Judge Rules Congoleum Can't File Chapter 11 to Void Asbestos Claims

Congoleum, a floor covering manufacturer that has been trying since 2003 to evade its responsibility vis-à-vis asbestos-laced floor tiles it made decades ago, received a death blow on Feb. 5 when Judge Kathryn Ferguson dismissed the company's Chapter 11 filing.

Ferguson, a New Jersey federal bankruptcy court judge, backed the floor-covering giant into a final corner by denying the bankruptcy, which has been beset by problems since its introduction. In her opinion, dated Feb. 26, Ferguson wrote that Congoleum had submitted an "unconfirmable" bankruptcy plan and cited ongoing issues revolving around payments to two lawyers working for asbestos' claimants.

Ferguson's decision is not the first setback, but is likely the last. In 2005, the U.S. Court of Appeals for the Third Circuit reversed a decision approving Congoleum's bankruptcy and disqualified Congoleum's chief counsel, the firm of Gilbert Heintz & Randolph, because of its ties to another team of lawyers.

According to lawyers working for Congoleum's insurers, lawyers Joe Rice of Motley Rice and Perry Weitz of Weitz & Luxenberg were involved in secret negotiations between Congoleum and plaintiffs' counsel which would have enriched Rice and Weitz by $1 million each, provided preferential treatment to Rice and Weitz's clients, and released Congoleum from most of its legal liability, leaving the insurers to pick up the tab for asbestos suits.

In 2007, another New Jersey state judge ruled that Gilbert Heintz had also collaborated with the plaintiffs' lawyers to ensure a settlement in which Congoleum's insurers would be stuck funding a $500-million trust to pay asbestos claims.

The Congoleum case is one of the first to uncover what are known as "prepack" bankruptcy deals, which companies who are highly exposed to asbestos' legacy costs struck with plaintiff's lawyers representing asbestos claimants.

In such trademark deals of a decade ago, commonly known as torts or class action suits, companies at risk and plaintiff's lawyers agreed to transfer asbestos liability into special trusts, which were commonly funded by a company's insurance proceeds. It was a win for the companies because it allowed them to put a limit on their asbestos liability, and the plaintiff's lawyers, because it allowed them to make huge amounts of money for minimal effort.

However, when Congoleum's revised Chapter 11 plan still included million-dollar kickbacks to Rice and Weitz, and preferential payouts to specific plaintiffs, Judge Ferguson called a halt, noting that her dismissal "...would force the parties to follow through on an appeal that will resolve these (unreasonable payment) issues once and for all".

Ferguson's ruling means that Congoleum will no longer benefit from the provisions of Chapter 11 bankruptcy protection. Congoleum has already begun an appeals process. Congoleum's unsecured creditors have also filed an emergency motion seeking to stay the judge's decision.

Ferguson's ruling is effective 20 days from the date of the ruling, so if Congoleum can't get an appeal hearing, it will lose protection from creditors and be required to deal with the asbestos claims in civil court. The company, founded in 1886 and one of the world's largest sheet flooring manufacturers, employs 900 people in four facilities, and is headquartered in Mercerville, New Jersey.

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