Paddock Enterprises, LLC – Files Chapter 11 as O-I Glass, Inc. Looks to Use Corporate Restructuring and Bankruptcy Trust Provisions to Tie Tourniquet on Legacy Asbestos Liability

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January 6, 2020 − Paddock Enterprises, LLC  (“Paddock” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-10028. The Debtor, a wholly-owned subsidiary of O-I Glass, Inc. ("O-I Glass"), the world’s largest manufacturer of glass container products, is represented by Michael J. Merchant of Richards, Layton & Finger, P.A. Further board-authorized engagements include (i) Latham & Watkins LLP as bankruptcy counsel, (ii) Alvarez & Marsal North America, LLC as financial advisor and (iii) Prime Clerk as claims agent.

The Debtors’ lead petition notes between 5,000 and 10,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn. In lieu of a list of its top unsecured creditors, the Debtor has filed a list of the top 24 law firms with the most significant representations of parties asserting asbestos claims against the Debtor.

In a press release announcing the filing, O-I Glass advised that “On December 27, 2019, O-I Glass announced the adoption of a new holding company structure whereby O-I Glass became the new parent entity with Owens-Illinois Group, Inc. ('O-I Group') and Paddock as direct, wholly owned subsidiaries. The Company’s legacy asbestos-related liabilities are isolated within Paddock, structurally separating them from the Company’s glass-making operations, which remain under O-I Group. O-I Glass and O-I Group are not included in the Chapter 11 filing and will continue to operate as usual throughout Paddock’s Chapter 11 process."

The press release continued: “After exiting a business in 1958 that produced Kaylo, an asbestos-containing thermal insulation product, the Company has disposed of over 400,000 asbestos-related claims and incurred gross expense of approximately $5 billion for asbestos-related costs. Paddock’s ultimate goal in its Chapter 11 case is to confirm a plan of reorganization under Section 524(g) of the U.S. Bankruptcy Code and utilize this specialized provision to establish a trust that will address all current and future asbestos-related claims. Paddock has been and remains committed to fairly and equitably compensating claimants who are ill and have legitimate exposure to the Kaylo products manufactured by its predecessor from 1948-1958. Paddock looks forward to working swiftly and constructively to confirm a plan of reorganization and is committed to emerging from bankruptcy as expediently as possible.”

Andres Lopez, CEO of O-I Glass, added, “Addressing Paddock’s legacy liabilities through Chapter 11 will help enable O-I Glass to further unlock the value creation potential of this global franchise. By improving the Company’s capital structure, this important step will support a number of critical strategic efforts and possibilities as O-I Glass leverages its position as the world's leading manufacturer of sustainable glass packaging. Paddock evaluated its options and determined that a Chapter 11 plan of reorganization was the most fair and equitable way to obtain certainty and finality in addressing its legacy asbestos-related liabilities. Pending final resolution of the Chapter 11 proceeding, all asbestos-related claims payments will be suspended.”

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Gordon Declaration”), David J. Gordon, the Debtor’s President and Chief Restructuring Officer, detailed the events leading to Paddock's Chapter 11 filing (Mr Gordon, a specialist in chapter 11 cases involving asbestos mass tort and related insurance issues, has served in these roles for the Debtor since December 18, 2019). The Gordon Declaration argues that enough is enough; that the Debtor, whose predecessor sold a mere $40.0mn of asbestos-related products over a 10-year period that concluded more than 60 years ago has more than paid its dues, that $5.0bn in expenses incurred in respect of 400,000 claims should allow it to successfully seek and receive a bankruptcy court's blessing of a mechanism that would draw a line under O-I Glass's liability…which continues to cost the glass giant more than $100.0mn a year. This annual payment, Gordon argues, continues to defy what should be conventional wisdom; ie that after 60 years and with the average claim holder now over 83 years old, these claims should simply be dying out. They are not.To add insult to injury, Gordon argues that the Debtor's deep pockets have made it an outsized target for potential claimants. He also emphasizes that the Debtor has been disadvantaged by its decision to continue to tackle claims within the tort system (which he now slams as allowing "disparities to exist in the extreme") instead of the easier 524(g) trust distribution procedures used by industry peers (not to mention Owens Corning which bought the Debtor's Kaylo business and itself established a 524(g) trust in 2006). 

So why has the Debtor waited until now to ditch a disastrous tort strategy in favor of a 524(g) approach? Why has it continued to tolerate "the incredible disparity" between the enormous price it has incurred for products it last sold more than 60 years ago and the modest revenue that it last derived from those products in the year that Elvis joined the U.S. army? Gordon argues that times have changed: "Managing Asbestos Claims has always been a mix of legal art and science and something on which the Debtor has prided itself. The laws and the circumstances, however, have changed over time and the Debtor is no longer confident that it can appropriately and reliably manage these claims outside of a chapter 11 process. In contrast, the large number of asbestos defendants that have successfully navigated chapter 11 and confirmed section 524(g) plans (none of whom exited asbestos-related manufacturing over 60 years ago or have the Debtor’s uniquely limited cohort of claimants) leads the Debtor to be confident that it too can reach a successful resolution as to its Asbestos Claims in chapter 11." That may very well be true, and if it is…why did the Debtor wait so long?

