MDR vs. RAY (Post 2 of 4): Excerpt from RAY's most recent Q...
NOTE A - Formation of Raytech Corporation, Sale of Raymark,
Chapter 11 Proceeding and Other Litigation
Raytech Corporation ("Raytech" or the "Company") was
incorporated in June 1986 in Delaware and held as a subsidiary of
Raymark Corporation ("Raymark"). In October 1986, Raytech became
the publicly traded (NYSE) holding company of Raymark stock through
a triangular merger restructuring plan approved by Raymark's
shareholders whereby each share of common stock of Raymark was
automatically converted into both a share of Raytech common stock
and a right to purchase a warrant for Raytech common stock. The
warrants expired on October 1, 1994. The purpose of the formation
of Raytech and the restructuring plan was to provide a means to gain
access to new sources of capital and borrowed funds to be used to
finance the acquisition and operation of new businesses in a
corporate structure that should not subject it or such acquired
businesses to any asbestos-related or other liabilities of Raymark
under the doctrine of successor liability, piercing the corporate
veil and fraudulent conveyance.
Prior to the formation of Raytech, Raymark had been named
as a defendant in more than 88,000 lawsuits claiming substantial
damages for injury or death from exposure to airborne asbestos
fibers. Subsequent to the divestiture sale of Raymark in 1988,
lawsuits continued to be filed against Raymark at the rate of
approximately 1,000 per month until an involuntary petition in
bankruptcy was filed against Raymark in February 1989, which stayed
all its litigation. In August 1996, the involuntary petition filed
against Raymark was dismissed following a trial and the stay was
lifted. However, in March 1998, Raymark filed a voluntary
bankruptcy petition again staying the litigation.
In accordance with the restructuring plan, Raytech
purchased the Wet Clutch and Brake Division and German subsidiary in
1987 from its then wholly-owned subsidiary, Raymark. Each such
acquisition was financed through borrowed funds from new lenders
and Raytech stock and notes. Pursuant to these acquisitions,
Raymark agreed to indemnify Raytech for any future liabilities and
costs that may result from asbestos litigation. Management believed
that each purchase by Raytech from Raymark complied with Raytech's
restructuring plan principles of (i) paying fair market value, (ii)
acquiring businesses that did not give rise to any asbestos-related
or other claims against Raymark, (iii) permitting Raymark to retain
the proceeds for its ongoing business and creditors, (iv) entering
the transactions in good faith and not to hinder, delay or defraud
creditors, and (v) conducting its affairs independent of Raymark.
In May 1988, following shareholder approval, Raytech sold
all of the Raymark stock to Asbestos Litigation Management, Inc.,
thereby divesting itself of Raymark. Consideration received for the
Raymark stock consisted of $50 cash paid at the closing and a 7-l/2%
$950 promissory note to be paid in six equal annual installments.
Despite the restructuring plan implementation and
subsequent divestiture of Raymark, Raytech was named a co-defendant
with Raymark and other named defendants in approximately 3,300
asbestos-related lawsuits as a successor in liability to Raymark.
Until February 1989, the defense of all such lawsuits was provided
to Raytech by Raymark in accordance with the indemnification
agreement included as a condition of the purchase of the Wet Clutch
and Brake Division and German subsidiary from Raymark in 1987.
However, subsequent to the involuntary bankruptcy proceedings
against Raymark, a restrictive insurance funding order was issued by
an Illinois Court, denying defense costs, and another Raymark
insurance carrier had been declared insolvent. These circumstances
caused Raymark to be unable to fund the costs of defense to Raytech
in the asbestos-related lawsuits referenced above. Raytech
management was informed that Raymark's cost of defense and
disposition of cases up to the automatic stay of litigation in 1989
under the involuntary bankruptcy proceedings was approximately $333
million of Raymark's total insurance coverage of approximately $395
million. It has also been informed that as a result of the
dismissal of the involuntary petition, Raymark encountered newly
filed asbestos-related lawsuits but had received $27 million from a
state guarantee association to make up the insurance policies of the
insolvent carrier and had $32 million in other policies to defend
against such litigation. In March 1998, Raymark filed a voluntary
bankruptcy petition as a result of several large asbestos-related
judgments.
In an asbestos-related personal injury case decided in
October 1988 in a U.S. District Court in Oregon, Raytech was ruled
under Oregon equity law to be a successor to Raymark's asbestos-
related liability. The successor ruling was appealed by Raytech and
in October 1992 the Ninth Circuit Court of Appeals affirmed the
District Court's judgment on the grounds stated in the District
Court's opinion. The effect of this decision extends beyond the
Oregon District due to a Third Circuit Court of Appeals decision in
a related case cited below wherein Raytech was collaterally estopped
(precluded) from relitigating the issue of its successor liability
for Raymark's asbestos-related liabilities.
