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In re Congoleum Corp.

August 17, 2009

IN RE CONGOLEUM CORPORATION, DEBTORS.


The opinion of the court was delivered by: Pisano, District Judge

FOR PUBLICATION

OPINION

On February 27, 2009, Judge Ferguson of the Bankruptcy Court denied confirmation of the fourteenth plan of reorganization*fn1 (the "Plan") submitted over the last five years by the Plan Proponents*fn2 /Appellants. She then dismissed the bankruptcy case. It is the appeal of those two Orders that is currently before the Court. This Court has jurisdiction to hear the instant appeal pursuant to 28 U.S.C. § 158(a). Oral argument was held on this matter on July 1, 2009. For the reasons stated below, this Court reverses in part and affirms in part the Bankruptcy Court's Order denying confirmation of the Plan, and reverses and vacates the Order dismissing the Debtors' bankruptcy cases. Further, this Court withdraws the reference pursuant to 28 U.S.C. § 157(d) for this matter and will conduct additional hearings on the case.

I. Background

A. The Debtors' Asbestos Liability and Prior Litigation

Congoleum is a manufacturer of floor tile and other products based in Mercerville, New Jersey. The company owns and operates four plants, two of which are located in New Jersey, and employs approximately 600 employees. "Since 2005, Congoleum has generated cumulative earnings before interest, taxation, and amortization ('EBITDA') of approximately $74 million, including the generation of approximately $7 million during 2008 despite a recession and severe downturn in its end markets of residential and manufactured housing." (Declaration of Howard N. Feist, III, Joint Appendix, Vol. I., A169, ¶ 4.)*fn3

Before 1974, Congoleum's floor tiles contained asbestos fibers within them, and Congoleum stopped producing asbestos-containing sheet vinyl products in 1983. Beginning in 1981 and continuing through 2002, Congoleum was subject to approximately 70,000 tort suits alleging bodily injury due to exposure to its asbestos-containing floor tiles. (See A1390-92.) Congoleum's primary insurance carriers settled some 33,000 of these claims, at a cost of about $13.5 million. (Id.) "As of September 30, 2002, over 99% of claims incurred by [Congoleum] have settled, on average, for amounts less than $102 per claimant." (Id. at A1392.) Most of these claims were settled by Congoleum's primary insurers, all of whom subsequently claimed Congoleum had exhausted its coverage by August 2002. (See A170-71, ¶¶ 11-14.)

Counsel for the Debtors noted at oral argument that settlement of asbestos claims was particularly difficult because of the frequent latent nature of asbestos-related injuries. (Transcript of Oral Argument at 9, In re Congoleum Corp., 09-1337 (July 1, 2009).)*fn4 As a result of this latency issue and the claimed exhaustion of Congoleum's primary insurance coverage, in February 2001, Congoleum sought to enter into a "coverage in place" agreement with its excess insurers, under which the parties could agree on how asserted claims against Congoleum would be handled and paid by its insurers. After a series of unsuccessful negotiations, some of Congoleum's excess insurers initiated insurance coverage litigation in the Superior Court of New Jersey, seeking a declaration that the excess insurers had no obligation to defend or indemnify Congoleum's asbestos claims (the "Coverage Action").

Throughout the pendency of the Coverage Action, Congoleum continued its efforts at settling the various asbestos cases percolating throughout the tort system. In July 2001, a New York jury returned damages-only verdicts for asbestos claimants Kenneth Cook and Richard Arseneault in the amounts of $18.1 million and $15.8 million, respectively, during the first phase of a reverse, bifurcated trial (i.e. before liability was determined) against Congoleum and other defendants. Perry Weitz, an attorney based in New York, represented Cook and Arseneault at the damages-trial. Discovery for the liability phase of the case concluded in September 2002, shortly after Congoleum's primary insurers claimed exhaustion of its coverage limits.

On August 26, 2002, Congoleum provided its excess insurers with a report regarding its asbestos claims and reiterated its desire to enter into a coverage-in-place agreement. After its primary insurers claimed exhaustion on August 28, 2002, "Congoleum settled 131 . . . trial-listed cases in the tort system solely for a promise to pay and/or assignment of insurance rights" (the "Pre-Petition Settlement Agreements") for a total of approximately $25 million to be secured by Congoleum's insurance recoveries. (A174, ¶ 24; Letter from Don Golemme, Congoleum Risk Manager, to Arthur Pergament, Pergament Advisors, dated Feb. 12, 2004, A1075-1079.) For example, Congoleum reached a settlement in principle with Richard Comstock, an asbestos claimant, for $225,000 in August 2002 ("Comstock settlement"). Of that sum, one of Congoleum's primary insurers paid $168,577.34 to Comstock. Payment of Comstock's claim exhausted Congoleum's primary insurance coverage limits so the $56,422.66 balance owed to Comstock under the settlement remained unpaid. Congoleum's attempts to obtain a coverage-in-place agreement were unsuccessful.

