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									POTTS-RIVLIN MACRO 1                                            4/28/2003 2:05 PM

                       KEN RIVLIN* & JAMAICA D. POTTS**

     In March 1998, when technology stocks were a hot pick and
Enron was just an energy company, Sealed Air Corporation
acquired Cryovac, a specialty-packaging division of W.R. Grace &
Co. (“Grace”), for $4.9 billion.1 With its purchase of Cryovac,
Sealed Air, the maker of Bubble Wrap, added the food packaging
capabilities of Cryovac to its operations.2
     At the time of the transaction, Grace was a defendant facing a
substantial number of asbestos claims, but was able to manage its
related liabilities. In 1999 and 2000, however, the number of
asbestos claims against Grace and other major defendants
increased dramatically. Under the burden of these claims, Grace
filed for bankruptcy protection in April 2001.3
     In the subsequent bankruptcy proceedings, creditor
committees representing asbestos claimants brought an action
against Sealed Air, alleging that Grace was insolvent at the time of

   Environmental Counsel, Allen & Overy, New York; J.D., Boston University
1994; B.A., Brown University 1987.
   Associate, Allen & Overy, New York; J.D., Harvard Law School 2002, magna
cum laude; B.S. Chemistry, Stanford University 1999, with distinction.
       Sealed Air Corp., Current Report [Form 8-K], SEC File No. 001-12139
(Apr. 15, 1998) [hereinafter Sealed Air 1998 8-K]; Soma Biswas, Sealed Air
Settles Asbestos Claims for $838 M, at (Dec. 2, 2002),
available at LEXIS, The Daily Deal; Sealed Air to Cut 750 Jobs and Take $112
Million Charge, N.Y. TIMES, July 28, 1998, at D4.
       W.R. Grace and Sealed Air Lose Ruling in Fraud Suit, N.Y. TIMES, July
31, 2002, at C4.
       W.R. Grace & Co., Annual Report [Form 10-K405], SEC File No. 001-
13953, at 1 (Apr. 16, 2001) [hereinafter Grace Bankruptcy 10-K]. See also
Biswas, supra note 1.

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2003]      NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT                   627

the Cryovac transaction and that the transfer improperly reduced
the assets available to pay asbestos claims.4 Facing the risk of a
trial verdict that could require the Cryovac transaction to be
unwound, or Cryovac to pay up to $3.7 billion in compensation to
Grace, Sealed Air settled at the end of November 2002.5 Once
approved by the bankruptcy court, the settlement agreement will
require Sealed Air to pay $512.5 million in cash and transfer nine
million shares of its common stock (valued at approximately $340
million) to a trust established in the Grace plan of reorganization,
which will make payments to asbestos claimants on behalf of
      The Sealed Air case illustrates one of the risks inherent in
acquiring assets, even “clean” assets, from troubled companies,
particularly companies with asbestos liabilities. Unlike Grace,
neither Cryovac nor Sealed Air had ever manufactured or used
asbestos-containing materials in their products, nor had they been
subject directly to asbestos liabilities.7 Since the late 1990s,
asbestos claims have been on the rise, leading to a number of high
profile bankruptcies and accompanied by an increase in political,
judicial, and corporate scrutiny. In September 2002, the United
States Senate held hearings on asbestos litigation,8 and in early
November of that year, the Supreme Court heard oral arguments
concerning fear of cancer claims in asbestos actions.9 Fueling the
interest in asbestos is a recent report issued by the RAND Institute

       Sealed Air Corp., Quarterly Report [Form 10-Q], SEC File No. 001-
12139, at 12 (May 11, 2001); Biswas, supra note 1.
       Shanon D. Murray, Letter from Delaware: Something in the Air, at (Sept. 11, 2002), available at LEXIS, The Daily Deal;
Biswas, supra note 1; See also infra Part III and the related discussion of the
Sealed Air transaction and ensuing litigation.
       Sealed Air Corp., Current Report [Form 8-K], SEC File No. 001-12139
(Nov. 27, 2002); Sealed Air Settles All Asbestos-Related Claims, N.Y. TIMES,
Nov. 30, 2002, at C4; Biswas, supra note 1.
       See, e.g., Sealed Air Corp., Annual Report Form [10-K405], SEC File No.
001-12139, at 8 (Mar. 23, 2001).
       Asbestos Litigation: Hearing Before the Senate Committee on the
Judiciary, 107th Cong. (2002) [hereinafter Senate Asbestos Hearing].
       Norfolk & Western Ry. Co. v. Ayers, No. 01-963, 2003 WL 888363
(March 10, 2003). See also, e.g., Linda Greenhouse, Asbestos Appeal Centers on
Fear of Cancer, N.Y. TIMES, Nov. 7, 2002, at C18 (reporting on defense
arguments against fear of cancer claims). The Supreme Court upheld the lower
court decision permitting such fear of cancer claims to proceed. Norfolk &
Western. Ry. v. Ayers, 123 S. Ct. 1210, 1215 (2003).
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628              N.Y.U. ENVIRONMENTAL LAW JOURNAL                     [Volume 11

for Civil Justice, which details new trends in asbestos litigation.10
Several mass settlements, including Halliburton’s four billion
dollar settlement of over 300,000 asbestos-related claims, have
also kept asbestos litigation in the spotlight,11 and reform efforts
have recently made the front page of the New York Times.12
      This Article provides a brief overview of the Sealed Air
proceedings and identifies some of the key issues that should be
considered when contemplating transactions involving companies
with asbestos liabilities. With asbestos liability in the United
States estimated to exceed the costs associated with Enron,
WorldCom, and September 11th combined13 and unsettling
business expectations among corporate deal-makers such as Grace
and Sealed Air, , there is an increased need for effective exposure
control in corporate transactions. In the first two parts of this
Article, we present a history of asbestos litigation and an update on
current developments in asbestos litigation. Part I provides
background information and describes asbestos usage and its
possible health consequences. In Part II, we discuss six current
trends of asbestos litigation in detail, including (1) increased
claims; (2) diminished percentage of claimants with actual injuries;
(3) increased exposure by more peripheral defendants; (4) larger
verdicts and settlements; (5) increased bankruptcies; and (6)
heightened interest in reform. In Part III, we describe the Sealed
Air transaction structure, the history of asbestos claims against
Grace, and the legal developments that led to the Sealed Air
settlement. Part IV discusses lessons that can be drawn from the
Sealed Air transaction for purchasers. In this Part, we evaluate the
range of inquiries required for due diligence in the context of

       The RAND Institute is a nonprofit research organization that focuses on
policy and decision making. The Senate and the House have requested testimony
from staff at the Institute on matters of asbestos litigation and the RAND report
is considered objective and authoritative on the subject. See STEPHEN J.
COSTS AND COMPENSATION: AN INTERIM REPORT (2002), available at (last accessed March
27, 2003) [hereinafter RAND REPORT].
       Halliburton Settles Asbestos Claims for $4 Billion, N.Y. TIMES, Dec. 19,
2002, at C4.
       Alex Berenson, Asbestos Accord Said To Be Near, N.Y. TIMES, Apr. 24,
2003, at A1.
       Business Center: Companies and Some Attorneys Banding Together to
Place Limits on Asbestos-Related Liability Lawsuits (CNBC television
broadcast, Sept. 9, 2002), LEXIS, CNBC News.
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2003]      NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT                    629

asbestos acquisitions, and then discuss the basic and more complex
considerations that may (and in many cases should) guide
transaction structure decisions, as analyzed through the lens of
Sealed Air. While complete protection from asbestos risk is can
rarefly if ever be assured, searching due diligence and innovative
deal structures may provide some comfort . Part V provides a final
summary of the issues facing acquirer in light of mass tort


                       A. Introduction to Asbestos
     Asbestos encompasses a family of naturally-occurring fibrous
materials that have superior insulation and tensile strength
properties.14 The most utilized form of asbestos is chrysotile, a
white, curly fiber.15 Chrysotile is a component of roofing
materials, plastics, and many materials exposed to high
temperature conditions.16       The spiral nature of chrysotile
differentiates the fiber from all other forms of asbestos, including
the other two commonly used forms of asbestos, amosite and
crocidolite, which have straight fibers and have been more tightly
linked to disease.17 While all three major types of asbestos are still

