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|ISSN 1470-8108||Issue 56||Autumn 2004|
T&N: Who Gets What?
Whether dying victims or aging pensioners deserve first crack at a moribund company's finite resources is a decision that would tax the wisdom of Solomon. This, however, is only one aspect of the on-going saga of the Federal-Mogul(FM)/T&N reorganization process.1 As global stakeholders continue to jostle for position, T&N's UK administrators, Kroll Buchler Phillips (KBP), find themselves increasingly out of the loop. In mid-August, the placing of a series of advertisements in legal journals, newspapers and other media outlets in the UK, India, Brazil, and France by FM's US lawyers came as news to Simon Freakley, head of the court-appointed KBP team. In a Press Release issued by MP John Battle on August 16, 2004, Battle reported Freakley's surprise at FM's manoeuvre to circumvent the administrators by appealing directly to potential claimants. On August 22, Freakley, perhaps in an effort to paper over the widening gulf between US and UK interests, attempted to put the advertising campaign into context saying:
Suspicions that the proposed Reorganization Plan will give short shrift to T&N's non-US3 creditors are growing. A statement by Freakley on August 5 hinted at a possible UK rejection of the US Plan:
As administrators, we need to be confident that whatever reorganization plan we support represents the best outcome for all T&N's creditors. The Plan of Reorganization as it now stands is valued at 7.24 cents on the dollar; it is likely that, unless a more generous offer is tabled, a controlled sale of the company's UK assets could yield several times that amount. Although this is a step we are reluctant to take, it is something that warrants consideration. It is essential that any Plan of Reorganization deals fairly with UK pensioners and UK asbestos creditors as well as all US creditors.4
Last year's announcement by the independent trustee of the T&N Pension Fund of a £875 million deficit in the £1 billion scheme has led to headlines such as Wind-up of T&N plan is likely, Pension threat for 40,000 T&N staff, Turner & Newall pension fund fears and Thousands of UK workers set to lose pensions through company administration.5 On July 9, 2004, the Occupational Pensions Regulatory Authority (Opra) said: There have to be grounds to be concerned; their (pension fund) situation is not at all clear cut.6 Currently there are 21,206 members drawing on T&N's Retirement Benefits Scheme, as well as 4,119 active and 15,474 deferred members. A UK pension expert believes current T&N employees could get less than half of what they were expecting if the fund were to be closed. It is not in anyone's interests that the scheme be allowed to wind up, said a UK trade unionist. If that happens it could potentially jeopardize 4,000 UK workers' jobs as well as 40,000 peoples' pensions... Looking at the broader picture, John Rowse, of the Transport and General Workers Union, said: Once again UK workers are losing out because of our antiquated and unfair laws on insolvency.7 The National Secretary of Amicus, Tony Murphy, agreed: Here we have a loyal UK workforce that have stayed with the company through difficult and uncertain times and this is how they have been rewarded.
As the prime responsibility of the independent trustee is the maximization of the pension fund assets, if the deficit gap is not plugged, the trustee may be forced to liquidate the scheme leaving most beneficiaries with a fraction of what they are owed. The Pension Protection Fund, due to be introduced by the UK Government in April, 2005, could come too late for those whose T&N pensions are at risk; they would also be unable to make claims on the Government's £400 million rescue fund for those affected by pension shortfalls prior to May, 2004. Full pension entitlements to T&N's retired employees will continue but payments may be frozen and not inflation-linked.
