The WSJ’s Kimberly Strassel pens this devastating op-ed in today’s edition in which she chronicles one of the chapter 11 cases prompted by contingent liability for asbestos claims that has resulted in the Third Circuit Court of Appeals issuing a series of decisions over the past several years highly critical of the asbestos plaintiffs bar’s conduct in connection with those reorganization cases. Previous posts on a several of those cases are here.
The particular case that Strassel addresses is the In re: Congoleum Corp case, a New Jersey reorganization in which the Third Circuit concluded that the Bankruptcy Court had improperly approved the debtor company’s retention of one of the asbestos claimants’ law firms (Gilbert, Heintz & Randolph or “GHR”) as special counsel for the debtor:

Under the Congoleum plan, the lawyers would shift their asbestos claims into a special trust that had first dibs on any money. Congoleum and its parent, ABI, would contribute $250,000 in cash and a $2.7 million promissory note — payable 10 years down the line. Congoleum would then breeze in and out of bankruptcy in record time, its shareholders emerging with all of their equity and the company with a clean bill of health.
As for who’d pay for the trust, that was the beauty of the deal: The lawyers would arrange it so that the trust bill would land with insurers. And elegantly, the size of the trust they engineered was almost precisely what insurers owed under Congoleum’s maximum policy limits: a staggering $1 billion. Much of this booty would go instantly to the lawyers (via contingency fees) and their plaintiffs. Anyone who really did get sick from a Congoleum product down the line would be ushered into a second, unsecured trust that could pay pennies on the dollar.

In a stroke, sworn enemies were working together. The lawyers’ goal was to get the biggest insurance payoff. Congoleum’s job was apparently to sign off on any claim that came its way and ultimately deliver on the insurance proceeds. This would lead to a Congoleum windfall, as it emerged from bankruptcy with its shares unburdened. The lawyers would also be well-positioned to get exactly what they wanted. Theoretically, Congoleum’s legal team should have been vigorously fighting to keep the trust small and protect its insurers. Instead, Congoleum hired GHR — a firm with ties to [other asbestos claimant law firms] . . .
GHR’s first job was to “represent” the Congoleum side in negotiations over the size of the trust. Given its past prepack work with [other asbestos plaintiffs lawyers], this struck at least a few insurers as having the same team sitting on both sides of the table. As it happens, the ties were more than just smelly. What GHR never fully disclosed to the bankruptcy judges was that it was also serving as co-counsel with [another asbestos plaintiffs law firm] in representing 10,000 asbestos plaintiffs who were suing Congoleum. GHR was thus designing an enormous trust ostensibly on behalf of Congoleum that would ultimately benefit GHR’s own legal clients. One insurer, Century Indemnity, litigated this conduct all the way to the Third Circuit Court of Appeals, which ultimately led to GHR’s disqualification and disgorgement [of $9.6 million in compensation from the Congoleum bankruptcy estate].

Read the entire piece.