B e f o r e :
| In the Matter of T&N Limited & Others
|- and -
|In the Matter of the Insolvency Act 1986
Crown Copyright ©
Mr Justice David Richards :
"This is a matter of utmost complexity. It is impossible to explain every issue and relevant fact in a witness statement of manageable proportions."
In order to understand the issues raised, and to provide a summary which can be used as and when further applications are made to this Court, it is necessary to set out a considerable amount of information and evidence. I wish to pay a real tribute to all the advocates who have appeared on this application and to the solicitors and clients, for the great assistance which they have given in their evidence and submissions and in seeking to make the many issues of fact and law as manageable as possible.
"In the past 20 months, five major publicly traded companies have filed for Chapter 11 protection because of the overwhelming burden of asbestos litigation. These include GAF, Armstrong, USG, Grace and Owens Corning. The US courts have been unable to cope on a case-by-case basis. Consolidation of claims has led to indiscriminate grouping of NMNI claimants with the impaired. The NMNI claimants have succeeded in obtaining large jury verdicts. This has only served to fuel the problem further, with overwhelming demands for settlement now being made without regard to traditional notions of liability or damages.
The net is being cast ever wider to find potential defendants on the periphery of any direct involvement with asbestos who still have assets available to meet the demands. For example, a class of civil conspiracy claims has developed in an attempt to overcome the normal requirements to show causation as a result of actual or secondary exposure to a product for which the defendant is responsible.
The overall problem of the massive increase in asbestos-related litigation and the manner in which claims are now being brought and targeted is one which the US Congress, independently and at the urging of the United States Supreme Court, has attempted without any success to address with various different bills coming before it in the 1980s and throughout the 1990s.
In 1998, asbestos payments made by the FM Group totalled $89 million all of which related to T&N liabilities. These payments increased to $178 million in 1999 and $351 million in 2000, of which 93% and 92% respectively were attributable to T&N even though, as a practical matter, there has been virtually no exposure to any T&N asbestos product in the US since the mid-1960s. To illustrate the point I make in paragraphs 20 and 21 above, I can say that there are now thousands of claims now brought against T&N in the US which are entirely unrelated to any direct exposure to T&N product."
"Our use of T&N's historic resolution costs places conservatively low values on its liabilities for pending claims. As we did in October 2002, we use T&N's resolutions over the multi-year period 1998-2001 as the basis for valuing pending claims even though T&N's average costs to resolve claims had increased over this period. It is unlikely that T&N would have been able to continue to resolve its asbestos liabilities for the amounts that it paid as a CCR member. T&N would have had to pay considerably more on average to resolve claims in the future both because it lost the negotiating and tactical advantages that it had as a CCR member and also because it would have faced sharply increased demands and settlement expectations as other asbestos defendants entered bankruptcy in 2000 and 2001. These changes would have been particularly sharp for T&N because of its history in manufacturing and selling many and particularly dangerous asbestos products. Even CCR members who did not have the burden of T&N's particular history saw their settlement values increase by multiples in the early 2000s after leaving CCR. T&N would likely have had to pay even greater increases."
The Center for Claims Resolution (CCR) was a body formed in 1988 by defendants in asbestos litigation, including T&N, as an agent to administer, negotiate and settle all asbestos-related personal injury and wrongful death claims brought against its members. T&N's membership terminated in October 2001.
"We forecast T&N's liability under the current terms of the TDP that will be administered by the Federal-Mogul Trust. This TDP specifies conditions that claimants must satisfy to receive payment. These requirements will result in disallowance of many claims, far more than the percent of claims that were closed without payment by T&N prior to its bankruptcy. The TDP also provides claim values that exceed the historic average settlement amounts paid by T&N as a CCR member. These increases reflect the greater quality of claims that will be paid under the TDP, claims that meet the more rigorous claims requirements of the TDP. The TDP values also attempt in part to reflect the greater amounts that T&N would have had to pay as of the date of its bankruptcy filing, both because the company no longer had the advantages and protections of CCR membership and also because plaintiffs would have looked to T&N for far higher payments as a highly culpable defendant remaining after bankruptcy proceedings removed most other major asbestos defendants." (emphasis added)
Applying the TDP claim values to his preferred estimate of 1,160,880 future claims, and to the pending claims, Dr Peterson estimates the present value of total liability for US claims at $10.497 billion: Table 3.2.
