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Appeals court: bankruptcy no shield from asbestos liability

Section 524(g) of the U.S. Bankruptcy Code was set up to protect the rights of victims of asbestos-related illness should the asbestos manufacturers who injured them go bankrupt. If asbestos claims didn’t survive bankruptcy, companies who produced dangerous products or negligently exposed their workers to lethal cancers could have shed those debt through periodic reorganization.

To protect people sickened by asbestos, Congress set up special rules when manufacturers that could potentially face future asbestos liability claims file for Chapter 11 business reorganization.

As a stand-in for future asbestos claimants, a trust is set up and must be given at least a 51-percent ownership stake in the company. This “asbestos trust” is funded by company assets and can only be used to pay asbestos claims.

While it’s not news that bankruptcy law requires reorganizing companies make permanent provisions for asbestos victims, it often makes the news nevertheless.

Recently, just such a case had to be heard before the 9th Circuit Court of Appeals. After decades of asbestos litigation, a company called Plant Insulation Co. filed for Chapter 11. Plant manufactured an asbestos-based insulation called Fibreboard beginning in the 1930s, and people began reporting cancers in the 1970s and continued to do be diagnosed with them until at least 2006.

A great deal of complex litigation ensued between various companies and multiple insurers, ending with Plant filing for Chapter 11. The existing asbestos plaintiffs formed a committee to protect their rights and those of future claimants -- and their input was key.

The bankruptcy court approved a Chapter 11 plan for Plant that would have made the 51-percent ownership stake by the bankruptcy trust contingent on certain factors. In one situation, the trust would get its 51 percent only if the reorganized company defaulted on a $250,000 note -- which would essentially mean the company was insolvent and its stock was valueless.

Opponents of the plan appealed, and the 9th Circuit recently held that the stability of bankruptcy trusts cannot depend on contingencies. It sent the case back for a new plan that would protect future claimants.

When companies are driven into bankruptcy by asbestos liability claims, some critics call it a tragedy. Congress, however, recognized the far greater tragedy of human beings being stricken by deadly cancers by dangerous products and having no recourse from the companies that harmed them.

Source: Courthouse News Service, “No Easy Out for Firm Sunk by Asbestos Cases,” Elizabeth Warmerdam, Oct. 29, 2013

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