In re Armstrong World Industries, Inc.

• Decision Date: 14 August 2006
• Docket Number: No. 00-4471.,00-4471.
• Citation: 348 B.R. 111
• Parties: In re ARMSTRONG WORLD INDUSTRIES, INC., et al., Debtors.
• Court: U.S. District Court — District of Delaware

348 B.R. 111

In re ARMSTRONG WORLD INDUSTRIES, INC., et al., Debtors.

No. 00-4471.

United States District Court, D. Delaware.

August 14, 2006.

Rebecca L. Booth, Mark D. Collins, Jason M. Madron, Rebecca Lee Scalio, Deborah E. Spivack, Shannon Stacy Frazier, Richards, Layton & Finger, Joanne Bianco

Wills, Klehr Harrison Harvey Branzburg & Ellers, Sharon M. Zieg, Young, Conaway, Stargatt & Taylor, Etta Rena Wolfe, Smith Katzenstein & Furlow LLP, Wilmington, DE, for Debtors.

MEMORANDUM

EDUARDO C. ROBRENO, District Judge.¹

                                                  TABLE OF CONTENTS
                  I.  Introduction ................................................................___
                 II.  Factual and Procedural History ..............................................___
                      A.  Overview ................................................................___
                      B.  AWI and Asbestos Personal Injury Litigation .............................___
                      C.  AWI's Bankruptcy ........................................................___
                      D.  The Court's February 23, 2005 Denial of Confirmation ....................___
                      E.  The Modified Fourth Amended Plan of Reorganization ......................___
                III.  Legal Standards .............................................................___
                      A.  Jurisdiction ............................................................___
                      B.  Confirmation of a Reorganization Plan Under 11 U.S.C. § 1129 ............___
                      C.  Unfair Discrimination ...................................................___
                      D.  The Principles of Estimation ............................................___
                 IV.  Evidence Adduced by the Parties .............................................___
                      A.  Dr. Mark Peterson .......................................................___
                      B.  Dr. B. Thomas Florence ..................................................___
                      C.  Dr. Letitia Chambers ....................................................___
                      D.  The Expert Testimony — Similarities and Differences ......................___
                  V.  The Expert Estimations Offered by the Plan Proponents Are More Persuasive
                        Than That of the Plan Opponents ...........................................___
                 VI.  Conclusion ..................................................................___
                

I. INTRODUCTION

Before the Court is Armstrong World Industries, Inc.'s Fourth Amended Plan of Reorganization, as modified. The sole objection to the Fourth Amended Plan of Reorganization, as modified (the "Plan") is asserted by the Unsecured Creditors' Committee (the "UCC"), Class 6, which claims that the Plan unfairly discriminates against the Unsecured Creditors in favor of the Asbestos Personal Injury Claimants (the "Asbestos PI Claimants"), Class 7. Therefore, the UCC argues, the Plan does not comply with Section 1129(b) of the Bankruptcy Code.² The Court must determine whether to confirm the Plan despite this objection.

The Court has considered the comprehensive submissions of Armstrong World Industries, Inc. ("AWI"), the Asbestos PI Claimants, and the Legal Representative for Future Asbestos Claimants (the "Plan Supporters" or "Plan Proponents"), and those of the UCC (the "Plan Opponents"), as well as the evidence presented in a three-day hearing and oral argument.

This is the second time this Plan has been before the Court; in February 2005 the Court denied confirmation of the Plan based on its violation of the absolute priority rule embodied in Section 1129(b) of the Bankruptcy Code, and the Third Circuit affirmed this decision on December 29, 2005. The Plan has since been modified to address the violation, thereby leaving only the UCC's present objection for resolution.

The Plan provides for Available Cash, Plan Notes, and Common Stock of AWI, amounting to approximately $2.8 billion, to be distributed to the Unsecured Creditors and the Asbestos PI Claimants. The Unsecured Creditors will receive approximately $982 million. This allocation allows for each holder of an Allowed Unsecured Claim to receive approximately 59.5% of its allowed claim, based on an undisputed estimate of an upper limit of $1.651 billion for the Unsecured Creditors' claims. The remaining Available Cash, Plan Notes, and Common Stock, amounting to approximately $1.8 billion, will be distributed to an Asbestos PI Trust, which will assume and manage liability for all present and future Asbestos PI Claims. Plan, Section 1.22, Exhibits 1.23, 1.24.

