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In bankruptcy, Grace lawyer says asbestos was 'total money machine'
10/9/2008 12:30 PM
 | | Bernick | | |  | | Finch |
PITTSBURGH - Manufacturer W.R. Grace and Company languished seven years in bankruptcy due to asbestos claims but turned solvent this year by forcing a trial on their value.
Grace, a global specialty chemicals and materials company, shook off about a million pending and future suits by settling under the watch of Bankruptcy Judge Judith Fitzgerald of Pittsburgh.
At trial earlier this year asbestos lawyers sought to introduce Grace's past settlements as evidence of present value, but Fitzgerald wouldn't allow it. Fitzgerald demanded claimants provide evidence of their disease.
"I am not satisfied that what has gone on in all cases in the past is what the world should be or is," Fitzgerald said.
She pounced on asbestos lawyer Nathan Finch of Washington when he told the court an expert would testify about how the "system" works.
"About what system?" Fitzgerald said. "About a settlement system? About the court system in the state of Texas? About the court system in Illinois?"
Money machine
At an estimation trial Fitzgerald presided over as visiting judge in Wilmington, Del, Grace attorney, David Bernick of New York, said settlements were driven by factors other than merits and they cost Grace far more than its legal share.
Grace had asked for the estimation trial, which a bankruptcy court can hold, to determine the value of creditor claims. It began in January and ended abruptly in April when lawyers announced a settlement.
Under the terms, Grace will spend $420 million now and $1.55 billion later to settle about a million suits - that comes out to $420 per suit now and about $1,550 later.
Grace's liabilities had been estimated by an asbestos lawyer to be at least $12 billion.
Bernick said the reason cases were settled was not necessarily that Grace wanted to avoid trial.
"There was a money machine here," he said.
"That was a principal concern in many cases based on the jurisdictions that were selected and how the cases were run," he said.
"It was a total money machine based upon the ability to name the same companies again and again and again," he said.
"It was driven by the whole idea that the more people you can name, the more people you can settle with, the more money there is to be made," he said.
Grace under pressure
Grace filed for protection from creditors in 2001 after an increase in asbestos claims left it with no recourse but Chapter 11.
"It was an increase in claims that we know today had absolutely no basis in medicine and no basis in law," Bernick said.
But at trial, the validity of claims was questioned.
Epidemiologist Howard Ory testified for Grace that 13 of every 14 asbestos suits lacked a scientific basis.
Bernick asked for X-rays of claimants. Finch said he wouldn't produce old X-rays but he would arrange new ones.
Fitzgerald said, "The claimants have been given numerous opportunities to produce the evidence of their disease either by X-ray or something else."
"At this point, they simply do not have that option any longer," she said.
On April 1, six days before the settlement was reached, Finch moved for summary judgment on the validity of past settlements. Fitzgerald denied the motion.
She also said that if claimants wanted to argue that the attorney client privilege would protect documents, each client would need to be contacted and asked if they asserted the privilege.
"If that means three thousand clients, he is to contact them all," she said.
Settlement
In the settlement, Grace has agreed to deposit $250 million in a trust fund along with warrants to buy ten million shares of Grace stock at $17 a share.
Starting in 2019, Grace would add $110 million a year to the fund for five years.
Starting in 2024, Grace would add $100 million a year for ten years.
After the settlement was announced, investors started celebrating Grace's recovery, for a share of its stock soared from a low of $1.52 to $26.56 in June.
As a commentary on our time, the crash of the stock market has pulled Grace down by two-thirds in four months. On Oct. 9 shares of W.R. Grace and Co. closed in New York at $8.53.
Grace has filed a reorganization plan, which remains pending in Fitzgerald's court.
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