PITTSBURGH – Bankruptcy Judge Bruce McCullough unraveled a plot between asbestos lawyers and bankruptcy lawyers, saving Travelers Insurance $146 million.
McCullough ruled May 26 that collusion between the Maritime Asbestos Legal Clinic of Detroit and Skinner Engine bankruptcy lawyers at McGuire Woods in Pittsburgh prevented him from confirming a settlement they planned.
The plan would have channeled 20 percent of Travelers payments to Skinner Engine, pumping millions into a business that doesn't do any business.
Because Skinner Engine wouldn't collect if its defense succeeded, he wrote, "Debtor is nothing but financially incentivized to sabotage its own defense."
He wrote that he himself would breach the Travelers policies that Skinner Engine held if he confirmed the plan.
Travelers defended Skinner Engine against about 28,000 claims for about 20 years without losing a single time.
"Such fact is strong evidence as to the futility of such claims and it makes little, indeed no, sense to settle claims that have thus far been so overwhelmingly unsuccessful," McCullough wrote.
A multi district judge administratively dismissed all but a few, he wrote.
"Such fact also serves to substantiate that such claims are not very strong, so that once again, it makes little, if not any, sense for such claims to be settled," he wrote.
"As a consequence of the foregoing realizations, the Court is not surprised to see the extreme extent to which due process protections and procedural safeguards afforded to the insurers via the federal bankruptcy rules and the federal rules of civil procedure have been relaxed," he wrote.
He converted the case from Chapter 11 to Chapter 7, providing for appointment of a trustee to administer Skinner Engine's estate.
Skinner Engine filed a bankruptcy petition in 2001 and sold its assets by bankruptcy court orders in 2002 and 2003.
Creditors moved to convert the case from Chapter 11 to Chapter 7, so that the court could appoint a trustee to administer Skinner Engine's estate.
Skinner Engine and Travelers opposed conversion, and McCullough denied it.
Travelers, responsible for Skinner Engine's defense, negotiated asbestos claims with the maritime clinic, a division of Jaques Admiralty Law Firm of Detroit.
In 2003 Skinner Engine started independent talks with the clinic.
In 2004 the talks produced a plan, the third before the court.
Creditors approved the third plan, but in 2005 Travelers started an adversary proceeding to attack it.
Travelers reported that it spent more than $215,000 defending Skinner Engine claims.
Skinner Engine asked McCullough to deny standing to Travelers, but at a hearing he adopted the insurer's view.
Calling the plan "a scam from the start," he ordered Skinner Engine and the clinic to revise it.
They presented the fourth plan, which looked like the third to McCullough.
At a hearing in 2006 he said, "It's reasonable to believe that there isn't many claims out there that are any good."
He griped about "playing games" and "walking the dog."
Again he ordered revision, and he received a fifth plan.
It scheduled $100,000 for mesothelioma claims, $27,000 for severe asbestosis and lung cancer, $13,000 for other cancer, and $2,880 for pleural disease, with maximum values two and a half or three times as great.
Like earlier plans, it allowed asbestos claimants to choose between continuing in state courts and pursuing alternative resolution through bankruptcy court.
Like earlier plans, it proposed a surcharge for alternative resolution.
At a hearing McCullough said, "Apparently out of the 29 thousand or whatever number of claims there are, there is nobody that is really seriously injured."
Still, he denied a motion from Travelers to dismiss the case entirely.
Travelers sought reversal in district court, and in 2007 District Judge Gary Lancaster affirmed McCullough.
"We understand that the insurers believe that the third plan was in reality crafted by the asbestos claimants' attorney so that they could avoid the MDL proceeding and realize a large, and nearly effortless, payout at the expense of the insurers," Lancaster wrote.
"We understand that insurers viewed this plan as an insurance scam," he wrote.
"The insurers might be right," he wrote, but he left the question for the adversary proceeding or confirmation of the fifth plan.
Travelers appealed, and last year the Third Circuit affirmed Lancaster.
The case returned to McCullough, who pounced on Skinner Engine lawyer Sally Edison as she explained the 20 percent surcharge at a Feb. 4 hearing.
He said, "Call it what you want. It's assignment."
He said, "I don't see any law in Pennsylvania that allows such an assignment."
Edison said, "The asbestos claimants are voluntarily contributing the 20 percent of their recoveries under their insurance policies"
McCullough asked if each of the claimants signed an assignment to that effect.
Edison said they would vote for the plan.
McCullough said, "That's not the answer."
Edison said, "A third party who you pick will determine whether or not these individuals have met the disease criteria and whether they are even sick."
She said, "We are not agreeing to pay invalid claims."
McCullough said, "This plan is not better than a Chapter 7 if they are going to give up 20 percent of their claim."
Edison said, "Right now they are getting nothing."
McCullough said, "But you are going to get something by collusion."
Edison said, "We are not going to get something by collusion."
McCullough said, "Oh yes, you are."
After the hearing he read the Third Circuit opinion again and noticed that it said unsecured creditors and asbestos claimants voted in support of the plan.
On Feb. 10 he signed an order suggesting the Third Circuit was in error and asking who represented to the district court or circuit court that a vote took place.
For Travelers, Joseph Gibbons of Philadelphia answered that Travelers was unaware of any vote on the fifth plan.
Edison answered that the order implied that someone misled the Third Circuit.
"Such an implication is simply unfounded and inappropriate," she wrote.
"This case has been on a long detour for six years including three years wasted on a groundless motion to dismiss that this court rightfully denied," she wrote.
McCullough's May 26 order not only denied confirmation of the plan but also converted the case to Chapter 7.
"Because the insurers have withheld their consent to the asbestos claims settlement, such settlement is impermissible under Pennsylvania law," he wrote.
He wrote that "an insured is not free to enter into a settlement of a claim absent an insurer's consent no matter how reasonable such settlement is, even if such settlement has been entered into in good faith, and even if such insurer has not been prejudiced by such settlement."
This plan was neither reasonable nor in good faith, he wrote.
He called it patent collusion and added that bad faith was more important
In an ominous warning, he wrote that for the present he would abstain from deciding whether Skinner Engine voided its insurance coverage.