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					HARDIN, KUNDLA , M CKEON,
POLETTO & POLIFRONI, P.C.
673 Morris Avenue
P.O. Box 730
Springfield, NJ 07081-0730
(973) 912-5222
John S. Favate (JS-7819)

CROWELL & MORING LLP
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2595
(202) 624-2500
Mark D. Plevin (MP-5788)

Attorneys for One Beacon Insurance Company,
Seaton Insurance Company, and Stonewall Insurance Company

And, for purposes of this brief only, on behalf of
“Certain Insurers” and their undersigned counsel


                         UNITED STATES BANKRUPTCY COURT
                          FOR THE DISTRICT OF NEW JERSEY


                               )                     Chapter 11
In re:                         )
                               )                     Case No. 03-51524-KCF
CONGOLEUM CORPORATION, et al., )
                               )                     Joint Administration Pending
                               )
                               )                     Hon. Kathryn C. Ferguson
        Debtors.               )
                               )                     APPLICATION PENDING TO FILE
                                                     UNDER SEAL


         CERTAIN INSURERS’ BRIEF (I) RESPONDING TO THE AFFIDAVIT
               OF VINCENT J. SULLIVAN AND (ii) REQUESTING
                      A SCHEDULING CONFERENCE


               The “Declaration in Support of First Day Motions” filed by Vincent J. Sullivan,

Senior Vice President-Finance of debtor Congoleum Corporation (“Congoleum” or the
“Debtor”),1 is particularly notable for some critical omissions. Although Mr. Sullivan portrays

the process through which Congoleum developed its pre-packaged bankruptcy as a means for

addressing its asbestos-related liabilities (see Declaration of Vincent J Sullivan in Support of First

Day Motions at pp. 7-10), he fails to mention many critical facts regarding the bankruptcy, such

as:

       • Congoleum’s plan of reorganization (the “Plan”) contemplates payments to
         unimpaired claimants up to thirty times the historic payment for such claims;

       • Congoleum is seeking a release from all current and future asbestos liability through
         payment of only a token sum;

       • Congoleum is calling upon its insurers to pay the costs of the extravagant pre-
         petition “settlement” it reached with certain plaintiffs’ lawyers, which settlement
         involves improperly using the Plan and the bankruptcy process as a means to obtain
         access to insurance policies notwithstanding the fact that the Plan itself, as well as the
         negotiations leading up to it, breach Congoleum’s obligations under its policies; and

       • Congoleum refused the pre-petition offer of substantially all of its insurers to pay
         their allocated share of asbestos claims.

These omissions severely limit the value of Mr. Sullivan’s declaration.

               The undersigned insurers, all of whom issued excess insurance policies to

Congoleum,2 submit this brief to (i) fill the wide and critical gaps in Mr. Sullivan’s rendition of

the facts leading up to Congoleum’s bankruptcy filing, (ii) d escribe generally the confirmation

objections that Certain Insurers preliminarily anticipate filing, (iii) explain the need for discovery


1
        Two affiliates of Congoleum Corporation, Congoleum Sales, Inc. and Congoleum Fiscal,
Inc., commenced their own Chapter 11 cases at the same time as Congoleum. Congoleum has
moved for joint administration of the three cases. The three debtors shall be collectively referred to
as the “Debtor.”
2
       “Certain Insurers” include One Beacon Insurance Co., Seaton Insurance Co., Stonewall
Insurance Co., Employers Mutual Casualty Company by its General Agent and Attorney-in-Fact
Mutual Marine Office, Inc., American Reinsurance Co., Old Republic Insurance Co., Federal
Insurance Co., Everest Reinsurance Co., Mt. McKinley Insurance Co., and Westport Insurance Co.



                                                 -2-
Certain Insurers need to prepare and prove such confirmation objections, and (iv) request the

Court to request a scheduling conference related to confirmation matters:

       • The Real Story. As shown in detail below, Congoleum’s Plan is the culmination of a
         conspiracy among Congoleum, its majority stockholder American Biltrite, Inc.
         (“ABI”), and certain counsel for asbestos claimants to take Certain Insurers’ money
         and transfer it to the claimants (and their counsel), who would otherwise receive little
         or nothing for the most of these claims in the tort system. In return for these overly
         generous payments, the claimants, by voting in favor of Congoleum’s Plan, would
         confer on Congoleum and ABI a prized “channeling injunction” that will insulate
         them for all time from asbestos liability. The entire transaction, as well as
         Congoleum’s actions leading up to the filing of these bankruptcy cases and the Plan,
         violates not only the Bankruptcy Code but also the terms and conditions of the
         insurance policies which Certain Insurers issued to Congoleum.

       • The Motion to Dismiss. Certain Insurers will file, in the very near future, a motion to
         dismiss the bankruptcy petition as a bad faith filing pursuant to Sec. 1112(b) of the
         Bankruptcy Code. In addition, Certain Insurers plan to move the Court for a
         declaration (i) that Section 362(a) of the Bankruptcy Code is not applicable, or in the
         alternative (ii) for relief from the automatic stay. This brief discusses these filings in
         connection with Certain Insurers’ request that a conference be held to establish a
         reasonable schedule for hearing these and any additional motions and, where the
         Court deems necessary, for any discovery required to address the motions.

       • The Potential Confirmation Objections. Certain Insurers have insufficient
         information to formulate, with any certainty, their potential objections to
         Congoleum’s Plan. Nevertheless, to the extent possible at this early stage of the
         bankruptcy process, this brief describes how the Plan and the transactions leading to
         the Plan are in violation of Sections 524(g) and 1129(a) and other sections of the
         Bankruptcy Code. The purpose of this description is to provide a background for
         the discovery conference requested by Certain Insurers.

       • The Schedule. Certain Insurers contemplate filing confirmation objections. While
         Certain Insurers have some information about the events and actions of Congoleum,
         its counsel, and certain of the attorneys for asbestos claimants that led the
         formulation of the Congoleum’s Plan, there remains a substantial amount of
         discovery needed by Certain Insurers in order to assess, develop, and prepare the
         confirmation objections. This brief describes the nature and amount of discovery
         necessary for their confirmation objections and requests that the Court convene a
         scheduling conference so that it may consider all relevant information, including that
         provided by Certain Insurers, in connection with setting a fair, efficient, and effective
         schedule.




                                               -3-
I.        OVERVIEW

               Congoleum is a public company, traded on the American Stock Exchange, with

approximately 55 percent of its stock currently held by ABI. 3

               For more than 100 years, Congoleum and its predecessor companies have been in

the flooring business. For a period of time (until 1974 with respect to floor tile, and until 1983

with respect to sheet vinyl), certain of Congoleum’s flooring products contained fully

encapsulated asbestos. “Encapsulated” means that the asbestos in Congoleum’s products was

bound into the product in a way that precluded the dissipation of asbestos fibers. Thus, persons

exposed to Congoleum’s asbestos-containing products generally were not exposed to asbestos

fibers.

               Nevertheless, as with many other companies that manufactured items containing

asbestos, Congoleum has been a named defendant in litigation in which plaintiffs’ counsel claim

their clients were injured through exposure to asbestos from Congoleum’s products. Until 2002,

Congoleum’s primary insurers paid its defense costs and any settlements or judgments relating

to the asbestos litigation. Working with Congoleum, these insurers were able to control

Congoleum’s liability exposure, obtaining outright dismissals in thousands of cases and settling

hundreds of others for de minimis sums. As of September 2002, more than 99% of the asbestos

claims against Congoleum were settled for average amounts less than $102 per claimant. See



3
         ABI is not a debtor in these Chapter 11 cases. Nevertheless, ABI is one of the prime
beneficiaries of Congoleum’s bankruptcy filing, because the Plan would (i) ensure that ABI’s equity
interest in Congoleum remains intact, and (ii) confer on ABI the protection of an injunction
permanently barring certain asbestos bodily injury claims against ABI. As explained below, the fact
that majority stockholder ABI retains its majority ownership of Congoleum even while future
claimants who cannot speak for themselves are paid less (likely substantially less) that the amount of
their claims has the effect of turning the absolute priority rule on its head.



                                                 -4-
Congoleum Form 10-Q (September 30, 2002) at 11.

               Although one of Congoleum’s primary insurers claimed (incorrectly, according to

a recent New Jersey Supreme Court decision) to have exhausted its policies’ coverage,

Congoleum’s first-layer excess insurers offered prior to the commencement of these bankruptcy

cases to assume the defense of asbestos lawsuits against Congoleum and to pay their allocated

shares of the cost of judgments or settlements resulting from this litigation. Higher-layer

insurers joined in this offer. Congoleum, therefore, had (indeed, still has) the option of

continuing to work with its insurers in defending against asbestos claims – a solution that

renders the instant petition unnecessary. Indeed, Congoleum’s Chairman, Roger Marcus,

acknowledged that if the pre-packaged bankruptcy failed, the company was “fully prepared to

utilize our insurance and other resources to return to the strategy of vigorous defense that we

have employed in the past.” (See January 13, 2003 Press Release, Statement of Roger Marcus.)

