Paddock Enterprises LLC

January 6, 2020

Ohio-based Paddock Enterprises LLC (aka Owens-Illinois Inc.) is the latest victim of asbestos-related liabilities to find itself in bankruptcy court. And by “latest” we mean the first in, like, a few days. Just last week, another Ohio-based manufacturer, ON Marine Services Company LLC, filed for bankruptcy after having had enough of dealing with decades-worth of claims within the tort system. ON filed for bankruptcy to address 6,000 claims emanating out of the 70s; Paddock filed for bankruptcy because its alternative to the tort system — “administrative claims agreements” — became increasingly untenable and it must still address 900 claims stemming from the 40s and 50s. That’s right, the 40s and 50s!! The purpose of filing for bankruptcy is to establish a 524(g) trust to deal with current and future asbestos claimants.

This case seems rather straight-forward and so we’ll spare you the long summary. In a nutshell, if a company at one time manufactured product with asbestos, it is generally f*cked. But there is an interesting commentary herein about these types of lawsuits and why bankruptcy is warranted. In the context of discussing its reserve coverage of asbestos-related tort expenditures ($722mm!), the company notes:

The Debtor believes that, although the established reserves are appropriate under ASC 450, its ultimate asbestos-related tort expenditures cannot be known with certainty because, among other reasons, the litigation environment in the tort system has deteriorated generally for mass tort defendants and Administrative Claims Agreements are becoming less reliable.

It gets better (PETITION Note: this is a long but worth-it passage):

What is certain is the incredible disparity between what the Debtor has historically paid, and is now being asked to pay, for Asbestos Claims, given the extent of its historical asbestosrelated operations. As of September 30, 2019, the Debtor had disposed of over 400,000 Asbestos Claims, and had incurred gross expense of approximately $5 billion for asbestos-related costs. In contrast, its total Kaylo sales for the 10-year period in which it sold the product were approximately $40 million. Asbestos-related cash payments for 2018, 2017, and 2016 alone were $105 million, $110 million, and $125 million, respectively. Although these cash payments show a modest decline, the overall volume and claimed value of Asbestos Claims asserted against the Debtor has not declined in proportion to the facts that (i) over 60 years have passed since the Debtor exited the Kaylo business, (ii) the average age of the vast majority of its claimants is now over 83 years old, (iii) these demographics produce increasingly limited opportunities to demonstrate legitimate occupational Kaylo exposures, and (iv) other recoveries are available from trusts established by other asbestos defendants. Rather, increasing settlement values have been demanded of the Debtor. And because the Debtor has settled or otherwise exhausted all insurance that might cover Asbestos Claims, it must satisfy all asbestos-related expenses out of Company cash flows.

Oh man. You’ve gotta love the plaintiff’s Bar. Those numbers are staggering. $40mm in 1940-1950 dollars would be equal to approximately $565mm in 2018 dollars. As compared to $5b in liability. And more to come. SHEEEESH. (PETITION Note: none of the foregoing is intended to disrespect any of the victims of the debtor’s product. Yes, we feel obligated to say that.)

There’s also a structural issue: the debtor entity subject to these extensive liabilities was incorporated in December 2019 as a direct wholly-owned subsidiary of O-I Glass Inc. ($OI), a $2b market cap glass container manufacturer. This is the classic “good company,” “bad company” structural separation. We suspect there’ll be at least some fireworks in bankruptcy court over this structure as creditors — almost exclusively the plaintiffs’ law firms — try to broaden the pool of potential proceeds from which they can recover monies for their clients.

• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure:

• Professionals:

  • Legal: Latham & Watkins LLP (George Davis, Jeffrey Bjork, Christina Craige, Jeffrey Mispagel, Helena Tseregounis, Michael Faris, Lisa Lansio) & Richards Layton & Finger PA (John Knight, Michael Merchant)

  • Board of Directors: Kevin Collins, John Reynolds, Scott Gedris

  • Estimation Agent: Bates White LLC

  • Financial Advisor: Alvarez & Marsal LLC

  • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

• Other Parties in Interest:

  • O-I Glass Inc.

    • Legal: Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Joseph Halsey)

  • Future Claims Representative: James Patton Jr.

    • Legal: Young Conaway Stargatt & Taylor LLP

    • Claims Analyst: Ankura Consulting Group LLC