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Official Committee of Asbestos Claimants of G-I Holding, Inc. v. Heyman

April 28, 2006

OFFICIAL COMMITTEE OF ASBESTOS CLAIMANTS OF G-I HOLDING, INC., PLAINTIFF,
v.
SAMUEL J. HEYMAN, DEFENDANT.



The opinion of the court was delivered by: Sweet, D.J.

OPINION

The plaintiffs Official Committee of Asbestos Claimants of G-I Holdings, Inc., suing on behalf of the Chapter 11 Bankruptcy Estate of G-I Holdings, Inc. f/k/a GAF Corporation, et al. ("The Committee") has moved to discover certain communications which have been withheld by the defendants Samuel J. Heyman ("Heyman"), G-I Holdings Inc. ("G-I"), and International Specialty Products, Inc. ("ISP") on the grounds of attorney-client and work-product privileges.

As will soon become evident, this motion is part of a hard-fought and interrelated litigation which has included the G-I bankruptcy proceeding in the United States District Court for New Jersey, No. 01-30135 (RG), and this Court. For the reasons set forth below, the motion is granted in part and denied in part.

Prior Proceedings

In January 2001, G-I filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code in the face of massive asbestos liabilities. Its bankruptcy case is ongoing before the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). The Committee was appointed by the Office of the United States Trustee pursuant to 11 U.S.C. § 1102(a)(1). Its members are individuals who assert damage claims against G-I for asbestos-related bodily injuries or death.

The Committee was appointed by the Bankruptcy Court on May 14, 2001, "to pursue and prosecute any and all claims and causes of action belonging to the Debtor and/or its estate against Samuel Heyman and his affiliates arising out of the transfer of the stock of International Specialty Products, Inc. and/or ISP Holding, Inc., including any claims or causes of action pursuant to Section 544(b) of the United States Bankruptcy Code." In re G-I Holdings, Inc. f/k/a GAF Corporation, No. 01-30135 (RG). This transfer has been characterized by the Committee as the Spin-off.

On September 20, 2001, the Committee filed its complaint in this Court. Heyman moved to dismiss the complaint, which motion was denied in an opinion of April 8, 2002 (the "April 8 Opinion"). Official Comm. Of Asbestos Claimants of G-I Holding, Inc. v. Heyman, 01 Civ. 8539 (RWS), 2002 U.S. Dist. LEXIS 6187 (S.D.N.Y.). The authority of the Bankruptcy Court to delegate a trustee's role to a creditors' committee became an issue litigated in the Third Circuit. See Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 304 F.3d 316 (3d Cir. 2002), vacated, 310 F.3d 785 (3d Cir. 2002), rehearing en banc, 330 F.3d 548 (3d Cir. 2002).

After the resolution of its status, the Committee moved to amend its complaint which motion was granted by an order and opinion of June 6, 2005 (the "June 6 Opinion"). See Official Comm. Of Asbestos Claimants of G-I Holding, Inc. v. Heyman, 01 Civ. 8539 (RWS), 2005 U.S. Dist. LEXIS 10757 (S.D.N.Y.). The first amended complaint ("FAC") was filed on June 23, 2005 alleging a fraudulent conveyance arising out of a series of events ranging from transactions initiated in 1996.

The FAC has stated a series of claims to avoid the Spinoff and to recover the ISP stock under 11 U.S.C. §§ 544(b) and 550, based on state law fraudulent conveyance theories. It alleges that the Spin-off constituted a constructively fraudulent transfer on several alternative grounds: (a) G-I was insolvent, or rendered insolvent, when the ISP stock was gratuitously transferred to the insiders, (Count I); (b) the Spin-off left G-I with an unreasonably small capital for its business, (Count II); and (c) at the time of the Spin-off, G-I knew or reasonably should have known that it was incurring debts, including asbestos liabilities, beyond its ability to pay as they became due, (Count III). Additionally, it alleges that Heyman and G-I carried out the Spin-off with actual intent to hinder, delay, and defraud asbestos claimants by placing the value of ISP beyond their reach, (Count IV). Finally, the FAC asserts that by stripping G-I of ISP for his own enrichment, Heyman breached his fiduciary duty to G-I and caused G-I to breach its own fiduciary duty to creditors, (Counts VI and VII).

Discovery schedules were determined in response to the Committee's document requests under Rule 34, Fed. R. Civ. P., and Heyman produced certain documents in April 2005.

ISP's amended privilege log, dated February 14, 2005, and two supplements thereto, consists of 48 pages and list 433 documents objecting to 37 of the Committee's 52 document demands on the basis of attorney-client privilege.