Concern over the pension situation prompted the administrators to seek guidance from the High Court:
(In July, 2004) the Court handed down an Order directing us (the administrators) to withdraw the subsidiary companies from the T&N Pension Scheme. As well as maintaining the balance between all creditors, this action protects the interests of those employees who are members of the T&N pension scheme, whilst we progress toward an exit from Administration and Chapter 11 for the group. In the event of a wind-up of the scheme, current pension law provides that retired members get paid their benefits first. Also, deferred members (former employees who have yet to retire) do not make ongoing contributions to the scheme We wish to make it clear that the scheme is still open it hasn't terminated nor is it currently subject to winding up
A separate interest-bearing Trust Account to collect pension contributions from the 2,500 T&N workers who the Court removed from the underfunded scheme has been set up; in time this will be replaced by a Defined Contribution Scheme. Replacement death-in-service insurance cover has also been obtained. Information regarding T&N pension arrangements can be obtained by contacting a telephone hotline.8
Discussion of the pension problem took place throughout the Summer. On August 4, Baroness Hollis of Heigham, the Parliamentary Under-Secretary of State and Government spokesperson on work and pensions in the House of Lords, met trade union officials in London to review the situation. On August 10, 2004 representatives from Amicus and the GMB9 expressed their members' fears during a four-hour meeting in New York with the independent trustee,10 representatives of KBP and FM creditors and executives. Describing the session as a dogfight, the Amicus spokesman said: The Americans are like a pack of wolves and they do not understand UK trust law. Carl Ichan, FM's major US bondholder, saw it differently:
We presented a proposal that we believe will save jobs of Federal-Mogul's U.K. workforce and avoid a wind-up of the Pension Scheme.11
The $130 million (£65 m) offered in full and final settlement was way under the £29 m/year for eight years deemed necessary by the independent trustee. The next day (August 11), lawyers for both sides held another meeting; no progress was reported. Back in the UK, on August 19 Pensions Minister Malcolm Wicks was told of the strength and depth of feeling which exists on this matter in our constituencies, by a group of MPs. Minister Wicks confirmed that his department was monitoring the situation closely and that he shared the MPs' view that in the first instance it was the company's responsibility to meet its obligations to its current and past workforce.12 A Parliamentary All-Party Support Group for Members of the Federal Mogul/Turner & Newall Pension Fund which liaises with fund members, Ministers, civil servants, trade unions and the company is pressing for coordinated action to resolve the situation.13 On September 2, the T&N pension problem was the subject of talks which took place at the London headquarters of Amicus; the thirty delegates attending the four-hour meeting included UK shop stewards, Tim Culverhouse and Derek Sloan, the independent trustee and his lawyer, administrator Simon Freakley and FM executives and legal representatives. At several points during a House of Commons debate on the status of UK pension arrangements (September 8), politicians referred to the uncertainty arising from the T&N pension shortfall:14
A confidential briefing of MPs by the administrator took place in Westminster on September 9. A few days later at the annual Trades Union Congress conference an emergency motion was passed which expressed alarm at the situation facing 40,000 Turner & Newall pensioners (and supported) the joint unions in asking the Government to investigate and if necessary intervene to bring about a successful resolution to this issue.15
US vs UK Interests
The FM Reorganization Plan is driven by US interests. What we do know, Tom Levitt told the Commons is that the key decision will be made not in Chapel, nor Whitehall, but in America. Judging by other Chapter 11 reorganizations, claimants exposed to FM/T&N asbestos outside of North America have reason to expect that the compensation process will be skewed against them. In 1982, three major US asbestos defendants filed for Chapter 11 reorganization; the resolution of the bankruptcy proceedings of UNR Industries, formerly Unarco, Amatex and the Manville Corporation set many precedents. Under the Manville Trust Distribution Process, 2.1% of the 673,111 claims processed to date have been foreign claims; foreign claimants receive one third the value for the same category of injury as US claimants.16 Based on the experience of the Manville Trust, MP John Battle's scepticism seems well-founded:
The plan proposes to set up a trust to compensate asbestos victims, but it will be based in America and already it is clear that under US law US claims by potential victims will take precedence over the claims of actual victims in Britain.
It is ironic that even though FM's US pension pot has a $536m (£290m) deficit, in the event of corporate insolvency, the pensions of FM's US employees will be protected by the Pension Benefit Guarantee Corporation. With government schemes protecting pensions in France and Germany, it seems that UK pensioners are amongst the most vulnerable.17 As it is unclear whether the British regulator can force a foreign firm to honour its UK pension commitments, should the intransigence of FM bondholders continue, it is more than likely that the independent trustee will be forced to put the pension fund into wind-up.
The pension negotiations have revealed a growing divergence between US and UK positions; as a participant at a recent meeting in London remarked:
There are clear differences between the UK administrator and the company (FM) as to how the pension fund issue can best be resolved. This is essentially about how much money the co-proponents have said they can make available ($130m) and what the independent trustee believes the UK assets are worth.18
Towards the end of August, the independent trustee formally rejected the $130m proposal in an email sent to Peter Wolfson, the attorney representing the US bondholders; Wolfson commented:
We are already offering to pay a significant premium to what we think the plan is valued at They are overvaluing the assets and undervaluing the asbestos claims against them They are taking a big gamble that their valuations are right and that they will find a buyer.19
Surprised and disappointed at the trustee's decision, FM said:
The co-proponents (creditors), working with the administrator, will now determine the next steps, which could include a 'market test' of the UK assets. The co-proponents believe this will demonstrate the fairness of what was offered to UK creditors including the pension scheme.20
In a recent statement by the administrators,21 the polarization between the US and UK positions was clear:
The (US) Plan Proponents have declined to make any revisions to the Plan to take account of the Administrators' concerns. Instead, the Plan Proponents have pressed ahead in the United States.
