The Mass Tort Pre-pack What Will They Think of Next

<b>Editor's Note:</b>

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This column has chronicled new and interesting developments in recent bankruptcy cases. There is

a historic element to all of this; usually, it reports the results of cases that have already occurred. This month's

column is different in that it reports on a pending case in which the outcome is to be determined.

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<p>In September 1998, Fuller-Austin Insulation Co. filed a "pre-packaged" chapter 11 case in the U.S. Bankruptcy

Court for the District of Delaware. While pre-packaged cases are common in commercial bankruptcies, this may be

the first pre-packaged mass tort asbestos bankruptcy case. The fact that the case has been filed in the first instance is

noteworthy in itself.

</p><p>Mass tort bankruptcy cases are usually filed as the last resort to a mass tort crisis that has overwhelmed the debtor.

Mass tort bankruptcy cases in general, and asbestos bankruptcy cases in particular, are complex, difficult and riven

with unsettled legal issues on the frontiers of bankruptcy law.

</p><p>Asbestos bankruptcy cases usually have several common features that distinguish them from garden variety chapter

11 cases—and make the task of effecting a successful reorganization that much more difficult. They generally involve

thousands of known asbestos personal injury claimants and an equally large number of estimated, but presently

unknown, future claimants. (Future asbestos personal injury claimants are presently unknown because their latent

asbestos diseases have not yet become manifest.) The aggregate amount of the asbestos claims is often tens, if not

hundreds, of millions of dollars.

</p><p>The known asbestos claimants often are represented by a separate committee consisting of the asbestos personal

injury lawyers (who are never shy about sharing their views). A legal representative for unknown future claimants is

usually appointed by the bankruptcy court as a fiduciary to represent their interests in the reorganization process.

</p><p>There is almost always an insurance component to these cases in which the debtor and the asbestos claimants

attempt to maximize all available insurance assets with which to fund the reorganization. Insurers do not often share

the asbestos claimants' view of the extent of coverage; and such disagreements result in coverage litigation.

</p><p>A post-confirmation settlement trust is established to liquidate the asbestos claims and make distributions to

claimants. The settlement trust is funded with various property of the estate, principally the insurance assets. These

can take the form of cash settlements from insurers, insurance coverage in place, or assignment of pending causes of

action against insurers. The settlement trust may also be funded with equity in the reorganized debtor, future income

streams from the reorganized debtor and/or contributions from the debtor's affiliates. The package is held together by a "channeling injunction" issued under §105(a) and, if available, §524(g) of the Bankruptcy Code. This device

"channels" the asbestos claims to the settlement trust and enjoins any future recovery from other sources such as the

reorganized debtor, settling insurers and/or a parent, subsidiary or affiliate of the reorganized debtor. The purpose is

to insulate such parties from any post-confirmation successor liability.

</p><p>Bringing an asbestos bankruptcy case to confirmation is a long, tough job and indeed a high-wire act under the best

of circumstances. Why would anyone even consider doing it as a pre-packaged bankruptcy case?

</p><p>The answer may lie in the limitations of what can be achieved outside of bankruptcy. Sometimes, outside of

bankruptcy, a "global settlement" among the asbestos manufacturer/installer (the debtor), the asbestos claimants and

the insurers can be reached. To be sure, the asbestos litigation bar would rather consummate global settlements

outside of bankruptcy. The preferred technique is a class action settlement under Rule 23 of the Federal Rules of

Civil Procedure. This technique, however, recently received a major setback. In <i>Amchem Products Inc. v. Windsor,</i>

117 S. Ct. 2231, 138 L.Ed. 2d 689 (1997), the U.S. Supreme Court struck down a national asbestos class action

settlement under F.R.C.P. 23 involving unknown future claims. <i>Amchem</i> focused on the shortcomings of Rule 23

class action settlements for resolving the tensions between the competing interests of known claimants and the

unknown future claimants. <i>Amchem</i> forced the recognition in the asbestos litigation world that bankruptcy may be

the only remaining alternative for effecting global settlements involving unknown future claims.

</p><p><i>Fuller-Austin</i> appears to be a creative response to the post-<i>Amchem</i> world of asbestos litigation. Here is how all of

the pieces were put into place <i>before</i> the bankruptcy case was filed.^{<small><a href="#1" name="1a">1</a></small>} Since 1987, Fuller-Austin has been subjected

to more than 18,000 asbestos lawsuits. Although its insurers had paid substantial defense costs and settlements

under reservations of rights, pending coverage litigation placed further payments from insurers in doubt. With

insolvency impending, bankruptcy was considered to be the preferable alternative in order to take advantage of the

benefits of a "channeling injunction" under §524(g) of the Bankruptcy Code and to resolve the asbestos claims

without the substantial costs of protracted litigation. Fuller-Austin began to negotiate simultaneously with

representatives from the various asbestos claimants, its insurers and its parent corporation.

</p><p>A committee of representatives of various groups of asbestos claimants was formed. Fuller-Austin selected a

well-known law professor as the legal representative for unknown future claimants on the basis of his independence,

disinterestedness and experience in other mass tort cases.

</p><p>Professionals for Fuller-Austin, its parent, the committee and the legal representative were retained. Each of the

parties also retained consultants to analyze the known asbestos claims and estimate the extent of the unknown future

claims. The committee also engaged an accounting firm to investigate the past and present businesses of

Fuller-Austin and its parent.

</p><p>Over a six-month period, the parties engaged in protracted negotiations. Settlements were reached with

Fuller-Austin's parent resulting in its contribution of various assets to fund the settlement with the asbestos

claimants. Settlements were also negotiated with certain insurers for contributions of cash and certain insurance

coverage in place. Agreements were also reached on the terms of a settlement trust and asbestos claims resolution

procedures.

</p><p>The negotiations ultimately resulted in a global settlement among Fuller-Austin, its parent, the committee and the

legal representative for the terms of a plan of reorganization and the filing of a pre-packaged bankruptcy case. What is

remarkable is not that a global settlement was reached (they almost always are), but that it was achieved before

bankruptcy and without the high transactional costs of litigation. This signals that the maturity of bankruptcy as a

forum for resolving mass tort cases has yielded sufficient predictability so that parties know where they will end up

before they start. This is good news for everyone. This case demonstrates that the pre-packaging process can even be

employed in a difficult mass tort context.

</p><p>The pre-bankruptcy global settlement reached in this case is similar in certain respects to those reached in other

mass tort cases outside of bankruptcy. After <i>Amchem,</i> however, the problem of binding unknown future claimants

prevents consummation of such settlements outside of bankruptcy.

</p><p>As of this writing, there is still some wrangling over approval of the disclosure statement and it remains to be seen

whether Fuller-Austin will be successfully reorganized. If so, there may be a trend to attempt to consummate other

non-asbestos mass tort settlements as pre-packaged bankruptcy cases. In any event, it will be interesting to watch

the development of this case as a model for other pre-packaged mass tort bankruptcy cases.

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<h3>Footnotes</h3>

<p>^{<small><a name="1">1</a></small>} All information about the case was obtained from the disclosure statement and the bankruptcy case docket. <a href="#1a">Return to article</a>

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