G-I provided three privilege logs, one for itself, another for documents held by its counsel, Weil Gotshal & Manges, and one for Robert Poyourow, an in-house attorney. Together these logs consist of 27 pages and list 341 documents withheld on the basis of attorney-client privilege. The meet and confer process was not completed and the instant motion was heard and marked fully submitted on December 7, 2005.

The Facts As Alleged

The following background facts relating to GAF's asbestos liabilities and the events surrounding the asbestos claims are set forth in the FAC. These events are described in the FAC ¶¶ 45-50 and are described also in the Committee's memorandum of law in support, pp. 3-8, and these allegations are summarized hereafter.

In 1996 G-I was a party to a proposed class action settlement of future asbestos claims against members of the Center for Claims Resolution, Inc. ("CCR"), which sought to process, defend, and resolve asbestos claims. See Georgine v. Amchem Prods., Inc., 157 F.R.D. 246, 257 (E.D. Pa. 1994), vacated, 83 F.3d 610 (3d Cir. 1996), aff'd, 521 U.S. 597 (1997). Known as the Georgine Settlement, it was proposed to take future asbestos claims against CCR members out of the courts and channel them into a private system for processing and payment for at least ten years, which would have altered the rules and practices of resolution of such claims up to that time. See Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 604-05 (1997). In 1992, based on an estimate of what its payment obligations would be over the ten-year term of the Georgine Settlement, G-I took a charge of $322.5 million against earnings and established an unfunded accounting reserve for asbestos claims in that amount, net of anticipated insurance recoveries. See G-I Holdings, Annual Report (Form 10-K) (1992). According to the Committee, calculations made by G-I in September 1993 show that its total estimated liability under the Georgine Settlement and arrangements then in place for resolving pending claims was just under $700 million ($649.4 million for pending and future claims plus $43.8 million in administrative expenses), of which only $348.9 million was expected to be covered by insurance.

After a fairness hearing, the Georgine trial court approved the settlement and certified the class in August 1994.

Georgine, 157 F.R.D. at 315. Shortly thereafter, that court entered a preliminary injunction barring class members from initiating or maintaining suits against CCR members based on asbestos injuries. Georgine v. Amchem Prods., Inc., 878 F. Supp. 716 (E.D. Pa. 1994). On May 10, 1996, the Court of Appeals for the Third Circuit rejected the Georgine Settlement. Georgine v. Amchem Products, Inc., 83 F.3d 610 (3d Cir. 1996). According to the Committee, within a month of that decision, G-I management met with auditors and outside counsel to plan the transactions to be completed by January 1, 1997, which are now sought to be avoided.

On June 24, 1997, the Supreme Court issued its opinion affirming the Third Circuit's decision and refusing to reinstate the settlement. See Amchem, 521 U.S. 591. According to the Committee, G-I then sought to change existing law and achieve the goals of the Georgine Settlement by legislation. In August 1997 the trial court dissolved the preliminary injunction in Georgine and asbestos claims against G-I followed.

On January 1, 1997, G-I divested itself of at least 80,500,000 shares of the stock of ISP, its chemicals subsidiary, by way of a distribution to G-I's shareholders. As the 96% shareholder of G-I, Heyman received in the Spin-off, directly or indirectly, an equivalent percentage interest in the asset transferred, consisting of stock in ISP Holdings, the direct parent of ISP. About a year later, ISP and ISP Holdings merged, and Heyman and certain Heyman family entities controlled by him obtained direct ownership of the bulk of ISP's own stock. (Heyman's Answer to FAC, ¶ 33).

In its Form 10-K for 1996, ISP described the Spin-off as part of a series of "Separation Transactions" and emphasized that ISP Holdings and ISP were "no longer direct or indirect subsidiaries" of G-I. ISP managed G-I and affiliated companies under a management agreement that, as amended from time to time, has remained in place since 1989. Throughout that period, the senior executives of G-I, including its president, chief financial officer, and general counsel, have been employees of ISP who have rendered services to G-I under the Management Agreement in exchange for a management fee. Heyman has been chairman of ISP at all relevant times.

The Issues

The Committee seeks to overrule the asserted privileges on three grounds. First, it contends that the holding in Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343 (1985), that corporate insiders may not withhold information from a bankruptcy trustee of their corporation under claim of privilege should apply here to the duly-authorized creditors committee.

Second, the Committee contends that the fiduciary exception set forth in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), should apply to defeat the exercise of the attorney-client privilege by the corporation.

Third, according to the Committee, the fraud exception to the attorney-client privilege and work product doctrine, should apply here because the case involves fraudulent conveyance. See, e.g., In re Grand Jury Subpoena Duces Tecum Dated Sept. 15, 1983, 731 F.2d 1032, 1038-42 ...


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