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A federal judge has ruled that asbestos claimants against bankrupt W.R. Grace & Co. can include claims made after 1998 in their quest to prove that the company was insolvent and that its assets were fraudulently transferred. The decision is bad news for Sealed Air Corp. Because the Saddle Brook, N.J.-based firm bought Grace unit Cryovac in 1998, it is potentially on the hook for the fraudulent conveyance. U.S. District Judge Alfred Wolin in Newark, N.J., who is presiding over the asbestos-related bankruptcies of Grace and four other companies that filed for Chapter 11 in Wilmington, Del., said in his ruling Tuesday that, “as framed by the statute, the only question is whether the debtor was insolvent on the transfer date or became insolvent.” Fraudulent conveyance occurs if a company sells or transfers an asset when it’s insolvent to prevent creditors and others from gaining control of it. A seller, buyer or lender in a transaction can be charged in a fraudulent conveyance. Generally speaking, however, buyers are generally blamed. In the Cryovac case, Sealed Air, not Grace, is the company the asbestos claimants are suing for fraudulent conveyance. Potentially, the asbestos claimants are seeking the value of the asset transferred, that is, the $4.9 billion Sealed Air paid for Cryovac. That’s why Sealed Air is appealing Wolin’s ruling before the actual fraudulent conveyance trial against the company begins Sept. 30. “What is interesting in the ruling is that asbestos claimants that came on board [after 1998] can be included,” said Sandra Mayerson, a New York-based partner in the bankruptcy practice at Holland & Knight and a fraudulent conveyance expert. “That’s something new. Although logical, that’s an expansion of existing law.” Wolin, in his 38-page opinion, cites the Uniform Fraudulent Transfer Act, a law on the books of most states, rather than on the fraudulent transfer statute of the federal bankruptcy code. The reason is because Grace and the asbestos plaintiffs have hung their arguments on state laws. “The issue in the case has to do with whether or not the data that has accumulated with respect to claims since 1998 could be used in the consideration by the court as to what the claims were worth — present and future — as of the time of the transfer [to Sealed Air],” said the asbestos plaintiffs’ attorney, Elihu Inselbuch of Caplin & Drysdale’s New York office. “You have to calculate what the liability was in 1998,” he added. “But it’s now 2002, and there’s more information available about claims against Grace than in 1998. The question is, can you use that information?” For the asbestos plaintiffs to prove the Cryovac deal involved fraudulent conveyance, they must demonstrate that Grace was insolvent in 1998. Whether Grace or Sealed Air knew it was insolvent is irrelevant. “[Wolin's opinion] is controversial,” said Martin Zohn, partner in corporate reorganizations at Proskauer Rose. “The real question is at what point in time should [the buyer, the seller and even banks that financed the acquisition] have realized that there was substantial asbestos liability.” Zohn says that while he thinks Wolin’s ruling is a “sensible reading of the statute,” other lawyers would argue that “it’d be too contingent” to count lawsuits that neither Grace nor Sealed Air knew would be filed against Grace in 1998 when the transaction took place. Zohn noted the fraudulent transfer issues are relevant to a lot of companies. “For example, many people argue that if the Ford Explorer is defective, should the company take that into account in estimating its liability even though no one has yet won a lawsuit on the dangers of the Explorer?” he said. “The real question is at what point in time should they [Grace, Sealed Air and its bankers] have realized that Grace had substantial asbestos liability?” Even if asbestos plaintiffs can show Grace was insolvent or that it knew it would be as a result of asbestos lawsuits going forward, they would also have to show that Cryovac was sold for less than it’s worth in order to win against Sealed Air. If they do win, they could sue Sealed Air to get back Cryovac or, more likely, settle for an equivalent amount — that is, $4.9 billion. Copyright (c)2002 TDD, LLC. All rights reserved.

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