AIA: Bankrupt Asbestos Deal Points To Legal Need

"The court highlighted a problem with the system," Ms. Rochman said.

People who are sick and dying are not getting compensation, and trial lawyers are running the system, she said.

"We have to get trial lawyers out of the system," Ms. Rochman said.

The issue involves the asbestos-related bankruptcy of ACandS Inc., a subsidiary of Lancaster, Pa.-based Irex Corp., a commercial and industrial insulation firm.

Its ACandS subsidiary is a specialty contractor.

ACandS had substantial asbestos liabilities which it attempted to resolve through a prepackaged bankruptcy. A prepackaged bankruptcy is one in which plaintiffs and defendants agree on a claims payment schedule prior to the filing of a bankruptcy petition by the defendant.

Under the agreement, five categories of secured asbestos claimants were established, to be paid in descending order of priority.

According to Judge Newsome's opinion, there was no cogent explanation or rationale for how these categories were determined or how claims were categorized.

However, the claimants of the law firms that participated in the negotiations appear prominently in the categories of secured claims.

Judge Newsome noted that even though the categories had different rights and priorities, all the categories contain the same types of claims.

Thus, he said, a claimant in Category A who had some evidence of asbestos exposure but who is not sick would have been paid in full. By contrast, Judge Newsome said, someone with mesothelioma who was not included, for whatever reason, in a secured category will in all probability receive nothing.

In rejecting the bankruptcy petition, Judge Newsome said that prepackaged agreement does not comply with bankruptcy law.

While the law does allow the creation of mechanism to manage asbestos-related claims, those mechanisms must provide reasonable assurance that present and future claims that are similar will be treated in substantially the same manner, he said.

The agreement, Judge Newsome said, does nothing of the kind.

"Not only does the plan discriminate between present and future claims, it pays similar claims in a totally disparate manner by giving preferential treatment to certain claimants who are secured by insurance proceeds," he said.

These security interests, he said, are not based upon the medical condition of the claimants, but simply because they were first in line.

Moreover, Judge Newsome said, the settlement was not executed in good faith.

"Although ACandS was represented during the course of the prepackage negotiations, the correspondence among plaintiffs' asbestos counsel presented at trial indicates that the plan was largely drafted by and for the benefit of the prepetition committee," Judge Newsome wrote.

The prepetition committee was comprised entirely of plaintiffs' lawyers who negotiated the agreement with ACandS.

The judge said there was obvious self-dealing.

In addition, Judge Newsome said, it is impossible to conclude that the agreement is fundamentally fair, since one claimant with nonsymptomatic pleural plaques will be paid in full while someone with mesothelioma runs the substantial risk of receiving nothing.

"Both should be compensated based on the nature of their injuries, not based on the influence and cunning of their lawyers," Judge Newsome said.