Thus, Congoleum was not “forced” into bankruptcy; it simply opted for it.

               The reason that the company chose bankruptcy is that the ability to misuse

Section 524(g) of the Bankruptcy Code provided an inviting opportunity for the company and

its non-debtor parent to forever rid themselves of the inconvenience of asbestos claims, and to

increase the value of Congoleum’s stock for the benefit of its equity owners by eliminating the

“drag” that asbestos liabilities have on stock price.4 While Section 524(g)’s appeal is


4
        The appeal of Section 524(g)’s injunction mechanism makes it peculiarly subject to such
misuses, pa rticularly in pre-packaged cases where all creditors other than asbestos claimants are
treated as “unimpaired,” thus eliminating all potential dissenters – other than the insurers who are
being asked to foot the bill for the debtor’s settlement of asbestos claims, reached without regard to
insurers’ contractual rights to participate in such settlements. See generally “Pre-Packaged Asbestos
Bankruptcies: A Flawed Solution,” 44 So. Tex. L. Rev. 883 (2003) (“Pre-Packaged Asbestos
Bankruptcies: A Flawed Solution”) (Exh. A hereto)



                                                 -5-
understandable, a company cannot utilize it without a legitimate need for bankruptcy protection

and a valid reorganizational purpose under Chapter 11. Congoleum is simply attempting to shed

its asbestos liability for a paltry cash contribution of $250,000, a 10-year $2.7 million note, and a

purported assignment of disputed insurance rights.

               The Court should query why the asbestos plaintiffs’ bar and the proposed FCR

would go along with such an irrational deal. Purely and simply, this bankruptcy case is an

“insurance play.” The proponents of the Plan hope that this Court will assist them in both (i)

overriding clear and unambiguous policy provisions protecting insurers from coercive

settlements and (ii) expediting access to insurance proceeds by claimants (and their attorneys)

who, absent the Plan, would recover nothing, or at most de minimis settlements, from

Congoleum. Because the amount of Congoleum’s and ABI’s contributions to payment of

asbestos claims under the Plan is fixed, they have instead essentially stipulated to unlimited

liability to be funded entirely by the insurers. And, as will be developed below, Congoleum’s

and ABI’s hunger to rid themselves of the “drag” and distraction of asbestos claims at essentially

no cost was so strong that they in effect conspired with their nominal adversaries the asbestos

claimants against Congoleum’s insurers – all despite Congoleum’s contractual and common-law

duties of cooperation and fidelity to its insurers.5




5
        Although the chief victims of the scheme embodied in the Plan are the insurers who will be
called upon to fund the Plan in contravention of the terms of their policies, there are other victims
as well – most particularly, those asbestos claimants with meritorious claims, both present and
future, who will find their ability to achieve fair settlements thwarted by Congoleum’s breaches of its
insurance contracts and the Plan’s attempted hijacking of insurance proceeds for payment of
thousands of non-meritorious claims.



                                                 -6-
II.    FACTUAL BACKGROUND

       A.       Congoleum’s Insurance Program: Congoleum’s Obligation To
                Cooperate With Its Insurers To Resist Liability

                Dozens of insurers issued general liability insurance to Congoleum between 1952

and 1985. During this time, Congoleum maintained primary insurance with Liberty Mutual

Insurance Company (“Liberty”) from 1952 to 1972 and from 1976 to 1985, and with

Nationwide Indemnity Company (f/k/a Employers Insurance of Wausau) (“Nationwide”) from

1973 to 1975.

                Starting in 1953, Congoleum also obtained multiple levels of excess insurance

policies. Certain of the excess insurers have become insolvent, which as a matter of New Jersey

law leaves Congoleum uninsured with respect to those coverage periods and requires it to satisfy

the insolvent insurers’ share of liability for judgments and settlements.

                As with all insurance policies, Congoleum’s insurance policies transfer to the

insurers the financial risk of certain of Congoleum’s liabilities. This risk transfer is subject,

however, to the express terms and conditions of the policies. Most importantly, in exchange for

agreeing to assume the financial risks transferred under the policies, the insurers obtain the right

to protect their financial exposure by, inter alia, controlling the defense and settlement of claims

with the full cooperation of the policyholder.6 Absent such control, the policies would function

as nothing more than a sort of demand account on which the policyholder could draw down at

any time for any purpose. In order to protect against such a circumstance, the insurance policies




6
        The rights of insurers vary depending on the terms of their policies. The policies of some
insurers do not contain a right to defend against claims.



                                                 -7-
contain important express conditions precedent to coverage, without which the insurers would

not have issued policies to Congoleum.

               For example, the excess insurers have the discretionary right, at their option, to

“associate” with Congoleum (and its underlying insurers, if any) in the defense and control of

any claim, suit, or proceeding reasonably likely to involve payments under the excess policies.

Moreover, the excess insurers are only required to pay for covered damages assessed after an

actual trial or pursuant to a written settlement agreed to by the claimant, Congoleum, and the

excess insurer. The policies provide that if Congoleum settles a claim or suit on its own, it does

so at its own cost, waiving any right to reimbursement from its insurance. Each excess policy

also requires Congoleum to cooperate with the issuing insurer in defending and settling claims

and suits. If such cooperation is not given, coverage is vitiated. Finally, the policies contain

express “anti-assignment” clauses, providing that Congoleum’s assignment of its interest under

the policies shall not bind an insurer unless or until the insurer consents to that assignment.

That way, the insurers can be assured that the policyholder’s duties under the insurance contract

(e.g., the duty to give prompt notice of claims and the duty to cooperate with the insurer in the

defense and settlement of claims and suits) will be discharged by a person or entity that the

insurer, in its sole discretion, determines can be relied on to work with the insurer to avoid or

reduce any liability under the policies.

               Further, Congoleum’s excess policies provide that an excess insurer has no

obligation to pay any claims under a particular policy unless all applicable underlying coverage is

properly exhausted by payment of covered claims. Excess insurers accept lesser premiums

because they are further away from the risk than primary insurers or lower-level excess insurers.

Thus, the excess insurers are contractually entitled to the protection afforded by requiring the



                                                -8-
underlying insurance to be properly and completely exhausted before they can be called upon to

make any payments under their insurance policies.

       B.      Congoleum’s Asbestos Litigation History: Working With Its
               Insurers, Congoleum Avoids Significant Asbestos Liability

               From the early 1980s up to and including September, 2002, Congoleum and its

insurers actively and successfully defended asbestos injury lawsuits. During this time, the

Debtor’s primary insurers, Liberty and Nationwide, oversaw the processing of asbestos claims

and the defense of asbestos lawsuits. By raising well-established defenses, many cases were

dismissed outright, and others were settled for de minimis sums (through September 30, 2002,

more than 99% of the claims against Congoleum were settled for average amounts of less than

$102), thereby discouraging the filing of claims that had minimal evidentiary support. As of

September 30, 2002, more than twenty years after Congoleum was first named as a defendant in

an asbestos injury suit, the company had resolved more than 33,000 claims for an aggregate total

of only approximately $13.5 million – roughly $400 per claim. (Congoleum SEC Form 10-Q

(Sept. 30, 2002) at 11.)

               Based on this successful history of resolving asbestos claims for de minimis

amounts, Congoleum projected its future, 50-year liability for asbestos claims at a relatively

modest amount, compared to the value of the settlement Congoleum seeks to implement

through confirmation of the Plan in this case. Thus, in its SEC Form 10-Q for the period ended

September 30, 2002, Congoleum concluded that the “range of probable and estimable

undiscounted losses for asbestos-related claims through the year 2049 is between $53.3 million

and $195.6 million before considering insurance recoveries.” (Id. at 12.)




                                               -9-
        C.      Transition Of Insurance Coverage Due To Claimed Exhaustion By
                Congoleum’s Primary Insurers

                Until early 2001, Congoleum’s defense of asbestos bodily injury claims had been

funded and administered by Liberty Mutual, Congoleum’s primary insurer from 1955-1972 and

1976-1985. In early 2001, Liberty asserted that its primary policy limits with respect to asbestos

bodily injury claims were exhausted. Liberty’s claim of exhaustion was based on its

interpretation of a so-called “non-cumulation” clause contained in certain of its primary

policies.7

                Following Liberty’s claim of exhaustion, Nationwide assumed control of

coordinating Congoleum’s national asbestos defense strategy and continued Liberty’s long

record of success. In late August 2002, however, Nationwide advised Congoleum that its policy

limits were also nearly exhausted.

