Advisors in Asbestos-related Bankruptcies Judicial Contamination

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Apr 2004

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The appointment of special advisors, coupled with unique case-management techniques utilized in several Delaware asbestos-related bankruptcy cases, opened the door for recusal motions by creditors and a debtor-in-possession (DIP), which were denied on Feb. 2, 2004, in In re Owens Corning, et al.² The recusal motions, notably filed two years into the proceedings, were aimed at U.S. District Judge Alfred M. Wolin, who is the senior judge for the District of New Jersey currently presiding over the asbestos-related claims and issues of five asbestos bankruptcy cases (the "five asbestos cases") involving the chapter 11 debtors: Owens Corning, W.R. Grace & Co., USG Corp., Armstrong World Industries Inc. and Federal-Mogul Global Inc.³

While this article addresses the recusal battle being waged in the five asbestos cases, our broader purpose is to illuminate some of the innovative approaches being employed by at least one court faced with an inherently complex asbestos-related bankruptcy case. As noted in the opinions discussed infra, asbestos-related bankruptcies have an average life span of six years from petition to confirmation.⁴ Given the web of complex issues that these cases present against the backdrop of the injured asbestos-claimants whose lives are cut short each day,⁵ how far should courts go in taking an activist approach to moving these cases through the system?

Background

In November 2001, Judge Becker, then chief judge of the Third Circuit, ordered that the five asbestos cases be transferred from the U.S. Bankruptcy Court for the District of Delaware to Judge Wolin, the senior district judge from New Jersey.⁶ Shortly thereafter, Judge Wolin referred the bankruptcy cases back to the Delaware bankruptcy court but retained jurisdiction over the asbestos-related claims and issues.⁷ Judge Becker's initiative created an "unprecedented concentration of authority over nationwide asbestos litigation."⁸ Upon taking on this monumental task, Judge Wolin noted, "[a] sense of duty and the challenge to accomplish a breakthrough in the disposition of asbestos-related issues were the driving forces that led to [his] acceptance of the call to arms by the chief judge of our circuit."⁹ In accepting the assignment, Judge Wolin also accepted the chief judge's "mandate" to revamp the management of asbestos-related bankruptcies.¹⁰ Judge Wolin proceeded to do just that, arguably exposing himself to the recusal motions that seek his disqualification.

At the outset of his involvement with the five asbestos cases, Judge Wolin appointed five advisors with specialized knowledge of the issues relevant to asbestos and/or mass-tort cases¹¹ in the belief that these advisors would provide the court with the "necessary background" and competence to preside over these cases and enable the court to explore a "multitude of asbestos-related issues."¹² The advisors included David R. Gross, a litigator with significant experience in asbestos-related cases, and C. Judson Hamlin, a former judge of the Appellate Division for the New Jersey Superior Court.¹³ Prior to his appointment in the five asbestos cases, Hamlin had accepted an appointment by the New Jersey bankruptcy court to serve as the legal representative of present and future holders of asbestos-related demands in a separate asbestos-related bankruptcy, In re G-I Holdings Inc., Bankr. No. 01-30135.¹⁴ Hamlin subsequently engaged Gross to act as his local counsel in the G-I Holdings case.¹⁵ These dual roles of Hamlin and Gross became the centerpiece of the recusal debate.

The first of the recusal motions was filed in the Owens Corning case by Kensington International Ltd., Springfield Associates LLC and Credit Suisse First Boston (Kensington).¹⁶ The motion asserted that Judge Wolin should be disqualified due to his use of Hamlin and Gross, who were allegedly biased by their involvement in the G-I Holdings case.¹⁷ The movants argued that many of the G-I Holdings asbestos-claimant creditors also have claims against the debtors in the five asbestos cases.¹⁸ Thus, the movants contended that Gross and Hamlin could not remain "neutral" in their advisory roles to Judge Wolin and at the same time "zealously" represent their clients in the G-I Holdings case.¹⁹ Under 28 U.S.C. §455(a), whenever a court's impartiality may reasonably be questioned, recusal is warranted.²⁰ The movants contended that Judge Wolin's reliance on biased advisors created an appearance that cast doubt on his impartiality.