       The Asbestos Inst., Chrysotile Products, at
en/products.htm (last visited March 13, 2003) (reporting that there are “still a
significant variety of common-day and industrial uses of chrysotile containing
products” including “roof sealants, textiles, plastics, rubbers, door seals for
furnaces, high temperature caulking, paper, [and] components for the military
and the nuclear industry”); See also PRODUCTS LIABILITY PRACTICE GUIDE, PART
II SPECIFIC PRODUCTS, (E) TOXIC SUBSTANCES §78.01[1][a] (Matthew Bender &
Co., Inc. 2002).
       The Asbestos Inst., Chrysotile Products, supra note 15.
15, §78.01[1]; Dr. Corbett McDonald, Carcinogenicity of Fibrous Tremolite in
Workplace and General Environments 1 (2001) (summary of paper presented at
EPA Asbestos Health Effects Conference, May 14, 2001) (on file with authors).
See also Asbestos Contamination: Hearing before the Senate Committee on
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630              N.Y.U. ENVIRONMENTAL LAW JOURNAL                    [Volume 11

in use throughout the world, amosite and crocidolite are currently
banned or restricted in some countries.18 Amosite asbestos is a
short gray or brown colored fiber that was primarily used in
insulation products.19 Historically, it has been mined in South
Africa20 along with crocidolite, a blue asbestos form considered to
be the most hazardous among asbestos fibers.21 Crocidolite was
used in a variety of consumer products, including cigarette filters
and in asbestos-cement water and sewer pipes that are still in place
throughout the United States.22
      With deposits pocketed throughout the world, use of asbestos
began as early as 2000 years ago, and mining of the inexpensive
mineral on an industrial scale became prevalent in the late 1880s.23
Manufacturers began to exploit the flame-retardant and insulating
properties of asbestos in heavy industrial use in the 1940s and
incorporated asbestos into as many as 3000 products24 by the early
1970s, when usage peaked for the industry.25 From automotive
applications such as gaskets and brakes, to home uses such as roof
shingles and attic insulation, the use of asbestos for commercial
applications proliferated through most of the twentieth century and
still continues today at a decreased rate.26 The United States
consumes approximately 16,000 metric tons of asbestos each year,
incorporating it into machinery, building materials, and other
insulation products.27

Health, Education, Labor & Pensions, 106th Cong. (2001) (testimony of Dr.
Richard Lemen, former Assistant Surgeon General of the United States)
[hereinafter Lemen testimony].
available at (last
visited April 5, 2003). See also PRODUCTS LIABILITY PRACTICE GUIDE, supra
note 15, §78.01[1][c].
       PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.01[1][b].
       PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.01[1][c].
       The Asbestos Inst., What is Chrysotile?, at
chryso.htm (last visited March 13, 2003); BARRY I. CASTLEMAN, ASBESTOS:
MEDICAL AND LEGAL ASPECTS 1-2 (4th ed. 1996).
       EPA, The Asbestos Informer, at
inform.htm (last visited April 5, 2003).
       See RAND REPORT, supra note 10, at 13.
       See ASBESTOS FACT SHEET, supra note 14, at 1; The Asbestos Inst.,
Chrysotile Product, supra note 15.
       The Asbestos Inst., Chrysotile Products, supra note 15.
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2003]      NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT                    631

                         B. Hazards of Asbestos
     Asbestos is abundant, cheap, and useful, but it can also be
extremely hazardous. While the scientific community debates the
relative hazards associated with chrysotile, amosite, and
crocidolite,28 all types of asbestos are classified by the United
States Department of Health and Human Services as carcinogenic
when in their airborne or “friable” state.29 Friability can occur
when asbestos blocks are sawed, when rock is mined for asbestos,
when asbestos is sprayed on a surface, or when a material
containing asbestos crumbles or is otherwise exposed to the air.30
Such conditions may release asbestos dust that, unless effectively
controlled, can become airborne and enter the lungs. Inhalation of
asbestos fibers, especially from the straight fibrous family of
asbestos that includes brown and blue asbestos, may increase an
individual’s chance of contracting lung ailments such as
mesothelioma, lung cancer, and asbestosis.31 Superficial damage
to the lungs, such as pleural thickening, can also result from
exposure to asbestos fibers.32
     Physicians, scientists, and epidemiologists have studied the
possible carcinogenic effects of asbestos inhalation since the early
1900s.33 Despite extensive research, however, asbestos exposure
was not expressly linked to its signature disease, mesothelioma,
until 1960.34 Mesothelioma is a fatal cancer of the outer lung and

       PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.01 [1]; Lemen
testimony, supra note 17. Because of its curled structure, researchers
hypothesize that chrysotile does not lodge in the lungs as effectively as its
straight-fibered cousins. This relative lack of lung penetration may reduce the
risks of disease. See, e.g., McDonald, supra note 17, at 2-3. For our purposes,
we will use the term asbestos to refer to all known forms of the material.
21-4 (10th ed. 2002). The Department of Health and Human Services
established the National Toxicology Program in 1978. Nat’l Toxicology
Program, NTP Mission, at (last modified Nov. 15,
       EPA, The Asbestos Informer, supra note 24.
       See McDonald, supra note 17, at 2-3; DOBRA, supra note 17, at 10; RAND
REPORT, supra note 10, at 17.
       RAND REPORT, supra note 10, at 17.
       PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.01[2][a]-[c];
CASTLEMAN, supra note 23, at 1-4, 49-50.
       PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.01[2][c]; J. C.
Wagner et al., Diffuse Pleural Mesothelioma and Asbestos Exposure in North
Western Cape Province, 17 BRIT. J. INDUS. MED. 260, 269 (1960). See also
RAND REPORT, supra note 10, at 14.
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632              N.Y.U. ENVIRONMENTAL LAW JOURNAL                   [Volume 11

chest cavity, and can occur up to 40 years after exposure to
asbestos fibers. Mesothelioma tends to cause death within a year
or two of onset.35 To date, asbestos inhalation is the primary and
most well-established cause of mesothelioma.36
     It has also been hypothesized that exposure to asbestos may
cause lung cancer and cancers of the mouth, stomach, kidney, and
other organs.37 Other health and environmental factors may
exacerbate the effects of asbestos inhalation.38 For example,
smoking and asbestos have been independently linked to lung
cancer, but persons who both smoke and are exposed to asbestos
are fifty times more likely to develop lung cancer than their
nonsmoking and unexposed peers.39
     Asbestos exposure may also result in asbestosis, a more
common condition linked to the inhalation of fibers.40 Asbestosis
is the scarring of lung tissue that results when the body secretes
acid to dissolve the asbestos fibers lodged in the lungs.41 A
progressive disease, asbestosis is a chronic condition that impairs
breathing function in those who suffer from it. 42 Severe asbestosis
can also cause death.43
     Aside from serious injury, exposure to asbestos fibers may
also create pleural thickenings or plaques on the lungs of those
who inhaled the fibers. While not often impairing lung function,
pleural plaques or thickenings represent scars on the outer lung
membrane that alter the natural state of the lung and provide an
indication that one has been exposed to asbestos. 44

       RAND REPORT, supra note 10, at 17.
       Id.; DOBRA, supra note 17, at 10. Erionite, a curly fibrous material not
classified as an asbestos has been linked to mesothelioma cases in Turkey. See
       RAND REPORT, supra note 10, at 17. See also PRODUCTS LIABILITY
PRACTICE GUIDE, supra note 15, §78.01; CASTLEMAN, supra note 23, at 132-36.
       RAND REPORT, supra note 10, at 17.
       Id.; PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.01 [2] [f].
       RAND REPORT, supra note 10, at 17
       See EPA, General Information: Asbestos—What is It?, at (last visited April 5, 2003).
       RAND REPORT, supra note 10, at 17.
       Id. See also PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15,
       RAND REPORT, supra note 10, at 17-18.
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                       C. Total U.S. Asbestos Exposure
      Asbestos has created “the worst occupational health disaster
in U.S. history.”45 In all, the RAND study estimates that twenty-
seven million workers in the United States were exposed to
significant amounts of asbestos dust from 1940 to 1979.46 An
unknown number of the those who encountered the mineral in less
risky environments may also have contracted or in the future be
diagnosed with the disease.47 More than 225,000 asbestos-related
deaths from cancers are predicted from exposures that occurred
from 1940 to 1979.48 In the 1970s, the United States government
began regulating asbestos, but a 1989 proposed ban of the mineral
was overturned judicially.49 While asbestos consumption has
declined, the material is still legally permitted in the United States
for traditional uses such as roofing shingles and friction reduction
      Because of the long latency of asbestos-related disease,
known cancer claims stem primarily from exposures in the 1950s
and 1960s; cancer claims arising from the peak usage years of the
1970s have yet to be brought. In his recent testimony before
Congress, David Austern, the executor of the Manville Trust,
which was established to pay claims against asbestos manufacturer
Johns-Manville, predicted that defendants could face significant
liability for another twenty-six years.51 The continuing use of
asbestos appears likely to result in additional claims of asbestos
exposure and related injury.

