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'Business as Usual' Bankruptcies

Asbestos: Think Again: 'Business as Usual' Bankruptcies

March 4, 2004

When Bankruptcy Means "Business as Usual"

Just as the ongoing epidemic of asbestos-caused mortality and injury has been overshadowed by the controversy over litigation, the origins of asbestos lawsuits have been buried beneath claims that litigation has "bankrupted" dozens of large U.S. companies, and that Congress must put an end to asbestos litigation in order to protect more companies from going bankrupt in the future.

But neither the flood of asbestos lawsuits, nor contemporary proposals to end it, should have been necessary at all. The controversy could have been avoided if the very same companies now pressing for "asbestos litigation reform" had acted responsibly and compassionately decades ago, when their highly detailed, proprietary knowledge showed that asbestos posed mortal risks to millions of their workers, and to tens of millions of Americans who came in contact with the deadly substance in their homes, schools and workplaces.

Instead of fair and respectful consideration for their workers and others, asbestos and insurance companies offered only cold, unrelenting resistance. The companies aggressively fought requests for financial or medical aid and support; they callously, and notoriously, hid unambiguous scientific evidence of asbestos exposure, injury and death. Indeed, no meaningful proposals for help of any kind were forthcoming from asbestos industries and their insurers until a handful of people, out of hundreds of thousands whose lives had been destroyed by asbestos illnesses and death, went to court seeking justice because they had no other choice -- and began to win.

Proponents of congressional action to block asbestos lawsuits now argue that this litigation must be stopped because it is "bankrupting" asbestos companies, their insurers, and by some accounts, the entire U.S. economy. Political speeches, and many media accounts, routinely refer to companies that are "bankrupt" as a result of asbestos litigation. As this section explains, "bankruptcy" connotes a degree of business distress that is rarely experienced by companies that have been sued by people with asbestos-related health problems.

According to Halliburton, it's "business as usual" as a result of their asbestos bankruptcy:

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Q. In Europe and many other countries, when a company is "bankrupt," it means that it is going out of business. What is different here? 

A. European bankruptcy laws, as in many countries, are very different from the laws in the U.S. Chapter 11 has been created so that a filing company can restructure its debt (or in our case resolve its asbestos and silica liability) and remain in business. It is not a liquidation; it is a reorganization. 

Halliburton and all of its subsidiaries, including DII Industries and KBR, will continue in business and will continue to provide all the excellent services our customers expect from us. The Chapter 11 petitions have been filed for the sole purpose of facilitating a settlement of Halliburton's personal injury asbestos and silica litigation claims. In other words, outside of the asbestos and silica settlement, it will be business as usual.

From www.halliburton.com/ir/asbestos_faqs.jsp

When most people hear that a company is going bankrupt, they think liquidation of assets, massive layoffs, and shutting down the business. With asbestos bankruptcies this is the very rare exception. Most "bankrupt" asbestos companies, especially the larger corporations typically offered as examples of asbestos-induced economic havoc, remain very competitive within their industries during bankruptcy, and often flourish afterwards.

This is because an asbestos bankruptcy is a reorganization authorized under Chapter 11 of the bankruptcy code, not a liquidation that occurs under Chapter 7. It is a way to stop ongoing and future litigation, consolidate liability, and protect the company and all of its subsidiaries from future liability. While not painless, it is a relatively smooth and equitable way for a company to assist the families of workers and others injured or killed by asbestos.

The asbestos industry and its supporters use the popular image of bankruptcy to argue that aiding people hurt by asbestos is costing huge numbers of jobs, ravaging the pension plans of innocent workers, and bankrupting the economy.

To quote Senate Majority Leader Bill Frist:

The torrent of asbestos litigation has wreaked havoc on asbestos victims, on American jobs, and this havoc has extended into our economy.

The economic reality of this crisis is not lost on my colleagues in this body. They understand that under the status quo the national asbestos crisis could cause (sic) [cost] our economy more than the savings and loan crisis of the 1980s and 1990s, and more than the Enron debacle or the WorldCom debacle.

Future funds for asbestos victims are threatened because company after company after company is going bankrupt. About 70 companies have gone bankrupt, and about a third of those have gone bankrupt in the last 2 1/2 to 3 years. The pace of bankruptcies of very large companies with thousands and thousands of employees is accelerating.

From Frist_Statement.pdf

A look at websites of "bankrupt" companies reveals a very different assessment of the economic and financial impact of asbestos bankruptcies.