B. The Pre-Packaged Bankruptcy Scheme

As of October 2002, Congoleum's negotiations with its insurers remained stalled. By October 2002, Congoleum's excess insurers had not disbursed any funds for payments of asbestos claims and were instead awaiting a decision in the Coverage Action to assess their exposure.*fn5 Therefore, "[i]n October 2002, Congoleum began simultaneously seeking coverage and considering the option of a pre-packaged bankruptcy for resolving its . . . asbestos liabilities." (A181, ¶ 46.) This decision coincided with Congoleum's settlement with Cook and Arseneault. Weitz had rejected Congoleum's initial offer of $2 million for each plaintiff in early September 2002, and had indicated that he was unwilling to settle for less than $10 million per plaintiff. On the eve of the liability trial, due in part to a poor outcome with a mock jury trial and differing, pessimistic predictions from experts about Congoleum's anticipated liability, Congoleum agreed to Weitz's settlement demand of $8 million each for Cook and Arseneault. However, at a September 23, 2002 meeting, Howard Feist, III, Congoleum's Chief Financial Officer, informed Weitz that "Congoleum did not have the financial resources exclusive of its insurance to pay a settlement in [that] amount." (A177, ¶ 33.) Per Weitz's recommendation, Congoleum contacted Scott Gilbert, of GHR, a purported expert in pre-packaged bankruptcies. Gilbert and GHR were retained by Congoleum on October 1, 2002. (A177, ¶ 35.) On that same day, October 1, 2002, Gilbert and Weitz agreed to an $8 million settlement for both Cook and Arseneault, with $800,000 to be paid in cash, and an assignment of insurance proceeds for the remaining $7.2 million for each case. These settlements were finalized in writing on October 21, 2002. (See Cook and Arseneault Settlement Agreement and executed releases, A226-32.)*fn6

Shortly after the Cook and Arseneault settlements were finalized in late October, GHR contacted Weitz and Joseph Rice, an attorney who also represented many asbestos claimants (Weitz and Rice together, "Claimants' Counsel"), presumably in order to discuss obtaining plaintiff approval of a pre-packaged bankruptcy plan.*fn7 A press release dated November 1, 2002, which was drafted but not issued, described Congoleum's ongoing efforts at filing a pre-packaged bankruptcy. (See Coverage Decision, A1297.) A general meeting with GHR and several claimants' representatives, including Claimants' Counsel, was held in New York on November 19, 2002 "to discuss the concept of an inventory settlement and a pre-packaged bankruptcy with representatives of certain claimants." (A182, ¶ 47.) Congoleum also had a December meeting with its lender on about a pre-packaged bankruptcy and debtor-in-possession financing, and notes from this meeting indicate that the parties discussed the payment of "facilitation fees" to Messrs. Weitz and Rice. Discussions concerning a pre-packaged bankruptcy plan continued through January 13, 2003, at which point Congoleum's Board of Directors expressly authorized counsel to proceed with negotiations with Claimants' Counsel regarding a pre-packaged bankruptcy. On that same day, Congoleum issued a press release stating that it intended to enter into a pre-packaged bankruptcy plan and that discussion with counsel for the asbestos claimants was ongoing.

In April 2003, Congoleum entered into a "global settlement" agreement under which claimants were entitled to an assignment of insurance rights to secure 75% of their claim amount in exchange for submitting their claims to the § 524(g) channeling trust (the "Claimants' Agreement"). The other 25% of the claim would be treated as an unsecured claim. Under the Claimants' Agreement, "Congoleum granted a security interest in its insurance assets to a 'Collateral Trust' it formed before the bankruptcy, giving Cook and Arseneault and the other parties to the Pre-Petition Settlement Agreements and Claimants Agreement secured claims." (Appellee Br. at 11; Security Agreement, A359; Collateral Trust Agreement, A369.) The Collateral Trust Agreement and Security Agreement were executed contemporaneously with the Claimants' Agreement, "form[ing] the cornerstones of the Debtors' pre-packaged plan." In re Congoleum Corp., 362 B.R. 167, 185 (Bankr. D.N.J. 2007) (A992). Under these agreements, the Trust was to be funded primarily by Congoleum's insurers. (Pre-Packaged Bankruptcy Plan, §§ 5.1(b), (d), Docket Entry No. 176, Case No. 03-51524.) The Claimants' Agreement also provided for $2 million in "facilitation fees" to Weitz and Rice, to be paid by Congoleum itself (i.e. not using any insurance monies).

