In re Western Asbestos Co.
| Decision Date | 31 October 2003 |
| Docket Number | No. 02-46284 T.,No. 02-46285 T.,No. 02-46286 T.,02-46284 T.,02-46285 T.,02-46286 T. |
| Citation | 313 B.R. 832 |
| Court | U.S. Bankruptcy Court — Northern District of California |
| Parties | In re WESTERN ASBESTOS COMPANY, Western MacArthur Company, and Mac Arthur Company, Debtors. |
Alan Pedlar, Charles D. Axelrod, Stutman, Treister & Glatt, Los Angeles, CA, for Debtor.
Margaret Sheneman, Murphy, Sheneman, Julian and Rogers, San Francisco, CA, Michael H. Aherns, Sheppard, Mullin, Richter and Hampton, San Francisco, CA Peter Van N. Lockwood, Caplin, Drysdale and Chartered, Washington, DC, for Official Committee of Unsecured Creditors.
The above-captioned chapter 11 cases are set for an evidentiary hearing on confirmation of a reorganization plan (the "Plan") beginning on November 10, 2003. To expedite the conduct of the hearing, the Court set a briefing schedule for legal issues relating to confirmation. After these issues were briefed, the Court issued a Tentative Decision in which it made tentative rulings on some of the issues, tentatively deferring its rulings on the remaining issues until the confirmation hearing.
After the Tentative Decision was issued, on October 29, 2003, a hearing on the legal issues was conducted at which counsel for all parties appeared and were heard.1 The Court issues this Memorandum of Decision after further consideration of the issues in light of oral argument. In it, the Court again makes rulings on some of the issues and defers the remaining issues for decision at or after the confirmation hearing. However, as indicated below, the Court's rulings and deferrals have been modified somewhat from those stated in the Tentative Decision.
The Plan is being jointly proposed by the three chapter 11 debtors (the "Debtors"), the Official Creditors' Committee (the "Committee"), and the Hon. Charles Renfrew (the "Futures Representative").2 The Debtors are: (1) MacArthur Co. ("MacArthur"), a distributor and installer of building materials and the parent of Western MacArthur Co. ("Western MacArthur"), (2) Western MacArthur, also a distributor and installer of building materials, and (3) Western Asbestos Company ("Western Asbestos"), a defunct company whose assets were acquired by Western MacArthur after it had been operated by MacArthur for two years.3 The members of the Committee are all asbestos claimants (or their attorneys).
The Debtors were in coverage litigation with USF & G for approximately 10 years before reaching the settlement embodied by the Plan.4 The settlement is conditioned on confirmation of the Plan. A committee of asbestos claimants, virtually identical in its composition to the Committee, and the Futures Representative participated in the negotiations. During the coverage litigation, before it was settled, the Debtors entered into agreements with many of the asbestos claimants. These agreements permitted the claimants either to seek default judgments (which the Debtors agreed not to oppose) (the "California default judgment claims") or provided them with stipulated judgments pursuant to Minnesota law in amounts set by a matrix consistent with other settlements of like claims in Minnesota. In return, the claimants agreed not to attempt to enforce their claims against the Debtors unless the Debtors filed bankruptcy petitions.
After the settlement and before the bankruptcy petitions were filed, additional asbestos claimants were permitted to liquidate their claims in accordance with the matrix proposed under the Plan (the "Matrix"). One other group of claimants has been permitted to liquidate their claims in accordance with the Matrix during the chapter 11 case. In addition, the Debtors entered into a settlement with a third group of claimants (the "Constructive Trust claimants"), which the Court approved, providing them with payment of a compromised amount directly by USF & G from funds that would otherwise have been available to fund the Plan.
As a result of these post-petition settlements, at this point, the only parties objecting to confirmation are four insurance companies: i.e., Hartford Accident and Indemnity Company ("Hartford"), Argonaut Insurance Company ("Argonaut"), General Accident Insurance Company of America ("General Accident"), and U.S. Fire Company ("U.S. Fire") (the "Objecting Insurers"), two of which (Hartford and Argonaut) are still in coverage litigation with the Debtors and two of which (U.S. Fire and General Accident) have been sued by Hartford in coverage litigation.5 Hartford is taking the lead in opposing confirmation.
The Plan divides creditors into four classes and interest holders into three classes. The Bankruptcy Code requires classes of claims and interests to be designated as "impaired" or "unimpaired."
