Asbestos-Suit Claimants Would Get Major Equity : Holders Oppose Manville Reorganization Plan

Manville’s proposed bankruptcy reorganization ran into stiff opposition Monday from a lawyer for its shareholders, whose investment in the company would be reduced by the proposal to as little as 20% of its existing value.

But U.S. Bankruptcy Judge Burton R. Lifland and attorneys for victims of asbestos-induced diseases expressed hope at a hearing Monday that the proposal may allow the company to emerge soon from protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.

Meanwhile, Manville’s bankruptcy lawyer, Michael Crames, defended the company’s controversial 1982 maneuver of filing a bankruptcy petition as a means “to prevent the liabilities from pulling the company apart and dismembering it.”

“Chapter 11 is no bed of roses,” he said. “It’s an alternative that a company looks at when all else has failed.”

Several other bankruptcy experts said that, despite the potential for a massive dilution of shareholders’ investments, Manville’s strategy may in the end preserve more of the company’s equity than would remain if it faced thousands of liability lawsuits over the years as they arose, paying claims steadily until the company was bereft of all assets.

But most agreed that Manville’s step is likely to be duplicated only by corporations facing catastrophic liabilities. Among those mentioned are A. H. Robins, maker of the Dalkon Shield contraceptive device, and Union Carbide, which may face billions of dollars in claims if victims of its poisonous gas leak in Bhopal, India, are successful in having their cases heard in U.S. courts.

Lifland acknowledged Monday that Manville’s proposal, worked out between the company’s management and Leon Silverman, a court-appointed attorney for future victims of asbestos-related ailments, may be little more than a blueprint for further negotiations.

“I assume there’s going to be some heavy, hard bargaining in the course of the next few weeks,” he said. “But the process has now come to a point where we can see the light of day.”

He ordered the company and attorneys for its creditors--including victims, banks and shareholders--to report next Tuesday on the progress of negotiations.

Manville filed its controversial Chapter 11 petition on Aug. 26, 1982, contending that billions of dollars in claims from thousands of asbestos victims could destroy the company. The petition was unique because the company was still solvent at the time.

On Friday, the company’s board approved a plan of reorganization in which Manville would establish a trust to compensate victims and finance it with $815 million in cash, a pledge of at least $75 million a year--or 20% of the company’s profits--starting four years after reorganization, and at least 50% and as much as 80% of its voting stock.

In addition to the financing, the key element of the proposal was Manville’s acknowledgement that future claimants--those whose diseases are not yet manifest or who have not yet filed a claim--will be covered by the settlement and have the option of suing to establish their claims.

As expected, the plan’s sharpest critic was George Hahn, a court-appointed attorney for holders of Manville’s common and preferred stock. The preferred shareholders’ interest would also be vastly diluted under the plan.

“The corporate shares are not Manville’s property,” Hahn told Lifland in court. “They are not in a position to make a present of them to Mr. Silverman.”

In an earlier interview, Hahn called the reorganization plan a “wish list.”

“The stockholders have yet to be heard from,” he said. “We were frozen out of the negotiations.”

Although he would not say what interest he thought the common and preferred shareholders should retain after creditor claims are paid, he called the proposal “too drastic in diluting both of them.”

Others Object

Also voicing objections were attorneys for property-damage claimants--those who want Manville to compensate them for the expense of removing hazardous asbestos insulation from their buildings. Manville is proposing to pay their claims, which total more than $70 billion, out of a $50-million fund.

“We have always felt that there is no legal liability for property damage,” Crames said.

Another potential problem is Manville’s attempt to limit punitive damage payments to $5 million. Crames said the company will attempt to get a court order disallowing all punitive claims, based on legal precedents ruling them out in other bankruptcy cases.

Manville’s plan still has bankruptcy and products liability lawyers disagreeing among themselves over the wisdom of the company’s unusual bankruptcy petition. Many lawyers decried the maneuver in 1982 as an abuse of the system.

“We’ve never considered this use of the (bankruptcy) act a proper one either to escape liabilities or put them off indefinitely,” said Robert Komitor, a New York products liability lawyer. “What’s important is that other companies will now look a little more carefully about using the (bankruptcy) act if they are a viable company.”

‘Bet and Lost’

One leading critic of the move has been Vern Countryman, a bankruptcy expert at Harvard Law School, who on Friday argued that the proposal’s massive dilution of stock meant that management “bet and lost.”

But another bankruptcy expert, George Treister of Los Angeles, said he considered Manville’s original filing “novel, but a creative, legitimate use of the (bankruptcy) apparatus.” He said Manville may have benefited by using the law to centralize victims’ lawsuits in the bankruptcy court, rather than facing them in state courts around the country.

As for paying victims’ claims at the expense of shareholders’ equity, he said: “I would have expected that those liabilities had to be taken care of before the shareholders kept any equity in the company.”

Other attorneys noted that, although Manville was solvent at the time of filing, the mounting claims clearly placed it on the brink of financial calamity, making its bankruptcy petition the least of many evils.

“It doesn’t strike me particularly as a blunder,” said Mark Roe, a Rutgers Law School professor who has written about the case. “While shareholders are likely to be extraordinarily disappointed, they were going to have to pay the tort claimants a lot of the company one way or another.”

Roe said the proposed reorganization does give one class of claimants a better deal than they might be entitled to under bankruptcy law: the future claimants represented by Silverman, the plan’s chief architect. The law is unclear, Roe said, on whether future claimants are necessarily creditors for bankruptcy purposes. Manville’s plan gives them virtually equal status with existing claimants.

“If the shareholders are going to attack the settlement,” he said, “then this is the place to attack it.”