                After Liberty’s February 2001 assertion that its coverage limits would soon be

exhausted due to application of the non-cumulation clause in its policies, Congoleum notified its

“first layer” excess insurers that their respective obligations under their policies might soon be

triggered. In response, the first-layer excess insurers promptly sought information regarding the


7
         Liberty asserted that under its “non-cumulation” clause, its total liability under its primary
policies was capped at an amount that was far less than the face amount of coverage under all of its
policies, added together. At the time Liberty claimed that its primary coverage to Congoleum was
exhausted on account of application of the “non-cumulation” clause, Liberty was engaged in
litigation in the New Jersey courts against another policyholder concerning the proper interpretation
of the clause. On April 10, 2003, the New Jersey Supreme Court rejected Liberty’s interpretation of
the non-cumulation clause and held that Liberty was required to pay its full limits in each triggered
policy period. See Spaulding Composites v. Aetna Cas. & Sur. Co., 819 A.2d 410 (N.J. 2003). As a
result of this ruling, Liberty was required to pay an additional $13 million toward Congoleum’s
asbestos liabilities, and its duty to defend Congoleum against claims or suits alleging liability for
bodily injury caused by exposure to Congoleum asbestos was reinstated. The $13 million in Liberty
policy limits which were effectively restored by the ruling in Spaulding Composites represented, of
course, an amount greater than the total amount Congoleum and its insurers had paid for asbestos-
                                                                                            (continued…)


                                                 - 10 -
exhaustion of Liberty’s coverage and questioned (correctly, as the New Jersey Supreme Court

made clear in Spaulding Composites) whether Liberty’s coverage was validly exhausted. The

requested information was not provided.

                 Even though Congoleum had not responded to the first-layer excess insurers’

requests for information, and even though Liberty still had $13 million in unpaid policy limits,

Congoleum’s counsel demanded that these insurers assume control of the asbestos matters.

Shortly thereafter, on September 15, 2001, the London Market Insurers, who had issued first-

layer excess insurance as well as higher-level excess policies, commenced a declaratory judgment

lawsuit in New Jersey state court seeking to have these disputed issues determined promptly by a

court. Congoleum counterclaimed against London Market Insurers for breach of contract and

also sued other excess insurers for breach of contract and/or declaratory relief. The parties

were subsequently realigned with Congoleum’s consent, with Congoleum as the plaintiff and

London Market Insurers and the other insurers as defendants. The operative pleading is now

the amended complaint filed by Congoleum. The coverage suit is currently docketed as

Congoleum Corp. v. ACE American Ins. Co., et al., Superior Court of New Jersey, Law

Division, Middlesex County, Docket No. MID-L-89080-01 (the “Coverage Litigation”).

                 Even while the Coverage Litigation remained pending, certain of the first-layer

excess insurers entered into discussions with Congoleum in an effort to agree to a “coverage-in-

place” settlement which would have determined the allocation of the coverage obligations of the




(…continued)
related liability in all of the preceding 20 years.



                                                      - 11 -
various first-layer excess insurers.8 In turn, Congoleum led its insurers, and the public, to

believe that these discussions were progressing and were likely to yield an agreeable solution for

all parties.

        D.     The Cook And Arseneault Settlements: Congoleum Violates
               Insurers’ Rights By Agreeing, Without Insurers’ Consent, To Pay
               Unjustifiably High Settlements

               As it turns out, Congoleum was simultaneously negotiating to settle two asbestos

personal injury actions pending against Congoleum and other defendants in New York state

court , that were approaching trial. Plaintiffs’ counsel in those cases, Cook and Arseneault, was

Perry Weitz of the firm Weitz & Luxenberg, which had thousands of other asbestos claims

pending against Congoleum.

               Congoleum had initially employed its historically successful strategy of “vigorous

defense” in both of these cases, given that the exposure evidence that existed against

Congoleum was particularly suspect. Mr. Cook and Mr. Arseneault, the plaintiffs, each testified

in depositions that their exposure to asbestos-containing floor products came when they worked

in the vicinity of other people who were installing asbestos-containing floor tiles; neither man

was able to identify Congoleum as the manufacturer of the tiles.9 More importantly, both men

had significant exposure to loose (e.g., unencapsulated) asbestos in the course of their respective

careers. Mr. Cook worked for 30 months for a company where he would regularly “mix”


8
        At Congoleum’s insistence, all of Congoleum’s excess insurers above the first layer were
barred from the Court-supervised settlement discussions among Congoleum and the first-layer
insurers.
9
       Plaintiffs Cook and Arseneault could only say that some of the tiles on which these other
people were installing may have come from Congoleum. Congoleum was hardly the only
manufacturer of asbestos-containing flooring products – there are many others as well. In essence,
                                                                                      (continued…)




                                               - 12 -
asbestos powder to prepare pipe insulation; Congoleum has never manufactured asbestos

powder, however. Mr. Arseneault was constantly exposed to asbestos at jobsites from the

installation of ceiling tiles, sheetrock walls, pipe insulation, boiler insulation (none of which was

ever manufactured by Congoleum), and the occasional installation of floor tiles.

               The initial settlement demand to Congoleum in February, 2002 was $1 million for

Arseneault and $750,000 for Cook. On September 26, 2002, Congoleum requested that its first-

layer excess insurers provide funding so Congoleum could settle these cases for a total of $4

million, more than twice the amount of the initial settlement demand. Without providing the

first-layer excess insurers an opportunity to respond to this request for settlement authority,

Congoleum settled Cook and Arseneault on October 2, 2002 for the staggering sum of $16

million. Of this amount, only $1.6 million was to be paid by Congoleum; the remaining $14.4

million was to be satisfied by the grant of a “security interest” in the proceeds of Congoleum’s

insurance policies. The $16 million Congoleum agreed to pay to settle just these two cases

exceeded the total amount Congoleum had paid in connection with all asbestos-related claims in

the more than 20 years since asbestos-related claims were first asserted against the company.

               The insurers later learned, through depositions taken in the Coverage Litigation,

that the Cook and Arseneault settlements were not negotiated by the lawyers who were

defending Congoleum in those cases or by the lawyers responsible for coordinating

Congoleum’s asbestos defense on a nationwide basis. Instead, the Cook and Arseneault

settlements were negotiated by Scott Gilbert of Gilbert Heintz & Randolph LLP (“GHR”), who


(…continued)
Mr. Cook and Mr. Arseneault were speculating that the floor tiles these unidentified other persons
were installing came from Congoleum rather than some other manufacturer.



                                                - 13 -
had, incredibly, been hired by Congoleum upon the recommendation of Mr. Weitz, the lawyer

for plaintiffs Mr. Cook and Mr. Arseneault. Mr. Gilbert and his firm represent Mr. Weitz and

Mr. Weitz’s clients in other asbestos matters, including suits against other manufacturers of

asbestos-containing floor tile. Mr. Gilbert is not an asbestos defense lawyer or any other kind of

defense lawyer; he is a specialist in pursuing insurance coverage. Just as incredible as the

staggering amount of the settlement and the fact that Congoleum hired Mr. Gilbert based on the

recommendation of the lawyer who represented the plaintiffs suing Congoleum is the fact that

Mr. Gilbert settled Cook and Arseneault on the same day he was hired by Congoleum.10

       E.      Negotiation Of An Omnibus Settlement Agreement With Claimants
               Counsel

               Mr. Gilbert’s charter from Congoleum was far broader than merely settling Cook

and Arseneault. In fact, Congoleum had retained Mr. Gilbert’s law firm, GHR, and a consulting

firm 70% owned by GHR, Kenesis Corp., for the purpose of assisting with the development of

a prepackaged plan of reorganization that would free Congoleum from asbestos liability. To

negotiate the terms of the prepackaged plan, which would require the approval of 75% of

existing asbestos claimants against Congoleum, members of GHR met with Mr. Weitz (counsel

to plaintiffs Mr. Cook and Mr. Arseneault) and Joseph Rice of the Ness Motley law firm (now

Motley Rice), another prominent lawyer for asbestos claimants.




10      Mr. Gilbert freely admitted in a deposition he gave in the Coverage Litigation that he
was, in settling Cook and Arseneault, not burdened by any knowledge of the cases, the
allegations in them, the prior course of settlement negotiations, Congoleum’s liability defenses
and damages defenses, Congoleum’s history regarding settlement of similar claims, or the
remittitur procedures in effect in New York for reverse-bifurcated cases such as these (in which
damages are determined prior to liability) that almost invariably result in asbestos verdicts being
substantially reduced by judges.


                                               - 14 -
               As a result of these discussions, in January 2003, Mr. Gilbert, Michael Rooney of

Kenesis, Mr. Weitz, and Mr. Rice finalized the elements of an agreement in principle on the

terms of a bankruptcy reorganization plan for Congoleum that resulted, inter alia, in a more-than-

generous settlement of asbestos claims that had no relation to Congoleum’s historical defense

and settlement record. Despite Congoleum’s contractual obligation to cooperate with its

insurers in the defense and settlement of claims and suits, Congoleum never told any of its first-

layer excess insurers of its ongoing discussions with Messrs. Weitz and Rice (“Claimants’

Counsel”). Indeed, the insurers had been led to believe that they and Congoleum were close to

consummating the coverage-in-place agreement that they had been negotiating. Furthermore,

although the insurers had the contractual right to decide whether or not the claims should be

settled or for how much, Congoleum negotiated and entered into its settlement agreement with

Claimants’ Counsel without the insurers’ consent. Because the insurance contracts provide that

the right to control the defense and settlement of claims belongs to the insurers, not

Congoleum, it is the insurers’ contention that Congoleum breached its insurance contracts by

agreeing with Claimants’ Counsel to settle asbestos claims via the prepackaged plan of

reorganization.