The UCC asserts that the allocation of $1.8 billion to the Asbestos PI Trust amounts to a 91.3% recovery for the Asbestos PI Claimants, based on an upper limit of $1.96 billion for the asbestos PI claims, and therefore unfairly discriminates against the Unsecured Creditors, who will only receive approximately 59.5% of their claims. The Plan Proponents respond that the asbestos PI claims will amount to at least $3.1 billion, thereby fixing the Asbestos PI Claimants' recovery at 59.5% or less.³ In addition, the Plan Proponents state that the allocated value must be used for the costs of administering the Trust, and a part of the value will be reserved for an undetermined number of future personal injury claimants. Therefore, recovery for the personal injury claimants will be lower than for the Unsecured Creditors. Memorandum of Law in Support of Confirmation of Armstrong World Industries, Inc.'s Fourth Amended Plan of Reorganization, As Modified ("AWI Memo in Support") at 4-5.

If the liability for the asbestos PI claims amounts to less than $3.1 billion, then the $1.8 billion allocated to the asbestos PI trust amounts to a higher recovery for the Asbestos PI Claimants than for the Unsecured Creditors. The Court must therefore determine whether this is, in fact, the case. If the recoveries to be received are different, the Court must decide whether the difference amounts to discrimination, and if so, whether the discrimination is unfair.

Of course, the Court's inquiry is complicated by the fact that AWI's liability for asbestos PI claims is an uncertain number; the trust to which the money is allocated is responsible for future claims as well as pending claims. Although there is no dearth of well-compensated experts willing to assume the task of predicting the future asbestos personal injury liability of companies emerging from bankruptcy — this Court heard from three very able estimation experts — the number of possible variables makes any pretense to certainty illusory. The best the Court can do is to consider the expert reports, "make reasonable adjustments based on the record created at trial and embrace the methodology it finds more reliable, while remaining vigilant to the potential bias that a party's expert may have on his or her estimation figures." In re Federal-Mogul Global, Inc., 330 B.R. 133, 156 (D.Del.2005).

The Court concludes that a reasonable approximation of AWI's liability for its present and future asbestos personal injury claims is at least $3.1 billion. The Court therefore finds that the Plan does not discriminate against the Unsecured Creditors, in that their percentage recovery under the Plan is not materially less than that of the Asbestos PI Claimants.⁴

II. FACTUAL AND PROCEDURAL HISTORY

A. Overview

Armstrong World Industries, Inc.'s Chapter 11 bankruptcy and attempts at reorganization take place within the exhaustively depicted and much analyzed realm of asbestos litigation. Although the Court need not comprehensively rehearse this history, it is important to outline the environment from which this case arises. The resolution of the issue before the Court depends heavily on an understanding of the ways in which asbestos cases have historically moved through the courts.

The harmful effects of asbestos and the litigation that followed have greatly impacted public health, the legal system, and the economy of the United States for decades. The numbers are staggering: total corporate liability is expected to surpass $200 billion, approximately 20 million workers suffered occupational exposure in the United States, approximately 250,000 people have died from the exposure, and hundreds of thousands more have exposure-based illnesses. Samuel Issacharoff & John Fabian Witt, The Inevitability of Aggregate Settlement: An Institutional Account of American Tort Law, 57 Vand. L.Rev. 1571, 1619 (2004) (collecting data).

Courts and counsel, both plaintiffs' and defendants', have struggled to create mechanisms to contain the asbestos litigation that has swamped the legal system — with varying degrees of success. See In re Combustion Engineering, Inc., 391 F.3d 190, 200-01 (3d Cir.2004) (stating that global settlement class actions have not succeeded); Issacharoff & Witt, Aggregate Settlement, 57 Vand. L.Rev. at 1620-31 (discussing concentration and specialization of claims). Given the inability of the courts to cope with the large number of claims filed, Congress has for years been contemplating the enactment of a scheme to resolve asbestos claims on a nationwide scale. See Combustion Engineering, 391 F.3d at 201; Alison Frankel, Numbers Reveal Drop in Asbestos Suits, Legal-Times.com, July 10, 2006, available at http://www.legaltimes.com. Numerous corporations have filed for bankruptcy. See Issacharoff & Witt, Aggregate Settlement, 57 Vanc. L.Rev. at 1619 (citing Deborah H. Hensler, As Time Goes By, 80 Tex L.Rev. 1899, 1899 (2001) ("As a result of [asbestos litigation], more than forty corporations have filed for insolvency or reorganization")).

The environment of asbestos litigation is on the cusp of major change. Although there is much disagreement about the quantity of liability that asbestos corporations will face in the future, there is widespread acknowledgment that the legal landscape has altered since the 1990s. This shift is due to many factors, including the aging of the exposed asbestos population, state tort reform, the recognition of problems with the mechanisms used to resolve...