Saying the plan would open opportunities for “gamesmanship” by trial lawyers, insurer CNA has asked a bankruptcy judge to shoot down a plan by the successor company to a defunct boiler maker to wind down its existence by essentially giving lawyers representing plaintiffs in nearly 34,000 asbestos claims the chance to vote themselves a payday.
However, the company says the Chicago-based insurer is simply trying to “distract” and “obfuscate” to gain “advantages” and “leverage” to “elevate its own interests” in the case, and essentially reduce its potential liability to pay out under the company’s policy.
Stephen Bobo | Reed Smith LLP
The case at the heart of the dispute landed in federal court in Chicago in late 2015, when Oakfabco, the successor company to the Kewanee Boiler Corporation, filed for Chapter 11 bankruptcy protection. The company intended to gain court approval of a plan to liquidate its sole remaining assets, certain insurance policies through CNA and other insurance companies, to ultimately set up a trust to handle and pay current known asbestos personal injury claims, and then wind down its existence.
“The approval of the insurance settlement agreements and confirmation of a plan of liquidation will ensure a fair and equitable distribution among current asbestos claimants,” Oakfabco president Frederick W. Stein wrote in a declaration.
The asbestos claims are largely associated with boilers made by the company featuring an “asbestos rope gasket.”
In 1988, Kewanee filed for Chapter 11 bankruptcy, agreeing to sell off its boiler manufacturing assets and rename itself Oakfabco.
However, the company’s bankruptcy plan included no provisions limiting its exposure to asbestos-related personal injury lawsuits, and the claims continued to pile up. According to court filings, Oakfabco faces an estimated 3,400 active asbestos claims and more than 30,000 inactive claims.
After filing for bankruptcy in 2015, the company agreed to insurance settlements with three insurers for a total of about $14.3 million, including a settlement with CNA for about $9.8 million.
However, while $4.5 million settlements with two other insurers were approved, a committee of trial lawyers representing the tens of thousands of asbestos claimants objected to the settlement with CNA. In discovery that followed, the asbestos claimants committee asserted it had uncovered evidence indicating Oakfabco’s policy with CNA entitled claimants to potentially more than $17 million in coverage.
Oakfabco then pulled out of the settlement, and the court rejected the deal.
In December 2017, Oakfabco presented a liquidation plan to the court, and proposed the court allow its claimants to vote on the plan under a matrix assigning weighted votes to claimants based on the value of their claims. Oakfabco asserted the proposal followed the reasoning of prior decisions in prior similar asbestos-related bankruptcy cases, and particularly the reasoning of the court in the case docketed in New York federal court as In Re Quigley Co. In that case, which also involved a huge pre-bankruptcy settlement from Quigley Co.’s parent company, Pfizer, the judge signed off on a proposal to similarly weight claims, based on their severity.
In the Oakfabco case, however, CNA objected to Oakfabco’s plan, asserting the plan would essentially leave CNA holding the bag, without proper opportunity to enforce its own claims, as Oakfabco’s insurer.
In a brief filed April 25, lawyers for CNA argued the plan would fix the outcome any vote, as it would give the asbestos personal injury claimants, through their lawyers, free rein to use essentially worthless claims against Oakfabco to “skew the results” of any vote on the liquidation plan.
In the brief, CNA asserts it believes as many as 90 percent of the remaining asbestos claims should be considered all but worthless, as they hold little to no possibility of ever recovering damages from Oakfabco.
“Many such claims come from the inventory of plaintiffs’ firms and have not named or pursued the Debtor (Oakfabco) in the many years since the plaintiff first developed a disease,” CNA wrote in its brief. “Rather, they have sued and obtained recoveries from other defendants that they claim are responsible for their injuries.
“These claims have no value, especially in comparison to the relatively few that have timely pursued the Debtor and can offer evidence connecting the development of their disease to a Kewanee Boiler product.”
Allowing those vast majority of the claims, which “likely have zero value” were they to attempt to pursue the claims in court, “would dramatically skew the results, using generic values for the votes of legitimate claims and significantly inflated values for the votes of those holding non-compensable claims.”
Further, CNA argued the proposed “matrix” balloting system in Oakfabco’s proposed plan would open up “opportunities for abuse” for the trial lawyers representing the asbestos claimants group to essentially stuff the ballot box.
“The plaintiffs’ lawyers have an obvious incentive to assert their entitlement to vote larger numbers of claims with larger values, and now that the Debtor has struck a deal with the asbestos committee members in exchange for their votes, the Debtor supports this get-out-the-vote effort,” CNA wrote.
And, while CNA asserted the liquidation plan would grant outsized influence to allegedly worthless claims, the insurer further argued the plan’s proposal to render its own contribution claim worthless, would “disenfranchise” the insurer, stifling its vote in the outcome of the plan.
CNA asked the court to order discovery into the nature of the remaining claimants to quantify which claimants should be allowed to vote on the Oakfabco liquidation plan.
In response filed May 8, Oakfabco’s lawyers asked the court to brush aside CAN’s objections, characterizing the insurer’s arguments as “misplaced” and saying the insurer’s claims concerning disenfranchisement “cannot be taken seriously.”
Oakfabco said CNA’s contention concerning the relative merit of the various asbestos claimants amounts to little more than the insurer’s “opinion (at best).”
“The Debtor’s proposed voting procedure offers only a way to efficiently value those claims for voting purposes,” Oakfabco wrote. “The proposed voting procedure neither liquidates any claim nor grants any recovery to any claimant.”
Oakfabco asserted the proposed discovery proceedings, to “screen out unmeritorious claims,” would “threaten to consume a significant portion of the estate’s assets, and could leave little or nothing for ‘meritorious’ claims to recover after a plan is confirmed and becomes effective.”
“All together, the arguments in CNA’s Reply amount to nothing more than an attempt to distract the Court and to obfuscate what is a reasonable and common voting procedure for asbestos-related claims in an asbestos-related Chapter 11 case,” Oakfabco wrote. “CNA may not like that proposal because it does not offer the advantages or leverage that CNA is seeking to elevate its own interests in this Chapter 11 case, but its disfavor cannot justify departing from the Debtor’s reasonable and appropriate voting procedure proposal.”
CNA is represented in the action by attorneys Michael Lotus and David Christian, of David Christian Attorneys LLC, of Prairie Village, Kan.
Oakfabco is represented by attorneys Stephen T. Bobo, Paul M. Singer and Andrew J. Muha, of the firm of Reed Smith LLP, of Chicago and Pittsburgh.