The administrators' barrister, Richard Snowdon QC, told the Financial Times that the plan is structurally unfair; the article, which appeared on September 23, 2004, summed up the situation as follows:
(the) deal would give a trust for asbestos plaintiffs a 50.1 per cent stake in the restructured Federal-Mogul and 49.1 per cent to bondholders Mr. Snowdon said the administrator would want the English court to look at this alleged 'fundamental point of unfairness' and advise on what might happen if the reorganisation was approved in the US without complementary voluntary schemes being drawn up in the UK.
He claimed the plan could impose unattractive and unsuitable sale obligations on the UK administrators and envisaged that asbestos claimants would be forcibly 'assigned' to the US trust.22
Snowdon will seek directions from the English High Court in October, 2004.
The independent trustee has also asked the Court to rule on alternative courses of action now that FM's final pension fund offer has been rejected. The pension stalemate increases the likelihood that KBP will not agree that T&N's UK businesses should be part of the FM global settlement; if this happens, then a controlled liquidation of UK assets is inevitable. Time is short. On December 9, 2004, the US Bankruptcy Court for the District of Delaware, which approved FM's Plan of Reorganization on June 4, 2004, will consider whether to confirm the Plan. The FM/T&N Chapter 11-administration process in the US and UK is one of the most complicated transnational insolvency proceedings ever attempted. A collision of the US and UK judicial systems is not impossible.
Status of T&N Insurance Litigation
While the T&N pension crisis staggers on, the plight of hundreds of UK asbestos victims whose claims against T&N have been frozen since October 2001 seems to be largely forgotten. When T&N went into administration, research was commenced to ascertain the history of T&N's Employers' Liability (EL) insurance. According to minutes from the Turner and Newall Board Meeting on February 10, 1977:
When the Employers' Liability (Compulsory Insurance) Act came into force we found ourselves in some difficulty. The present situation is that our insurers (The Royal Insurance Company Ltd. now Royal & Sun Alliance: RSA) provide the certificates required by the Act, but the clause in the policy excluding asbestosis liability still remains. Insurers have now indicated that they are not prepared to continue, and we are now, through Hogg Robinson, seeking another insurer (at Lloyd's of London). The Royal were concerned because since 1972 they have been carrying a risk, by reason of having issued the certificates, which is specifically excluded from the policy, and furthermore that it is a continuing risk for claims which may take up to twenty years to arise. They put forward a suggestion that we consider setting up a trust fund so that claims could continue to be paid even if T&N became unable to meet them. This was not regarded by T&N as a practical solution. On the other hand, T&N asked the Royal to quote a premium for full cover within the terms of the Act but they have declined to do so. The obvious solution seemed to be for T&N to continue to settle asbestosis claims, and for insurers to charge a premium for the other risks which reflected their contingent liability to meet asbestosis claims if T&N ever failed to do so, but they have declined to adopt this course.
T&N's novel insurance arrangements left plenty of scope for disagreement should the company become unable to meet its liabilities. Attempts by the UK administrator to enforce the insurance cover were vigorously resisted. The RSA claimed:
that the policies excluded all asbestos related claims; that the (£1,000 per claim) excess applied; and that RSA were entitled in any case to avoid payment of any EL claims (including non asbestos claims) by reason of alleged misrepresentations and material non disclosures by T&N.23
The Brian Smith Syndicate at Lloyd's of London, which was the EL insurer from 1977-1995, also sought to avoid payment of claims on the grounds that alleged misrepresentations and material non disclosures by T&N entitled them to do so. The administrator began legal proceedings against both insurers in May, 2002. A verdict issued in May, 2003 was conclusive:
This decision was appealed by both defendants and a hearing was scheduled for November 2003. According to Neil Griffiths, the administrators' lawyer:
At that stage the administrators and the insurers asked the Court of Appeal to postpone the appeal hearing so that settlement negotiations could take place. The Court of Appeal deferred the hearing until May, 2004.
Long and complex settlement negotiations were conducted with the insurers. Shortly before the appeal hearing was due to be heard in May 2004, the parties reported to the Court of Appeal that agreement had been reached in principle for the settlement of all asbestos related issues in the litigation. At the parties' request, the proceedings were stayed so that the settlement could be finalised and put into effect.
The proposed settlement, once approved and implemented, will provide a fund of approximately £36 million for distribution as compensation to insured T&N workers exposed to asbestos during the period 1969 to 1995. Of that sum, £34.74 million in cash has been paid into accounts held jointly by the solicitors for the administrators and the insurers pending implementation of the settlement. The compensation fund would receive a further £1.26 million from future dividends expected to be payable to insurers, bringing it to £36 million, plus interest earned on the accounts in the meantime. The insurers have also made a payment of £2 million into joint accounts towards the administrators' costs of the litigation.
As the settlement only covers insured T&N workers in the UK, the assets will not be gobbled up by American litigants. Although the proportion of each claim which will be paid is dependent on the total number of claims received, based on current projections it is being estimated that applicants will receive around 70% of the claims' value.