Impairment means any alteration of a claimant's or interest holder's legal or equitable rights. 11 U.S.C. § 1124. Only impaired classes are entitled to vote on a plan. 11 U.S.C. § 1126(f). However, other parties in interest may object to the Plan on legal grounds. The only impaired classes in the Plan are Class 4 (the asbestos related claims) and Classes 5B and 5C (the equity interests in Western Asbestos and MacArthur Company, respectively). Administrative claims (i.e., claims incurred after the bankruptcy case was filed) and pre-petition priority tax claims are not classified. The Bankruptcy Code specifies how they must be treated. The Plan complies with the Bankruptcy Code in its proposed treatment of these two categories of unclassified claims.
The Plan provides for the establishment of a trust (the "Trust") which will process and pay the Class 4 claims to the extent possible from the funds contributed by USF & G and other possible sources of recovery: e.g., hoped for recoveries from the Objecting Insurers. The way in which the Plan will do this is set forth in another document, entitled Trust Distribution Procedures (the "TDP"). (The TDP is attached as Exhibit 2, Annex B, to the Plan.)
As discussed below, 11 U.S.C. § 524(g) requires the Trust to pay claims in such a way that present claims and future demands will receive equivalent payment percentages. At present, it is anticipated that asbestos claimants will receive an initial distribution of approximately 11.5% of their claims. Whether there will be any additional distributions depends largely on whether the Trust is able to recover any funds from the Objecting Insurers.
Claims that have already been liquidated will be paid approximately 11.5% shortly after confirmation. Some claimants received payments on their claims pre-petition and will only receive an amount sufficient post-confirmation to bring the total up to 11.5%. Holders of claims that have not been liquidated and future demands will have three choices: (1) they may have their claims liquidated in accordance with the Matrix; (2) they may submit to binding or nonbinding arbitration; and (3) if they submit to nonbinding arbitration and do not like the result, they may seek a judgment in court. Holders of unliquidated claims will not be entitled to receive the initial 11.5% distribution (or any additional distributions) until their claims are liquidated. There will be three trustees overseeing the Trust and a Trust Advisory Committee. The Committee and the Futures Representative will select these individuals.
The Debtors' settlement agreement with USF & G is attached as Exhibit 3 to the Plan. It provides that USF & G will pay a total of $975 million in full settlement of its liability for the asbestos claims, including future demands.6 Of this amount: $110 million was paid prior to the petition date on account of claims that have already been reduced to judgment; $740 million (or $737 million) has been paid into the "Claimant Escrow," which will fund the asbestos trust upon the effective date of the Plan; $40 million has been paid into the "Expense and Fee Escrow," of which $30 million was disbursed prior to the petition date to pay Debtors' counsel for their fees incurred in the coverage litigation and related settlement with USF & G; and $35 million has been paid into the "Administrative Fund Escrow" for miscellaneous fees and expenses, including costs and fees associated with litigation, with any remainder to be transferred to the Trust on the effective date of the Plan. In addition, the Trust will receive: (1) all of the stock of Western Asbestos, the defunct corporation, (2) a $500,000 promissory note executed by MacArthur secured by 51% of its stock, payable over 5 years, and (3) the benefit of all of the Debtors' rights (as well as any direct action rights of the asbestos claimants) against the Objecting Insurers with the exception of $1.0 million out of the first $5.0 million in recoveries on account of bad faith business loss claims.
Confirmation will "channel" all the asbestos claims to the Trust and will discharge two of the Debtors from those claims.7 In addition, if the Plan is confirmed, the Court will issue an injunction under 11 U.S.C. § 524(g), protecting USF & G and others from the "channeled" claims as well as from any claims for contribution or indemnification by the Objecting Insurers.
One of the most controversial provision of the Plan was the Debtors' request that the Court "adjudicate" the total amount of the asbestos related claims against the Debtors. As discussed below, based on the Court's tentative ruling that it could not "adjudicate" the total claims and demands against the Debtors, this request has been withdrawn.
To confirm the Plan, the Court must find that the requirements of both 11 U.S.C. § 524(g) and § 1129 have been satisfied.8 These requirements are discussed in sections 1 and 2, respectively. As noted above, the Plan proposes the issuance of certain injunctions. Section 3 discusses issues related to these injunctions. In addition, as also noted above, the Plan proposes to...
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