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Legal Ethics

Proposed Asbestos Settlement by McGuireWoods Labeled Collusive by Judge

Posted Jun 11, 2009 10:47 AM CDT
By Debra Cassens Weiss

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Updated: A federal bankruptcy judge has blasted a proposed bankruptcy plan to resolve asbestos claims as the product of collusion and refused to approve it.

The proposal was developed by lawyers at McGuireWoods representing the debtor, Skinner Engine, and the law firm representing claimants, the Maritime Asbestos Legal Clinic of Detroit, the Madison St. Clair Record reports. U.S. Bankruptcy Judge Bruce McCullough said the asbestos settlement plan was reached despite “strong evidence as to the futility of such claims.”

The debtor’s insurance company, Travelers Casualty and Surety Co., had objected to the settlement. McCullough said the plan could not be approved over the insurer’s objection.

Travelers had defended the now-defunct Skinner Engine against about 28,000 claims over 20 years and had not lost a single claim, the story says. Skinner had made ship engines insulated with asbestos and was still an operating company when it initially filed for bankruptcy.

Douglas Foley, chairman of McGuireWoods’ restructuring and insolvency department, defended his firm’s work in negotiating the proposed claims plan. He said the firm viewed itself as a kind of mediator between claimants, creditors and insurers, and the proposed plan was negotiated in good faith.

“We were just the debtor’s counsel trying to put together a plan to resolve claims,” he told the ABA Journal. “There was never any collusion in the sense that everything was negotiated at arm’s length and in good faith. Nothing was hidden or anything like that. It sort of sounds bad when you read some of the judge’s phraseology. That’s part of what’s disappointing.”

The rejected proposal had provided that claimants who used a dispute resolution process to resolve their claims would have to agree to give 20 percent of the proceeds to the debtor company. In McCullough's view, the provision gave Skinner Engine an incentive “to sabotage its own defense or, more aptly, the insurers’ defense of itself vis-a-vis the asbestos claims.”

“The asbestos claims settlement is neither reasonable nor one that was entered into in good faith,” McCullough said. “The ground for such holding is that the asbestos claims settlement is the result of patent collusion between the debtor and the co-proponents, on the one hand, and the asbestos claimants, on the other hand.”

McCullough's opinion (PDF) later said he uses the word “collusion” for the collective problems with the proposed plan, including the disincentive for the company to win its defense of asbestos claims. “However, whether it be collusion or not is not really important; what is important is that all of the foregoing demonstrates bad faith on the part of the debtor, the co-proponents, and the asbestos claimants in entering into the asbestos claims settlement.”

Foley said the judge did not hold an evidentiary hearing before writing his opinion. “That could be a basis for appeal, but what’s the point?” Foley said. The firm does not think an appeal is worthwhile since the judge, who converted the bankruptcy to a Chapter 7 liquidation, would be unlikely to approve any reorganization plan, according to Foley.

“The judge has strong feelings about asbestos claims,” Foley said.

Updated at 1:45 p.m. to include comments from Foley.

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