Debtors' in asbestos bankruptcy case appeal estimation decision to Third Circuit

It took months for U.S. Bankruptcy Judge Judith Fitzgerald to determine the present and

future asbestos liabilities of certain bankrupt companies that formerly dealt in products containing the fiber.

But then came Fitzgerald’s 50-page May 20 memorandum opinion in which the Delaware-based jurist estimated the liabilities of Specialty Products Holding Corp. and Bondex International to be in the neighborhood of $1.1 billion, many millions of dollars higher than what the debtors contended the true figure to be.

An expert working for the bankrupt companies – they are referred to as ‘debtors’ in bankruptcy proceedings as opposed to ‘defendants’ in the tort system – had estimated total future liabilities at between $465 million to $700 million nominal or $300 million to $575 million net present value.

In the end, Fitzgerald, who retired from the bench shortly after rendering her decision in the case, estimated the liabilities to be closer to the figures thrown out by attorneys representing the Official Committee of Asbestos Personal Injury Claimants and the Future Claimants’ Representative, numbers that were in the billion-dollar range.

Appropriate estimate

In her May decision, Fitzgerald wrote that after considering all of the evidence in the case, exhibits and arguments presented to the court during a weeklong estimation hearing in Pittsburgh earlier this year and during subsequent briefs and other legal filings, she considered an appropriate estimate for mesothelioma claims, pending and future, to be $1.1 billion net present value.

The judge also determined that an additional six percent, or $66 million, would have to be added pursuant to the parties’ agreement to cover non-mesothelioma asbestos personal injury claims, bringing the total estimate to $1.166 billion.

“This estimate considers, inter alia, Debtors’ small market share, claiming rates against Debtors, and the percentage of claims paid versus the percent dismissed or unpaid,” Fitzgerald wrote at the time.

Fitzgerald noted that the estimation process dealt with claims that are likely to be filed in the future and what the debtors’ would need to pay to address those claims, one component of which is the merits of the claims themselves.

The settlement values can vary throughout the years depending whether the claims that are settled for a dollar amount but not yet documented or paid are included in the consideration value, Fitzgerald wrote.

The debtors in this case, Specialty Products Holding Corp. and Bondex International, had filed for Chapter 11 bankruptcy protection in the spring of 2010.

When the companies were solvent, they specialized in the manufacture of joint compound designed for do-it-yourself home use.

During the January estimation proceeding in a federal courtroom in Pittsburgh – Fitzgerald had split her time between there and the federal courthouse in Delaware – lawyers representing the bankrupt companies and attorneys representing claimants sparred over the disputed future asbestos liabilities, with each side calling witnesses to support their respective positions.

The debtors had been defendants in the tort system prior to filing for bankruptcy, which puts the brakes on civil litigation and requires the formerly solvent companies to fund a trust designed to compensate victims of asbestos related disease.

Natalie Ramsey, an attorney from the Philadelphia office of Montgomery McCracken Walker and Rhoads who represented the claimants’ committee during the estimation proceedings, told a reporter back in early May that she and her team would hold off on taking any new action in the matter before Fitzgerald issued her ruling.

But in early July, after the judge’s ruling came down, the docket in the case once again became active.

Opposing debtors’ appeal

The record shows that the claimants’ attorneys for the Official Committee of Asbestos Personal Injury Claimants and the Future Claimants Representative filed a joint motion in the District of Delaware objecting to an earlier debtors’ motion for certification of the estimation decision for immediate appeal to the U.S. Third Circuit Court of Appeals.

The claimants’ lawyers contend that the debtors have not met the statutory requirements for direct appeal to the Third Circuit, despite contentions by the debtors’ attorneys to the contrary.

“First, the appeal does not involve a question of law to which there is no controlling decision,” the claimants’ attorneys wrote. “There is valid and binding Third Circuit authority addressing the issue at heart of this appeal: the methodology bankruptcy courts apply when estimating claims pursuant to … the Bankruptcy Code.”

The motion says that the debtors have attempted to manipulate “uncontroverted case law” as well as the estimation decision “so as to present a legal question of first impression, when that actually does not exist.

The claimants’ attorneys also wrote that the appeal does not involve matters of public importance.

“Though the Debtors are clearly dissatisfied with the Court’s utter rejection of their novel and untested estimation methodology that they advanced, they fail to explain how the Third Circuit’s consideration of their novel methodology would benefit the public at large,” the motion states.

Finally, the motion states, immediate consideration of the appeal by the Third Circuit would not materially advance the progress of the cases.

“On the contrary, certifying this appeal directly to the Third Circuit will only prevent the parties from moving forward and may create yet another road block to confirmation,” the petition states. “Further, as the Debtors have made clear that they intend to object to a multitude of issues surrounding confirmation that the parties have not yet even begun to address, the Third Circuit’s consideration of the estimation issues in this case now will in no way determine the result of future litigation.”

The debtors’ attorneys had filed their appeal in early July; the claimants’ attorneys filed their opposition motion mere days later.

Among the appeals issues are whether Fitzgerald erred by estimating the total amount of payments the debtors might potentially make to settle current and future asbestos claims in state courts, rather than estimating the debtors’ actual liability for those claims based on applicable state law; whether the bankruptcy court erroneously interpreted the Bankruptcy Code by estimating the amount the debtors might potentially pay to settle asbestos claims in state courts rather than estimating their liability on the merits of the claims; and whether the court erred by refusing to take into account the extent of the debtors’ liability for their several shares of the estimated claims, which were or would be brought against multiple defendants and submitted to multiple asbestos trusts.

The claimants’ attorneys maintain that the debtors’ issues don’t warrant direct appeal to the Third Circuit.

“The Debtors do not raise any pure legal issues of first impression,” the motion states. “At best they raise a mixed question of law and fact regarding the appropriate methodology to be used in applying well-settled and unambiguous law.”

And the Third Circuit, the filing states, has already ruled on the methodology to be used in bankruptcy estimation proceedings.

“The Debtors’ presentation of the issues in this appeal as ones of first impression is nothing more than an attempt to obtain an appellate court ruling on the validity of their novel estimation methodology,” the motion reads. “That this case involves creative and untested legal theories, however, does not transform the legal issue at the heart of the appeal into one of first impression.”

The debtors had also argued that the estimation decision raises issues that affect the public interest in asbestos litigation transparency because the court refused to allow the debtors to pursue discovery of payments received by claimants from co-defendants and asbestos trusts established in bankruptcy cases involving former co-defendants.

‘Another year to the process’

One attorney with extensive knowledge of asbestos bankruptcy litigation, who spoke with a reporter only on condition of anonymity because of his ties to players in the Bondex case, said that while estimation hearing results were in the past appealable only to the District Court, statutes have since been amended to allow for appeal directly to a federal appeals bench, the idea being that any District Court ruling would likely be appealed further, adding “another year to the process.”

The claimants’ committee, the attorney said, is clearly opposing the appeal of the estimation hearing “for the simple reason that they like the ruling.”

Because bankruptcy cases, unlike civil cases in the tort system, are solely about money and little else, the parties are often able to come to a compromise as far as dollar figures are concerned.

And if the debtors are able to “squeeze [another] year out of the process, and they like their chances of winning on appeal, “that’s an important thing to do,” the attorney said.

Asbestos bankruptcy cases such as these all end up with a reorganization plan, the lawyer said, and they “almost always end up in a plan that is agreed to by the debtors and the asbestos claimants.”

The Bondex case has since been assigned to another bankruptcy judge following Fitzgerald’s retirement.