The Mass Tort Pre-pack What Will They Think of Next
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.
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.
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.
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.
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.
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.
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?
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 Amchem Products Inc. v. Windsor, 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. Amchem 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. Amchem forced the recognition in the asbestos litigation world that bankruptcy may be the only remaining alternative for effecting global settlements involving unknown future claims.
Fuller-Austin appears to be a creative response to the post-Amchem world of asbestos litigation. Here is how all of the pieces were put into place before the bankruptcy case was filed.1 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.
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.
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.
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.
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.
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 Amchem, however, the problem of binding unknown future claimants prevents consummation of such settlements outside of bankruptcy.
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.