Asbestos claimants were invited to submit their claims by July 2003 to be covered under the Claimants' Agreement. (Claimants' Agreement, A340, 343.) In November 2002, GHR had retained the Kenesis Group, LLP, a claim reviewing company majority owned by GHR.*fn8 The Claimants' Agreement contemplated that Kenesis/Clearinghouse would review the submitted asbestos claims to determine which warranted payment. Claimants needed to provide evidence of injury and exposure to Congoleum products in order to qualify for compensation, and Kenesis/Clearinghouse would be compensated on a per-claim basis. (Coverage Decision, A1297-98.) By October 2003, the number of claimants under this agreement totaled approximately 79,000 claims. (Letter from Russell Hewit, Counsel to Kenesis/Clearinghouse, to Insurance Company Counsel dated Nov. 5, 2003, A1105-106.)

C. Bankruptcy Proceedings and Plan Amendments

Congoleum filed its petition for relief under Chapter 11 of the Bankruptcy Code on December 31, 2003. Congoleum had structured its reorganization plan as a pre-packaged plan pursuant to § 524(g), and under its terms, parties to the Pre-Petition Settlement Agreements (i.e. Arseneault, Cook, Comstock) were classified as Class 2 claimants, while parties to the Claimants' Agreement were characterized as Class 3 claimants.*fn9 The effect of these classifications was that the Collateral Trust would use the first $225 million in insurance recoveries to satisfy the Cook and Arseneault settlements, the Pre-Petition Settlement claimants, and the Claimants' Agreement settlements, in that order. (Pre-Packaged Bankruptcy Plan §§ 2.3(a), (b), and (c).)

Although Congoleum had solicited, and received, acceptance of the plan from some constituents prior to filing the bankruptcy petition, Congoleum's insurers, the United States Trustee, and other disfavored claimants objected to the pre-packaged plan. Further, the Bankruptcy Court ruled that the Coverage Action initiated by Congoleum's excess insurers, which was then proceeding through the state courts, would not be stayed pursuant to 11 U.S.C. § 362, thereby permitting the excess insurers to litigate certain aspects of the Claimants' Agreement.

In February 2005, the Third Circuit rendered its decision in In re: Combustion Engineering, Inc., 391 F.3d 190 (3d Cir. 2005), which altered the landscape governing pre-packaged bankruptcy plans involving asbestos claims under § 524(g). In that case, the court reviewed a pre-packaged bankruptcy plan in which certain asbestos claimants had received compensation pursuant to pre-petition agreements. The court held that the Bankruptcy Code's fundamental requirement of equal distribution among past and present claimants was violated by the plan's differing treatment of the claimants who were parties to the pre-petition agreements and those who could only apply for compensation through the plan's trust. In reaching this conclusion, the court found that the pre-petition payments were part of the integrated whole of the pre-packaged scheme, and thus could not be exempted from the Code's requirements.

In light of the Combustion Engineering decision, the parties had to re-convene to discuss the framework of a new pre-packaged plan, including compliance with the fundamental requirements of equal distribution between past and present claimants and that any pre-petition payments be reviewed by the court with reference to the "integrated whole" pre-packaged bankruptcy scheme. As a result, Congoleum withdrew the pre-packaged plan in April 2005 and subsequently announced yet another agreement in principle with various claimants. Under this new agreement, Cook, Arseneault and the other favored claimants agreed to waive any rights to their security interests in the Collateral Trust, and would instead share the common fund pro rata with other, unsecured, asbestos claimants. (A185, ¶¶ 56-58.)

Congoleum filed an amended plan of reorganization in July 2005 reflecting the new agreement-in-principle. However, "[i]n September 2005, the Debtors learned that certain settled claimants represented by [Perry Weitz] no longer supported" the newly amended plan. (A186, ¶ 60.) Congoleum subsequently withdrew this amended plan in December 2005 and, allegedly at the insistence of its insurers, initiated an omnibus avoidance action against Cook, Arseneault, and the claimants to the Pre-Petition Settlement Agreement and Claimants' Agreement in an effort to have these favored claimants set aside their security interests, and to recover the $2 million in facilitation fees furnished to Weitz and Rice ("Avoidance Action" or "Adversary Proceeding").*fn10

As the Avoidance Action progressed, Congoleum continued to negotiate with its creditors for a confirmable plan of reorganization. In May 2006, the Bankruptcy Court ordered the mediation of all issues in the bankruptcy cases. Over the course of the mediation, Congoleum, the Asbestos Claimants' Committee,*fn11 the Future Claimants' Representative,*fn12 the Bondholders' Committee,*fn13 and Messrs. Weitz and Rice eventually reached an agreement-in-principle which formed the basis for another amended plan of reorganization (the "Tenth Modified Plan"). Under the Tenth Modified Plan, the Avoidance Action would be dismissed, and the Pre-Petition Settlement Agreement claimants would release any security interests securing their settlements, and would reduce any asbestos claims to 50% of their settled amounts. (Tenth Modified Plan, Docket No. 4564, ยง 2.1.) Claimants under the Claimants' ...


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