      Id. at 16 (quoting Dennis Cauchon, The Asbestos Epidemic: An Emerging
Catastrophe, USA TODAY, Feb.8, 1999, at 4).
      Id. at 13.
      Id. at 16.
      Id. at 13.
      Id.; The Asbestos Inst., Chrysotile Product, supra note 15.
      Senate Asbestos Hearing, supra note 8 (testimony of David Austern,
General Counsel, Manville Personal Injury Settlement Trust). The trust will
operate until 2049. Id.
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634              N.Y.U. ENVIRONMENTAL LAW JOURNAL                       [Volume 11

      A number of new trends mark the current state of asbestos
litigation. After a dip in litigation in the mid-1990’s, the pace of
asbestos litigation has skyrocketed.52 The type of plaintiff and
defendant involved in asbestos litigation has also evolved. An
increasing number of plaintiffs have no physical impairment. In
the past, claimants tended to allege more severe asbestos-related
injury.53 In addition, plaintiff’s attorneys are targeting more
peripheral defendants, with over eighty-five percent of U.S.
industries facing asbestos claims.54 With costs estimated to total
between $200 billion55 and $275 billion,56 asbestos litigation has
produced two other trends of note: an increased numbers of high-
profile bankruptcies and intense and widespread calls for reform.57

                            A. Increased Filings
     Since litigation began in 1966, and as of the year 2000, at
least 600,000 individuals have filed suit against asbestos
manufacturers, employers, and other defendants.58 The overall
pattern in claim filings shows a sharp increase in claims beginning
in the late 1990s. After a period of stabilized claims rates,
hundreds of thousands of new claims were filed on behalf of
asbestos victims starting in 1999.59 For example, the Manville
Trust reported a claims spike beginning in 1999, with claims

       RAND REPORT, supra note 10, at vi, 40, 44.
       Id. at 41, 44.
       In Today’s UK Papers, Chem. News & Intelligence (Reed Bus. Info.),
Sept. 10, 2002, LEXIS, Chemical News & Intelligence; RAND REPORT, supra
note 10, at 49-50.
       Tillinghast-Towers, a U.S. actuarial firm, calculated the $200 billion figure
last summer. Press Release, Tillinghast-Towers Perrin, Tillinghast-Towers
Perrin Estimates Claims Associated with U.S. Asbestos Exposure Will
Ultimately Cost $200 Billion (June 13, 2001) (on file with author) [hereinafter
Tillinghast-Towers Estimate].
       AM Best estimated losses at $275 billion in September 2001. Raji
Bhagavatula et al., Asbestos: A Moving Target, BEST’S REV., Sept. 1, 2001, at
       See Business Center, supra note 13.
       RAND REPORT, supra note 10, at 40-41.
       Id. at 42.
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2003]      NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT                  635

jumping from approximately 30,000 in the mid-1990s to 58,041
claims in 2000 and 89,438 claims in 2001.60 The trust received
over 42,000 claims for 2002 by of the end of October of that year.
This was despite a four-month moratorium on claims earlier in
2002.61 Other affected defendants have reported the recent filing
of similarly large claims. Georgia-Pacific reported 32,200 new
claims in the first nine months of 2002,62 and Swedish engineering
company ABB’s Combustion Engineering unit reported over
29,500 new claims for 2002.63
     While trying to manage new claims, many companies are
wrestling with thousands of older claims that have yet to be
resolved. Figure 1 lists the number of pending claims against
some of the most heavily affected defendants in asbestos litigation.

       Senate Asbestos Hearing, supra note 8 (testimony of David Austern).
       Id.; Letter from Robert A. Falise, Chairman and Managing Trustee,
Manville Personal Injury Settlement Trust, to Judge Jack B. Weinstein, U.S.
District Ct (E.D.N.Y.), and Judge Burton R. Lifland, Bankr. (S.D.N.Y.) 2 (Oct.
30, 2002) (on file with authors). The moratorium was established to allow time
for the trust to develop an electronic claims filing system. Senate Asbestos
Hearing, supra note 8 (testimony of David Austern).
       Wood, Paper Business Stays Slow, DULUTH NEWS-TRIB., Oct. 18, 2002,
available at LEXIS, Minnesota News Sources.
       Corporate and Business, 28 CONN. LAW TRIB., Oct. 14, 2002, at 4,
available at LEXIS, Connecticut Law Tribune.
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636              N.Y.U. ENVIRONMENTAL LAW JOURNAL                [Volume 11


 COMPANY                              APPROXIMATE NUMBER                 OF
                                      PENDING CLAIMS
 3M64                                 43,000
 Combustion Engineering65             94,000
 Dana Corporation66                   116,000
 Georgia-Pacific67                    66,800
 Halliburton68                        329,000
 Honeywell69                          166,000
 Pfizer Inc.70                        117,957
 Viacom71                             125,600

                        B. Decreased Injuries
     The increase in claims filings observed by asbestos
defendants is attributed primarily to an increased number of claims
by unimpaired or only mildly-impaired plaintiffs.72 As an
example, an unimpaired person exposed to asbestos may have
developed pleural thickenings that are detectable on a chest x-ray
but otherwise exhibit no symptoms of disease. A mildly-impaired
plaintiff, in contrast, may have acough or shortness of breath that
may be attributable, in whole or in part, to asbestos exposure. The
RAND study calculated the number of claims associated with

      3M CO., Quarterly Report, [Form 10-Q], SEC File No. 001-3285, at 47
(Nov. 14, 2002).
      ABB LTD., [Form 20-F], SEC File No. 001-16429, at 97 (July 27, 2002).
      DANA CORP., Quarterly Report, [Form 10-Q], SEC File No. 001-1063, at
15 (Oct. 30, 2002).
      GEORGIA-PACIFIC, Quarterly Report [Form 10-Q], SEC File No. 001-
03506, at 25 (Nov. 12, 2002).
      HALLIBURTON CO., Quarterly Report [Form 10-Q], SEC File No. 001-
3492, at 11 (Nov. 12, 2002).
      HONEYWELL INTERNATIONAL, INC., Quarterly Report [Form 10-Q], SEC
File No. 001-08974 (Nov. 13, 2002).
      PFIZER INC., Quarterly Report [Form 10-Q], SEC File No. 001-03619
(Nov. 13, 2002).
      VIACOM INC., Quarterly Report [Form 10-Q], SEC File No. 1-9553, at 19
(Nov. 13, 2002).
      RAND REPORT, supra note 10, at 44.
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mesothelioma and other cancers and compared malignant claims to
nonmalignant claims.          The researchers determined that
nonmalignant claims accounted for ninety percent of the annual
claims filed each year, an increase from the eighty percent reported
in the late 1980s.73 As an overall proportion of claims, asbestos-
related cancers have decreased over the years.74

                       C. Peripheral Defendants
     In addition to changes in the type of plaintiffs involved in
asbestos litigation, asbestos litigation is currently focusing on
different defendants than in the past. The initial tier of defendants
included asbestos manufacturers, insulation companies, and
shipyards.75 Asbestos manufacturers, such as Johns-Manville,
were named defendants early, followed by large shipyards and
railroad companies that used asbestos in boilers and shipbuilding.76
As bankruptcies of the traditional defendants occurred, as will be
discussed later in this Article, the plaintiff’s bar has targeted so-
called peripheral or nontraditional asbestos manufacturers that
used asbestos in their products. 77 In addition, workplace
defendants that allegedly exposed workers to asbestos on-site have
become named defendants in asbestos litigation.78 In 1983,
approximately 300 defendants were implicated in asbestos suits;
today that number is 6000.79 According to the RAND report,
asbestos defendants are involved in seventy-five of the eighty-
three classifications for industry affecting virtually all parts of the
U.S. economy.80
     Nontraditional defendants pay approximately sixty percent of
the costs associated with asbestos liability.81 Reading “like the
Fortune 500”, current defendants include companies such as
Gerber Products Co., best known as a baby food manufacturer;
Sears, Roebuck & Co., a department store; General Electric

     Id. at 44-46.
     Id. at 47.
     See PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.02[2];
CASTLEMAN, supra note 23, at 225.
     RAND REPORT, supra note 10, at 47-50.
     Id. at 49.
     Id. at 50.
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638              N.Y.U. ENVIRONMENTAL LAW JOURNAL                      [Volume 11

Company; Ford Motor Company and General Motors Corporation;
Viacom Inc.; 3M Co.; and Exxon Mobil Corporation.82 Chemical
and pharmaceutical manufacturers, such as Pfizer and the Dow
Chemical Company, also have significant asbestos claims

            D. Large Settlements and Even Larger Verdicts
      As of 2000, asbestos claims have cost companies and insurers
an estimated fifty-four billion dollars.84 Experts estimate that the
total costs of asbestos liability, between $200 billion85 and $275
billion,86 will be shared by foreign insurers, U.S. insurers, and
asbestos defendants. Foreign insurers are expected to pay thirty-
one percent of the cost and U.S. insurers thirty percent, with
asbestos defendants paying the remaining thirty-nine percent from
their own funds.87
      Large verdicts and settlements drive up the cost of asbestos
litigation, both on an aggregate basis and for individual
defendants. Statistical information available for jury verdicts
shows a substantial cost to proceeding with litigation to the verdict
stage. In 2001, thirteen jury verdicts in asbestos litigation
exceeded ten million dollars, according to the National Law
Journal, which tracks jury verdicts in the United States.88 In 1999,
only one such asbestos verdict occurred.89 Verdicts for a single
mesothelioma case have been recorded as high as $55.5 million,90
and one verdict reached $150 million for claims of lung disease
without signs of cancer or asbestosis.91 Figure 2 lists some recent