               When the agreement in principle was reached in January 2003, counsel for

Congoleum’s parent company ABI, advised Congoleum and Messrs. Weitz and Rice that federal

securities laws required public disclosure of the deal. Messrs. Weitz and Rice protested that too

many new claims would be submitted by other attorneys once the agreement was publicly

announced, diluting the control of Messrs. Weitz and Rice and diluting the payments to their

clients (and to them, via their percentage-based contingency fees). Nevertheless, Congoleum

issued a press release regarding the deal on January 13, 2003. Congoleum’s counsel in the New



                                              - 15 -
Jersey coverage litigation case e-mailed the press release to counsel for the insurers the following

day.

       F.      Terms Of The Claimants Agreement: Targeting The Insurance
               Policies

               Congoleum had pursued the negotiation of the proposed prepackaged

bankruptcy filing with Claimants’ Counsel even though certain first-layer excess insurers were

near consummation of a coverage-in-place agreement. In fact, as late as December 2002,

Congoleum requested that the first-layer excess insurers discuss the terms of their coverage-in-

place proposal with Congoleum. In response, certain of the first-layer excess insurers agreed to

meet with Congoleum during January 2003, and these talks continued until the January 13, 2003

press release revealed that Congoleum had unilaterally settled with the claimants without the

insurers’ knowledge and in breach of Congoleum’s obligations under its insurance policies.

               In response to Congoleum’s announcement, many of the excess insurers sought

in vain to obtain information concerning the settlement agreement. They also sent cautionary

letters reminding Congoleum of its obligations under the insurance policies. Nearly two months

after the agreement in principle was first disclosed to the insurers and the public, Congoleum

finally relented and provided the first-layer excess insurers with drafts of the Settlement

Agreement between Congoleum Corporation and Various Asbestos Claimants (the “Claimants

Agreement”), as well as the “Collateral Trust Agreement” and the “Security Agreement” that

implemented the Claimants Agreement (the “Related Agreements”). However, Congoleum

foreclosed any meaningful involvement by the insurers because it gave its putative adversaries

the Claimants’ Counsel copies of these agreements at the same time (or earlier).

               It is not surprising, given the complete absence of any opportunity for the

insurers to be involved in negotiating the settlement, that the substantive terms of the draft


                                               - 16 -
agreements were to insurers’ severe detriment, violated the insurers’ contractual rights, and

adversely impacted the insurers’ financial interests. Because Congoleum perceived itself as

paying claimants with the money of its insurers, there was no incentive for Congoleum to draft

the agreement in such a way as to restrict the amounts pay to claimants. Under the draft

Claimants Agreement, Congoleum agreed to treat claims arising under pre-existing settlement

agreements or a trial-listed settlement as being 100% secured by a security interest in the proceeds of all of

Congoleum’s insurance policies. The claims of all other existing asbestos claimants who elected to

participate in the settlement were to be partially secured by rights to insurance in an amount

equal to 75% of the value established by a “Compensable Disease Matrix” negotiated between

Congoleum and Claimants’ Counsel (the “Matrix”), with the remaining 25% of the matrix value

being treated as an unsecured claim in Congoleum’s bankruptcy case. As a result of their 25%

unsecured claim, these claimants would be eligible to vote in the Chapter 11 case, and provide

part of the 75% supermajority approval required for entry of a Section 524(g) “channeling

injunction,” even though most of their alleged claim was being satisfied outside the plan of

reorganization.

                 The claim values in the Matrix bear no relationship whatsoever to the de minimis

amounts Congoleum and its insurers had historically paid to settle claims against Congoleum.

Whereas Congoleum had been able through September 30, 2002 to settle 99% of the claims

against it for $102 or less, and had resolved all of its claims for an average of roughly $400 per

claim, the Matrix obligated Congoleum to pay many times these values – $1,000 to $3,000,

depending on certain criteria – to unimpaired claimants (e.g., claimants without any existing




                                                    - 17 -
functional impairment as the result of their alleged exposure to asbestos).11 Nothing in

Congoleum’s historical claims payment experience justifies such large payments to unimpaired

claimants.

                In addition to paying unimpaired claimants up to 30 times the amount of

historical payments for such claims, the draft Claimants Agreement also failed to impose any

meaningful requirements that claimants submit evidence they had ever been exposed to a

Congoleum asbestos-containing product in a manner capable of causing injury. Rather, all the

agreement required a claimant to do is submit a “verified statement” that he or she “was

exposed to an asbestos-containing product manufactured, sold, or distributed by Congoleum or

for which Congoleum has legal liability.”12 As a result, a claimant could recover pursuant to the

terms of the draft Claimants Agreement without providing any verifiable evidence of the fact or

extent of such exposure. In light of the absence of any requirement that claimants prove actual

exposure and the nature of such exposure, Congoleum effectively agreed to assume virtually

unlimited liability to claimants who never actually had potentially injurious exposure to an

asbestos-containing Congoleum product.


11
          Under docket control plans in effect in many states throughout the country – including,
importantly, New York County, where many of Mr. Weitz’s suits against Congoleum were filed –
suits filed by such “unimpaired” claimants are placed on suspense dockets, preserving the claims
against statute of limitations challenges, but precluding the claims from coming to trial until the
claimants actually have some functional impairment. The result is that such claims have no
settlement value at all. Mark A. Behrens & Monica G. Parham, Stewardship for the Sick: Preserving
Assets For Asbestos Victims Through Inactive Docket Programs, 33 Tex. Tech. L. Rev. 1 (2001); Hon.
Griffin B. Bell, Asbestos Litigation and Judicial Leadership: The Courts’ Duty to Help Solve The Asbestos
Litigation Crisis, Briefly, Vol. 6, No. 6, June 2002); In re New York City Asbestos Litig., Order Amending
Prior Case Mgmt. Orders (N.Y. Supreme Ct. N.Y. Cty., Dec. 19, 2002). Despite this, the Matrix in
Congoleum’s settlement would pay claimants asserting such claims as much as $3,000 – about 30
times the historical average of Congoleum’s claim settlements.




                                                  - 18 -
               The draft Claimants Agreement also provided for Congoleum to pay $1 million

each to the very lawyers who were their adversaries in so many of the underlying suits, Messrs.

Weitz and Rice. These payments were in addition to whatever contingency fees Messrs. Weitz

and Rice were entitled to obtain from their clients. Although the Claimants Agreement in its

final form provides that the payment will be used to reimburse the out-of-pocket expenses of

Messrs. Weitz and Rice incurred in connection with negotiation of the Claimants Agreement and

the possible pre-package bankruptcy, the Claimants Agreement contains no requirement that

Messrs. Weitz and Rice account for any such expenses as a condition of getting the $1 million

payment. In fact, in a recent deposition in the Coverage Litigation, an official of the company

that financed these payments testified that Congoleum had indicated that the purpose of the fee

(which he recalled Congoleum referring to as a “payoff”) was to secure the cooperation of the

claimants in connection with arranging the bankruptcy. 13

       G.      The Insurers’ Objections To The Settlement Are Not Heeded

               After months of efforts by the insurers to meet with Congoleum representatives

to discuss the Claimants Agreement, Congoleum finally advised the insurers that its counsel,

Mr. Gilbert, would be meeting with Messrs. Weitz and Rice in Charleston, S.C. on March 13,


(…continued)
12
       The Claimants Agreement was later modified to require a sworn statement that the Claimant
was exposed to an asbestos-containing product manufactured, sold, or distributed by Congoleum.
13
        Originally, Messrs. Weitz and Rice were to be paid $5 million in the aggregate by Congoleum
for their trouble in negotiating, as adverse counsel to Congoleum, the settlement deal with
Congoleum. We do not know why the amount and nature of the payment was changed in the final
agreement, but believe it has much to do with a desire to avoid the litigation that plagued the
Combustion Engineering asbestos bankruptcy case, where the debtor’s parent company agreed to
make a $20 million “success fee” payment to Mr. Rice. See, e.g., In re Combustion Engineering, Inc.,
295 B.R. 459, 478 (Bankr. D. Del. 2003); “Pre-Packaged Asbestos Bankruptcies: A Flawed
Solution,” 44 So. Tex. L. Rev. at 909-10.



                                               - 19 -
2003 to discuss finalizing the terms of the Claimants Agreement and the other agreements that

would serve as the basis of Congoleum’s anticipated prepackaged bankruptcy. At the insistence

of the insurers, Congoleum permitted a limited number of “representatives” of the insurers to

attend the meeting. At the meeting, counsel for the insurers stated their objections to the

Claimants Agreement and attempted to participate meaningfully in the discussions; they were

told, however, that their comments would not be considered unless they agreed unconditionally

to pay their full policy limits of approximately $1 billion, despite the fact that Congoleum just six

months earlier had estimated its total asbestos liability through 2049 at between $53.3 million

and $195.6 million. (See Congoleum SEC Form 10-Q (Sept. 30, 2003) at 12.) At a meeting held

one week later in New York, counsel for the insurers again were told that their objections to the

settlement would not be considered absent a commitment to pay full policy limits.

