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TRENTON, N.J.--A federal bankruptcy judge has rejected Congoleum Corp.'s 10th attempt at a Chapter 11 reorganization plan to resolve hundreds of millions of dollars of asbestos claims, citing its unequal treatment of claimants and other flaws.
At the same time, the judge turned away an alternate plan offered by units of CNA Financial Corp. and rejected that plan's creation of a class of insurance company claimants in the bankruptcy proceeding.
Congoleum, a Mercerville, N.J.-based flooring manufacturer, said it will return to negotiations with asbestos claimants and other parties, and hopes to have a revised plan ready by the end of September.
"Although I was disappointed by the ruling, we now have clear direction from the court on what aspects of our plan need to be changed," said Roger S. Marcus, Congoleum's chairman, in a statement. "With this guidance, I believe we can craft a plan that should satisfy the court."
Congoleum originally filed a "pre-packaged" Chapter 11 petition in December 2003, seeking to create a bankruptcy trust into which all of its pending and future asbestos claims would be channeled.
The plan went through nine revisions before the company filed its 10th proposal last September.
Several of Congoleum's general liability insurers, led by units of CNA and Hartford Financial Services Group Inc., objected to the plan and filed motions to block its confirmation.
In a ruling last week, U.S. Bankruptcy Judge Kathryn C. Ferguson agreed with some insurer objections and found the plan could not be confirmed in its current form.
The judge noted, for example, that Congoleum's plan would create several classes of asbestos claimants, including those who settled before the bankruptcy filing with settlements secured by a collateral trust.
These claimants could fare much better than those in other classes, particularly those who are unsecured future asbestos claimants, Judge Ferguson found. The two largest secured claimants, for instance, would receive $4 million each under the plan, while even the most gravely ill future claimant would get only a fraction of that, she observed.
The bankruptcy code requires substantially similar treatment of similar claims, but the inequality of Congoleum's classification system "is manifest," she found.
Judge Ferguson also questioned contributions to the proposed asbestos trust fund by Congoleum and its parent, American Biltrite Inc. of Wellesley Hills, Mass.
If a group of bondholders agrees to the 10th plan, Congoleum proposes to contribute 3.8 million shares of its stock and a $2.7 million note that is convertible to company stock in the event Congoleum defaults on its note payments. That is in addition to insurance proceeds.
While bankruptcy law requires Congoleum to contribute a majority of its voting stock to the asbestos trust--either immediately or when triggered by certain contingencies--it is unclear under the plan's terms whether the company would ever transfer a controlling stake, even if the $2.7 million note is converted to stock, the judge observed.
The event allowing conversion--default by Congoleum--also suggests that it would be insolvent with virtually worthless stock, which would defeat the purpose of providing the trust with a majority stake, Judge Ferguson ruled.
American Biltrite, meanwhile, would be required to contribute only $250,000 in cash to the trust, an amount too small to be considered "fair and equitable" under bankruptcy law, the judge ruled.
In a separate opinion, Judge Ferguson rejected an alternate Chapter 11 plan proposed by CNA. That plan improperly creates a class of insurance company claims for overpayment of defense and indemnity obligations, bad faith and other matters, the judge found.