      The Asbestos Burden, Editorial, CHI. TRIB., Sept. 25, 2002, at 24, available
at LEXIS, Chicago Tribune.
      Id.; PFIZER INC., Form 10-Q, supra note 70.
      RAND REPORT, supra note 10, at 53.
      Tillinghast-Towers Estimate, supra note 55.
      Bhagavatula et al., supra note 56, at 85.
      Tillinghast-Towers Estimate, supra note 55.
      Top Verdicts of the Year: The Big Get Smaller, NAT’L L.J., Feb. 4, 2002, at
C3. See also Top Verdicts of the Year: Verdicts at a Glance, NAT’L L.J., Feb. 4,
2002, at C24-C26 (listing the top 100 verdicts of 2001 by dollar amount won).
      Top Verdicts of the Year: The Big Get Smaller, supra note 88, at C3. Of
the top 100 jury verdicts in the country in 2001, eight stemmed from asbestos
claims. Top Verdicts of the Year: Verdicts at a Glance, supra note 88.
      VerdictSearch, Jury Adds to Request, Awards Family $55.5 Million
in    Asbestos      Case,     at
0204verdicts_hernandez.jsp (last visited March 27, 2003).
      VerdictSearch, Six Asbestos Workers Awarded $25 Million Each,
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2003]      NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT                 639

large verdicts in asbestos litigation and includes information about
the type of injury claimed for each verdict. The data shows that
even nonmalignant conditions can be costly to companies facing
asbestos liability.

 COMPANY               VERDICT       # OF          INJURY            JURIS.
                         SIZE     PLAINTIFFS
3 M, AC&S              $150       6            “Asbestos-           MS
and                    million:                related lung
Halliburton92          10/27/01                disease”; not
                                               cancer or
Halliburton            $130       5            Asbestosis,          TX
and North              million:                colon cancer,
American               9/12/01                 lung cancer
Kelly-Moore            $55.5      1            Mesothelioma         TX
Paint94                million:
Harbison-              $40.33     5            Mesothelioma         MD
Walker,                million:
AC&S and               12/5/01
A.P. Green95
U.S.                   $35.2      22           Asbestosis           TX
Gypsum96               million:
North                  $29.74     6            Lung cancer,         TX
American               million:                asbestosis
Refractories           4/25/01
J-M A/C Pipe           $20.5      1            Mesothelioma         CA
Company98              million:
Hopeman                $19.8      3            Mesothelioma         MD
Brothers99             million:

at (last
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640              N.Y.U. ENVIRONMENTAL LAW JOURNAL                     [Volume 11

     Settlement costs for an individual plaintiff can also be high
for asbestos litigation. Because settlements are often conditioned
on confidentiality, information on settlement rates is difficult to
obtain. Figure 3 provides examples of settlements received by
mesothelioma plaintiffs, as reported by the plaintiff’s bar.
Settlement values for an individual claim are typically lower than
verdict amounts, but still may reach over one million dollars per

visited March 27, 2003).
       VerdictSearch, Alabama Plaintiffs Awarded $130 Million By Texas Jury,
(last visited March 27, 2003); Texas Jury Awards $130 Million to Five Plaintiffs
in Asbestos Suit, ASBESTOS LITIG. REP., Sept. 27, 2001, at 3, available at LEXIS,
Asbestos Litigation Report.
       VerdictSearch, Jury Adds to Request, Awards Family $55.5 Million in
Asbestos Case, supra note 90.
       VerdictSearch, Baltimore Jury Awards $40M in Asbestos Case,
at (last
visited March 27, 2003).
       Texas Refinery Workers Awarded $35.2 Million, NAT’L L.J., Feb. 26,
2001, at A12-A13.
       VerdictSearch, Steel Workers and Survivors Obtain $29.7 Million
Jury Verdict, at
douglas.jsp (last visited March 27, 2003).
       Top Verdicts of the Year: Verdicts at a Glance, supra note 88; Jury
Awards $ 20.5 Million in Calif. Asbestos Case, NAT’L L.J., April 30, 2001, at
       VerdictSearch, Toxic Exposure-Asbestos-Shipyard, at http://www. (last visited March 27,
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2003]      NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT                     641

                  OF MESOTHELIOMA CLAIMS
        CLAIMANT’S OCCUPATION                    APPROXIMATE            JURIS.
 Bystander in home renovation project           $4,700,000             IL
 Construction worker and laborer                $4,200,000             TX
 Navy electrician and Coast Guard               $4,000,000             CA
 Yard supervisor
 Laborer near blast furnaces in a steel         $2,500,000             KY
 Navy machinist mate and worker in              $2,500,000             NY
 Lumber yard worker                             $2,400,000             CA
 Drywall sprayer                                $2,400,000             ID
 Plant worker                                   $2,300,000             CT
 Electrician                                    $2,000,000             MS

     While verdicts and settlements of individual claims may reach
million dollar figures, claim aggregation, in the form of class
actions or consolidated lawsuits, can put extreme pressure on a
company to settle, causing considerable litigation losses. As an
example, nearly 250 defendants, including large companies such as
Honeywell, settled approximately 8,000 asbestos claims in
September 2002 in a large consolidated action in West Virginia. 101
While the settlement price was not disclosed per defendant,
plaintiffs’ counsel announced that the settlement was in the range
of hundreds of millions of dollars.102 Halliburton’s settlement of
300,000 claims for four billion dollars overshadows the losses in

       The following chart is derived from information culled from the website of
Early, Ludwick, Sweeney & Strauss, LLC, a plaintiff’s firm with offices in New
York and Connecticut. Early, Ludwick, Sweeney & Strauss, EARLY,
LUDWICK, SWEENEY & STRAUSS, LLC - Asbestos Disease, Mesothelioma,
Settlements, Trial Verdicts, at (last
visited March 27, 2003).
       Jonathan D. Glater, Many Concerns Settle 8,000 Asbestos Suits, N.Y.
TIMES, Sept. 25, 2002, at C12.
       Id. Dow Chemical, one of the defendants that did not settle the case, was
recently found liable for exposing “thousands” of its workers to asbestos. It
faces a damages trial in 2003. W. Va. Jury Finds Union Carbide Liable in
Asbestos Mass Trial, ASBESTOS LITIG. REP., Nov. 7, 2002, at 3, available at
LEXIS, News.
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West Virginia.103 Recent aggregate settlements have also been
proposed by ABB; as part of a possible bankruptcy plan, the Swiss
company offered 110,000 plaintiffs $1.12 billion to settle asbestos

                       E.   Increased Bankruptcies
     The substantial costs associated with the increase in asbestos
claims have driven a number of firms into bankruptcy. Actuarial
experts estimate that there have been at least sixty-four asbestos-
related bankruptcies since asbestos litigation began,105 including
recent bankruptcies by Grace, Federal-Mogul, and Owens
Corning.106 The frequency of asbestos-related bankruptcies has
also accelerated.       Of the sixty-four so-called “asbestos”
bankruptcies referred to above, twenty-two firms were initiated
between January 2000 through Spring 2002. In contrast, only
eighteen asbestos-related bankruptcies occurred in the 1990s and
sixteen in the 1980s.107
     One reason for the increase in bankruptcies has been the
combination of the higher claim numbers, as discussed above, and
the magnitude of the losses associated with such asbestos claims.
At the time of its bankruptcy filing, W.R. Grace had already paid
over $280 million in asbestos claims,108 and the company expects
240,000 claims in the future related to asbestos.109 Likewise,
Federal-Mogul chose to enter bankruptcy after paying over $700

       Halliburton Settles Asbestos Claims for $4 Billion, supra note 11, at C4.
       Terry Brennan, For Asbestos Relief, ABB Unit Eyes Chapter 11, at
http://www.The , Jan. 7, 2003, available at LEXIS, The Daily Deal.
       Letter from Jennifer L. Biggs, Chairperson, Mass Torts Subcommittee,
American Academy of Actuaries, to Senator Orrin G. Hatch, Committee on the
Judiciary, U.S. Senate 2 (October 2, 2002) (on file with authors).
       Albert B. Crenshaw, High Court Rejects Delay on Asbestos; Big West
Virginia Case Is Cleared for Trial, WASH. POST, Sept. 17, 2002, at E1 (providing
a short history of asbestos litigation and bankruptcies).
       RAND REPORT, supra note 10, at vii.
       Susan Drumheller, Lawyers in Libby Case Bag Million: Grace Bankruptcy
is Among the Largest in the Nation, THE SPOKESMAN-REV. (Spokane, Wash.),
Sept. 8, 2002, at A1, available at LEXIS, The Spokesman-Review (reporting
Grace had $282 million in asbestos-related expenditures in 2000 and filed for
bankruptcy in April 2001).
       David B. Siegel, Asbestos Liability: Where is it Going Next? 17 (Oct.
2002) (presentation by General Counsel, W.R. Grace & Co.) (on file with
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2003]      NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT                     643

million in claims.110
     In addition, amendments to the bankruptcy code in 1994
provided special forms of relief to companies facing asbestos
liabilities, which may make bankruptcy more appealing than
continuing litigation of asbestos claims. The asbestos bankruptcy
provisions allow companies to create a bankruptcy trust that is
specifically designed to pay asbestos claims, both those that have
accrued at the time of filing and claims that arise in the future.111
Asbestos claimants must look to the trust for compensation and are
generally not allowed to make claims against the post-filing debtor
or acquirers of the debtor or its assets.112

