Defunct boiler maker, crippled by asbestos claims, files for bankruptcy again

By Jessica Karmasek | Aug 18, 2015

CHICAGO (Legal Newsline) - A defunct boiler manufacturer has filed for bankruptcy -- the second time in less than 30 years -- and is looking to establish a trust for the asbestos claims that have crippled it, including the 3,400 active cases it is currently facing.

Earlier this month, Frederick W. Stein, president and sole director of Oakfabco Inc., formerly known as Kewanee Boiler Corporation, filed a Chapter 11 case in the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division.

Oakfabco, though under a different name, also went through bankruptcy in the 1980s. In this case, the company, which has no employees and whose sole remaining asset is its insurance, is looking to set up a trust that will pay only current claims.

“It is not the Debtor’s intention to treat so-called future claims or demands,” Stein wrote in his Aug. 7 declaration.

“To resolve current claims, the Debtor intends to seek approval of the insurance settlement agreements and confirmation of a chapter 11 plan of liquidation as soon as practicable. The plan will provide for the establishment of a liquidating trust into which the remaining insurance proceeds from the Settling Insurers and insurance rights against other insurers that may have obligations to Oakfabco will be transferred.”

The liquidating trust, Stein wrote, will assume liability for all current asbestos claims and will use its assets to resolve the claims.

“By monetizing the Settling Insurers’ policies and establishing procedures to govern trust distributions, the liquidating trust will be able to value and pay current asbestos claims in a fair and efficient manner,” he wrote.

“The approval of the insurance settlement agreements and confirmation of a plan of liquidation will ensure a fair and equitable distribution among current asbestos claimants.”

Stein, according to his declaration, currently serves as the general counsel of a Chicago area company. He assumed the role of president after the death of his father, William C. Stein, who was Oakfabco’s sole shareholder.

For many years prior to 1970, Kewanee Boiler was a division within American Standard Inc. And like many companies at the time, American Standard used asbestos in several products.

According to the company’s 1956 catalog, its Kewanee boilers were made with an “asbestos rope gasket.”

American Standard sold all of the assets and certain liabilities of Kewanee Boiler to Kewanee Boiler Corporation, a newly-formed Illinois company, in 1970.

In 1975, William C. Stein and others purchased the stock of Kewanee through a holding company.

In 1986, Kewanee filed for Chapter 11 -- also in the Northern District of Illinois bankruptcy court -- for the purpose of dealing with ongoing losses associated with the boiler business.

In 1988, the bankruptcy court confirmed Oakfabco’s second amended Chapter 11 plan of reorganization.

Under the plan, Kewanee sold its boiler manufacturing assets to Coppus Engineering Corporation and was renamed Oakfabco. It has not manufactured boilers since.

However, Oakfabco did not take any steps to limit its liability to claimants who might assert a claim for asbestos-related diseases after the plan’s confirmation.

Later on, the bankruptcy court determined that future victims of torts from defective boilers cannot be forced into participating in the limited distribution that unsecured creditors are entitled to receive under the company’s 1988 plan. Rather, the court determined that such tort claimants may seek to collect against the reorganized company.

According to Stein’s declaration, because no such provision was made in the 1988 plan, claimants have continued to file claims against Oakfabco since the plan’s confirmation.

“Such claimants seek money damages for personal injury and wrongful death alleged as a result of exposure to asbestos-containing products allegedly manufactured or sold by the Debtor or a predecessor in interest,” he wrote.

As of now, Oakfabco estimates there are about 3,400 active asbestos claims and more than 30,000 inactive asbestos claims outstanding against it.

For several years, pursuant to a 2010 cost-sharing agreement, resolution of the asbestos claims has been handled exclusively by the settling insurers -- First State Insurance Company, New England Reinsurance Company, and Twin City Fire Insurance Company, collectively Hartford; Affiliated FM Insurance Company; and American Casualty Company, Continental Casualty Company and Columbia Casualty Company, together CNA.

But after years of covering Oakfabco’s defense and indemnity costs relating to the asbestos claims, the company’s coverage soon will be exhausted, if it isn’t already.

Among the 20 firms that helped drive the company to bankruptcy, according to a filing with the Illinois bankruptcy court: Weitz & Luxenberg PC of New York; Chicago mesothelioma firm Cooney & Conway; Gori Julian & Associates PC of Edwardsville, Ill.; the Law Offices of Peter Angelos PC in Baltimore; and Napoli Bern Ripka Shkolnik LLP of New York.

Weitz & Luxenberg -- one of the most prolific filers of asbestos-related lawsuits in the nation -- has the largest number of claims.

But Oakfabco is not alone in being forced into bankruptcy.

Since 1982, more than 100 companies have filed for bankruptcy, seeking similar asbestos trusts, according to the most recent Mealey’s Asbestos Bankruptcy Report.

To help fund Oakfabco’s current Chapter 11 case, a portion of the proceeds of a settlement with the three insurers -- Hartford, Affiliated FM and CNA -- will be used.

The company, ahead of its Chapter 11 filing, negotiated with the insurers, resulting in settlement agreements that monetize the policies issued by them in the amount of $17,333,079 -- $4.55 million from Affiliated FM, $3 million from Hartford and $9,783,079 from CNA.

The insurers also provided an advance payment of $50,000, aggregating $150,000, to Reed Smith LLP, the proposed counsel for Oakfabco.

Additionally, prior to the Chapter 11 filing, Hartford and Affiliated FM made subsequent payments of $450,000 and $675,000, respectively, in connection with their obligations under their settlement agreements.

All such sums provided by the insurers were deposited in Reed Smith’s client trust account.

The firm set off the amount of its fees and expenses incurred to the date of Oakfabco’s Chapter 11 filing against the balance in its trust account and has agreed to transfer the remaining balance to a debtor-in-possession account that will be used to fund the costs of administering the case.

“It is intended that funds remaining in the debtor-in-possession account after payment of administrative expenses of the Chapter 11 Case will be transferred, together with other insurance settlement payments, to the liquidating trust to pay asbestos claims,” Stein wrote in his declaration.

An Aug. 13 hearing on Oakfabco’s motion for entry of an order authorizing the listing of addresses of counsel for personal injury claimants and approving notice procedures has been continued until Sept. 15.

According to an Aug. 11 order by Judge Jack B. Schmetterer, Oakfabco’s Chapter 11 plan and disclosure statement both are due Dec. 5. A status hearing is set for Dec. 15.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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Cooney & Conway The Law Offices of Peter Angelos

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