"The above points lead us to believe that the US TDP values for T&N are overstated. However, we have seen insufficient information to allow us to form a view on the extent to which they may be overstated. In our opinion, the starting point for the TDP values has to be the recent historical experience. However, we acknowledge that the introduction of strict TDP medical criteria and the notional settlement of claims through the tort system rather than the CCR facility will increase the average settlement value of claims. At the same time we note that this is not the basis on which the TDP purports to establish the TDP values, nor the basis on which the UK TDP values have been determined. In any event, we have not seen sufficient evidence to justify the significant increases suggested by Dr Peterson. For the purposes of arriving at an illustrative valuation we have selected a value mid-way between the historical average claims and the TDP value. However, there is of course, a wide range of possible results and there remains significant uncertainty regarding the best estimate value of T&N's US asbestos related liabilities." (emphasis added)
"There is an inherent uncertainty in any actuarial estimates of asbestos liabilities. Projections of mass tort liabilities, such as asbestos, are subject to much greater uncertainty than would normally be associated with a review of general liability exposures other than mass torts. The technological, judicial and political climate for mass torts is changing and future events relating to asbestos litigation are extremely uncertain. Liabilities for claims are subject to the outcome of events yet to occur, e.g. the likelihood of claimants bringing claims, the size of jury awards, changes in the standards of liability, and the attitudes of claimants towards settlements of their claims. I have employed techniques and assumptions that, in my judgment, are appropriate, and the conclusions presented herein are reasonable, given the information currently available. However, it should be recognized that future patterns of claims and awards may deviate, perhaps materially, from my estimates."
Mr Angelina's best estimate of future US asbestos liabilities is in a range of $2.1$5.5 billion. He takes particular issue with the TDP values and the assumption that payments in the United States for mesothelioma and lung cancer will continue to rise at the same rate as observed during the period 19972001. As regards UK claims, his estimate is £216.7 million which he considers to be consistent with Dr Peterson's estimate of £252 million.
T&N pension scheme
Champion pension scheme
Commencement of Chapter 11 and administration proceedings
"The Parties wish to enter into this protocol in order:
(a) to promote the orderly and efficient administration of the Insolvency Proceedings to, amongst other things, maximise the efficiency of the Insolvency Proceedings, reduce the costs associated therewith, and avoid duplication of effort;
(b) to harmonise and co-ordinate activities undertaken in the Insolvency Proceedings;
(c) to implement a framework of general principles to address certain business, administrative and management issues arising by virtue of the international nature of the Insolvency Proceedings; and
(d) to facilitate the fair, open and efficient administration of the Insolvency Proceedings for the benefit of all of the Debtors, their creditors and other interested entities wherever located."
"The Parties agree subject to orders and directions of their respective Courts:
(a) to co-operate with each other in connection with any actions taken in the US Court and/or the English Court;
(b) where appropriate, to take such other steps as may be necessary to co-ordinate the administration of the US Cases and the Cross-Border Cases for the benefit of the Debtors' respective estates."
"5.1 The Parties acknowledge that nothing in this Protocol shall divest the US Court's independent jurisdiction over the subject matter of the US Cases and the English Court's independent jurisdiction over the subject matter of the Cross-Border Cases.
5.2 It is intended that, insofar as practicable:
(a) the US Court shall have sole and exclusive jurisdiction and power over the conduct of the US Cases; and
(b) the English Court shall have sole and exclusive jurisdiction and power over the conduct of the Cross-Border Cases.
5.3 Nothing in this Protocol shall be construed as releasing any Party from his general obligation to respect and comply with the independent, non-delegable duties imposed upon them by the Bankruptcy Code or English Insolvency Law or any other applicable laws as the case may be."
Clause 9 provides:
"9.1 In the event of any disputes arising between any of the Parties, they shall
(a) make all reasonable attempts to reach agreement; and
(b) where agreement cannot be reached:
(i) a dispute relating principally to matters affecting the Cross-Border Cases shall be referred to the English Court;
(ii) a dispute relating to matters affecting principally the US Cases shall be referred to the US Court; and
(iii) a dispute affecting substantially both the US Cases and the Cross-Border Cases shall be referred to whichever one of the courts appears best suited to determine the issues in dispute.
9.2 Where a dispute has been referred to one or both of the Courts for resolution, the Parties agree that the Court shall be asked to have regard to this Protocol and to give the fullest effect to the principles of comity and the objectives set out in Paragraph 1.4 above."
Clause 12.1 provides:
"In respect to any matters before the US Court or the English Court, the Parties shall request that the respective Court, where appropriate and feasible to do so, co-ordinate activities with, and respect the judgments of, the other Court."