                       F.    Current Reform Efforts
     For at least 15 years, Congress has reviewed asbestos
legislation but has not adopted substantial reform except in the
area of bankruptcy.113 Currently a number of asbestos reform bills
are pending in front of Congress and propose (1) to institute
physical injury requirements for claimants, adjust the appropriate
statute of limitations for bringing claims, require proportional
rather than joint and several liability, and permit ready removal to
federal courts of asbestos claims under certain conditions.114 (2)to
ban asbestos use,115 (3) to provide funding for Libby, Montana, a
community heavily affected by asbestos,116 and (4) to give tax
relief for asbestos claim payments.117

        Terry Brennan, Asbestos, Debt Drives Federal-Mogul Under, at, Oct. 1, 2001, available at LEXIS, The Daily Deal.
        Samuel Issacharoff, “Shocked”: Mass Torts and Aggregate Asbestos
Litigation After Amchem and Ortiz, 80 TEX. L.R. 1925, 1938 (2002) (discussing
the impact of 11 U.S.C. § 524(g), a provision that allows a bankrupt company to
create a separate fund for asbestos claims); 11 U.S.C. §524(g) (2000).
        Issacharoff, supra note 111, at 1938; 11 U.S.C. §524(g)(3)(A)(ii) (2000);
Ralph R. Mabey & Peter A. Zisser, Improving Treatment of Future Claims: The
Unfinished Business Left by the Manville Amendments, 69 AM. BANKR. L. J. 487,
499 (1995) (noting that the amendments prevent successors from assuming
liability solely by purchasing the assets of the debtor or the trust).
        Senate Asbestos Hearing, supra note 8, at 10 (statement of Jennifer L.
Biggs, Chairperson, Mass Torts Subcommittee, American Academy of
Actuaries) [hereinafter Biggs statement].
        Asbestos Compensation Fairness Act of 2003, H.R. 1586, 108th Cong.
        Ban Asbestos in America Act of 2002, S. 2641, 107th Cong. (2002).
        Libby Health Care Act, S. 3136, 107th Cong. (2002).
        S. 1048, 107th Cong. (2001); H.R. 1412, 107th Cong. (2001).
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     Filings by unimpaired plaintiffs have created an apparent split
in the plaintiff’s bar, with at least one prominent plaintiff’s
attorney counseling for Congressional intervention to limit such
claims.118 Individuals exhibiting mild asbestosis or with non-
impairing pleural thickenings often file claims because of
restrictive statutes of limitations or out of concern that the
defendant responsible will be unable to pay its claims.119
Entrepreneurial lawyering has also been blamed, as attorneys set
up free lung screenings and advertise for new claimants on the
internet and on television.120 According to critics, the increase in
unimpaired claims leads to decreased compensation for those with
serious asbestos-related injuries, such as mesothelioma. Reform
efforts advocate limitations on unimpaired claimants, proposing
medical criteria to eliminate claims by the non-injured or claims
based on fear of cancer or future disease.121 In addition, key
reform components typically include extensions of the statutes of
limitations for asbestos-related diseases and limits on punitive
damages. 122 Such reforms would address concerns over “fear of
cancer claims” and other payments to unimpaired claimants that
reduce and delay payments to those suffering from more severe
asbestos-related injuries. In addition, other reform groups call for
limitations on case consolidation, successor liability, and forum
shopping.123 Some state reform efforts have also been considered,
including limitations on punitive damages and jurisdiction
restrictions to combat the perceived problems with the current

       Compare Senate Asbestos Hearing, supra note 8 (testimony of Steven
Kazan) with Senate Asbestos Hearing, supra note 8 (testimony of Frederick
Baron). Kazan represents cancer victims in asbestos suits and argues for
limitations on unimpaired claims:
The asbestos companies are really cash cows that we should care for and
cultivate so we can milk them for years as we need to. But I have colleagues
who’d rather kill them, cut them up and put them on the grill now. We’d all have
a great time, but there are people who will be hungry in five years.
Lisa Girion, Firms Hit Hard As Asbestos Claims Rise, L.A. TIMES, Dec. 17,
2001, at A1 (quoting Steve Kazan).
       Plaintiffs’ Bar Now Opposes Unimpaired Asbestos Suits, NAT’L L.J., Apr.
1, 2001, at B14; Girion, supra note 118, at A1.
       Senate Asbestos Hearing, supra note 8 (testimony of Steven Kazan);
Girion, supra note 118, at A1.
       See, e.g., The Asbestos Alliance, Proposed Legislative Solution, at (last visited March 28, 2003).
       See Biggs statement, supra note 113, at 7.
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wave of asbestos litigation.124
      One prominent asbestos reform effort being considered
collectively by affected companies, insurers, and a small,
bipartisan group of United States Senators is the creation of a $100
billion privately financed trust.125      The trust would would
compensate asbestos victimsas their claims arose,126 while barring
individual lawsuits. The trust planwould permit recovery based on
injury, with the most impaired claimants receiving compensation
first.127 Although opposition is expected, it has been reported that
the American Trial Lawyers of America will not to oppose the
trust if, among other things, it offers payments similar to the net
amounts that victims currently receive.128


                       A. Grace’s Asbestos Woes
     Grace acquired most of its asbestos liability in 1963, when it
purchased the Zonolite company.129 As part of its operation in
Libby, Montana, Zonolite mined vermiculite, which is used in
assorted fire proofing and insulation products.130          Though
vermiculite is unrelated to asbestos, one of the contaminants found
in the vermiculite mine was a straight fibered form of asbestos
known as tremolite. 131 In mining the vermiculite, workers were
allegedly exposed to tremolite, which was inadvertently
incorporated into insulation and other products.132 Scientists

       Ken Ellingwood, Mississippi Curbs Big Jury Awards, L.A. TIMES, Dec. 4,
2002, at 1.
       Berenson, supra note 11, at A1.
       Siegel, supra note 109, at 10-12.
       Drumheller, supra note 108, at A1.
       Feds Fear Asbestos Poisoning Spread Beyond Montana, SEATTLE POST-
INTELLIGENCER, June 21, 2002, at A10, available at LEXIS, Seattle Post-
Intelligencer. See also McDonald, supra note 17, at 3; Grace Bankruptcy 10-K,
supra note 3, at 13-14.
       Feds Fear Asbestos Poisoning Spread Beyond Montana, supra note 131.
See also McDonald, supra note 17, at 3; Grace Bankruptcy 10-K, supra note 3,
at 13-14.
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hypothesize that tremolite rivals blue asbestos in carcinogenicity133
and tremolite exposure forms the basis of many of the claims
experienced by Grace.134 In addition to bodily injury claims,
Grace experienced a significant number of property claims
demanding payment for the removal of insulation containing
asbestos and restoration of affected properties.135
     From 1995 through the time of its sale of Cryovac in 1998,
Grace was named in a total of approximately 120,000 asbestos
claims.136 Toward the end of the 1990s, the pace of new claims
increased for Grace, as it did for many other asbestos
defendants.137 Grace received approximately 50,000 new claims in
2000, nearly double the number of claims received in 1999, and
experienced an increase in bodily injury claims of approximately
eighty-one percent.138 This increase in new claims, stemming both
from a rise in the number of unimpaired claimantsand the
willingness of courts to permit claims by thousands of asbestos
claimants who were not sick, created an increasing burden on
Grace’s finances.139 Faced with these worsening difficulties,
Grace filed for bankruptcy with the United States Bankruptcy
Court for the District of Delaware in April 2001.140 At the time it
filed for bankruptcy, W.R. Grace had already paid over $280
million in asbestos claims associated with its mining operations in

                       B. The Cryovac Transaction
   The sale by Grace of its Cryovac business was structured as a
“Morris Trust” transaction.142 Morris Trust transactions are used as
a way for corporations to dispose of appreciated assets or