Action taken by the administrators against European reinsurers which issued the Hercules Asbestos Insurance Policy24 in 1996 has prompted the following responses:
For the moment, little reassurance can be given to anxious pensioners and uncompensated victims. One thing, however, can be said with 100% confidence: hundreds of people exposed to T&N asbestos will continue to contract asbestos-related diseases. In the UK, funds allocated for research into mesothelioma, a type of asbestos cancer, are minimal. Dr. Ken O'Byrne, former head of the British Mesothelioma Interest Group, explains: People think it will pass away. It has often been perceived as a disease of older working-class men and historically they tend not to get the best deal. Consensus over the best treatment for mesothelioma has not emerged with some specialists advocating radical surgery such as extrapleural pneumonectomy and others promoting various chemotherapy regimes or palliative care. The Asbestos Sub-Committee of the All Party Parliamentary Occupational Safety and Health Group has received repeated calls for a national mesothelioma strategy to be implemented. Commenting on the urgent need for action, John Battle, a member of the Asbestos Sub-Committee, said:
Ten years ago we were all saying 'You have HIV or Aids, you die.' Now, not only can we extend life, we can mitigate the worst effects so people don't suffer appallingly. With mesothelioma people die a terrible death in agony. We can't leave them to suffer alone.25
1 In 1998, the US automotive parts manufacturer, Federal-Mogul Corporation (FM), bought the UK-owned company: T&N Ltd. On October 1, 2001 FM/T&N filed for voluntary Chapter 11 reorganization in the US and administration in the UK (see British Asbestos Newsletter, issues 45, 46, 48, 51, 53, 55).
2 Kazan-Allen L. Federal-Mogul: Causing Anxiety and Raising False Hopes. August, 2004. Website: www.ibas.btinternet.co.uk
3 According to the FM website, claims from Canadian and US asbestos victims will receive equal treatment.
4 On June 4, 2004, the United States Bankruptcy Court for the District of Delaware approved the Disclosure Statement respecting the Third Amended Joint Plan of Reorganization for Federal-Mogul Corporation.
5 There are: 4,000 current T&N UK employees at 11 UK factories located in Bradford, Lydney, Chapel-en-le Frith and Slough, up to 20,000 deferred pensioners and 20,000 existing pensioners. T&N's UK businesses had net sales of approximately £218 million ($402 million) for the year ended December 31, 2003.
6 Thorniley T. Pension threat for 40,000 staff. Business Telegraph. Accessed July 20, 2004, website: http://www.telegraph.co.uk/money
7 Daley J. Turner & Newell pension fund fears. The Independent. July 23, 2004. p.42.
8 The help-line is managed by AON, the company which runs the T&N Ltd. pension scheme: tel: 0161 834 0594.
9 GMB: General and Municipal Boilermakers' Union
10 On this occasion, Alexander Forbes Pension Services, the firm acting as the independent trustee of the T&N Pension Fund, was represented by Quintin Heaney.
11 Statement from Federal-Mogul Regarding New York Meeting; http://www.-federal-mogul.com/
12 Federal Mogul pensions. Website: http://www.tomlevitt.labour.co.uk/
13 Levitt's High Peak constituency is home to FM's plant at Chapel-en-le-Frith while Robertson's Coventry base is the site of FM's Brico factory.
14 Hansards, September 8, 2004:Column 723-778.
15 Congress 2004 TUC Emergency Motion E1- Federal Mogul/Turner and Newall
16The Manville Corporation filed for bankruptcy in 1982. It was approved in 1988, payments commenced but were suspended in 1990 and did not resume until 1995.
17 In France, FIVA will pay the T&N pensioners with government money; problems may arise when the government seeks repayment from the company.
18 Joint Trade Union Press Release: September 2, 2004: Talks continue on Turner and Newall pension problem.
19 Hamilton D. UK Federal-Mogul Pension Plan Rejects Bid. August 27, 2004. Accessed August 30: http://news.moneycentral.msn.com/
20 Seager A. T&N offer rejected. The Guardian. August 30, 2004. http://www.guardian.co.uk/business
21 Freakley S. FM UK Update from Administrators. September. 27, 2004.
22 Tait N. Judge grants T&N request for advice on restructuring. September. 23, 2004. http://news.ft.com/
23 Insurance Litigation Briefing by Neil Griffiths, Denton Sapte Wilde, September 17, 2004.
24 According to Griffiths' memo: The value of the Hercules policy to T&N Ltd. is £500 million in excess of claims of £690 million, with three reinsurers (Swiss Re, through its subsidiary, being one) each taking an equal share under the reinsurance agreement of the £500 million cover.
25 'We can't leave them to suffer alone.' The Guardian. September 16, 2004.
Compiled by Laurie Kazan-Allen