The Gordon Declaration states: "The Debtor is the successor-by-merger to Owens-Illinois, Inc., which previously served as the ultimate parent of the Company. The Debtor is annually subject to hundreds of claims and lawsuits alleging personal injuries and death from exposure to asbestos (‘Asbestos Claims’) contained in products manufactured under the ‘Kaylo’ brand between 1948 and 1958, which were primarily pipe covering and block insulation products. These products contained either chrysotile or amosite asbestos fibers, depending on the year of manufacture, and had extremely limited applications, such as for high temperature piping in large industrial settings. As discussed further below, the Debtor’s predecessor sold its entire Kaylo business to Owens Corning Fiberglass Corporation (‘Owens Corning’) in 1958 and has not manufactured or sold any Kaylo products since then. No other entities within the Company were ever involved in the production or sale of Kaylo products. 

Owens Corning filed for chapter 11 protection in October of 2000 and confirmed its plan of reorganization with a section 524(g) trust in September of 2006. The Owens Corning 524(g) trust has been making payments on account of Kaylo-related asbestos claims since then. 

Despite having only produced Kaylo products for a fraction of the total production window, the Debtor continues to fund an outsized share of tort recoveries. 

The Debtor currently has approximately 900 personal injury lawsuits pending against it throughout the country, many of which are currently dormant in status. These lawsuits typically allege various theories of liability, including negligence, gross negligence and strict liability, and seek compensatory and, in some cases, punitive damages. Each lawsuit requires the Debtor to incur a range of tens to hundreds of thousands of dollars or more in attorneys’ fees and costs alone. 

Beginning in 2003, the Company had been estimating its asbestos-related tort expenditures based on an analysis of how far in the future it could reasonably estimate the number of claims it would receive, which was several years. In April 2016, the Company adjusted its method for estimating its future asbestos-related tort expenditures in compliance with accounting standards codification (“ASC”) 450, Contingencies. With the assistance of an external consultant, and utilizing a model with actuarial inputs, the Company developed a new method for reasonably estimating its total asbestos-related tort expenditures, which made several adjustments to consider the probable losses for Asbestos Claims not yet asserted, as well as related costs it could properly include in its estimate. 

Although the Company did not record any additional asbestos-related charges at the end of 2016 or 2017, as of December 31, 2018, the revised methodology led the Company to (i) conclude that a charge of $125 million was necessary, which produced a year-end accrual of $602 million for reasonably probable asbestos-related tort expenditures and (ii) estimate that reasonably possible losses could result in asbestos-related tort expenditures up to $722 million (both stated in nominal dollars). 

What is certain is the incredible disparity between what the Debtor has historically paid, and is now being asked to pay, for Asbestos Claims, given the extent of its historical asbestos-related operations. As of September 30, 2019, the Debtor had disposed of over 400,000 Asbestos Claims, and had incurred gross expense of approximately $5 billion for asbestos-related costs. 

In contrast, its total Kaylo sales for the 10-year period in which it sold the product were approximately $40 million. Asbestos-related cash payments for 2018, 2017, and 2016 alone were $105 million, $110 million, and $125 million, respectively. 

For years, the Debtor has paid more for its Asbestos Claims than its industry peers whose liabilities are paid by section 524(g) trusts. This is principally due to the inherent differences between the tort system and section 524(g) trust distribution procedures. The procedural and legal differences even among different jurisdictions in the tort system—such as joint-and-several liability—allow these disparities to exist in the extreme, which usually results in the Debtor paying different claim amounts to otherwise similarly-situated plaintiffs. This situation is neither fair to the Company and its stakeholders nor to asbestos claimants. 

The Debtor remains committed—as it has since the first Asbestos Claim brought against it—to fairly and equitably compensating claimants who are ill and have legitimate exposure to Kaylo products that the Debtor’s predecessor last manufactured more than 60 years ago. However, because the Company continues to face claims that increase in value, despite the fact that one would reasonably expect claims arising from the relevant manufacturing period to tail off and become more difficult to prove, the Debtor has concluded—consistent with the Company’s overall strategy of rationalizing and streamlining expenses—that the best path for fairness, certainty, and finality is only available through this Chapter 11 Case.

In order to explore potential alternatives to the status quo, the Debtor engaged its outside counsel, Latham & Watkins LLP (‘Latham’), to assist it in evaluating a number of strategic options. It also retained Bates White LLC (‘Bates White’) to provide estimation-related guidance with respect to its Asbestos Claims. The Debtor believes that guidance from both Latham and Bates White will assist it in reaching a consensual resolution in this Chapter 11 Case. 

Managing Asbestos Claims has always been a mix of legal art and science and something on which the Debtor has prided itself. The laws and the circumstances, however, have changed over time and the Debtor is no longer confident that it can appropriately and reliably manage these claims outside of a chapter 11 process. In contrast, the large number of asbestos defendants that have successfully navigated chapter 11 and confirmed section 524(g) plans (none of whom exited asbestos-related manufacturing over 60 years ago or have the Debtor’s uniquely limited cohort of claimants) leads the Debtor to be confident that it too can reach a successful resolution as to its Asbestos Claims in chapter 11."

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