      See McDonald, supra note 17 , at 3-4.
      See Grace Bankruptcy 10-K, supra note 3, at 13-14, F23-F24.
      Id. at 11.
      Siegel, supra note 110, at 18.
      Grace Bankruptcy 10-K, supra note 3, at 1, 12.
      See supra Part II.B; See also Grace Bankruptcy 10-K, supra note 3, at 12.
      Grace Bankruptcy 10K, supra note 3, at 1.
      Drumheller, supra note 108, at A1.
      Soma Biswas, Sealed Fate?, at, Sept. 12, 2002,
available at LEXIS, The Daily Deal [hereinafter Biswas, Sealed Fate?]; In re
W.R. Grace & Co., 281 B.R. 852, 868 n.5 (Bankr. D. Del. 2002). See also
Sealed Air 1998 8-K, supra note 1.
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businesses without incurring tax liability on the built-in gain.143
They are accomplished by spinning off the business that is not to
be acquired to the stockholders in a tax-free transaction, leaving
the old corporation consisting of only the assets to be sold.
Following the spin-off, the acquirer then merges with the old
corporation, which now consists of only the assets to be disposed
of, in a stock-for-stock merger.144
      Diagram 1 follows the transaction undertaken by Grace and
Sealed Air. In the case of the Grace-Sealed Air transaction, Grace
spun out its specialty chemical business (i.e., the business to be
retained by the Grace stockholders and the business that had the
historical asbestos liabilities) to its stockholders and called the new
company New Grace, as shown in Steps 1 and 2 of the diagram.145
In the next step of the transaction, represented by Step 3 of the
diagram, the “old Grace,” consisting only of Cryovac, the business
to be sold, merged with Sealed Air.146 In the acquisition, Sealed
Air and Cryovac paid approximately $1.2 billion in cash to New
Grace.147 In addition to cash compensation, the shareholders of
Grace, who originally owned stock in Grace at the time when
Grace contained both the specialty chemical business and Cryovac,
received shares of Sealed Air common stock and preferred stock
representing sixty-three percent of the outstanding shares of Sealed
Air.148 The value of the Sealed Air stock, approximately $3.7
billion, accounted for the remaining purchase price for Cryovac.149
At the end of the transaction, New Grace was renamed to Grace
and the Sealed Air-Cryovac entity became Sealed Air.150 The final
resulting structure from the Morris Trust is shown below in Step 4
of Diagram 1.          The transaction documentation included
indemnification provisions in which New Grace agreed to
indemnify the old Grace against any asbestos liabilities. 151

      Peter C. Canellos, New IRS “Morris Trust” Regulations Bring Some
Clarity, But Caution Still Advised, THE M & A LAWYER, June 2002, at 15.
      See Canellos, supra note 143, at 15; Biswas, Sealed Fate?, supra note 142.
      Sealed Air 1998 8-K, supra note 1.
      Id. See also Sealed Air to Cut 750 Jobs and Take $112 Million Charge,
supra note 1.
      Sealed Air 1998 8-K, supra note 1.
      W. R. GRACE & CO. ET AL., DISTRIBUTION AGREEMENT 23-24 (Mar. 30,
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                                         Step 1.
                             Grace owns two types of assets:
                       assets it wants to keep (A) and Cryovac (CY).

                                    Grace shareholders

                                     CY             A

                                        Old Grace

                                         Step 2.
                        Grace spun off A into New Grace.
                       CY remained part of the Old Grace.
             Grace shareholders received pro rata stock in New Grace.
                                     Grace shareholders

              CY                                                   A

               Old Grace                                  New Grace
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                                           Step 3.
  Sealed Air then merged with the Old Grace, i.e. CY, retaining the name Sealed
              Air. New Grace, which contains A, is renamed Grace.

   Sealed Air shareholders                                     race
                                                              G shareholders

                                        G shareholders

           SEA LED                                                                   Grace
             AIR                            CY                                         ith )
                                                                                     (w A

                                           ld race
                                          O G

                                           Step 4.
 After the transaction, Grace shareholders owned 63% of Sealed Air, Sealed Air
     retained 37% of Sealed Air stock, and Grace itself received $1.2 billion.

        S ealed A ir shareholders               G race shareholders


                          A IR                                           G ra c e
                         (w ith C Y )                                    (w ith A)
                                               $1.2 billion
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           C. The Sealed Air Fraudulent Conveyance Case
      In Grace’s bankruptcy, creditor committees were formed to
divvy up the assets of Grace and determine the allotments each
should receive. In March 2002, the committees representing
asbestos claimants in the Grace bankruptcy proceeding brought an
action against Sealed Air seeking recovery of Cryovac.152 In
addition to demanding reconveyance of Cryovac, the creditor
committees sought punitive and compensatory damages as a result
of the transfer. The chief allegation was that Grace fraudulently
transferred Cryovac to Sealed Air.153
      The fraudulent conveyance doctrine generally prevents an
insolvent corporation from selling assets for less than fair value
before the corporation goes into bankruptcy. 154 Fraudulent
conveyance law is typically governed by statute, with most states
adopting the Uniform Fraudulent Conveyance Act (“UFCA”), the
Uniform Fraudulent Transfer Act (“UFTA”), or minor variations
of these acts.155 A successful fraudulent conveyance action may
upset the settled expectations of the parties to a transaction by
forcing the purchaser to reconvey its acquired assets.156 If a
plaintiff cannot show that a seller intended to defraud its creditors,
the plaintiff must typically demonstrate that the company was both
insolvent at the time of the asset sale and that the seller received
less than the reasonable equivalent value of the assets.157
      Insolvency, the first element of a fraudulent conveyance,
occurs when the company’s debts exceed the company’s assets at
fair value at the time of the transaction.158 While the test for
insolvency may appear to be quite simple, the determination of
when a debt has been incurred may be difficult, as will be
discussed below.

      SEALED AIR, Quarterly Report [Form 10-Q], SEC File No. 001-12139, at
31 (May 14, 2002).
      In re W.R. Grace & Co., 281 B.R. at 854-855; Biswas, supra note 1.
      11 U.S.C. §548(a) (2003).
      J. Maxwell Tucker, The Clash of Successor Liability Principles,
Reorganization Law, and the Just Demand that Relief Be Afforded Unknown and
Unknowable Claimants, 12 BANKR. DEV. J. 1, 9 (1995).
      UNIF. FRAUDULENT TRANSFER ACT §7(a)(1) (1984).
      See id. §§4(a)(2), 5(a).
      See id. §2(a).
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     The second element of a fraudulent conveyance requires that
the plaintiff show that the value received for the assets was
inadequate. To determine whether reasonably equivalent value
was received, courts typically analyze the fair market value of the
acquired assets and compare that value to the consideration paid in
the transaction.159
     On July 29, 2002, Judge Alfred Wolin, the judge responsible
for overseeing the Grace bankruptcy proceeding, issued an order
that stacked the deck against Grace.160 In his order, Judge Wolin
held that Grace’s solvency at the time of the transaction could be
determined in light of claims made after the time of the transfer; in
other words, Grace’s solvency at the time of the sale of Cryovac
could be viewed in retrospect.161 At the time of the transfer, Grace
had obtained expert estimates of its existing and future asbestos
liabilities, taking into account historical claims rates,
epidemiological studies and a variety of other factors.162 Based on
these estimates and other factors, both Grace and Sealed Air
believed, and continued to assert, that Grace was solvent at the
time of the transaction.163 In concluding that post-1998 asbestos
claims should be included in the solvency analysis, however, the
court greatly increased estimates of Grace’s asbestos exposure at
the time of the Cryovac transaction.164 In its decision, the court
reasoned that post-1998 asbestos claimants had a right to payment
as of the transfer date even if they themselves were unaware of
their claim at that time.165 As the court explained in its ruling,
exposures before 1998 created the claims faced by Grace after the
transfer date:
        W.R. Grace’s product had already proven dangerous on the
        transfer date affecting tens of thousands, not hundreds. The
        post-1998 increase in the claiming rate was not an airplane
        falling out of the sky nor a melt-down in a reactor. Every
        element of liability was already present and had been for many
        years. Nor is this akin to all of an insurer’s policyholders dying

      See, e.g., Walczak v. EPL Prolong, Inc., 198 F.3d 725, 731 (9th Cir.
1999); Leibowitz v. Parkway Bank & Trust Co. (In re Image Worldwide), 139
F.3d 574, 577 (7th Cir. 1998).
      In re W.R. Grace & Co., 281 B.R. at 852 (Bankr. D. Del. 2002).
      Id. at 869.
      Biswas, Sealed Fate?, supra note 142.
      In re W.R. Grace & Co., 281 B.R. at 862-63.
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        in one year. W.R. Grace’s asbestos claimants, pre- and post-
        transfer, are not all dead, thankfully. But the Court has taken as
        a working assumption that many, and perhaps all, of the post-
        1998 claimants had suffered a legally cognizable injury as of
        the transfer date. 166
By including post-acquisition claims, the court lightened the
plaintiffs’ burden in showing that Grace was insolvent by
increasing the amount of asbestos liabilities Grace owed at the
time of the Cryovac transfer.167
      As a result of the judge’s ruling, it became clear that there was
a significant risk that Grace would be deemed to have been
insolvent at the time of the Cryovac transaction.168 While Grace
asserted that it could still prove solvency under Wolin’s test,169 it
also faced a potential uphill battle on the second element for
fraudulent conveyance: inadequate payment for the assets it sold to
Cryovac. In the Sealed Air acquisition, Sealed Air paid $3.7
billion to the shareholders of Grace in the form of stock, but Grace
itself only received $1.2 billion.170 Thus, most of the consideration
in the Sealed Air transaction passed to the shareholders of Grace
rather than to Grace itself. This left Grace with fewer funds
available to satisfy the asbestos creditors than it would have had if
Sealed Air had made its payment solely to Grace.171 Utilizing that
reasoning, Grace was thus effectively paid $1.2 billion for an asset
that should have fetched $4.9 billion.
      On November 27, 2002, a week before the trial was set to
begin, Judge Wolin called a pretrial meeting and strongly
encouraged the parties to reach a settlement.172 Facing the
prospect of having to return Cryovac or pay Grace up to $3.7
billion to fund future asbestos claims, and notwithstanding its view
that it would prevail at trial, Sealed Air agreed to settle two days

