[Pen-l] Bankruptcy

[Louis Proyect <lnp3@xxxxxxxxx>]

http://www.bloomberg.com/fun/bbco/lawcol/lawcol1_01.html

Mon, 2 Feb 1998, 11:32pm EST
Dow Corning Bankruptcy Solves Year 2020 Problem: Legal Affairs
Bay City, Michigan, Jan. 21 (Bloomberg) --

When Dow Corning
Corp. filed for Chapter 11 bankruptcy protection in 1995, it
sought solutions to two problems, not just one.

The company already was spending millions of dollars
defending itself against more than 10,000 lawsuits filed by women
who said its silicone breast implants made them sick.

But Dow Corning faced the potential of even more lawsuits
from the estimated 400,000 women who received implants between
the early 1960s and 1992 and hadn't yet sued. By filing for
bankruptcy, Dow Corning hopes to settle the lawsuits against it
as well as the ones it hasn't seen, possibly for pennies on the
dollar. If it succeeds, more companies facing product-liability
suits may head for Chapter 11.
``What it does is give you a way to separate yourself from
future liability,'' said Thomas Smith, a bankruptcy expert at the
University of San Diego School of Law.

Bankruptcy may become even more popular in the wake of a
U.S. Supreme Court decision limiting the ability of companies to
end future litigation with class-action settlements.

Lawyers negotiating last year's $368.5 billion settlement
with the tobacco industry were worried enough to include a clause
that prevents the companies from escaping payments by filing for
bankruptcy during the 25-year accord.

Plaintiffs' lawyers, of course, don't like it when their
targets head for Chapter 11
``The bankruptcy code was never intended to be used as a
litigation strategy,'' said Richard Laminack, whose Houston law
firm has handled many of the Dow Corning implant suits.

Hand It Over

Unfortunately for some legal claimants, that's exactly what
bankruptcy lets companies do. In theory, bankruptcy law requires
a company to pay off all its creditors in full or hand over
ownership to settle the bill.

Dow Corning -- a joint venture of Dow Chemical Co. and
Corning Inc. -- has some 400,000 women seeking payment and less
than $6 billion in assets. The most it could pay is about $13,000
per claim, far less than many women are seeking. That would mean
that Dow Chemical and Corning would have to give their stock in
the venture, once valued at some $800 million, to the implant
claimants.

Usually, however, the two sides in bankruptcy work out a
compromise. While bankruptcy law gives unsatisfied claimants the
power to take control of a company in the end, it also gives
management the power to delay that day of reckoning for years.
That puts pressure on plaintiffs' lawyers to reach an agreement
that preserves some of the value of the company for its original
shareholders while paying out as much cash as possible to their
clients -- and themselves, in the form of fees. Left out in the
cold: Future claimants, who usually don't have a representative
in the negotiations.

``You get to decide how much to give them when they're not
in the room,'' Smith said.

Pennies on the Dollar

That's what happened at asbestos maker Johns Manville Corp.,
which entered bankruptcy in 1982 to escape thousands of lawsuits
by workers exposed to cancer-causing asbestos fibers. After more
than five years of wrangling, the company left bankruptcy by
agreeing to hand over about $2.7 billion in cash and debt and as
much as 70 percent of its stock in exchange for protection
against future lawsuits.

By 1990, this trust fund was broke and unpaid claimants
sued. Manville had to set up a second trust, with 80 percent of
the stock in the company.

That trust is paying out benefits at about 10 percent of the
former level, said Les Fagen, a lawyer appointed by the
bankruptcy court to represent future claimants.

``The plaintiffs' lawyers have present-day clients, who want
money today,'' he said. ``Whether they were ganging up on the
future claimants or they just blew it, I don't know.''

Critics say the trust established in the bankruptcy of A.H.
Robins to settle lawsuits over the Dalkon Shield intrauterine
device also shortchanged some claimants, although they can sue
for more money by entering a lengthy and expensive process
outside the trust.

No Representation

The Dow Corning bankruptcy could raise the same complaints,
if long-term exposure to silicone fluid is as dangerous as
plaintiffs' lawyers say. Dow Corning vigorously denies that
silicone causes illness and hopes to dispose of most of the
future litigation with a single trial.

If that tack fails, however, future claimants still may not
get what they want. The court hasn't assigned an independent
lawyer to represent their interests and Laminack said one isn't
necessary, because both sides have identified all the women with
potential claims against the company.

Smith of the University of San Diego is skeptical that the
two sides will set aside enough money for future claims. He says
companies such as Dow Corning should give out stock to all their
creditors, instead of cash. That way the financial markets could
try to gauge future litigation costs, much as the market
determines each day what International Business Machines Corp. is
worth.

Dow Corning's bankruptcy attorney, Barbara Houser, said U.S.
Bankruptcy Judge Arthur Spector in Bay City, Michigan, reviewed
Smith's plan.

``We don't agree with his theory,'' Houser said. ``It was
never seriously considered.''
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