Bankruptcy judge OKs Oakfabco's liquidation plan withdrawal, but blasts lawyers; Oakfabco requests mediation

By Jonathan Bilyk | Aug 9, 2018

Even as the company has requested the chance to head to mediation to resolve differences between its insurers and trial lawyers representing tens of thousands of asbestos claimants, a federal bankruptcy judge has granted bankrupt boiler maker Oakfabco’s request to abruptly withdraw its liquidation proposal, leaving unsettled for now how the company will continue through bankruptcy and wind down those asbestos-related personal injury claims.

By Antoine Taveneaux [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0)], from Wikimedia Commons

Even as the company has requested the chance to head to mediation to resolve  differences between its insurers and trial lawyers representing tens of thousands of asbestos claimants, a federal bankruptcy judge has granted bankrupt boiler maker Oakfabco’s request to abruptly withdraw its liquidation proposal, leaving unsettled for now how the company will continue through bankruptcy and wind down those asbestos-related personal injury claims.

Last month, U.S. Bankruptcy Judge Jack B. Schmetterer issued an order sua sponte – meaning without request of any party involved in a case – to cancel nearly all upcoming hearings in the bankruptcy proceedings, including an anticipated hearing to hash out differences among Oakfabco, its insurance carriers and a committee of trial lawyers representing the asbestos personal injury claimants, over Oakfabco’s proposed liquidation plan.

Following that order, however, Oakfabco has petitioned the judge to allow the parties to take the matter to mediation.

The parties have been at odds over the plan since Oakfabco presented it last December, the company’s latest proposal to guide the liquidation of several insurance policies into a trust to process and pay out current known asbestos-related personal injury claims, and then wind down its existence.


Stephen T. Bobo   Reed Smith LLP

Oakfabco’s insurers, including CNA, however, objected to the plan’s proposal to win approval for the liquidation through a weighted “matrix” balloting system.

CNA asserted Oakfabco had essentially struck a deal with the trial lawyers in an effort to remove opposition to the liquidation plan, while essentially leaving the insurers holding the bag, with no real way of asserting their own claims as Oakfabco’s insurer.

CNA asked the court to allow it essentially screen the claims, to determine which should actually be granted the right to vote on Oakfabco’s plan. Otherwise, CNA asserted the trial lawyers could use essentially worthless claims to “skew the results” and vote themselves a payday.

Oakfabco, however, asserted CNA was merely trying 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.”

The case at the heart of the dispute landed in Chicago federal court in late 2015, and has become more complex as the years have worn on. In that initial filing, Oakfabco, as the successor company to the former Kewanee Boiler Corporation, had sought to win court approval for its planned liquidation of

Kewanee had filed for Chapter 11 bankruptcy protection in 1988, 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.

While litigation is still pending between the asbestos claimants’ trial lawyers and the insurers, Oakfabco returned to court in December 2017 with a new liquidation plan.

Amid the continuing rancor, however, the company in July petitioned Judge Schmetterer to withdraw that plan, according to court documents.

In its withdrawal notice, dated July 16, Oakfabco did not explain why it was withdrawing the liquidation plan, but told the court it would “not pursue any further measures in this Chapter 11 Case to secure the confirmation of any of the withdrawn plan materials, or the approval of any of the disclosure statement materials.”

In response, the judge followed up with his sua sponte order a week later.

In that order, Judge Schmetterer chided all involved for their perceived lack of progress on resolving the issues. The judge noted he had granted the “professionals” representing the parties permission to “draw a percentage of fees from the estate prior to court approval in order to allow for a cash flow needed for counsel to prosecute the case.”

“Such orders are not entered to allow the parties to bleed the estate dry with unnecessary and frivolous litigation,” the judge wrote. “The parties in this case have done just that, accruing millions in fees without working toward a resolution. After three years, Debtor (Oakfabco) does not even have a plan or disclosure statement pending before the Court.

“The undersigned Judge is no longer confident that the Debtor and creditor professionals are working towards a meaningful resolution in this case.”

The judge said he intended to vacate his prior order allowing the payments to attorneys representing Oakfabco and the creditors.

However, following the judge’s order, Oakfabco filed a motion on Aug. 6, asking the judge to send the company, the asbestos trial lawyer committee and the insurers to a “single-day mediation session in an attempt to find a consensual resolution to this Chapter 11 Case, or, at least, a consensual agreement on a path for this Chapter 11 Case to reach confirmation proceedings.”

“Although one might view the most recent withdrawal as a step away from a confirmation hearing, in light of the history set forth above, the Debtor sees it as a necessary clearing of the slate in an effort to move forward again,” Oakfabco wrote in its Aug. 6 motion.

The company noted the continuing courtroom imbroglio between the insurers and the asbestos trial lawyers, but said: “Notwithstanding those remaining obstacles, the Debtor believes that one final attempt to find a consensual resolution to this Chapter 11 Case is merited.”

Oakfabco is represented by attorneys Stephen T. Bobo, Paul M. Singer and Andrew J. Muha, of the firm of Reed Smith LLP, with offices in Chicago and Pittsburgh.

CNA is represented by attorneys Michael Lotus and David Christian, of David Christian Attorneys LLC, of Prairie Village, Kan.

 

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Organizations in this Story

CNA Financial Corporation Reed Smith LLP Stephen T. Bobo U.S. Bankruptcy Court for the Northern District of Illinois Chicago Division

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