Halliburton calls its asbestos bankruptcy "good news" and a "definite win for people who care about Halliburton." (seewww.halliburton.com/ir/asbestos_faqs.jsp

The company certainly does not feel that its $4.5 billion settlement with asbestos victims represents any threat to the ongoing profitability of the company.

To quote again from their website:

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In a successful implementation of an asbestos settlement under Chapter 11, most aspects of the company's business do not have to change. Under the proposed Plan of Reorganziation (sic):

• The company and its subsidiaries do not go out of business.

• Nothing necessarily changes at any business units, whether they are in Chapter 11 proceedings or not, from an operational standpoint.

• No facilities need to close and no jobs need to be eliminated as a result of a Chapter 11 filing.

• No pension or benefits programs are be (sic) reduced or eliminated.

• No employees have their salaries cut, or promotion opportunities restricted.

• No vendors are delayed in payment from normal terms.

• No creditors are delayed in payment from normal schedule.

• No business units outside the U.S. are affected in any way.

• The company does not have to renegotiate contracts as a result of the Chapter 11 filing.

 

From www.halliburton.com/ir/chapter11_primer.jsp

In 1994, Congress amended the bankruptcy code to provide special protection for companies with asbestos liability. What distinguishes these amendments from traditional Chapter 11 bankruptcy is that they allow companies to seek bankruptcy protection from future liability, if they can show that future liability exceeds the assets of the company (Bankruptcy Reform Act of 1994). As a result of these changes, bankruptcy emerged as the preferred option for companies seeking to limit asbestos liabilities. Forty-eight firms filed for bankruptcy due to asbestos claims between 1982 and 1999, and an additional thirty firms filed between 2000 and 2002 (White, 2002, at 1320).

The 1994 amendments are known as the "Manville Amendments," because they were modeled after the core components of the Manville Trust, a legal entity established to settle asbestos claims against a major asbestos company, Johns-Manville. In addition to allowing asbestos companies to settle all future asbestos liability claims by filing Chapter 11 and establishing a special asbestos bankruptcy trust, known as a 524(g) trust, the law also grants courts the power to issue injunctions that prevent all asbestos litigation against the company and its subsidiaries from moving forward, a major benefit to companies with substantial liabilities (Bankruptcy Reform Act of 1994; Macchiarola, 1996, at 617). The amendments also applied retroactively to litigation that was ongoing at the time of passage (Crames, et al., 2002; White, 2002, at 1322).

In practice, Chapter 11 asbestos bankruptcies rarely result in lost jobs or diminished pensions beyond what would be attributable to the normal business cycle. Instead, the Chapter 11 bankruptcy allows a company to receive an "automatic stay," which stops all payments to creditors (including payments owed through settlements), stops all pending lawsuits, and lets the company reorganize and then prioritize payments.

Under the Chapter 11, section 524(g), an asbestos company can stop all of its pending asbestos lawsuits and set up a fund to settle all present and future asbestos claims. This automatic stay provision also extends to parent and subsidiary companies and protects them from future asbestos lawsuits. Because Chapter 11 requires the company to adopt a court-approved reorganization plan, payments on asbestos claims may be delayed as long as five to six years while the plan is developed, approved, and implemented (White, 2002, at 1320).

While any form of bankruptcy is serious, it is clear that asbestos filings under Chapter 11 have not wreaked havoc on the economy. Between February 2000 and October 2001, the seven largest companies facing asbestos liability filed for bankruptcy protection under Chapter 11. These companies include Babcock & Wilcox, Owens Corning, Armstrong, W.R. Grace & Co., U.S. Gypsum Co., Federal-Mogul and Building Materials Corporation of America.

An analysis of 10K filings for these companies for the years 1998 through 2002 concluded that:

"The Chapter 11 companies have been able to continue operations successfully. Indeed, with few exceptions, they have prospered, increasing their sales. They have been able to maintain their assets and employment, meet their obligations to business creditors and employees, and make capital investments that will allow them to continue to prosper." (Benston, 2003, at 5).

Download Benston Study

A review of the companies' public statements confirms this conclusion. Babcock & Wilcox filed for bankruptcy in 2002. The company explains its decision to file for Chapter 11 protection from asbestos liability as follows:

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When a company files for Chapter 11, it is permitted to continue operating while developing a plan to emerge as a stronger, healthier company. Most people, when they hear "bankruptcy," think "liquidation" (that is, when a company sells off all its assets and inventory and goes out of business). That is a different kind of bankruptcy, called a Chapter 7. Chapter 11 does not mean liquidation.

