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July 23, 2004
U.S. Probes 'Pre-Pack' Scandal
Copyright 2004 Informa Publishing Group Ltd
July 23, 2004
US probes 'pre-pack' scandal
US federal legislators have been examining accusations of unfairness in the pre-packaged bankruptcy process, a topic that has been exercising insurers for months.
Several insurers believe they have fallen foul of the current system and trade bodies have welcomed this week's hearings into the controversy by the House Judiciary Committee's sub-committee on commercial and administrative law.
The sub-committee's chairman is Chris Cannon, of Utah, a prominent campaigner against tort abuses who has spearheaded drives to push what he describes as "frivolous lawsuits" out of the system.
Among those giving evidence to this week's sub-committee hearing was asbestos bankruptcy expert Lester Brickman, professor at Yeshiva University's Benjamin Cordozo School of Law. In a presentation for the Center for Legal Policy at the Manhattan Institute in March this year, Professor Brickman, outlined his opposition to "pre-pack deals".
He explained that the current situation had been created by the enactment of new bankruptcy provisions in 1994 under which asbestos claims against an insolvent debtor are channelled to a trust which is funded by equity provided by the debtor and, increasingly, by the debtor's insurance coverage.
"For the trust to be established and thus insulate the debtor from future liability, 75% of claimants must vote to approve the plan. Because this vote is on the basis of 'one man, one vote', it gives plaintiff attorneys an additional incentive to troll for more 'un-sick' claimants to add to their inventories; doing so gives them control over the bankruptcy process, including assuring substantial cashflows to them at the expense of the 5%-10% of claimants who have actually suffered injury. This control has led to the 'pre-packaged bankruptcy' which, in its current form, is a further perversion of legal process," Professor Brickman claimed.
But the problem is worse even than that, the professor believes. He outlined a practice among plaintiff lawyers of targeting defendants at risk of failure and "making them an offer they can't refuse". Generally that offer would be "agree to do a pre-pack and we will allow you to keep most of your assets; all we want is the insurance coverage".
That situation creates further unfairness, according to Professor Brickman. He claimed: "As part of the price, plaintiff lawyers demand that defendant first settle a large number of pending cases for highly-inflated values, with payment to come from insurance coverage. Plaintiff lawyers also instruct the defendant to hire a particular law firm to facilitate the pre-pack. The two law firms then proceed to draw up the plan with little or no input from the defendant.
"At that point, defendant is indifferent to whether the claimants are sick or even whether their only exposure to its products was seeing pictures of them in loose-leaf notebooks compiled by plaintiff lawyers. All the defendant cares about is getting the 75% approval to bulletproof it against future claims. Plaintiff lawyers representing the 'un-sick' control the vote and therefore whatever they say goes. In one case, they demanded settlement of 95% of the inflated value of each such claim. This allowed them to continue to vote these settled claims in favour of the plan even though these claims consisted only of the 5% stub deliberately left unpaid."
Earlier this year Delaware judge Randall Newsome refused permission for a US insulation manufacturer ACandS to proceed with its planned pre-packaged reorganisation and delivered a harsh criticism of the process that saw a hierarchy of claimants drawn up in a manner that he deemed unfair.
ACandS had been involved in a bitter dispute with the Travelers group and reports had suggested the pre-packaged deal would have left the insurer facing a $1bn-plus bill.
The case hit the headlines because of the particular strong criticism levelled at the reorganisation plans by Judge Newsome (ID, Jan 29).
The fact that US lawmakers are looking closely at the issue has been welcomed by insurance representatives.
Leigh Ann Pusey, senior vice-president, government affairs at the American Insurance Association, said: "The entire pre-packaged bankruptcy process has been shamelessly abused, and is now rife with startling conflicts of interests. As a result, pre-packaged asbestos bankruptcies have become wonderful tools for further enriching personal injury lawyers, but for people dying of asbestos-induced disease, creditors, insurers and the civil justice system, they are a travesty."
She insisted the process needed specific Congressional scrutiny and added: "For example, asbestos-related compensation for individuals with the same injury is determined not by an equitable, objective standard, but by who their attorney is; the compensation schemes are negotiated in secret; and, most tragically, those who are truly sick from asbestos are left holding the bag while individuals who are not sick from asbestos get paid long before those who are dying."
July 23, 2004
Copyright © 2004 LexisNexis, a division of Reed Elsevier Inc. All rights reserved.
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