"(a) developing, in consultation with the Administrators in so far as it relates to the Cross-Border Companies, an integrated Reorganisation Plan and confirming and implementing a Reorganisation Plan;
(b) conducting, in consultation with the Administrators in so far as they relate to the Cross-Border Companies, any and all Proceedings Involving Asbestos (including, without limitation, any proceedings to establish standards that will be applied to claims or litigation that has been or may be filed against any of the Debtors or to estimate the liabilities of any of the Debtors);"
Development of the Plan
i. it must assume the asbestos-related liabilities of the debtor company;
ii. it must be funded in whole or in part by the securities of one or more debtor companies involved in the Plan and by the obligation of such debtor or debtors to make future payments, including dividends;
iii. it must own, or be entitled in specified circumstances to own, a majority of the debtor, its parent corporation or any debtor subsidiary; and
iv. it must use its assets or income to pay asbestos-related claims and demands.
The Plan must be approved by the class or classes of claimants whose claims are to be assumed by the trust, the required majority being 75% of claimants voting on the Plan. If confirmed, the plan and any injunctions made to supplement it will require all present and future asbestos-related claims and demands to be made against the trust and not against the debtor companies or third parties within certain categories.
i. the Asbestos Trust would, on implementation of the Plan, receive 50.1% of the common stock of the reorganised FMC; and
ii. the Noteholders would in settlement of their claims receive the remaining 49.9% of the common stock of FMC, and would be entitled to appoint a majority of the directors.
This remains the central feature of the Plan and, for reasons which will appear, drives the payments to be made to other creditors.
Administrators' application for directions
i. The Plan is fundamentally unfair in its treatment of the creditors of the UK Companies.
ii. Creditors of the English companies are likely to achieve a better result from a controlled realisation of the businesses and assets of those companies and a distribution of the realisation proceeds among the creditors, than under the Plan.
"11. It seems plain to me that the court hearing the Administrators' application on that occasion will not be in a position to make any determination which will in any sense be binding on anybody other than the Administrators themselves. It may, however, be in a position to offer a view, more authoritative than that which the Administrators themselves could offer to the United States court, as to what the effect of various possible permutations in relation to future events would be so far as UK insolvency law and administration are concerned. It may very well be that the United States court would be grateful to receive such a view.
In relation to the Plan Proponents' motion filed with the US Court on 16 September 2004, Mr Justice Hart said at paragraph 15:
"15. It seems to me that, having regard to what I conceive will be the much more limited nature of the application which will be before the English court on 4th October, one which should not, as it seems to me, hold terrors for the proponents of the plan which their presence here in large numbers indicates it may have previously held for them, that it may be possible by agreement for the hearing of that United States motion to be deferred, subject to the agreement of the United States court, so that, whatever guidance the English court is able to give, both to the Administrators and to the United States court, can be available before the United States court has to determine that motion."
i. Questions of fairness of the Plan.
ii. The approach of the English Court to CVAs and schemes of arrangement designed to implement the Plan in England.
iii. The compatibility with English pensions law of the proposals for the trustees of the T&N and Champion pension schemes.
iv. The compatibility with English insolvency law of the provisions of the Plan designed to implement it as regards the English companies if the administrators do not propose CVAs and schemes of arrangement.
v. Issues in connection with the motion filed on 16 September 2004 with the US Court (the Sales Motion).
Insolvency law: general
Company voluntary arrangements
Schemes of arrangement
Fairness: CVAs and schemes of arrangement
"In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with, second that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.
The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but, at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind, or some blot is found in the scheme."
That paragraph is directed to schemes of arrangement. The crucial difference with a CVA is that there is just one meeting of creditors, so that necessarily means that there may be sub-groups who would constitute separate classes for a scheme. In considering unfair prejudice, the court will have regard to the different position of different groups of creditor. This, too, will be the case with a scheme of arrangement where groups of creditors with different interests or even rights nonetheless have been included in the same class for the purpose of considering and voting on the scheme.
Fairness of the Plan
Recovery under the Plan
UK Asbestos Claimants: opposition to the Plan
Pension scheme trustees: objections to the Plan.
i. Each scheme will continue "as modified". The modifications have not been fully detailed.
ii. Current active employees will be offered a choice with respect to pension benefits relating to services performed after the effective date of the Plan. The choice is not clear.
iii. The contribution rate from the effective date to 30 April 2012 will be limited to the annual maintenance cost with respect to services rendered after the effective date by current active employee participants who choose to remain in the scheme, provided it is lower than current annual funding. There are uncertainties surrounding the determination of the annual maintenance cost. Further, there is no indication of what, if any, contributions are to be made by T&N or FMI after 30 April 2012 if the schemes are not terminated on that date.
iv. No annual contributions will be made to the schemes in respect of the underfunding that relates to prior service by retired, deferred, or active members.
v. T&N and FMI (but not the trustees) shall have the right, but no obligation, to terminate their respective schemes on or after 30 April 2012. In the event of such termination, the trustees of the T&N scheme shall receive a cash sum equal to
"the Allowed Amount of the Non-Priority T&N Pension Plan Employee Benefit Claims against all UK Debtors calculated as of the Petition date multiplied by T&N Distribution Ratio 1 plus interest at market rate from the Effective Date through the date the T&N Pension Plan is terminated."
