Babcock Ch. 11 puts lawsuits in limbo

Crain's Cleveland Business

March 6, 2000

Christopher Serres

Sitting on Michael Kelley's desk is a five-inch pile of letters that the Cleveland attorney is afraid to send.

"I know that once these letters are out the door ... that's when the yelling and screaming is going to start," said Mr. Kelley, managing partner at the law firm Kelley & Ferraro LLP.

Like many local attorneys who handle asbestos-related personal injury cases, Mr. Kelley is grappling with how to notify his clients that Babcock & Wilcox Co. in Barberton filed for Chapter 11 bankruptcy protection from creditors Feb. 22 in the U.S. Bankruptcy Court in New Orleans.

Due to the delays associated with that filing, Mr. Kelley estimates that 300 to 400 of his clients will die of asbestos-induced cancer before they see "a single cent" from potential settlements of their pending claims against Babcock & Wilcox.

Mark Wintering, an asbestos attorney with Cleveland law firm Robert E. Sweeney Co. LPA, has another 50 clients facing a similarly grim outlook, he said.

"You should try to tell people who have a month left to live that they're going to have to wait. Many of these people will simply die waiting," Mr. Wintering said.

Asbestos-related claims have dogged Babcock & Wilcox, a unit of worldwide energy services company McDermott International Inc. of New Orleans, since the 1970s. It was discovered back then that the company had used harmful asbestos fibers in its industrial and marine boilers.

Individuals who breathe asbestos fibers for prolonged periods have a high risk of contracting mesothelioma, a cancer that infects the lining of the lungs and stomach. The average mesothelioma patient dies within one year after contracting the disease, according to the American Cancer Society in Atlanta.

Before its decision to file for Chapter 11, Babcock & Wilcox had earned a reputation for paying asbestos claims "quickly and efficiently," said Paul Lefkowitz, a partner in the asbestos litigation department at Cleveland law firm Climaco, Lefkowitz, Peca, Wilcox & Garofoli Co. LPA. Indeed, Babcock & Wilcox preferred to settle the lion's share of its asbestos claims rather than drag them out in court, lawyers said.

Since 1982, the company has paid out $1.6 billion to settle 340,000 asbestos claims. Most of those claims were settled within six to nine months, rather than the two to three years typical of many companies facing a large number of asbestos claims, Mr. Lefkowitz said.

"I think you would be hard-pressed to find a single company that handled its asbestos claims as professionally as Babcock & Wilcox. Their reputation was very high among (asbestos) attorneys," said Mr. Lefkowitz, who represents about 200 clients with pending claims against Babcock & Wilcox.

But that reputation changed abruptly when Babcock & Wilcox filed for bankruptcy protection from its creditors. Attorneys who once toasted the company became resentful, and some began to question the company's rationale for filing Chapter 11.

In an announcement following the filing, Babcock & Wilcox said it was forced to file due to a "sharp increase" in the amount of money demanded by attorneys seeking to settle asbestos claims.

For reasons the company cannot identify, the average claim filed against Babcock & Wilcox over the past three to four months has been "many multiples" of the historical average of $4,500 to $5,000 per claim, said Sharyn McCaulley, spokeswoman for Babcock & Wilcox.

"Our effort to negotiate these (claim) increases down to more tolerable levels has failed, leaving us little choice," Ms. McCaulley said.

Still, that explanation did not satisfy several local attorneys, who believe asbestos victims have been wrongly singled out as the cause for the filing.

"I think most attorneys who handle these cases find it odd that a company that has been meeting its asbestos obligations without a hitch for nearly two decades would wake up one morning and declare bankruptcy," Mr. Wintering said.

Though the size of asbestos claims may be edging upward, Babcock & Wilcox still has plenty of insurance, lawyers noted. Ms. McCaulley estimates the company's insurance policies will cover $1 billion of asbestos claims.

According to Mr. Kelley, the $1 billion should be "more than enough" insurance to cover the 45,000 asbestos claims still pending against the company.

"You can do the math. This company is not destitute," Mr. Kelley said.

But Ms. McCaulley insists the company has "no way of knowing" whether the $1 billion in insurance coverage will cover the 45,000 pending claims and future claims likely to be made against the company.

"We can't predict how many settlement demands are out there and whether our insurance will cover them," she said.

Lawyers also expressed concern that asbestos claimants could be shortchanged in the Chapter 11 process.

In a Feb. 22 announcement following its Chapter 11 filing, Babcock & Wilcox said it planned to continue to pay all employee wages, salaries and pension benefits. In addition, the company's trade creditors would receive 100 percent of the money owed them, the company promised.

"It's nice to see they are meeting their obligations with trade creditors. But what do I tell my sick clients?" Mr. Lefkowitz asked.

Ms. McCaulley insists that Babcock & Wilcox will not turn its back on its asbestos liabilities. As part of a reorganization plan that will be filed soon, Babcock & Wilcox will create a trust fund that will enable asbestos claims to be evaluated and resolved in an orderly manner, she said.

"We have a tradition of dealing with (asbestos) claims orderly and fairly, and we will continue to do so," Ms. McCaulley said.

But even if the asbestos claimants are paid, the Chapter 11 process could delay payments for up to three years, Mr. Kelley said.

"How do you tell a dying guy that the money he expected to get to pay his chemotherapy won't be there?" he asked. "I'll have to tell 'em straight out, but it won't be easy."