B&W's core business continues to be strong. B&W filed for protection under Chapter 11 because it offers the only viable legal process for determining and comprehensively resolving its asbestos claims.

B&W's core operating business continues to be a solvent and strong business with a backlog totaling over $1 billion. [t]here should be little impact on day-to-day operations. It's business as usual. Project work will continue. [w]e expect there will be no effect on salaries, benefits or promotion opportunities.

See www.babcockwilcox.com/pgg/pr/chapter11.html.

Another asbestos manufacturer, Owens-Corning, filed for bankruptcy protection on October 12, 2000 to settle its approximately $2 billion in asbestos liability. The company had previously paid out or had commitments to pay out $5 billion. (Asbestos Litigation Reporter, 2002).

Senate Majority leader Frist named Owens-Corning on the floor of the Senate as a company that had been driven to bankruptcy by excessive asbestos litigation and then went on to say that:

"Asbestos-related bankruptcies spell doom for these workers' jobs; thus, their families, and, of course, incomes and retirement savings."

Owens-Corning has a dramatically different take on its Chapter 11 asbestos proceeding:

View a case study on Owens-Corning

On Thursday, October 5, 2000, Owens Corning voluntarily filed a petition for reorganization under Chapter 11 bankruptcy protection in the United States Bankruptcy Court in Wilmington, Delaware.

The filing will enable the company to refocus on operating its business and serving its customers, while it develops a plan of reorganization that will resolve its asbestos and other liabilities and provide a suitable capital structure for long-term growth.

To enhance its liquidity, Owens Corning has obtained a $500 million debtor-in-possession financing commitment from Bank of America. Upon court approval, these funds will be available to the company to help meet its future needs and fulfill obligations associated with operating its business, including payment under normal terms to suppliers and vendors for all goods and services that are provided after today's filing. Employees will continue to be paid in the normal manner and their health benefits, as well as those of retirees, will not be disrupted. The company's pension plan for retirees and vested employees is fully funded and protected by federal law.

It is important for our customers and business partners to know that all Owens Corning operations are open and we are continuing to focus on serving our customers. Customer service and daily operations are our top priorities.

See www.owenscorning.com/financialreorganization/.

Owens-Corning's Chairman and CEO, Glen Hiner, assessed the impact of the company's asbestos bankruptcy filing this way:

"[w]ith the Chapter 11 process we can finally put this difficult issue behind us in a fair and responsible manner and move forward with our resources and energies focused on competing successfully in the global marketplace." Cy Goldberg & Dareen J. Check, Bullseye Gets Bigger on Peripheral Defendants: The Effect of Bankruptcies on Asbestos Litigation, The Legal Intelligencer (Apr. 25, 2001).

Clearly these companies have not "gone bankrupt" in the sense commonly imagined by the public and invoked by politicians who are pressing for "asbestos litigation reform." Instead, these asbestos companies have taken advantage of a special provision of Chapter 11 called a 524(g) trust, which was specifically inserted into the tax code by the Congress in 1994 to help asbestos manufacturers shield current assets from present and future asbestos liability (Green Testimony, 2003).

View a case study on Owens-Corning

References

  1. Bankruptcy Reform Act of 1994, Pub. L. 103-394, (codified at 11 U.S.C. § 524(g),(h)).
  2. Statement of Senator Bill Frist. (2003). "Asbestos Litigation Crisis." Congressional Record Page: S15514. (Senate - November 22, 2003).
  3. Michelle J. White, Fifteenth Annual Corporate Law Symposium: Corporate Bankruptcy in the New Millennium: Why the Asbestos Genie Won't Stay in the Bankruptcy Bottle, 70 U. Cin. L. Rev. 1319, 1320 (2002).
  4. Frank J. Macchiarola, The Manville Personal Injury Settlement Trust: Lessons for the Future, 17 Cardozo L. Rev. 583 (1996).
  5. Michael J. Crames, Benjamin Mintz & Dean M. Trafelet, Section 524(g) & the Futures Representative, ALI-ABA Course of Study Materials, Asbestos Litigation in the 21st Century (Sept. 2002).
  6. Asbestos Liability Claims Cause Owens-Corning to File for Chapter 11, 22 Asbestos Litigation Reporter 3 (Oct. 12, 2002).
  7. Testimony of Prof. Eric D. Green, Judiciary Committee Hearing on S. 1125 (June 4, 2003).
  8. The Legal Intelligencer. (Apr. 25, 2001). "Bullseye Gets Bigger on Peripheral Defendants: The Effect of Bankruptcies on Asbestos Litigation," by Cy Goldberg & Dareen J. Check.