               On March 21, 2003, Century Indemnity Company (“Century”), one of the excess

insurers, notified Congoleum in writing of its demand to assume the defense and to control

whether particular covered asbestos claims and suits against Congoleum should be settled or

tried, even though the underlying primary policies were still not exhausted. Century’s continuing

demand to assume the defense of Congoleum’s asbestos-related claims and suits and its

objection to the global settlement was subsequently reiterated in open court in the Coverage

Litigation on March 26, 2003. Thereafter, Century continued to assert its demand to assume the

defense and its objection to the global settlement up through the petition date. In each of these

communications, Century objected to the proposed global settlement, demanded that Century’s

right to assume the defense be honored, and advised Congoleum that if it went forward with the




                                               - 20 -
proposed settlement over Century’s objection, it would be a non-covered claim.14 Congoleum

rejected outright Century's demand to assume the defense of its asbestos-related claims and suits

as well as the offers of other insurers.15

                Without informing the insurers, on April 10, 2003 Congoleum and Claimants’

Counsel executed final versions of the Claimants Agreement and Related Agreements which

were substantially identical to the original drafts. The comments and objections of the insurers

were ignored, in violation of the insurers’ rights under their policies.

                Claimants’ Counsel were correct in predicting that the January 13, 2003 public

announcement of the plans for a prepackaged bankruptcy would prompt a deluge of claims

against Congoleum. As of December 31, 2002, there were approximately 16,000 asbestos

lawsuits pending against Congoleum, involving approximately 56,567 individual claimants. A


14
         It is black letter insurance law that, under the “duty to defend” provision of an insurance
policy, the insurer has an absolute right to defend. See Couch on Insurance 3d § 200:1 (1999)
(“Couch”); Appleman, Insurance Law and Practice § 4681 at 2 (Berdal ed. 1979) (“Appleman”).
The insurer’s right to exercise exclusive control over litigation against the policyholder is derived
from the public interest in having the insurance industry regulate the disbursement of the money
its receives from the public in the form of premiums, and to minimize unwarranted claims. See
Appleman § 4681 at 2. A policyholder’s refusal to allow an insurer to control the defense
breaches both the “cooperation” and “no voluntary payment” provisions of an insurance
contract. Kindervater v. Motorists Cas. Ins., 120 N.J.L. 373, 377, 199 A. 606, 608 (“A violation
of either relieves the insurer from policy liability, regardless of whether actual prejudice has
ensued therefrom”); Appleman at § 4681 at 4; Couch § 199:30.
15
        As alluded to above, a policyholder is required by New Jersey law to fund that portion of
coverage attributable to its insolvent insurers. Congoleum’s chief financial officer testified in a
deposition in the Coverage Litigation that Congoleum could afford to pay the share of liability that
under New Jersey law would have been the responsibility of the insolvent insurers. Subsequently,
substantially all of Congoleum’s excess insurers have offered a coverage-in-place agreement in which
Congoleum’s responsibility to pay the shares of insolvent insurers would be capped at $8.75 million
per year, with any unused portions of the annual cap (or any liability in excess of the annual cap)
rolled over to the next year. The cap provides Congoleum with additional protection beyond that to
which it is entitled under New Jersey law or the terms of its insurance policies. Congoleum has not
agreed to this proposal, however.



                                                - 21 -
scant nine months later, Congoleum was the subject of asbestos bodily injury claims by

approximately 101,784 claimants. The give-away embodied in the Claimants Agreement had

proved to be a virtually irresistible magnet, almost doubling the amount of asbestos claims

against the company in just nine months. 16 Given Congoleum’s historical success in achieving

dismissal of more than 99% of claims filed, it would not be unreasonable to estimate that fewer

than 2,000 of these claims are valid.

                The subterfuge involving the Claimants Agreement becomes even more obvious

in light of the final days of the bankruptcy preparations. Kenesis, the subsidiary of the GHR law

firm that represented Congoleum in the negotiation of the Claimants Agreement, served the role

of “claims reviewer” for the claims submitted pre-petition. Kenesis originally reviewed claims

asserting entitlement to an aggregate of $600 million, but rejected claims aggregating $400

million for failure to comply with even the ridiculously simple requirements for the claims

submission process. However, holders of the rejected claims (who were also allegedly impaired

and therefore entitled to vote on the prepackaged Plan) were given until December 15, 2003 –

before the voting deadline – to cure the deficiencies in their claims. In other words, these

claimholders were permitted to withhold their favorable vote until they had been notified

whether Kenesis approved their claim. When some of the insurers audited the Kenesis process,

they identified numerous examples where the claims were still deficient yet were approved by




16
         The deluge of claims was undoubtedly the result of lawyers for asbestos claimants wanting to
get their clients’ claims in before the “cut-off” date for the submission of claims to receive a security
interest (either 100 percent or 75 percent) for the claims. The sophisticated plaintiffs’ bar is well
aware of the importance of filing claims soon enough so they will be paid under the pre-bankruptcy
trust. See “Pre-Packaged Asbestos Bankruptcies: A Flawed Solution,” 44 So. Texas. L. Rev. at 901-
02, 911-14.



                                                 - 22 -
Kenesis. The insurers brought these problems to Congoleum’s attention but Congoleum

refused to get involved in questioning its own claims handler.

               Certain Insurers believe that the improprieties surrounding this pre-petition

claims allowance served numerous goals. It permitted the plaintiffs’ attorneys to have their

clients’ claims allowed outside the scrutiny of the Court and at a time of maximum leverage

because Congoleum needed their votes for confirmation. Moreover, it ensured that the claims

review happened under “friendly hands;” even if the Court disqualifies Kenesis from

representing the Debtors going forward (as Certain Insurers intend to request), the plaintiffs’

attorneys no doubt expect that the Court will not order all of the claims to be re-reviewed, and

therefore to the extent illegitimate claims slipped through those “friendly hands,” they will have

gotten away with funds supposedly earmarked for legitimate claims.

       H.      Congoleum’s Prepackaged Bankruptcy Reorganization Plan:
               Attempted Confiscation Of Insurance Funds Without Regard To
               The Terms Of The Policies

               The settlement between Congoleum and the asbestos claimants embodied in the

Claimants Agreement was predicated on Congoleum filing a prepackaged Chapter 11 plan

establishing a trust pursuant to Section 524(g) of the Bankruptcy Code to which asbestos bodily

injury claims would be “channeled.” Congoleum’s Chapter 11 plan was distributed to claimants

beginning October 27, 2003. The solicitation period was initially scheduled to end on December

19, 2003 but was later extended until December 24, 2003. Congoleum and its affiliates

Congoleum Sales, Inc. and Congoleum Fiscal, Inc. commenced these Chapter 11 cases on

December 31, 2003.

               At best, Congoleum’s Plan was negotiated between Congoleum and Claimants’

Counsel. At worst, asbestos plaintiff’s counsel simply dictated to Congoleum the terms relating



                                              - 23 -
to payments to claimants. In any event, the insurers were shut out of negotiations over the Plan.

Accordingly, as in the case of the Claimants Agreement, Congoleum’s negotiation of and

agreement to the Plan breached its obligation to cooperate with the insurers and violated the

insurers’ right to control the defense and settlement of claims.

               The Plan divides claims into fourteen classes including the following four which

are related to asbestos bodily-injury claims.

       •       Class 2 -- Secured Asbestos Claims of Qualified Pre-Petition Settlement
               Claimants. These claimants settled prior to the filing date. Under the Claimants
               Agreement, this Class is secured for 100% of the amount specified in each
               individual’s settlement agreements.

       •       Class 3 -- Secured Asbestos Claims of Qualified Participating Claimants. These
               claimants filed claims prior to the August 15 cut-off date specified in the
               Claimants Agreement. Their claims are secured to the extent of 75 percent of
               their value, in accordance with the Matrix in the Claimants Agreement.

       •       Class 9 -- ABI Claims. In 1993, the assets of Congoleum and the Amtico Tile
               Division (“Amtico”) of ABI were combined. The agreement under which
               Amtico was acquired obligated Congoleum to indemnify ABI for all liabilities
               relating to Amtico, including asbestos claims, to the extent insurance proceeds are
               not recovered by ABI. There are three types of ABI claims: (i) ABI Asbestos
               Personal Injury Indemnity Claims; (ii) ABI Asbestos Property Damage Indemnity
               Claims and Other ABI Asbestos Claims; and (iii) all other ABI claims related to
               Amtico.