      Id. at 865.
      See Biswas, supra note 1; Biswas, Sealed Fate?, supra note 142.
      See Biswas, supra note 1; see also Biswas, Sealed Fate?, supra note 142.
      See Biswas, Sealed Fate?, supra note 142.
      Sealed Air 1998 8-K, supra note 1. See also Sealed Air to Cut 750 Jobs
and Take $112 Million Charge, supra note 1.
      See In re W.R. Grace & Co., 281 B.R. at 868. Judge Wolin’s opinion
addressed only the issue of insolvency. His discussion of inadequate payment,
however, suggests that the judge may have considered the tax avoidance device
of a Morris trust to place assets out of the reach of the asbestos claimants.
      See Matthew Haggman, W.R. Grace Creditors Agree to $800 Million
Deal, PALM BEACH DAILY BUS. REV., Dec. 3, 2002, at A1, LEXIS News.
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2003]       NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT                653


     Sealed Air in effect saw the purchase price for Cryovac
increase by $853 million more than four years after completing the
transaction. While, as a technical matter, the court’s decision only
applies to cases brought in jurisdictions assigned to the Third
Circuit Court of Appeals (Delaware, New Jersey, Pennsylvania,
and the U.S. Virgin Islands), the Sealed Air result is a cautionary
tale for any company contemplating the acquisition of a business
from a seller that has asbestos liabilities or other “long-tail”
environmental or tort liabilities. It is increasingly important to
conduct careful due diligence on the seller, including liability and
solvency valuations in the case of troubled companies, and to
consider transaction structures that can minimize, if not completely
eliminate, contingent litigation risk.
     While it may be difficult to completely eliminate all risk when
acquiring companies tainted with asbestos liability, thorough due
diligence and careful acquisition structuring may help to mitigate
the risks associated with such acquisitions.

                         A. Due Diligence
      As always, due diligence is important. Besides conducting
traditional thorough investigation into the acquired business, buyers
should carefully consider a seller’s financial and legal status. A telling
example comes from the history behind Federal-Mogul’s asbestos
litigation. Before its acquisition of Turner Newell, a car parts
manufacturer, Federal-Mogul knew of the company’s asbestos
exposure and yet undervalued the magnitude of the claims.174 By not
accounting for the possibility of payments to unimpaired claimants,
Federal-Mogul paid hundreds of millions of dollars more than
expected and, for these and other reasons, plunged into bankruptcy.175

       See Biswas, supra note 1.
       Analysis: Adding Insult to Injury, ACCOUNTANCY AGE, Sept. 26, 2002, at
7, available at LEXIS, Accountancy Age.
       John Wirebach, Asbestos Chokes Federal-Mogul Finances, Creates
Investor Doubt, AFTERMARKET BUS., Sept. 1, 2001, at 11, available at LEXIS,
News & Business.
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654                N.Y.U. ENVIRONMENTAL LAW JOURNAL           [Volume 11

Similar acquisition woes affected Grace, which, as noted above,
acquired the Zonolite company and its accompanying asbestos
liability in the 1960s.176 With respect to asbestos, buyers should pay
particular attention to the target’s asbestos claims profile, settlement
and litigation history, insurance coverage, and financial reserves.

1.         Claims Profiling
      The first step in investigating an asbestos-laden target is to
assess its claims profile. Before even sitting down with the target,
it is possible to get helpful preliminary information from public
disclosures to the Securities and Exchange Commission, as well as
from newspaper and internet sources, that contain information
about claims exposure without putting the target on notice of the
acquisition interest. Once the target has become involved,
however, a more rigorous analysis of the claims profile can begin.
Acquirers should consider the total pending and resolved claims
against the target and analyze the annual and monthly claims rates.
Remembering the lessons learned by Federal-Mogul, acquirers
should also determine the “disease mix” of the claim, i.e. the types
of injuries that are being alleged.
      Other considerations in claims profiling include evaluating the
jurisdictions that have been the situs for the litigation. Certain
jurisdictions, such asTexas and West Virginia, have liberal
procedural rules that tend to favor plaintiffs or are known to have
jury pools that have a history of making large plaintiff awards;
claims originating in such states may expose the target to greater
      Claims profiling also requires review of settlement rates and
averages, broken down by the alleged harm. As part of the review
of asbestos-related settlements, the due diligence team should
inquire into the settlement and litigation strategy of the target.
Defendants that fight every case can find that they have created a
deep deposition or trial record that contains documents or
materials that can be helpful to future plaintiffs. On the other
hand, those tending to settle all or virtually all of the cases against
them may find that this strategy in fact attracts additional claims, a
strategy that amounts to “tossing chum into piranha-infested

           Siegel, supra note 109, at 10-12.
           See RAND REPORT, supra note 10, at 34-35.
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waters”.178 An evaluation of the plaintiff’s firm’s capabilities is an
additional factor related to claims profiling and settlement strategy;
the ability of a firm to aggregate and attract plaintiffs may increase
pressure to settle claims. Considerations of claim scope and past
strategy can be important factors in predicting future asbestos
liability and allow acquirers to better understand the liability
associated with a given acquisition.
2.         Target’s Historical Association with Asbestos
     In addition to claims profiling, an understanding of the
company’s history with asbestos is a necessary step for due
diligence. As with claims profiling, newspaper and internet
sources can provide a basic understanding of the underlying cause
for asbestos litigation against the target. After the target has
become involved in the deal, the due diligence team should next
construct a corporate tree for the target and attempt to identify the
current or former subsidiaries, properties, and operating divisions
that are or were in the past responsible for asbestos-containing
products or materials. Information about the production volume of
asbestos-containing products, their intended markets, and the
distribution networks employed will also provide some insights
regarding the likely size of the potential claimant pool; in other
words, how many individuals may legitimately allege exposure to
asbestos at target’s facilities or in target’s products .
     Complicating the gathering of historical information can be a
target’s reluctance to disclose “bad” facts or key documents.
There is an incentive for sub-optimal disclosure by a target to an
acquisition. Not only may more plaintiffs be attracted to the target
should negative facts come to light, but asbestos liabilities
frequently deter acquirers from purchase or result in large purchase
price discounts. In addition, while companies subject to SEC
reporting requirements must make certain disclosures, most
companies are sensitive to the potential impact that such
disclosures of potential asbestos liability may have on share price
and otherwise the ability access money in the capital markets, and
may look for ways to minimize any such public statements.

     Mark Truby, Asbestos Ruined Federal-Mogul: Auto Parts Maker Never
Made the Costly Lethal Fiber, DETROIT NEWS, Mar. 31, 2002, at 13A, available
at LEXIS, Detroit News.
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656               N.Y.U. ENVIRONMENTAL LAW JOURNAL                    [Volume 11

3.         Insurance
     The next due diligence step is to evaluate the current
insurance coverage of the target. The extent of coverage, whether
such coverage is confirmed, and the amount of the deductible are
items to explore in assessing the asbestos risk. An analysis of the
insurer’s capability to pay may also be necessary. The insurance
industry has currently paid out twenty-four billion dollars in
asbestos claims and is predicted to face a reserve shortfall between
ten and thirty-five billion dollars in the future. 179 Because many
insurers have borne heavy losses paying asbestos claims, it is
crucial to assess the solvency of the target’s insurers and likely
ability or willingness to pay future claims.
4.         Financial Reserves and Estimations of Asbestos Liability
     Finally, financial reserves and the reporting of asbestos claims
should also be examined in the risk assessment process. Acquirers
should carefully assess the assumptions underlying the predicted
losses and the reserves that the target has set aside. For example, a
company’s reserves may account for losses anticipated only over a
short multi-year period, rather than for the complete liability
horizon, which could stretch many years into the future. Other
assumptions underlying sophisticated reserve estimates may
include predictions about (i) inflation, (ii) numbers of claims (both
in the aggregate and for individual claim types), (iii) changes in the
“disease-mix” among claimants, (iii) settlement amounts (by claim
type) and (iv) extent to which past settlements will permit
claimants to make additional future claims if their conditions
worsen. In addition, the acquirers should recognize that such
estimates are subject to substantial additional uncertainties,
including the potential amounts and impacts of any future adverse
trial verdicts against the target, bankruptcies of other major
defendants or reform efforts which could impact the timing and
amounts of, and criteria for, future payments, and the ability and
willingness of individuals who are not sick to demand
compensation. Changes in one or more of these assumptions in
particular reserve estimates could require significant adjustments,
which in turn could distinctly affect the value of a contemplated

       Keith M. Buckley, et al., Asbestos: Impact on the U.S. Insurance Industry,
FITCHRATINGS, July 25, 2002, at 1, 5, available at
(last visited March 29, 2003).
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2003]         NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT                  657


               B. Structuring a Transaction: Basic Lessons
     Corporate attorneys have traditionally used certain methods of
structuring transactions that mitigate buyer responsibility for
contingent liabilities.. These include acquiring assets rather than
stock, using a special purpose acquisition vehicle for the purchase,
and obtaining the strongest possible contractual protections. Those
familiar and protective methods should remain important parts of
the deal structuring toolkit when acquiring companies with
asbestos liabilities. In addition, thought should be given to
structures that minimize the potential for successful fraudulent
conveyance claims. As outlined below, the Morris Trust structure
may have helped to expose Sealed Air to liability by giving value
to Grace shareholders rather than to Grace itself.

