More coverage, this time in the insurance trade press, of that House Judiciary Committee hearing last month (see Jul. 21) in which our friend Prof. Lester Brickman of Cardozo Law School explained in detail how "pre-packaged" bankruptcies permit some plaintiff's lawyers to conspire with asbestos-company managements against the interest of both truly sick claimants and insurance companies ("U.S. Probes 'Pre-Pack' Scandal", Insurance Day, Jul. 23).
The steps in the process: 1) under 1994 revisions to federal bankruptcy law, a bloc representing 75 percent of claimants can seize control of a bankruptcy, even if its claims are not the largest or strongest; 2) lawyers representing large numbers of unimpaired asbestos claimants are thus in a good position to seize control of such bankruptcies; 3) these lawyers negotiate with incumbent managers to strike deals which leave the managers in control of most operating assets in exchange for giving the lawyers a claim against insurance coverage and guaranteeing high payments to the lawyers' unimpaired clients; 4) the gains from rigging the process in this way come at the expense of nonasbestos creditors of the bankrupt companies, seriously ill asbestos claimants, and insurers.
The Insurance Day article goes on to note that "[e]arlier this year Delaware judge Randall Newsome refused permission for a US insulation manufacturer ACandS to proceed with its planned pre-packaged reorganisation and delivered a harsh criticism of the process that saw a hierarchy of claimants drawn up in a manner that he deemed unfair. ACandS had been involved in a bitter dispute with the Travelers group and reports had suggested the pre-packaged deal would have left the insurer facing a $1bn-plus bill." Leigh Ann Pusey, senior vice-president of the American Insurance Association, said the pre-packaged bankruptcy process "has been shamelessly abused, and is now rife with startling conflicts of interests".