Transportation, Norfolk Southern Railway or Conrail are in Chapter 11, but they are challenging in the Supreme Court a $5.8 million jury award to six retired railroad workers who say that they suffer “emotional distress” from fear of contracting cancer because of past asbestos exposure, even though none of them are sick. The railroads want the high court to decide if such awards are valid. The justices must decide two major things, says the railroads’ lawyer, Carter Phillips at Sidley Austin Brown & Wood. “Under what circumstances is it appropriate for individuals to get awards for fear of cancer due to exposure to asbestos if they don’t yet have the disease?” he says. “And how should courts apportion blame to companies for asbestos-related illness when an individual has been exposed to products of several companies over many years?” Some companies that don’t face the threat of bankruptcy but do face a constant stream of asbestos lawsuits are pursuing a different angle. Recently, Honeywell and Halliburton asked Judge Judith Fitzgerald of the U.S. Bankruptcy Court in Pittsburgh to consolidate the asbestos personal injury cases against them with the insolvencies of two U.S. units of an Austrian manufacturer of heat-resistant materials, RHI AG. Halliburton and Honeywell have an interest in those two cases because as the original owners of the two RHI units, Harbison-Walker and North American Refractories Co., they were named as co-defendants in asbestos lawsuits against the RHI units. They also have other ties to asbestos liabilities from their former asbestos-tainted units. Honeywell had sold North American Refractories Co., a maker of high-temperature brick and cement products used in steel production, in 1986 and agreed to indemnify the former unit for asbestos claims. There are 116,000 claims pending against Narco; 7 percent of them also name Honeywell. Halliburton got the Harbison-Walker asbestos liability when it bought Dresser Industries, Harbison-Walker’s former parent. Dresser had indemnified Harbison-Walker for asbestos liability when it spun out the maker of heat-resistant industrial materials in 1992, and agreed to share with its former unit a $2.1 billion insurance policy to cover asbestos claims. Now both Halliburton and Honeywell want the settlement with asbestos claimants in the RHI bankruptcies to include lawsuits against them, too. Typically, asbestos bankruptcies have closed with the creation of a trust, such as the Manville trust, containing a controlling stake in the bankrupt company plus other compensation such as the insurance policies that cover the asbestos claims. Halliburton will ask the Pittsburgh bankruptcy court to allow any trust set up in the Harbison-Walker bankruptcy to include current and future asbestos claims against Halliburton in connection with Harbison-Walker’s operations and products, and Halliburton will contribute its insurance policy into the trust to meet claims payments, said Cedric Burgher, spokesman for the company. Such a trust would be a first for asbestos bankruptcies because it would include both the claims against the debtor and those against another company, Halliburton. Of course, the plaintiffs in the case want to go after the full value of Honeywell and Halliburton. “Narco is really a phony shell company created by Honeywell to hide asbestos liability,” argues Steven Kazan of Kazan, McClain, Edises, Abrams, Fernandez, Lyons & Farrise of Oakland, Calif., a lawyer for asbestos plaintiffs in RHI. “Honeywell itself is truly the old Narco. In Harbison-Walker, the liabilities really belong to both Dresser and Halliburton.” Kazan thinks the Halliburton-Honeywell strategy is way out of line. “This is World War III with the plaintiffs’ bar,” he says. It’s an extension of a strategy used in earlier cases, but it’s so much of an abuse of the theory that they don’t have enough money to buy from us what they want. We’ll litigate this for years.” (Halliburton and Honeywell have won a small victory, since Fitzgerald stayed the claims against them while the RHI bankruptcies proceed.) The strategy hasn’t worked for everyone. Daimler Chrysler AG, General Motors Corp. and Ford Motor Co., represented by Kirkland & Ellis’ Bernick, wanted their asbestos lawsuits brought into the bankruptcy of Southfield, Mich.-based auto parts maker Federal-Mogul Corp. But U.S. District Judge Alfred Wolin of the District of New Jersey, who’s now taken over the asbestos-related issues in five Delaware bankruptcies, wouldn’t allow it. The Big Three have taken the case to the federal court of appeals in Philadelphia, and the case will be heard on June 17. Despite Wolin’s ruling, the judicial system, too, is recognizing that change is necessary when dealing with asbestos claims. In an unprecedented move in asbestos litigation, Judge Edward Becker, the chief justice for the 3rd U.S. Circuit Court of Appeals, placed the Grace, USG, Federal-Mogul, Owens Corning and Armstrong World Industries cases under Wolin. The move was novel for two reasons. For one thing, Becker appointed a district judge instead of a bankruptcy judge to specifically deal with personal injury issues in all the cases related to asbestos. For another, it was the first time an effort will be made to be consistent about asbestos-related issues in those bankruptcies. The move by Becker, says Bernick, “was in recognition of the importance of the five cases individually and their interrelationship not only among themselves but with asbestos litigation as a whole.” Wolin then assigned the five cases to two bankruptcy court judges to take care of the day-to-day bankruptcy matters and to lighten his load. USG, Armstrong and Federal-Mogul went to Randall J. Newsome in Oakland, Calif., while Owens Corning and Grace went to Fitzgerald in Pittsburgh. (Fitzgerald also oversees the asbestos-related insolvency of building materials manufacturer Pittsburgh-Corning Corp.). As a result, Wolin, Fitzgerald and Newsome together will preside over and coordinate the treatment of the six biggest asbestos bankruptcies currently in court. Other judges, however, could prove to be just as influential. In January, for example, Charles Weiner, the Pittsburgh judge responsible for all federal asbestos lawsuits, issued an order automatically dismissing asbestos lawsuits filed by people who aren’t sick but have been assessed as having an asbestos-related disease by mobile X-ray vans. His order does enable them to refile their cases if the claimants get sick. Since 1991, when a panel of judges decided to send all federal asbestos cases to his court, Weiner has handled over 100,000 asbestos cases under the so-called multidistrict litigation (known as MDL 875) process. His recent order speaks to the meteoric rise in claims based on the potential of someone getting sick and not the actual reality of it — leaving the truly ill from asbestos with fewer funds to tap. “Filing fees are paid, service costs incurred, and defense files are opened and processed,” he wrote in his order. “Substantial transaction costs are expended and therefore unavailable for compensation to truly ascertained asbestos victims.” It’s possible that a fifth approach to asbestos-claims management is in the offing — taking the fight to state courts. Besides going to the Supreme Court, CSX Transportation, Norfolk Southern and Conrail, have challenged a system of dealing with class action lawsuits put in place in West Virginia by that state’s supreme court in 1999. So has Exxon Mobil Corp. Under this so-called mass litigation panel and procedure, six judges have the power to decide whether lawsuits filed in the state are class action lawsuits and which judges preside over them. The system allows the judges to lump together thousands of asbestos lawsuits against different companies, involving different products and different groups of plaintiffs into one. Asbestos defendants see the West Virginia court system as a cash cow by asbestos litigants. Of 33,100 civil lawsuits of all types pending in West Virginia courts as of last November, more than 25,000 of them were asbestos-related, according to the three railroads. ExxonMobil faces a trial with some 18 other companies, expected to begin sometime in the next two months, since it lost its challenge to the mass litigation system. “The difficulty is when you start lumping large cases together, the chance that awards will be bigger is higher,” says Sidley’s Phillips. “So it forces a settlement.” And brings asbestos-claims management for corporations back to square one. Related chart: Different Strokes, Different Folks Copyright (c)2002 TDD, LLC. All rights reserved.

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