The recusal motions also alleged that Judge Wolin should be disqualified due to certain ex parte communications, which the movants felt imparted personal knowledge to the judge, allowing them to invoke 28 U.S.C §455(b)(1) (requiring recusal when the judge obtains "personal knowledge" of a "disputed evidentiary fact" concerning the proceeding).²¹ Adhering to his mandate to change the dynamics of managing asbestos-related cases, Judge Wolin had announced at the initial global case management conference that the court would entertain requests for ex parte conferences.²² Judge Wolin allowed that although "well versed in the methodology of complex case management" at the outset of his involvement with the five asbestos cases, he was "unsophisticated in the contours of asbestos bankruptcy litigation."²³ Judge Wolin determined that ex parte conferences would best facilitate his ability to "accumulate" and "process" the information that he would need to preside over these highly complex cases.²⁴ All parties were invited to request ex parte conferences, and prior to the filing of the recusal motions, all parties actively accepted the court's invitation.²⁵

Following Kensington's lead, a second recusal motion was filed in the W.R. Grace case by D.K. Acquisition Partners L.P., Fernwood Associates L.P., and Deutsche Bank Trust Co. America (D.K. Acquisition).²⁶ Finally, the DIP and the unsecured creditors' committee in the USG-Corp. case filed their recusal motion.²⁷ Judge Wolin had previously withdrawn the reference as to the Kensington motion and stayed all proceedings, including discovery, so that the court could formulate a comprehensive case-management order for the recusal proceedings.²⁸ Judge Wolin did not hide his suspicion that these motions were brought as a litigation tactic rather than out of a sincere concern over the court's impartiality. The recusal motions in W.R. Grace and USG-Corp. were placed on the same track with the Kensington motion.

Undeterred, the movants filed emergency petitions with the Third Circuit Court of Appeals, seeking writs of mandamus directing Judge Wolin to recuse himself or in the alternative directing Judge Wolin to lift the stay on the recusal motions and expedite his consideration of these motions.²⁹ The court consolidated the petitions and entertained oral argument, obviously intrigued by Judge Wolin's practice of appointing advisors. During oral argument, the circuit court asked the respondent attorneys for precedent supporting Judge Wolin's appointment of these "hybrid" advisors and underscored their struggle "to define the role and position" of the advisors.³⁰

Also at oral argument, Elihu Inselbuch, representing the respondents, the Official Committee of Asbestos Claimants of Owens Corning, urged the court for an expedited resolution. Mr. Inselbuch represented to the circuit court that "since the filing of these cases, close to 30,000 asbestos claimants had died of mesothelioma and lung cancer and that 15 victims 'will die today as a matter of statistics.'"³¹ As is evident from the circuit court's opinion, Mr. Inselbuch's plea was well-taken.

Concerned that it did not have an adequate record to rule on such a "complex situation," the circuit court remanded the petitions to Judge Wolin's court and directed Judge Wolin to rule on the motions by Jan. 31, 2004.³²

Judge Wolin's Decision

Judge Wolin ultimately denied the motions for recusal largely based on the untimeliness of the motions. Although Judge Wolin went to lengths to address all issues raised by the movants, he determined that the untimeliness of the motions constituted an "adequate and independent ground" to deny the requested relief.³³ Clear from the opinion, though, was Judge Wolin's belief that these motions were filed for improper purposes. To underscore this concern, Judge Wolin provided a snapshot of what critical events were occurring in each case and why it would behoove the different movants to delay the proceedings or remove the presiding judge in hopes of changing their fortunes.³⁴ In denying these motions, Judge Wolin remarked, "[a]s the district court emerges from the stormy waters of litigation, its course is steady and its grasp of the helm is firm."³⁵

Judge Wolin's opinion outlines the case-management strategy employed in the five asbestos cases and to answer the circuit court's questions about the role the advisors played in navigating the complex landscape. The opinion provides a great insight as to the management issues courts face when called to preside over an asbestos-related case.

The Advisors

"[The] intractable nature of the asbestos problem and the difficulties of case management" that are attendant to asbestos-related cases have been well documented by the courts.³⁶ Judge Wolin candidly admitted that he had a steep learning curve to climb, one that he undertook to scale without delay in order to effectively manage these cases.³⁷ Appointing the advisors was his first step toward following the circuit court's mandate for a "sound management" plan.³⁸ Judge Wolin put together a team of consultants with "impeccable credentials," including three former superior court judges with vast experience in mass-tort and asbestos-related cases, a legal scholar recognized as a preeminent authority on "mass- and toxic-tort litigation," and rounded out with David Gross, the former national defense counsel to Johns-Manville Co.³⁹ "The advisors' distinguished roles in asbestos litigation has never been challenged by the parties."⁴⁰ The appointment of these advisors was indicative of the innovative approach Judge Wolin adopted in presiding over the five asbestos cases.