       •       Class 10 -- Unsecured Asbestos Personal Injury Claims. This impaired Class
               includes (i) current asbestos claimants who did not settle or meet the
               requirements to be paid under the Claimants Agreement and (ii) Future Asbestos
               Claimants (e.g., “demands” under § 524(g)(5) of the Bankruptcy Code). This
               Class also includes the 25% unsecured portion of the claims of Qualified
               Participating Claimants in Class 3.




                                                - 24 -
               Except for certain ABI Claims, all of the classes containing asbestos claims are

considered impaired.17 Indicative of Congoleum’s financial strength, all of the classes of claims

unrelated to asbestos are unimpaired.18 For example, Congoleum anticipates paying

approximately $85 million to its general unsecured creditors (Class 7).

               The Plan establishes a trust (the “Plan Trust”) to pay the asbestos-related claims.

(See Plan at § 5.1.) Other than Congoleum’s disputed insurance rights, which Congoleum

intends to assign to the trust pursuant to the Plan, the only assets that the Plan Trust would have

are (i) a 10-year note from Congoleum in the face amount of $2,738,234.74 (an infinitesimal

fraction of Congoleum’s projected asbestos liability) bearing 9% interest payable quarterly (the

“Note”), (ii) $250,000 cash, contributed by ABI, and (iii) a contingent “Additional Plan Trust

Contribution” if ABI prepays the Note and subsequently sells or disposes of its equity in

Congoleum after the Principal Adjustment Date (one year after the Effective Date) but before

the third anniversary of the Principal Adjustment Date.19

               Upon consummation of the Plan, the Plan Trust would fund the settlement of all

asbestos-related classes of claims, which would be “channeled” to the Plan Trust under § 524(g)

of the Bankruptcy Code.




17
        Under the Plan, ABI Asbestos Property Damage Indemnity Claims in Class 9 will be deemed
disallowed.
18
        Class 4 – Lender Secured Claims – is listed as impaired in the Plan because the Plan
anticipates the restructuring of the existing credit agreement between Congoleum and Congress
Financial Corporation and of the existing subsidiary guaranty executed by Congoleum Fiscal, Inc.
and Congoleum Sales, Inc.
19
        The Plan also includes in the Plan Trust Assets “all of the assets held by the Collateral Trust
as of the Effective Date [of the Plan].”



                                                 - 25 -
               Even though asbestos creditors are impaired under the Plan – including “future

claimants” who, by definition, cannot vote on the plan or appear to represent their own interests

– Congoleum shareholders, including majority shareholder ABI, would retain their equity

interests under the Plan. ABI would forfeit its ownership rights only if Congoleum failed to

make the payments required by the Note and ABI fails to cure the default. The amount and

terms of the Note were, of course, carefully calibrated to ensure that ABI would permanently

retain its ownership rights.

               The Plan contains a variety of provisions that specifically seek to impair the rights

of Congoleum’s insurers and pre-determine the outcome of the Coverage Litigation . For

example, Section 8.4 of the Plan provides that nothing contained in the Plan or any of the

negotiations leading up to the Plan shall constitute a waiver of any claim, right, or cause of

action that any of the Debtors or the Plan Trust may hold against any insurer, including under

any policy. In other words, the Plan inappropriately seeks an order from this Court insulating

Congoleum from the consequences of its breach of the insurance policies (e.g., its decision to

negotiate the Plan and its incorporated settlement by itself, without permitting its insurers to

exercise their essential contractual rights to control the settlement of claims against Congoleum).

Likewise, the Plan provides that confirmation is conditioned on the Court making two findings

that would adversely impact the insurers’ rights under their policies:

      •       All insurers affording insurance coverage that is to be assigned to the Plan Trust
              have had notice and an opportunity to be heard on matters relating to the
              assignment, and are bound by the Plan and the findings of facts and conclusions
              of law set forth in the Confirmation Order (Plan at § 10.1(a)(xv)); and

      •       The duties and obligations of the insurers are not eliminated or diminished by (a)
              the discharge of the liabilities of the Debtors or Reorganized Debtors, (b) the
              assumption of liability for the Plan Trust Asbestos Claims by the Plan Trust, or (3)




                                               - 26 -
              the assignment to the Plan Trust of Debtor’s insurance rights (Plan at
              § 10.1(a)(xvii)).

               The Plan provides that all current claims not satisfied pursuant to the pre-petition

Claimants Agreement, and all future claims, will be processed under criteria set forth in the

Plan’s Trust Distribution Procedures (the “TDPs”). The TDPs set forth the method by which

claims will be submitted, valued, reviewed and evaluated, and paid. Although virtually all of the

assets of the Plan Trust are anticipated to come from proceeds of insurance policies, and even

though the insurers have the contractual right to control the defense and settlement of claims

against Congoleum, the TDPs grant the insurers no role whatsoever in any aspect of claims

processing. In addition, although the TDPs state that a claimant seeking payment from the Plan

Trust must provide evidence (deposition testimony, invoices, affidavits, or other “credible

evidence”) of exposure to an asbestos-containing product manufactured, sold, or distributed by

a Debtor or for which a Debtor has legal liability, the TDPs establish no requirements for what

the evidence must show for a claim to be approved. There are no standards in the TDPs for

example, for the length of exposure or type of exposure. The claims reviewer, therefore, has

virtually unfettered discretion to allow claims for payment against the Plan Trust.

               As to future claimants and current claims of claimants not participating under the

Claimants Agreement, the TDPs contains a “Compensable Disease Matrix” with scheduled

values for claims. Claims are to be assessed by the claims reviewer under one of three regimes:

an “Expedited Review Process,” which offers quicker payments in exchange for the claimant

accepting a payment generally equivalent to the values in the Matrix contained in the Claimants

Agreement, an “Individual Review Process,” under which greater scrutiny is given to claims, in

exchange for which the claimants may be entitled to even higher claim payments; and

“Extraordinary TDP Valued Asbestos Claims,” which permits greater payments for claims


                                              - 27 -
deemed deserving by the claims reviewer, applying criteria not detailed in the TDP.20 Once a

claim is given a value under one of these three regimes, it is then subject to a percentage

reduction based on the ratio of the Plan Trust’s anticipated assets to the anticipated value of all

allowed unsecured asbestos claims. Thus, to the extent payments to the current “secured

claimants” would consume a disproportionate amount of the Trust, future claimants may get

little or no recovery.

       I.      The Coverage Litigation

               The Coverage Litigation by Congoleum against its insurers, Congoleum Corp. v.

ACE American, et al., has been proceeding for more than two years. The presiding judge in the

Coverage Litigation, Hon. Mark B. Epstein, has almost 20 years experience on the New Jersey

Superior Court, where he has overseen other complex insurance coverage cases including

Uniroyal, the Mark IV litigation, and the Stanley case.21 Judge Epstein is intimately familiar with

the parties, the facts of the case, and the claims presented. He has already decided several

motions for partial summary judgment in that case, ruled on motions to compel, and has – with

the parties’ agreement – also attempted to mediate a settlement of the coverage case.22


20
          The TDPs provide that, to recover as a Extraordinary TDP Valued Asbestos Claim, the
claimant must demonstrate, in addition to the requirements for an Individual Claim, (i) either his or
her exposure to asbestos (a) was greater than 40 percent the result of exposure to a Congoleum
asbestos-containing product or (b) occurred predominantly as the result of working in a Congoleum
facility a nd (ii) he or she has little likelihood of substantial recovery elsewhere. However, the TDPs
contain no criteria regarding how the claim is to be valued.
21
       See Mark IV Indus., Inc. v. Commercial Union Ins. Co., No. MID-I-1201-02 (N.J. Super. Ct.,
Middlesex Cty.); The Stanley Works v. The Travelers Ins. Co., MID-L-3466-00 (N.J. Super. Ct.,
Middlesex Cty.); Uniroyal, Inc. v. American Re-Ins. Co., No. L-8172-94 (N.J. Super. Ct., Middlesex
Cty).
22
        Judge Epstein has appointed a Special Discovery Master in the Coverage Litigation, John
Keefe, who also has long experience as a New Jersey state court judge. Mr. Keefe was formerly
Presiding Judge of the Appellate Division of the New Jersey Superior Court where he served for
                                                                                     (continued…)


                                                 - 28 -
                 One of the partial summary judgment motions Judge Epstein has already granted

was filed by the insurers. In that motion, certain excess insurers who had issued policies above

those issued by the first-layer excess insurers obtained a ruling that they have not breached their

insurance contracts with Congoleum. Judge Epstein held that these insurers could not be in

breach because they did not yet have any duty to pay asbestos claims against Congoleum, given

the fact that underlying coverage had not exhausted. The court also rejected Congoleum’s

thinly-veiled effort to assert an anticipatory breach claim, noting that the company had not pled

anticipatory breach in its complaint and, in any event, there had not been any unequivocal

repudiation by any of the excess insurers. As a result of this ruling, Congoleum cannot invoke

an argument often made by debtors seeking to justify their having negotiated bankruptcy plans

without permitting their insurers to be involved: that is, that the insurers have breached their

contracts and “abandoned” their policyholder. To the extent such an argument has merit in any

other context, it does not apply here, given Judge Epstein’s finding that the insurers who filed

the summary judgment motion had not breached their policies with Congoleum.