As the result of the inability of Raymark to fund Raytech's
costs of defense recited above, and in order to obtain a ruling
binding across all jurisdictions as to whether Raytech is liable as
a successor for asbestos-related and other claims, including claims
yet to be filed relating to the operations of Raymark or its
predecessors, on March 10, 1989, Raytech filed a petition seeking
relief under Chapter 11 of Title 11, United States Code in the
United States Bankruptcy Court, District of Connecticut. Under
Chapter 11, substantially all litigation against Raytech has been
stayed while the debtor corporation and its non-filed operating
subsidiaries continue to operate their businesses in the ordinary
course under the same management and without disruption to
employees, customers or suppliers. In the Bankruptcy Court a
creditors' committee was appointed, comprised primarily of asbestos
claimants' attorneys. In August 1995, an official committee of
equity security holders was appointed relating to a determination
of equity security holders' interest in the estate.
In June 1989 Raytech filed a class action in the Bankruptcy
Court against all present and future asbestos claimants seeking a
declaratory judgment that it not be held liable for the asbestos-
related liabilities of Raymark. It was the intent of Raytech to
have this case heard in the U.S. District Court, and since the
authority of the Bankruptcy Court is referred from the U.S. District
Court, upon its motion and argument the U.S. District Court withdrew
its reference of the case to the Bankruptcy Court and thereby agreed
to hear and decide the case. In September 1991, the U.S. District
Court issued a ruling dismissing one count of the class action
citing as a reason the preclusive effect of the 1988 Oregon case,
previously discussed, under the doctrine of collateral estoppel
(conclusiveness of judgment in a prior action), in which Raytech was
ruled to be a successor to Raymark's asbestos liability under Oregon
law. The remaining counts before the U.S. District Court involve
the transfer of Raymark's asbestos-related liabilities to Raytech on
the legal theories of alter-ego and fraudulent conveyance. Upon a
motion for reconsideration, the U.S. District Court affirmed its
prior ruling in February 1992. Also, in February 1992, the U.S.
District Court transferred the case in its entirety to the U.S.
District Court for the Eastern District of Pennsylvania. Such
transfer was made by the U.S. District Court without motion from any
party in the interest of the administration of justice as stated by
the U.S. District Court. In December 1992, Raytech filed a motion
to activate the case and to obtain rulings on the remaining counts
which was denied by the U.S. District Court. In October 1993, the
creditors' committee asked the Court to certify the previous
dismissal of the successor liability count. In February 1994, the
U.S. District Court granted the motion to certify and the successor
liability dismissal was accordingly appealed. In May 1995, the
Third Circuit Court of Appeals ruled that Raytech is collaterally
estopped (precluded) from relitigating the issue of its successor
liability as ruled in the 1988 Oregon case recited above, affirming
the U.S. District Court's ruling of dismissal. A petition for a
writ of certiorari was denied by the U.S. Supreme Court in October
1995. The ruling leaves the Oregon case, as affirmed by the Ninth
Circuit Court of Appeals, as the prevailing decision holding Raytech
to be a successor to Raymark's asbestos-related liabilities.
Since the bankruptcy filing several entities have asserted
claims in Bankruptcy Court alleging environmental liabilities of
Raymark based upon similar theories of successor liability against
Raytech as alleged by asbestos claimants. These claims are not
covered by the class action referenced above and will be resolved in
the bankruptcy case. The environmental claims include a claim of
the Pennsylvania Department of Environmental Resources ("DER") to
perform certain activities in connection with Raymark's Pennsylvania
manufacturing facility, which includes submission of an acceptable
closure plan for a landfill containing hazardous waste products
located at the facility and removal of accumulated baghouse dust
from its operations. In March 1991, the Company entered a Consent
Order which required Raymark to submit a revised closure plan which
provides for the management and removal of hazardous waste, for
investigating, treating and monitoring of any contaminated
groundwater and for the protection of human health and environment
at the site, all relating to the closure of the Pennsylvania
landfill and to pay a nominal civil penalty. The estimated cost for
Raymark to comply with the order is $1.2 million. The DER has
reserved its right to reinstitute an action against the Company and
the other parties to the DER order in the event Raymark fails to
comply with its obligations under the Consent Order. Another
environmental claim was filed against the Company by the U.S.
Environmental Protection Agency for civil penalties charged Raymark
in the amount of $12 million arising out of alleged Resource
Conservation and Recovery Act violations at Raymark's Stratford,
Connecticut, manufacturing facility.
