Estimation Proceedings: Rough Justice in a Rough World
Though they likely occur far less frequently than the drafters of the Bankruptcy Code originally expected, estimation proceedings in bankruptcy are one way to convert uncertainty into certainty.
A recent decision from Delaware's district court in the In re Federal-Mogul Global, Inc., bankruptcy case illustrates how estimation proceedings can swiftly -- and conclusively -- convert uncertainty into certainty, much to the chagrin of the losing parties who had toiled for years in complex litigation. The need to estimate the foreign asbestos claims arose because of a conflict between the plan's proponents and a committee representing the interests of approximately 3,200 municipalities, school districts, hospitals, businesses, and individuals who owned and operated buildings where asbestos products manufactured by the debtor's non-US subsidiaries were installed, and who had filed proofs of claim for damages in the debtor's US bankruptcy case.
The Court noted the importance in bankruptcy of reducing uncertain claims to certainty, however rough that justice may be. Without much ado, the Judge fixed total liability at $9 billion, and with one decisive blow, resolved decades of potential litigation against the debtor, to the sure dismay of not only the defendants whose claims would be significantly diluted, but the many asbestos lawyers for the defense whose gravy train would soon be coming to an end.
An interesting sidenote from a procedural perspective is that -- surprisingly given the magnitude of the claims involved -- neither the Debtors, nor any of the Official Committees in the Chapter 11 proceeding, nor the administrators appointed in the Debtors' United Kingdom insolvency proceedings, nor the trustees for the T&N Pension Trustees, nor any other U.S. or U.K. creditor made an appearance at the estimation hearing. Instead, the need for estimation of the foreign asbestos claims was precipitated by the conflict between the reorganization plan's proponents and the committee representing the approximately 3,200 British municipalities and agencies. In essence, the parties who did not appear at the estimation hearing did not have a dog in the fight (though that generally never stops bankruptcy shops from sending SWAT teams in anyway to observe). Perhaps they shunned the hearing under the theory that nothing good can come from their attendance (particularly on res judicata or issue preclusion grounds) and that prudence, therefore, is the better part of valor.
In deciding that estimation was clearly appropriate in resolving this dispute between competing claimants to a limited fund, the Court explained (citations omitted):
Estimation helps the court "avoid the need to await the resolution of outside lawsuits to determine issues of liability or amount owed by means of anticipating and estimating the likely outcome of these actions." The Bankruptcy Code [in section 502(c)] states that estimation is necessary when liquidation outside of bankruptcy would unduly delay the administration of the case. The object of such a proceeding is to establish the estimated value of a creditor's claim for purposes of formulating a reorganization plan. Although courts have disagreed about whether estimation is mandatory or permissive, it is apparent that the Bankruptcy Code requires an estimation in order to prevent undue delay in the administration of the estate. It is undisputed that the Personal Injury Claims are contingent and unliquidated, and that liquidation of each claim by a trial would unduly delay the administration of these cases. Moreover, the parties are attempting a plan for reorganization; thus, in accordance with the underlying principles in bankruptcy of promoting the quick and efficient administration of the estate, the estimation of the aggregate allowable amount on all United States and United Kingdom pending and future asbestos claims will be determined by this Court.
As indicated above, the Bankruptcy Code is less than clear when a court should undertake an estimation process. The Code is equally vague about the purpose of estimation. Section 502(c) only speaks of estimating claims for the purpose of allowance. The language does not expressly state whether claims are estimated for voting only, for voting and confirmation only, or for all purposes including distribution into a personal injury trust....
The Bankruptcy Code does not establish the manner in which contingent or unliquidated claims are to be estimated. The Third Circuit has stated that Congress intended the procedure to be undertaken initially by the bankruptcy judges, "using whatever method is best suited to the particular contingencies at issue...."
In estimating liability at $9 billion, the Court heard experts with opinions ranging from between approximately $2 billion and $12 billion, and held:
In undertaking this comparative assessment, however, I prefer to avoid specific mathematical calculations: since mathematical precision cannot be achieved in the prediction being undertaken, it is important that we not pretend to have achieved mathematical accuracy. The task, therefore, cannot be to simply determine which expert makes a more compelling argument as to a particular variable in their formula, insert the most credible figure, and then continue with the calculus. The task is made more difficult because the parties have spent considerable time criticizing the other expert's assumptions and the methodology used to compute each variable. After consideration of the expert reports in this matter, it is evident that the Court must make reasonable adjustments based on the record created at trial and embrace the methodology it finds more reliable, while remaining vigilant to the potential bias that a party's expert may have on his or her estimation figures....
In consideration of the all submissions of the parties, the testimony in the courtroom, and the relevant law, the Court, pursuant to 11 U.S.C. § 502(c), estimates [the Debtor's UK subsidiaries'] total liability for asbestos-related personal injury or death, both pending and future claims, in the United States at $9 billion, and in the United Kingdom at �229 million.
© Steve Jakubowski 2005
Good day, Mr. Jakubowski,
I am tracking the estimation proceedings of W.R. Grace and ASARCO. I find your article on Federal Mogul's estimation proceeding very helpful.