1.         Asset Purchases
     Asset deals are generally preferable to stock deals, but are not
always sufficient to avoid the liabilities of the seller. In a stock
deal, the buyer assumes both the assets and the liabilities, stepping
into the shoes of the seller and taking on any accompanying
asbestos liabilities. In asset transactions, in contrast, buyers
generally only acquire specifically enumerated assets, and assume
only expressly identified liabilities. The availability of liability
avoidance through the mechanism of asset purchasing is limited,
however, by the well-established doctrines of successor liability180
and veil-piercing.181 For environmental matters and toxic torts,
courts are more willing to impose liability on purchasers than in
other contexts.

         Successor liability has been defined as the following:
       A corporation may be held liable for the torts of its predecessor if (1) it
       has expressly or impliedly assumed the predecessor’s tort liability, (2)
       there was a consolidation or merger of seller and purchaser, (3) the
       purchasing corporation was a mere continuance of the selling
       corporation, or (4) the transaction is entered into fraudulently. . . .
See, e.g., Shamis v. Ambassador Factors Corp., 34 F. Supp. 2d 879, 897
(S.D.N.Y. 1999).
         As a general rule, a properly formed company will shield its stockholders
from liability for the corporation’s debts. However, courts may pierce the
corporate veil in rare instances and assess liability to a stockholder if the
subsidiary is undercapitalized, excessively intertwined with the parent, or has
assets intermingled with the parent, to name a few triggers for the doctrine. See,
e.g., Worth v. Tyer, 276 F.3d 249, 259-260 (7th Cir. 2001).
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658              N.Y.U. ENVIRONMENTAL LAW JOURNAL           [Volume 11

     In structuring a transaction, choosing the assets to acquire
becomes important because, essentially, “you are what you eat.”
The goal in asset transactions is to purchase only the assets of a
target that are free of asbestos liability. In making its purchase
decision, the acquirer should consider the interaction of a “clean”
subsidiary with the other businesses in the target’s portfolio. Past
co-management, intermingling of assets, and other indications of
interactions with a tainted subsidiary may subject an acquirer of a
clean target to unexpected liability.
2. Special Purpose Acquisition Subsidiaries and Continued
Viability of the Seller
      In arranging theacquisition, the acquirer may consider ring-
fencing its purchase through the use of a special purpose
acquisition subsidiary whose sole purpose would be to purchase
and operate the acquired assets. In order to minimize the risk that
a court would pierce the corporate veil and impose liability on the
acquisition parent, this entity should be capitalized sufficiently to
complete the acquisition and manage its ongoing operations, and
scrupulously observe all corporate formalities (e.g., corporate
filings and fees, board meetings, minutes, financial accounting and
reporting, etc.). By structuring the transaction in this way, the
acquiring parent company may be able to limit its potential
exposure to the target’s liabilities to the initial investment amount.
      With an eye toward the various factors considered by courts
in determining whether to impose successor liability on acquirer
(either the acquisition subsidiary or the acquisition parent), it
would be prudent to avoid, if possible, using the same
manufacturing facilities, employees, management or product
name. Purchaser should be careful not to hold itself out as a
successor or continuation of Seller. If at all possible, Seller should
be required or incentivized to continue to operate and/or remain
viable after closing. While many of these steps may be difficult or
impractical depending upon the goal of a particular transaction, it
is important to keep in mind how a court might assess a
purchaser’s post-closing operations in the context of a successor
liability claim.
      In addition to the use of a special purpose subsidiary , the
acquirer may attempt to require the seller to agree to remain in
business, or only deal with sellers who are likely to remain viable
for the foreseeable future. This can be important because where a
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2003]      NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT                     659

seller can fulfill the obligations of tort claimants or at least
arguably do so, it is less likely that plaintiffs will look to another
party to assume the seller’s obligations, or that a court will seek to
impose liability on the acquiror in order to assure that tort
claimants can be compensated. If the seller discontinues operations
soon after completion of the transaction,, the court may determine
that a de facto merger occurred rather than an asset sale,182
Leaving the purchaser responsible for liabilities it was planning to
3. Contractual Protections: Indemnity, Insurance, and
Agreements on Strategy
     Of course, purchasers should always seek to the strongest
possible contractual protections, including in particular a broad
indemnity. In practice, an indemnity can only be as strong as the
party backing it. Accordingly, it is crucial to seek protection from
a solvent entity that is likely to be in existence and capable of
managing claims for the foreseeable future.
     Where there are questions about the viability of the negotiated
indemnity, purchasers may consider purchasing insurance. A
number of products are available, which can be costly but may be
appropriate in particular cases. Where the costs of insurance are
prohibitive and indemnity protection is not likely to be sufficient,
purchasers frequently seek a purchase price reduction or escrow.
Given the inherent uncertainties in estimating long-tail contingent
liabilities, negotiating the amount of a reduction, or the timing and
amount of an escrow payment, can be extremely difficult and is,
moreover, an approach that sellers will typically resist.
     Another contractual protection worth considering involves
stepped-up purchaser involvement in the asbestos defense strategy.
While idemnity claims management approaches can vary, it is
typical of most agreements that the party providing the
indemnification (typically, the seller) will manage the underlying
claims, with some participation from the indemnified party
(typically, the purchaser). Where the purchaser has qualms about
how claims are being addressed, and fears that seller’s strategy is
likely to result in seller’s bankruptcy, or in quick exhaustion of the
indemnity limits, purchaser may seek contractual rights to become

     See, e.g., Dobin v. Taiwan Mach. Trade Ctr. Corp. (In re Victor Int’l, Inc.),
278 B.R. 67, 83-84 n.23 (Bankr. D. N.J. 2002).
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660              N.Y.U. ENVIRONMENTAL LAW JOURNAL            [Volume 11

more involved, or even to control, the litigation defense. This can
be a risky strategy, particularly where purchaser wishes to stay
awary the asbestos plaintiffs’ target list and considering the
successor liability concerns raised above. Nevertheless, it is a
position worth considering in some instances, particularly where
purchaser reasonably believes that the overall costs are not likely
to affect its survival and that it can handle the defense more
efficiently and cost-effectively than seller.

4.    Fair Value Transactions
     In the wake of the Sealed Air case, anyone seeking to buy a
business from a troubled seller should consider its position
carefully before proceeding with a transaction that does not
involve payment directly to the seller. The transaction structure
chosen in the Cryovac acquisition appeared to impair Sealed Air’s
ability to argue that Grace and its creditors received fair value for
the business. In Sealed Air, most of the value was delivered
directly to stockholders, instead of to Grace. The stockholder
payment thus had the effect of reducing the assets available to
asbestos claimants upon the bankruptcy of Grace.
     The Sealed Air case demonstrates that transaction structures
that involve payment of consideration directly to stockholders -
while tax efficient in some cases - may expose buyers to liabilities
of sellers in circumstances where payment of the same value
directly to the selling corporation may not. Thus, in structuring a
transaction, it may be wise to consider structures that provide
value directly to the target rather than to its shareholders if further
protections are advisable against successor liability.

     This Article summarizesthe history of asbestos litigation,
current trends, and possible risk management solutions for would-
be acquirers of asbestos-tainted businesses and assets.
Notwithstanding the recent surge in asbestos reform activity,
asbestos litigation and liability will likely continue to impact
corporate America for the foreseeable future. While legislative
solutions are possible, it is impossible to predict their timing, or
whether they they will achieve their intended purpose.
Accordingly, corporate deal makers simply cannot assume that the
problem will go away. Before proceeding with any transaction
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potentially involving asbestos liabilities, purchasers must carefully
assess the potential risks and, to the extent possible, structure
transactions and conduct their post-closing operations in ways that
will mitigate potential related liabilities to the maximum extent
possible. While absolute protection is difficult if not impossible to
achieve, with careful planning, the likelihood of inadvertently
assuming massive asbestos liabilities can be reduced.

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