In January 1997, the U.S. Departmental Protection Agency
("EPA") and the State of Connecticut filed suit against Raymark
claiming damages for cleanup of the Stratford, Connecticut, site in
an amended amount of $300 million. The EPA and the State of
Connecticut have also filed bankruptcy claims against Raytech as a
successor to Raymark for cleanup of the Stratford site and other
Raymark sites totaling $330 million. Determination of Raytech's
liability for such claims is subject to Bankruptcy Court
deliberations and proceedings.
Under bankruptcy rules, the debtor-in-possession has an
exclusive period in which to file a reorganization plan. Such
exclusive period had been extended by the Bankruptcy Court pending
the conclusion of the successor liability litigation. However, in
December 1992, the creditors' committee filed a motion to terminate
the exclusive period to file a plan of reorganization. At a hearing
in May 1993, the motion was denied by the Bankruptcy Court but was
appealed by the creditors' committee. In November 1993, the U.S.
District Court reversed the Bankruptcy Court and terminated the
exclusive period to file a plan of reorganization effective in
January 1994. Accordingly, any party in interest, including the
debtor, the creditors' committee or a creditor could thereafter file
a plan of reorganization.
In May 1994, Raytech filed a Plan of Reorganization
("Debtor's Plan") in the U.S. Bankruptcy Court for the purpose of
seeking confirmation allowing Raytech to emerge from the bankruptcy
filed March 10, 1989. In September 1994, the creditors' committee
filed its own Plan of Reorganization in competition to the Debtor's
Plan ("Creditors' Plan"). Upon motion of the parties and support of
the Bankruptcy Court, the major interested parties agreed in August
1995 to participate in non-binding mediation to attempt to
effectuate a consensual plan of reorganization. The mediation
process commenced in October 1995 and was concluded in March 1996
without agreement for a consensual plan of reorganization. The
competing plans of Raytech and its creditors then returned to
Bankruptcy Court procedures. As the result of the Memorandum of
Understanding between the Debtor and its Creditors referenced
hereafter, a consensual plan of reorganization has been drafted and
is circulating among the parties for review and approval.
In February 1997, Raytech resumed making monthly payments
of $650,000 to Raymark pursuant to the 1987 Asset Purchase Agreement
as amended. In November 1997, the creditors' committee filed an
adversary proceeding complaint and motion for a temporary
restraining order to halt the payments. In January 1998, the
Bankruptcy Court stopped the payments pending a trial. Raymark
notified its retirees by letter that their benefits would cease
after February 1998 due to the effect of the cessation of payments
from Raytech under the injunction. Raymark retirees intervened in
the action; however, Raymark continued to fund their benefits. Upon
motion, the Raymark retirees have been permitted to form a committee
in the Raytech bankruptcy, but any rights to the Raytech estate
remain subject to the Court's judicial determination. In March
1999, the creditors' committee of retirees filed an adversary
proceeding against Raytech seeking a declaratory judgment holding
Raytech liable for employee welfare benefits due Raymark retirees,
including medical, life and supplemental pension benefits. In April
1999, a separate adversary proceeding was filed by Raytech against
the Pension Benefit Guaranty Corporation seeking a declaratory
judgment holding Raytech not liable for Raymark pension liabilities.
Both matters are pending in the Bankruptcy Court and discovery
procedures in the litigation are underway.
Following Raytech's cessation of monthly $650,000 note
payments to Raymark in December 1997, Raymark commenced 33 separate
lawsuits against Raytech subsidiaries in various jurisdictions from
New York to California ("Raymark Litigation") demanding payment or
the return of assets for breach of contract. Raytech filed an
adversary proceeding complaint to halt the Raymark litigation and
was granted a temporary restraining order in December 1997 by the
Bankruptcy Court that remains in effect. The creditors' committee
intervened in the action in support of the restraining order.
In March and April 1998, Raymark and its parent, Raymark
Corporation, filed voluntary petitions in bankruptcy in a Utah Court
which stayed all litigation in the Raytech bankruptcy in which
Raymark was a party. In connection with its attempt to assert
control over Raymark and its assets the creditors' committee, joined
by Raytech, the Guardian Ad Litem for future claimants, the equity
committee and the government agencies moved to have the venue of the
Raymark bankruptcies transferred from Utah to the Connecticut Court.
In July 1998, the Bankruptcy Court issued an order on the motions
and transferred venue to the Connecticut Court. Raymark filed an
appeal of the order but has since withdrawn the appeal. In October
1998, a trustee was appointed by the United States Trustee over the
Raymark bankruptcies. The Trustee is currently administering the
Raymark estate.
Continued in the following post... |