If the Champion Scheme is terminated by FM Ignition, its trustees will receive a cash sum calculated on the same basis except that the multiplier is "the greater of T&N Distribution Ratio 1 and the Company Specific Distribution Ratio." There are uncertainties as a matter of construction as to the intended meaning of the "Allowed Amount" and the "Company Specific Distribution Ratio".
vi. In either case, such payment will be in full satisfaction of the trustees' claims against the relevant UK Companies.
vii. The trustees shall, to the extent permitted by applicable law, continue the current investment strategy in consultation with T&N or FMI (as the case may be) and will not change the investment strategy without approval from T&N or FM Ignition (as the case may be)
"It was rightly accepted that it was not possible to contract out of the trustees' and employer's obligations to comply with the MFR regulations nor in advance to contract out of the provisions of s 75. Whilst the scheme is ongoing trustees cannot waive the need for compliance nor negotiate a more lenient schedule of contributions than the regulations prescribe, nor equally can they, in my judgment, contract out of the effect of s 75 in advance of the section coming into play. However, there is a clear distinction between this and trustees compromising or settling a debt which has arisen under s 75 in the best way they reasonably can for the benefit of their scheme members."
I entirely agree with both the statement of law and the reasons for it. Subject to any contrary argument, it appears to me to represent a real obstacle to acceptance of Let it Run.
"Neither the trust scheme nor the statement [of investment principles] may impose restrictions (however expressed) on any power to make investments by reference to the consent of the employer."
The terms of Let It Run dealing with investment decisions conflicts with this statutory prohibition.
i. They vote in favour of the Plan.
ii. They give an irrevocable undertaking to vote in favour of any CVA or scheme of arrangement promoted to implement the Plan.
iii. The administrators promote such CVAs and schemes of arrangement with respect to T&N or FMI (as the case may be): this is my reading of the effect of the condition expressed as "if the Consensual Marketing Procedures are not performed with respect to" T&N or FM Ignition.
"(A) On the Effective Date, the FM Ignition Pension Plan shall pay the FM Ignition Pension Plan Trustees an amount sufficient to purchase annuities to secure the benefits of participants retired and currently receiving pension payments.
(B) Actuarially equivalent transfer values would be provided to non-pensioner participants (assuming no cost of living adjustments.) Actuarial assumptions will be the same as used in that certain August 2003 Transfer Value change assumption calculation.
(C) Contributions by Reorganised FM Ignition to fund (A) and (B) shall be limited to no more than £9 million."
The trustees of the Champion pension scheme raise a number of issues with this alternative treatment. First, it is unclear whether the scheme is to continue or be terminated. If it is to continue, it shares the same problems as Let it Run in terms of contracting out of sections 55-61 and 75 of the Pensions Act 1995. Secondly, they have raised in their submissions a number of uncertainties. As in the case of Let it Run these uncertainties, unless answers are given, make it difficult, perhaps impossible, to reach a decision on the merits of the alternative treatment. The court would expect those proposing a CVA or scheme of arrangement to respond to reasonable requests for information or clarification. The Champion scheme trustees do not appear to have received responses to their requests.
Special case companies
"The Plan Proponents believe that this entity produced and distributed products containing asbestos into the world-wide stream of commerce for many years, and therefore, the Plan Proponents believe that it has substantial liability for future claims, even though only a limited number of asbestos claims have been asserted against it to date."
The administrators point out that there is no record of any exposure for these companies to claims by US Asbestos Claimants.
Implementation of the Plan in the UK
"the Plan Proponents will work towards an agreement on Consensual Marketing Procedures with the Administrators to retain those UK businesses that are valuable to Federal-Mogul Corporation and its customers and to jointly market those UK businesses that are not valuable to Federal-Mogul Corporation and its customers .."
This is silent as to the terms on which reorganised FMC would "retain" the businesses valuable to it. If it suggests that less than full market value be paid, it would conflict with the administrators' duty to which I have just referred. The Plan envisages that if Consensual Marketing Procedures are agreed, Asbestos Claims will lie against the Asbestos Trust. It is conceivable that the English Court would sanction a disposal by the administrators on terms that the selling companies were relieved of liability for US Asbestos Claims, which itself could only be achieved by appropriate orders of the US Court. However, the English Court would have to be satisfied that this produced at least as good result for the remaining creditors as a sale at full market value.