Asbestos Albatross

How many law firms does it take to fight asbestos cases in court? If you're a chief executive officer, you know this is no joke.

If you're Federal-Mogul Corp., the answer is 50. Since 1997, the Southfield, MI, supplier has hired these U.S. firms to defend it against claims that asbestos used by Federal-Mogul or its subsidiaries has made them ill, or soon will.

It may sound like judicial overkill. Actually, maybe Federal-Mogul didn't have enough lawyers to fight an astonishing 365,000 lawsuits.

If you're done wiping up the coffee you just sprayed on your desk, consider this: Since 1998, Federal-Mogul has paid out $600 million for asbestos liability. It will pay out an estimated $380 million this year and over the next 12 years these claims should cost Federal-Mogul about $1.6 billion. Hence, Federal-Mogul's Chapter 11 bankruptcy filing last month.

I'm no apologist. If a company is responsible for someone's illness, it should pay. Asbestos is nasty, and it was widely used between 1940 and 1979 — the years my father was in business remodeling homes. He must have torn out lots of the stuff, breathing in the fibers for years, only to find out in the 1980s that it can cause cancer.

I still remember as a kid when the initial news reports about asbestos caused a panic in my house as my dad scurried for information. He consulted the Environmental Protection Agency, which sent directions for containing and removing asbestos on the job.

Maybe my father was very lucky because he surely was exposed to asbestos. But he's never been diagnosed with lung cancer, and he just celebrated his 75^th birthday. My brother-in-law has been in the same business for more than 20 years, and he hasn't had any problems either.

The irony is that Federal-Mogul, a company with manufacturing roots dating back to 1899, never produced asbestos. Years ago, Federal-Mogul bought sheets of the flame-retardant material and punched gaskets from them.

But the bulk of the liability arrived with companies Federal-Mogul bought beginning in 1998 when former CEO Richard Snell was on an acquisition binge.

T&N plc, besides producing gaskets and pistons, also manufactured asbestos building materials. Fel-Pro Inc. used asbestos in gaskets. Cooper Automotive's aftermarket brands, Wagner and Abex, used asbestos in friction products.

Who are these 365,000 claimants? Only about 400 of them were employees of T&N. The rest are here in the U.S. — mechanics who handled brake pads and plumbers, electricians and plasterers who rehabilitated buildings.

Vice President Jim Zamoyski, Federal-Mogul's general counsel who has coordinated the multi-headed asbestos defense, says about 10% of the 365,000 claimants are people with cancer. The other 90%, Mr. Zamoyski says, are people “who would record a level on an X-ray but would not necessarily be impaired.” Of course, the plaintiffs would argue with that characterization.

He has no qualms about paying people who are suffering, but he says there are so many unimpaired plaintiffs that the truly impaired might not get anything. “The people who are going to get sick won't get any money because the people who aren't sick are getting it all up front,” he says.

Federal-Mogul was the last of 10 companies to file for bankruptcy due to asbestos litigation in the past two years. Some cases have cost Federal-Mogul dearly. In others, the company spent huge sums on legal fees, only to have the plaintiff acknowledge he didn't have a case. A legislative solution? Forget it.

Now in bankruptcy, Federal-Mogul makes no more cash payments to asbestos claimants as the company reorganizes under court protection.

The filing in Wilmington, DE, allows for the normal operation of the company, with the help of an emergency financing package of $675 million. Toward the end of reorganization — in a few years — the company will establish a trust vehicle to pay out asbestos claims, Mr. Zamoyski says.

Normally, bankruptcy is a mark of shame. But for Federal-Mogul, it's more like a blessing.

Listen to Tom Murphy and other Ward's editors Monday and Thursday on WJR 760 AM radio in Detroit.
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