Initially, Judge Wolin explained that he was not sure how he would use the advisors, but he knew that he needed to be educated on the issues, and he was sure that such a pool of talent would be invaluable in his management of these cases.⁴¹ Thus, the order appointing the advisors did not detail the role of the advisors or bestow any specific powers on the advisors.⁴² Of note for the bankruptcy practitioner is that Rule 9031 of the Federal Rules of Bankruptcy Procedure specifically excludes the use of masters from bankruptcy proceedings. Rule 9031 excepts from application in bankruptcy cases Rule 53 of the Federal Rules of Civil Procedure, which provides for the appointment of masters in civil cases. Judge Wolin, aware of these limitations, was careful to obtain consent of all parties prior to utilizing an advisor in a role akin to a master for any particular proceeding.⁴³ The same consent was obtained whenever an advisor was called on to act as a mediator in these cases.⁴⁴

The recusal movants endeavored to show that the alleged bias of advisors Hamlin and Gross had been imparted to the court. Thus, whether the court was receiving actual advice or whether the court was simply engaging in discussions with the advisors was hotly debated between the parties, with the movants taking the position that the court's rulings were based on advice from biased sources. Judge Wolin, however, found that the court's discussions with the advisors did not rise to the level of advice. "The discussions held between the court and its advisors were general, earnest conversations about an extraordinarily complex area of the law. They did not constitute advice as that term is generally understood."⁴⁵ Judge Wolin made it clear that the advisors did not provide "substantive advice" as to legal issues confronting the court.⁴⁶

"[The advisors'] most important task was to serve as a resource to the court and to inform the court of the vast landscape of asbestos-related issues that would permit the court to make reasoned case management decisions."⁴⁷ Although the advisors occasionally filled the roles of master and mediator, Judge Wolin's opinion endeavors to make it clear that their primary function was to educate the court on the complex issues presented by the five asbestos cases. Whether one agrees with the advisor strategy employed by Judge Wolin, one should conclude that he accepted his charge with the sincere intention of breaking the mold of the "elephantine mass"z that is asbestos-related litigation.

Ex Parte Contacts

Judge Wolin goes to some lengths to explain the need for the case-management tactics he adopted in the five asbestos cases.⁴⁹ He notes that the complexity of asbestos-related cases has driven courts across the country "to create new methods" to manage and preside over these cases.⁵⁰ The ex parte conferences adopted by Judge Wolin were an obvious target for the recusal movants (although many of the movants had themselves engaged the court in such conferences). However, Judge Wolin had determined early on that these conferences presented the best opportunity for the court to obtain the much-needed background information that was "proprietary and sensitive" but enabled the court to rule competently on the complex issues confronting the court.⁵¹ Judge Wolin did not believe that he could otherwise obtain such information through a "public, adversarial setting."⁵² According to Judge Wolin, the fierce competition of asbestos litigation is a "zero-sum game" that does not lend itself to the disclosure process necessary to adequately educate the court.⁵³

Judge Wolin expressed the belief that the dangers associated with ex parte contacts would be neutralized in light of the fact that all parties were able to request an ex parte conference.⁵⁴ In essence, the competing ex parte conferences would cancel out any impermissible views expressed during either sides' conference. Further, Judge Wolin was "confident" that he could resist being swayed by the "eloquence" portrayed by counsel during the ex parte meetings,⁵⁵ stating, "[T]his court is no babe in arms."⁵⁶

Conclusion

Judge Wolin freely admits that he set about an "activist" course in presiding over the management of these cases.⁵⁷ In explaining the course he took, Judge Wolin reminded the Third Circuit that he was navigating "uncharted waters."⁵⁸ Mindful that his decision would be appealed, Judge Wolin implored the circuit court to "carve out what it views as unacceptable case-management methodology, establish future case-management rules and permit the district court to finish its appointed duty."⁵⁹

Clearly, bankruptcy and district court judges alike face a lofty challenge whenever confronted with the prospect of presiding over an asbestos-related bankruptcy case. Outside-the-box thinking is demanded, and innovative approaches to case management must be considered in order to move these cases through to confirmation of a plan. Whether Judge Wolin's activist approach will ultimately lead to his disqualification now rests with the Third Circuit Court of Appeals. Oral argument is set to be heard on April 19, 2004.⁶⁰

Footnotes

¹ Board Certified in Business Bankruptcy Law by the American Board of Certification. Return to article

² In re Owens Corning, et al., No. 00-3837 through 00-3854, No. 01-1139 through 01-1200, No. 01-2094 through 01-2104, 2004 Bankr. LEXIS 78, at *130 (Bankr. D. Del. Feb. 2, 2004). Return to article

³ In re Kensington Intern. Ltd., et al., 353 F.3d 211, No. 03-4212, No. 03-4526, 2003 U.S. App. LEXIS 26554, at *4 (3d Cir. Dec. 18, 2003). Return to article

⁴ In re Owens Corning at *122. Return to article

⁵ In re Kensington at *35 n.13. Return to article

⁶ Id. at *6. Return to article

⁷ Id. Return to article

⁸ In re Owen Corning at *52. Return to article

⁹ Id. at *127. Return to article

¹⁰ Id. at *53. Return to article

¹¹ In re Kensington at *7. Return to article

¹² In re Owen Corning at *57-59. Return to article

¹³ Id. Return to article

¹⁴ Id. at *8. Return to article

¹⁵ Id. Return to article