                 Judge Epstein also recently denied certain insurers’ motion for summary

judgment that the Claimants Agreement was unreasonable and in bad faith, finding that genuine

issues of material fact bar entry of summary judgment at this time. However, the judge noted

the following:



(…continued)
thirteen years. Judge Keefe has considerable experience in asbestos litigation including, among other
things, being designated to supervise and administer a pilot project involving statewide asbestos
litigation prior to becoming a judge. In 1984, Judge Keefe was appointed to the position of
Presiding Judge of the General Equity Part. He served in that capacity and as asbestos judge until he
was appointed to the Appellate Division in July, 1988.



                                               - 29 -
        [The Pre-Petition Claimants Agreement and the Plan], the insurance companies say,
       contain all of the elements listed in the case law of a settlement entered into in bad
       faith that includes up front payments to claimants, abandonment of defenses, only a
       minor negative economic effect on the insured, assignment of insurance rights,
       reimbursement to the insured for moneys paid to its insurance companies to
       claimants and exorbitant amounts paid to claimants who are not likely to prevail at
       trial.
               .. .

       It strikes me that if [Certain Insurers’] allegations are all proven true there could be a
       basis for both civil – civil and criminal complaints not to mention ethics complaints.

               As of the date these bankruptcy cases were commenced, three additional

summary judgment motions were pending in the Coverage Litigation. These motions, brought

by London Market Insurers, Everest Reinsurance Company, and Mt. McKinley Insurance

Company, and Continental Casualty Company and Continental Insurance Company (collectively

“CNA”), and joined in by many other excess insurers, seek rulings that Congoleum breached its

contractual duty of cooperation by entering into its settlement with the claimants. The motion

filed by Everest and Mt. McKinley, which was filed December 19, 2003, is currently noticed for

hearing on January 18, 2004. The motion filed by London Market Insurers was filed on

December 24, 2003. The motion filed by CNA was filed on December 29, 2003.

III.   POTENTIAL CONFIRMATION OBJECTIONS

               This is not the appropriate time or place for Certain Insurers to argue their plan

objections, and, indeed, because they have not yet had a chance to conduct critical discovery,

they are not in a position to do so. However, to assist the Court in understanding why the

schedule proposed by Certain Insurers is necessary, a list of some of the major objections

Certain Insurers anticipate making at the appropriate time is set forth below.

       •      The TDPs are not reasonable or appropriate because, inter alia: (i) the exposure
              criteria and level of proof of exposure are completely inadequate, thus permitting
              persons to qualify for payment without proof that Debtor is liable for their alleged


                                               - 30 -
    injuries; (ii) amounts proposed to be paid to claimants is excessive by any measure;
    (iii) the medical/diagnostic criteria are insufficiently rigorous, thus permitting
    persons to receive payments from Debtor even though they do not have any
    legally enforceable right to payment; (iv) the claims adjustment and allowance
    procedures are insufficiently rigorous; and (v) no provision is made for insurers to
    have any role in the defense or settlement of claims to be paid through the TDP
    processes. 11 U.S.C. § 1129(a)(1)-(3).

•   The Plan violates the insurers’ contractual rights in many respects, including the
    following: (i) it is an effort to settle without the consent or even the participation
    of the insurers, which is contractually required; (ii) it was negotiated without the
    participation of the insurers, in violation of their contractual rights to control or
    associate in the defense and settlement of claims; (iii) it purports to assign policy
    rights without the consent of the insurers; and (iv) it contains provisions (e.g.,
    §§ 8.4 and 10.1) which would use the bankruptcy confirmation process to insulate
    Debtors from the consequences of their own contractual violations. 11 U.S.C.
    § 1129(a)(1)-(3).

•   The Plan has not been filed in good faith; the financially healthy Debtor has no
    right to be in Chapter 11 or to have a Chapter 11 plan confirmed. See 11 U.S.C.
    § 1129(a)(3); In re SGL Carbon Corp., 200 F.3d 154 (3d Cir. 1999).

•   The Plan does not comply with Section 1129(a)(4) of the Bankruptcy Code. Any
    payments made by a debtor or other plan proponent for services in or in
    connection with the case, or in connection with the plan and incident to the case,
    must be approved by the court (or be subject to approval by the court) as
    reasonable. 11 U.S.C. § 1129(a)(4). Here, Congoleum has agreed to pay $1 million
    each to its litigation adversaries Messrs. Weitz and Rice in connection with plan
    negotiations. These payments are not reasonable, so the Court cannot make the
    confirmation finding required by Section 1129(a)(4). Nor can the Court find
    “reasonable” contingency fees of 40% or more to be paid to counsel for claimants
    against the Plan Trust, given the lax standards for a claimant to recover under the
    TDPs – there is essentially no “contingency” to claimants’ recovery, thus
    contingency fees are inappropriate and unreasonable, particularly contingency fees
    of 40%.

•   Votes by “unimpaired” claimants cannot be considered, since they do not have
    any “right to payment” against Debtors. They are really holders of “demands,”
    who do not get to vote. 11 U.S.C. §§ 1129(a)(8), (10), 101(5).

•   Absent the availability of insurance proceeds because of Debtor’s breach of
    insurance policies, the Plan is not in the best interests of unsecured asbestos
    claimants because they would receive more in a Chapter 7 liquidation. 11 U.S.C.
    § 1129(a)(7).




                                     - 31 -
•   The Plan does not comply with the requirement of 11 U.S.C. § 524(g)(2)(B)(ii)(V)
    that it must pay “present claims and future demands that involve similar claims in
    substantially the same manner.”

•   The Plan and TDPs were negotiated by a Futures Claimants’ Representative
    (“FCR”) who is inherently legally conflicted, given that he was appointed pre-
    petition by his adversaries (Congoleum and Claimants’ Counsel) and was paid by
    Congoleum pre-petition. As a result, he cannot serve as FCR post-petition, since
    such appointment would fail to provide future claimants with the due process
    protections to which they are constitutionally entitled. 11 U.S.C.
    §§ 524(g)(4)(B)(i), 105.

•   The Plan is not “fair and equitable” with respect to certain asbestos claimants as
    required by 11 U.S.C. § 524(g)(4)(B)(ii). The Plan gives future claimants only
    unsecured claims while similarly-situated current asbestos claimants were given, as
    part of the negotiations of the Plan, security interests equal to either 75% or 100%
    of the stated value of their claims.

•   The disclosure statement does not inform claimants that the Plan itself, and the
    manner in which it was negotiated without insurer involvement, may breach the
    obligations of the Debtor under its insurance policies or that, as a result of these
    violations, there is a significant risk that no insurance proceeds will be available for
    the Plan Trust. Likewise, the Disclosure Statement fails to advise asbestos
    claimants that substantially all of Congoleum’s excess insurers have offered a
    coverage-in-place agreement under which the insurers would pay their allocated
    share of covered claims and cap Congoleum’s responsibility to pay the shares of
    insolvent carriers at $8.75 million per year, with any unused portions of the annual
    cap (or any liability in excess of the annual cap) rolled over to the next year. Thus,
    because the Disclosure Statement informs claimants of neither the risks inherent
    in the Plan nor the fact that the coverage-in place agreement offers a viable
    alternative to the Plan, the Disclosure Statement violates the requirement of 11
    U.S.C. § 1125 that it must provide “adequate information.”

•   There are serious concerns regarding the manner in which votes in favor of the
    proposed Plan have been obtained. Virtually all of the asbestos claimants voting
    in favor of the Plan have, pursuant to the Claimant Agreement, been provided
    with consideration in addition to the benefits they will receive under the Plan, i.e.,
    a security interest in the insurance proceeds and the right to be paid ahead of any
    other claimants. Such “vote-buying” violates long-standing principles applied in
    the bankruptcy system.




                                     - 32 -
IV.    CERTAIN INSURERS’ NEED FOR DISCOVERY AND REQUEST
       FOR SCHEDULING HEARING

               As parties-in-interest in this case (due to, inter alia, (i) the modifications of their

contractual rights that would be effected by the Plan, as well as (ii) the Plan’s interference with

the Coverage Litigation and (iii) the fact that the Plan contemplates that the Plan Trust will be

funded almost entirely by the insurers under conditions that are violative of the insurance

policies), Certain Insurers unquestionably are entitled to a reasonable and fair opportunity to

inquire into the circumstances surrounding the Plan and its creation and, if appropriate, to

object to confirmation of the Plan. In order to p rotect Certain Insurers’ rights to due process,

the Court must provide Certain Insurers with a reasonable time in which to complete substantial

discovery.

