We owe you what!!?!!? The Federal-Mogul Story

I'm currently attending the National Conference of Bankruptcy Judges' Annual Meeting. One of the most interesting educational presentations was coordinated by Jay Westbrook, an expert in international insolvency law. Instead of being a collection of disparate cases and a summary of general trends, the presentation focused on a single case, the bankruptcy of Federal-Mogul, a huge company that manufactures and supplies parts to transportation companies, including U.S. automakers. The example was chosen to illustrate what happens when things DON'T go as planned. It wasn't a self-congratulatory success story, which made listening to the lawyers and judges who were actually involved in the case--and who represented opposing parties--very fun. The key point was that working out nifty international bankruptcy laws doesn't completely smooth the way for these cases. The differences in core principles of legal regimes and differences in applicable non-bankruptcy law make it hard for even the most cooperatively-minded parties to bridge the gaps. Here, a major problem was the difference between the U.S. and the U.K. tort system.

The very short story is that the company essentially made two simultaneous bankruptcy filings: a U.S. filing in the New Jersey bankruptcy court and a U.K. filing, which is called an "administration." The precipitating factor for the bankruptcy was the rising tide of asbestos personal injury litigation by U.S. citizens.  Federal-Mogul, largely through its UK subsidiaries, had formerly operated businesses that used asbestos in its manufacturing activities. The hope was to create a trust to pay out all asbestos claims, as was first and famously done in the Johns-Manville case.

The sticking point was that U.S. and U.K law would pay these tort claimants very differently. American bankruptcy law clearly recognized future claimants, people who may have been injured by past activity but may not yet be sick, which is often the situation with asbestos exposure. All claims (future or past) are estimated according to what the claimants would recover under non-bankrutpcy law, which here would be the U.S. tort system replete with jury awards. The number kept climbing, but was around $10 billion dollars! In a U.K. liquidation (the benchmark for what had to be paid out in a reorganization case), it wasn't clear initially that future claimants would be entitled to recover anything. More importantly, the claims in a U.K. liquidation of Federal-Mogul's assets would be decided by a Liquidator--no jury, much harder rules about causation and damages, and limited appeal rights.  Yet, most of the liability for the asbestos exposure were with T&N, the U.K. division of Federal-Mogul. The dispute over the amount of the tort liability caused the case to drag on for years, and resulted in an initial settlement falling apart. (An additional drama here was the collaborations between two famous/infamous high-fliers: bond buyer Carl Icahn and asbestos plaintiffs lawyer Joe Rice). While there ultimately was a settlement approved on both sides of the ocean, Federal-Mogul was offered as a lesson in the difficulty in crafting an effective international insolvency regime. Because bankruptcy law incorporates so many substantive and disparate areas of law, such as tort law, these cases will continue to long, hard, expensive, and interesting.

Comments

[John Pottow]

Katie, do you know whether they treated victims/claimants differently in the plan based on their country of residence?

[F Javier]

Katie, I had a strong discussion with my students last year when speaking about insolvency and tort damages. The system here in Spain and in US and UK is clearly different, but I always wondered how could you reach an agreement that could affect people that weren't part of it. Could you stop a claim against (ie) Federal-Mogul (the case would be harder if it has closed after a liquidation procedure, I asume) from somebody injured and whose damages were shown (and thus, were evaluable in economic terms) months or years after the agreement was reached? How, if he did not ever renounce to his rights?
BTW, in my discussion we were questioning how to solve the problem of unknown damages after liquidation and if creditors that should be paid after tort claimants (here preferred to common creditors) should be bound to give back what they got in the liquidation. Even being aware of the practical problems, I am for the "yes" answer.