New York, NY, October 18, 2005--In a huge setback for Congoleum Corp., a federal appeals court has reversed a bankruptcy judge's approval of the company's "pre-packaged" bankruptcy plan after finding that one of the firms it hired suffered from conflicts of interest because it also represented plaintiffs with asbestos claims against Congoleum, according to Law.com.
In its 30-page opinion in In re Congoleum Corp., a unanimous three-judge panel concluded that Congoleum should not have hired Gilbert Heintz & Randolph of Washington, D.C., as "special counsel" to advise it on negotiating with asbestos claimants.
The court concluded that GHR suffered from an incurable conflict of interest because it had acted as counsel for Congoleum in negotiating settlement arrangements with asbestos claimants represented by lawyers from another firm -- Weitz & Luxenberg -- who were co-counsel with GHR in insurance matters for the same claimants.
As a result, the court held GHR "cannot meet the Bankruptcy Code's requirement of disinterestedness" because its status as co-counsel with the Weitz firm prevented GHR "from being completely loyal to Congoleum's interests."
The ruling is a victory for a group of insurance companies that would have been required under the bankruptcy plan to finance a $500 million trust that would allow Congoleum to put its asbestos liability behind it.
Attorney Tancred V. Schiavoni of O'Melveny & Myers, who argued the appeal on behalf of the insurers, said the ruling could have a "direct impact" on a separate case currently on trial in the New Jersey Superior Court in which Congoleum is demanding contributions to the trust from about three dozen insurers.
Schiavoni said the state court litigation has been on trial since August, but that the 3rd Circuit's decision may end the case.
At issue in the Superior Court case is whether the insurers have the right to control the litigation strategy in Congoleum's asbestos cases. So far, Schiavoni said, the insurers have successfully defended Congoleum in numerous trials.
But under the terms of the pre-packaged bankruptcy plan, the insurers would be forced to forego litigation and establish a hefty trust fund that would pay claimants on the basis of a "matrix," with mesothelioma victims being paid $100,000 each; lung cancer victims getting $30,000; victims of "other cancers" receiving $10,000; and lesser payments going to those with "non-malignant" diseases.
Now the 3rd Circuit has issued an opinion that is critical of U.S. Bankruptcy Judge Kathryn C. Ferguson's decision to approve the plan, finding that she should have rejected it on the grounds of GHR's conflict.
"We do not approve of a bankruptcy court applying less than careful scrutiny to pre-petition procedures in pre-packaged plans," Senior U.S. Circuit Judge Joseph F. Weis Jr. wrote.
"For a court to approve a pre-packaged plan whose preparation was tainted with overreaching ... would be a perversion of the bankruptcy process," Weis wrote in an opinion joined by 3rd Circuit Judges Dolores K. Sloviter and Theodore A. McKee Jr.
Pre-packaged bankruptcy reorganization plans, Weis said, "offer a means of expediting the bankruptcy process by doing most of the work in advance of filing."
But "that efficiency," Weis said, "... must not be obtained at the price of diminishing the integrity of the process. In this case, it was not a proper exercise of the bankruptcy court's discretion to fail to consider and appraise the conduct of the parties and counsel pre-petition."
Weis found that GHR had violated Rule 1.7 of the New Jersey Rules of Professional Conduct because, in the negotiation of the pre-packaged plan, it was simultaneously representing both Congoleum and asbestos claimants with interests adverse to Congoleum.
GHR had a duty, Weis found, to limit Congoleum's liability.