               To be sure, there has already been some relevant discovery in the Coverage

Litigation. Insurers made (and Congoleum responded to) a number of document requests, and

insurers conducted some depositions of Congoleum officials and third-party witnesses. This

discovery related primarily to the negotiation and content of the Claimants Agreement, the Cook

and Arseneault settlements, and other settlements entered into by Congoleum and asbestos

claimants prior to the filing of the Chapter 11 petition. In order to avoid wasteful duplication,

Certain Insurers intend, to the full extent permitted by the Bankruptcy Rules, to use in this case

the relevant evidence obtained through discovery in the Coverage Litigation, and will not pursue

any discovery that is repetitive. However, the discovery in the Coverage Litigation was not

directed at the Plan, the TDPs, or specific issues concerning Certain Insurers’ anticipated

confirmation objections. In fact, in the Coverage Litigation, Congoleum blocked any of

insurers’ discovery that it believed was directed at bankruptcy-related issues. For example,

Congoleum refused to produce for deposition its financial advisors, the FCR, or witnesses on


                                                 - 33 -
claim estimation. Consequently, notwithstanding that some discovery did take place in the

Coverage Litigation, it is necessary for Certain Insurers to take a substantial amount of

additional discovery during this bankruptcy case.

               In order to support their objections to the Plan and the TDPs, the insurers will

require discovery – document production, interrogatories, and depositions – into issues relating

to their potential confirmation objections, including (but not limited to) those listed above. It

will be necessary, for example, to conduct discovery into the negotiation of the Plan and the

TDPs, and with respect to whether or not the Plan was proposed in good faith and in

conformity with the Code. In this case, that means developing evidence regarding the

motivation of the filing of this case and the Plan, the manner in which support for the Plan was

obtained, the benefits and detriments of the Plan to all involved, whether the Plan can meet the

best interests test, the estimates of current and future asbestos liabilities upon which the Plan

relies, and other elements. Certain Insurers will also require depositions of whatever expert

witnesses Debtor or other plan proponents may offer in support of confirmation.

               Certain Insurers also intend, as part of the plan confirmation process, to litigate

the reasonableness of the TDPs. For instance, Certain Insurers believe that the TDPs will

permit payment of claims that are not valid and will result in overpayments on valid claims,

increasing the number and amount of claims against Certain Insurers. This issue alone will

require factual discovery into Congoleum’s prior history regarding resolution of asbestos

personal injury claims and the depositions of any experts Debtor, the Claimants, and/or the

FCR may seek to rely on to support their estimates and the TDPs. Certain Insurers anticipate




                                               - 34 -
that such experts may include experts from various medical disciplines, as well as financial

experts. Discovery could therefore encompass literally dozens of fact and expert witnesses.23

               Consistent with the foregoing, among the fact depositions that Certain Insurers

currently anticipate taking are the following:

       • Rule 30(b)(6) depositions of each of the three debtors about, among other things,
         negotiation of the Plan and the TDPs, as discussed above;

       • Each of Debtor’s officials who took part in, or made decisions regarding, the
         negotiation of the Plan or the TDPs;

       • ABI officials on the topics related to the Plan;

       • Each member of the unofficial Asbestos Claimants Committee who was involved in
         the negotiation of the Plan and/or TDPs, as well as others who took part in such
         negotiations;

       • R. Scott Williams, Esq., the putative FCR, with respect to his role in the negotiation
         of the Plan and TDPs; and

       • Vincent J. Sullivan, Congoleum’s Senior Vice President-Finance, relating to his
         Declaration in Support of First Day Motions.

These depositions cannot begin, of course, until Debtor and other parties have produced all

relevant documents. Certain Insurers therefore believe that any scheduling order should set an

early deadline for all parties to serve comprehensive document requests, with only limited

additional requests being permitted after those initial requests. This should ensure that all



23
         Such a challenge to proposed TDPs was recently litigated in the Western MacArthur
asbestos bankruptcy case in the Northern District of California. In that confirmation hearing, which
lasted 11 days, the court heard testimony from 17 witnesses for the plan proponents (8 percipient
witnesses and 9 expert witnesses) and 5 witnesses for the insurers objecting to the plan (1 percipient
witness and four 4 expert witnesses). The two sides’ experts included persons with expertise in
pathology, pulmonary illnesses, risk assessment and causation, and financial issues. Each side also
presented expert testimony as to the number and amount of anticipated future claims (or the
inability to estimate the number and amount of such claims.) Obviously, a tremendous number of
hours was spent deposing all these experts.



                                                 - 35 -
relevant existing documents are produced at the beginning of the discovery process.

               Any reasonable schedule leading up to a confirmation hearing must allow time to

for each of the following tasks to be completed in a reasonable time-frame:

       • Document production;

       • Fact witness depositions;.

       • Designation of expert witnesses and submission of expert reports, followed by
         depositions of all parties’ experts, including any rebuttal experts;

       • Submission of plan objections and plan proponents’ responses to such objections;

       • Submission, prior to commencement of the confirmation hearing, of plan
         proponents’ proposed findings of fact and conclusions of law regarding
         confirmation, to be followed by objectors’ proposed findings of fact and
         conclusions of law;

       • Exchange of exhibit lists and witness lists;

       • Sufficient time for the parties to meet and confer about stipulations on
         authenticity and admissibility of proposed hearing exhibits; and

       • Submission of motions in limine and responses thereto, and hearing of same.

                Certain Insurers believe that it is critical that any schedule take into

consideration the discovery needs described above. In this regard, Certain Insurers respectfully

request that, before the Court establishes any schedule for conducting hearings concerning the

adequacy of Debtor’s disclosure statement or whether to confirm Debtor’s Plan, the Court first

convene a scheduling conference to permit Certain Insurers to present information and

argument relevant to establishing a fair, efficient, and effective schedule.

V.     CONCLUSION

               This is not a proper Chapter 11 case and Debtor’s pre-packaged plan is not one

that lawfully can be confirmed. There are many steps that must be taken before this case will be




                                                - 36 -
ready to proceed to a confirmation hearing, necessitating a longer schedule than requested by

Congoleum. Certain Insurers intend to take an active role in this case in order to prevent the

conspiracy engineered by Congoleum and Claimants’ Counsel from running roughshod over the

insurers’ express contractual rights.

Dated: January 5, 2004                       Respectfully submitted,



                                             John S. Favate (JF-7819)
                                             HARDIN, KUNDLA , M CKEON,
                                             POLETTO & POLIFRONI, P.C.
                                             673 Morris Avenue
                                             P.O. Box 730
                                             Springfield, NJ 07081-0730
                                             Telephone: (973) 912-5222
                                             Facsimile: (973) 912-9212

                                             -and -

                                             Mark D. Plevin (MP-5788)
                                             Robert T. Ebert
                                             Jonathan H. Pittman
                                             Leslie A. Epley
                                             Stephen D. Martin
                                             CROWELL & MORING LLP
                                             1001 Pennsylvania Avenue, N.W.
                                             Washington, D.C. 20004-2595
                                             Telephone: (202) 624-2500
                                             Facsimile: (202) 628-5116

                                             Attorneys for OneBeacon Insurance Company,
                                             Seaton Insurance Company, and Stonewall
                                             Insurance Company

                                             And, for purposes of this brief only, on behalf of
                                             the following insurers and their counsel:

                                             Wendy L. Mager
                                             SMITH, STRATTON, WISE , HEHER & BRENNAN LLP
                                             600 College Road East
                                             Princeton, NJ 08540
                                             Telephone: (609) 924-6000


                                              - 37 -
Facsimile: (609) 987-6651

Attorney for Employers Mutual Casualty Company
by its General Agent and Attorney-in-Fact, Mutual
Marine Office Inc. and American Reinsurance
Company


Edward A. Cohen
Dena Economou
KARBAL COHEN E CONOMOU SILK DUNNE, LLC
200 South Michigan Avenue, Suite 2100
Chicago, IL 60604
Telephone: (312) 431-3646
Facsimile: (312) 431-3670

- and -

Louis A. Modugno, Esq.
MCELROY , DEUTSCH & MULVANEY, LLP
1300 Mount Kemble Avenue
P.O. Box 2075
Morristown, NJ 07962-2075
Telephone: (973) 425-8660
Facsimile: (973) 425-0161

Attorneys for Old Republic Insurance Company


John J. Dwyer
COZEN O’CONNOR
Liberty View, Suite 300
457 Haddonfield Road
Cherry Hill, NJ 08002
Telephone: (856) 910-5000
Facsimile: (856) 910-5075

Attorney for Federal Insurance Company


Kevin M. Haas
Marianne Gaul
COZEN O’CONNOR
1085 Raymond Boulevard, Suite 1900
Newark, NJ 07102
Telephone: (973) 286-1200

 - 38 -
Facsimile: (973) 242-2121

Attorneys for Everest Reinsurance Company, f/k/a
Prudential Reinsurance Company, and Mt.
McKinley Insurance Company, f/k/a Gibraltar
Casualty Company


Francis P. Maneri
DILWORTH PAXSON LLP
LibertyView – Suite 700
457 Haddonfield Road
Cherry Hill, NJ 08002
Telephone: (856) 663-8877
Facsimile: (856) 663-8855

Attorney for Westport Insurance Co. (f/k/a
Puritan Insurance Co.)




 - 39 -

				
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