Estimating Asbestos Claims in Bankruptcies No Easy Task
January 29, 2013
Asbestos bankruptcy trusts pay current and future claims for companies that reorganized under Chapter 11 of the U.S. Bankruptcy Code.
But how do we know how much these trusts should set aside to pay claims?
Section 524(g) of the U.S. Bankruptcy Code and a process known as estimation provide some clues.
Bankruptcy Code: Section 524(g)
Since 1994, companies filing for Chapter 11 bankruptcy reorganization because of asbestos liability used section 524(g) of the U.S. Bankruptcy Code. Under this provision, a federal bankruptcy court may confirm a plan for reorganization which establishes a trust.
The court also may issue an injunction to prevent further lawsuits against the reorganized company. Lawsuits can be halted under section 524(g) because there is a trust to pay current and future claims.
Section 524(g) is often described as allowing reorganized companies to “channel” their asbestos liabilities into a court-approved trust to avoid further asbestos lawsuits. But section 524(g) imposes several requirements on this channeling ability.
One requirement is that the reorganized company likely will face substantial future claims. Another requirement is that the amount, timing and number of these claims cannot be determined. Section 524(g) also requires assurance that the trust can pay current and future claims, despite uncertainty about the size of future claims.
Specifically, it requires that the trust “operate through mechanisms . . . that provide reasonable assurance that the trust will value, and be in a financial position to pay, present claims and future demands that involve similar claims in substantially the same manner.”
In other words, the trust must make sure it administers its funds in a way that pays current claims fairly but also leaves enough money available to pay future claims fairly.
For this reason, the bankruptcy court may require an estimate of current and future asbestos liabilities before it approves the proposed funding for an asbestos trust.
Asbestos Bankruptcy Estimation Proceedings
Estimating current and future liabilities in an asbestos bankruptcy can be as complicated as an asbestos personal injury trial. It’s arguably more complex because it involves claims that haven’t been filed yet.
It also involves input from several parties, including the reorganized company, the company’s insurers, current asbestos claimants, future asbestos claimants and non-asbestos claimants. Input from all of these parties can help the bankruptcy court determine whether a trust is adequately funded.
In any type of bankruptcy reorganization, creditors vote on the reorganization plan. In a bankruptcy reorganization that involves substantial asbestos liabilities, this means that both asbestos claimants and non-asbestos creditors must approve of the plan. Under section 524(g), 75 percent of voting asbestos claimants must approve the plan.
Owens Corning Bankruptcy Estimation
A 2005 ruling on Owens Corning’s asbestos liabilities offers an example of how complex bankruptcy estimation proceedings can get. Owens Corning filed for bankruptcy in 2000. At the time, it had settled 60,000 asbestos claims, had another 128,000 pending, and anticipated many more claims.
Owens Corning needed the asbestos claimants’ approval to channel its asbestos liabilities into a trust and avoid more lawsuits. Insurance was available to cover some, but not all, of the asbestos liabilities.
But the company also had $3.7 billion in debts to creditors that weren’t related to asbestos and weren’t necessarily covered by insurance. Those creditors and the asbestos claimants stood in line for the rest of the company’s assets. And both would have a say when it came time to estimate asbestos liabilities.
At one point during the case, Owens Corning estimated its asbestos liability at $2.2 billion. It later changed that estimate to $16.1 billion in hopes of getting the asbestos claimants to vote for the reorganization plan. But the non-asbestos creditors and some of the insurers weren’t pleased with that figure.
The bankruptcy court held an estimation proceeding to determine the total liability for current and future asbestos claims. Owens Corning, the Asbestos Claimants’ Committee (ACC), the Future Claimants’ Representative (FCR) and various non-asbestos creditors took part in the proceedings. The parties used data from Owens Corning’s past litigation, other asbestos bankruptcy cases, and various experts to estimate total current and future asbestos liabilities.
Arriving at an Estimate
At the end of the day, the court considered the following estimates:
- ACC’s Expert: $11.1 billion
- FCR’s Expert: $8.15 billion
- Owens Corning’s Expert: $6.5 to 6.8 billion
- Non-Asbestos Creditors’ Expert: $3.151 billion or less
The court disregarded the creditors’ expert testimony because it was “completely at odds” with the other experts. It also disregarded the ACC’s expert testimony because it was “at the other extreme.” The court found the FCR and Owen Corning’s’ expert most persuasive because it adjusted data on past asbestos claims to account for changes in asbestos litigation. For example, punitive damages (awards to deter misconduct in the future) are usually worth less than they were 20 years ago.
So what did the court ultimately do? It split the difference between the FCR and Owens Corning experts and estimated total asbestos liability at $7 billion.
This probably sounds very imprecise. But it’s important to remember that asbestos bankruptcy claims don’t necessarily give individual claimants as much as they could receive in court. That’s the not the aim of an asbestos bankruptcy proceeding. Rather they aim for an adequate estimate of total asbestos liability that avoids using up a company’s assets early and leaving future claimants in the cold.
In a future post, we’ll talk about how the creation of bankruptcy trusts may have affected the litigation system.