Federal-Mogul Seeks Judicial Relief From Asbestos Liabilities
Although it had been anticipated, the news that Federal-Mogul (FM) was filing for voluntary Chapter 11 reorganization in the US and administration under the UK Insolvency Act of 1986 set off shock waves on both sides of the Atlantic. On October 1, 2001, the Michigan-based multinational announced that simultaneous actions in both jurisdictions, intended to ensure the company’s survival in the face of an explosion in asbestos-related claims, had been initiated. According to the company, affiliates in Canada, Continental Europe, Africa, Latin America and Asia Pacific are unaffected by the restructuring process. FM’s newly elected Chairman and Executive Officer, Frank Macher, claims it is business as usual: "Federal-Mogul will continue to serve its existing customers, fulfil current contracts and secure new business." On October 15, a corporate press release boasted that FM had secured four new contracts valued at $20 million from auto manufacturers and suppliers with Macher commenting: "Federal-Mogul is continuing business operations without interruption and with the full support of our major customers."
For asbestos victims with personal injury claims against FM or one of its subsidiaries, it is most certainly not business as usual. In the UK, cases against T&N Ltd., a British multinational gobbled up by FM during a $6 billion corporate buying spree in 1998, have been frozen. Plaintiffs’ solicitors were informed by letters received in October that as a result of the proceedings, legal actions against T&N and subsidiaries such as Newalls Insulation Company Limited and J.W. Roberts Limited would be stayed. The High Court of Justice, Chancery Division, London approved the appointment of S V Freakley, J J Gleave and G P Squiries of Kroll Buchler Phillips as Joint Administrators. According to Mr. Freakley: "Whilst Federal-Mogul is viable at an operating level, it requires the protection of Administration and Chapter 11 to allow it time to address the financial difficulties caused by asbestos claims in the US." It is believed that few UK mesothelioma plaintiffs now claiming compensation from the T&N group will live to see this problem resolved.
Documents on FM’s website maintain that the hundred year old company had "only limited involvement with asbestos" prior to a series of take-overs which have resulted in 365,000 asbestos claims pending. By the end of this year, FM will have paid out $1 billion in claims. More than half the active claims relate to T&N, once the largest asbestos group in the UK, or its subsidiaries. Last year, FM revised its previous estimate of T&N’s total asbestos liabilities from $750.9 million to $1.56 billion. When FM purchased T&N, it was clear that the UK company’s financial future was inextricably linked to its asbestos past. Since T&N’s formation in 1920, the commercial exploitation of asbestos in building materials, automotive parts and insulation products had been at the heart of the company’s success. FM’s announcement that a £1.5 billion bid for T&N had been unconditionally accepted was greeted with amazement by UK asbestos specialists; the company’s vulnerability to asbestos claims was common knowledge. Investors worried about T&N’s asbestos liabilities had continually undervalued the stock. Attempting to reassure the City, T&N made a one-off payment of £92 million ($155 million) in November, 1996 for an additional £500 million ($725 million) layer of insurance to cover its asbestos liabilities. Under the reinsurance policy, coverage of claims notified post-June 30, 1996 would be accessible when the total value of claims received after June, 1996 exceeded £690 million. According to FM’s Annual Report of 2000, the company "does not expect to reach the trigger point of the insurance or begin to collect on the insurance recoverable for the next several years." Although this attempt to ring-fence the company’s asbestos liabilities was viewed as window-dressing by some and a stalling tactic by others, the spectre of asbestos claims didn’t seem to bother FM executives. At the time of the acquisition, FM’s General Counsel said: "We are pleased with T&N’s innovative efforts to manage this serious problem and intend to build on those efforts in the future." T&N’s 1997 accounts promised that the take-over would "provide the resources required to match the provision set up in 1996 to meet past and future asbestos liabilities."
How could they have got it so wrong? Although the existence of the asbestos problem was known decades ago, few, if any, observers could have predicted the exponential growth in the number and size of claims. When FM bought T&N "the thinking was that asbestos costs could be managed by the Center for Claims Resolution, a coalition of defendants that routinely settled almost any claim." In 1998 asbestos claims at FM were $85 million, in 1999, they were $178 million, in 2000 they were $351 million; this year they are forecast to hit $380 million. Similar progressions at other asbestos defendants resulted in thirty companies voluntarily seeking Chapter 11 to escape asbestos-related liabilities since 1982; these firms include familiar names such as Johns Manville, Raymark Industries, UNARCO, Celotex, National Gypsum, Babcock & Wilcox, Owens Corning, Armstrong World Industries, W.R. Grace and USG Corporation. With annual revenues of $6 billion, FM is thought to be the largest auto supplier to adopt this strategy. In addition to cash flow problems created by the escalation of claims, the disappearance of many co-defendants has increased the financial burden on FM. Despite assurances that the reorganization will be accomplished within two to five years, experience in the US has shown that this complex process often takes longer.
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October 19, 2001
