Being an insolvency practitioner is rarely a comfortable experience but Buchler Phillips IPs are in the unenviable position of helping asbestosis sufferers in the UK recover compensation from a subsidiary of Federal Mogul, the US auto parts manufacturer.
The company faces total claims of around £1.2bn with 800 UK claimants making up a considerable part of that sum. The harsh reality is that the money has been in place for some time to pay their compensation. Unfortunately, the nature of US insolvency law means the door to the money that could ease their suffering is shut with no telling when it will open.
The end result is that the suffering of claimants could be prolonged indefinitely. ‘The majority of victims have asbestosis and need the money to make life more bearable. They cannot climb stairs or walk nor do anything that puts a strain on their lung capacity. Most are now elderly, so they have limited resources,’ say solicitors at Robinson & Murphy, who are handling 20 claims worth about £100,000.
Asbestos liabilities have been wreaking havoc on the manufacturing industry. Last year they caused nine US companies to go bankrupt, including Federal Mogul, which brought down more than 100 UK subsidiaries. Frank Macher, chairman and CEO said at the time: ‘This was a difficult but necessary decision in order to develop and facilitate a way to pay our asbestos liabilities and establish a viable capital structure for the long-term growth and profitability of Federal Mogul’s operations.’
Estimates put the number of existing asbestos claims at 90,000 with a further 200,000 more pending. Experts predict the problem will escalate.
The problem began in the early 1960s when it was discovered the fire-retardant could cause lung diseases such as pleural plaques, asbestosis, mesothelioma and lung cancer. And it was discovered the diseases could take up to 40 years to manifest themselves.
Asbestos has also affected other businesses, including, famously, Lloyd’s of London, which has been managing asbestos claims for years.
For Federal Mogul the decision that brought about the company’s demise came in the late 1990s when it went on a global shopping spree. Among its acquisitions was UK car part maker Turner & Newell, which had used asbestos before its harmful effects were known. The new parent knew about T&N’s UK lawsuits at the time of acquisition, as it had commissioned a study to review potential costs of maximum exposure to asbestos claims.
But the study said Federal Mogul’s exposure would not exceed #400m and Turner & Newell was acquired. The report resulted in Federal Mogul not seeing that liabilities would spiral to the more than a billion pounds.
Despite more than 100 UK subsidiaries the insolvency remains the jurisdiction of US insolvency law, which has blocked access to funds for UK claimants.
Turner & Newell has set aside money from its business to pay for lawsuits that have been filed since the early 1970s and had been managing to make payouts right up until its parent company filed for bankruptcy.
Andrew Morgan, solicitor at Field Fisher Waterhouse, said: ‘Chapter 11 proceedings in the US and consequent administration of UK subsidiaries have frozen the claims when it is fairly clear T&N has the money to cover it.’
According to Kroll Buchler Phillips, the volume of cases and amount demanded by US claimants is stopping UK victims from getting compensation.
Simon Freakley, head of KBP’s corporate advisory and restructuring group, and administrator of Federal Mogul in the UK, says two issues are making the case complex.
First, the £1.2bn of claims is worth far more than Federal Mogul’s total assets which means the company will have to be reorganised so creditors end up owning Federal Mogul.
Secondly, the insolvency case must take place under US laws because Federal Mogul is an American company. This means it is the company’s management – and not the administrator as in the UK – that has drawn up the plan that will hand over ownership.
The creditors have now been split into three groups including one for asbestos claimants. The company will create a trust to cover the cost of compensation for future claims.
The debtor has until November to get this plan approved by creditors and file a ‘draft of reorganisation’, with a possible extension until January 2003. But if the creditors do not support the plan, the case will get dragged through the courts, and that could take years.
The frustration of the UK victims is compounded by differences between the English and the American legal systems – the main one being that in the UK, you cannot make a claim when you do not have an injury.
But in the US, the litigants only have to prove a causal link between the disease and their poor health. As a result 90% of cases against the company are from people who are not actually ill because of asbestos.
Additionally there is the phenomenon of ‘venue shopping’. According to US law, claimants take their case to any court in the country as long as they can prove any link between them, the area and the product. As a result litigants go to courts that have a track record of favouring the claimant.
Morgan concludes: ‘Now claims in California can bring a stop to claims on the other side of the Atlantic.’
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