As reported at law.com, the long-running Congoleum "pre-pack" asbestos bankruptcy has been given new life by U.S. District Court Judge Joel Pisano. To date, this opinion has received little attention in the media, but it is a fairly significant development in a case that has involved the removal of the debtor's pre-petition counsel who orchestrated the bankruptcy due to conflicts of interest, two dozen plan formulations, alleged "payoffs" to the lead plaintiffs' counsel, a scathing state court opinion that concluded the bankruptcy was arranged in bad faith, and numerous other examples of the potential for misconduct and abusive practices in asbestos bankruptcies. For more background, please see my recent article concerning asbestos bankruptcies, which has an extensive discussion of the history of the case.
Back in February, Bankruptcy Judge Ferguson made good on her promise to either dismiss or convert this Chapter 11 case if the current version of the plan still failed to address all of the concerns she has expressed for the last few YEARS about the structure and inequities of the plan. This was no hasty decision, and all of the parties in interest were on notice of her intentions for months before her decision. Still, Judge Ferguson made it clear that her decision to dismiss the case was more to force the parties to address these issues in the higher courts than anything else.
In an opinion issued Monday, Judge Pisano affirmed Judge Ferguson's order with respect to (a) recognizing the right of insurers to object to confirmation (noting that this was the 8th time that the plan proponents raised this issue and agreeing with the seven previous decisions that insurers have standing) and (b) denying plan confirmation. Neither of these points is terribly clear in the law.com summary, but they are extremely significant. Of course, the fact that the plan in its current form is unconfirmable requires the plan proponents to go back and make some adjustments. More importantly, by once again acknowledging insurer standing and the independent obligation of the court to ensure that the plan complies with bankruptcy law in a fairly strong fashion, Judge Pisano appears to be nudging the parties to stop hanging their hopes on litigation tactics and instead address the substantive concerns raised by the court. Moreover, the court expressly directed briefing on the issues that doomed the latest plan in advance of the confirmation hearing on the next version of the plan.
The emphasis of the law.com article is clearly on Judge Pisano's decision to reverse the bankruptcy court's order to dismiss the case and withdraw the reference from the bankruptcy court. As noted previously, the former is not much of a surprise. With respect to the latter, although not a terribly common procedural move, the district court's decision to withdraw the reference from the bankruptcy court and assume authority over the remaining proceedings is sensible. Judge Ferguson has done an admirable job of overseeing the case for roughly five years now, but her repeated admonitions to the plan proponents have been consistently met with, at best, superficial modifications to the plan, even as administrative expenses in the case hover around the $100 million mark. Due to the design of Section 524(g) and constitutional concerns, the bankruptcy court can only make recommendations concerning some key elements of the plan anyway. And by deciding the issues that have consistently doomed Congoleum's reorganization plans on its own, the district court may be in a better position to press the parties to make meaningful steps toward proposing a confirmable plan.