Federal-Mogul’s plans to emerge from Chapter 11 seemed to have hit a snag. Three large auto makers are objecting to the terms of the auto-parts supplier’s reorganization plan several weeks before it’s expected to seek approval from the bankruptcy judge, according to the Associated Press.
Ford Motor, DaimlerChrysler, and Volkswagen of America claim the plan would unfairly protect Cooper Industries from asbestos liability, according to the report.
Cooper, which sold a brake-pad company to Federal-Mogul in the 1990s, isn’t in bankruptcy. However, it wants to put money into a trust slated to be set up under Federal-Mogul’s Chapter 11 plan. The trust would absorb Cooper’s asbestos liabilities, the AP explained.
For their part, Ford, DaimlerChrysler, and Volkswagen would reportedly be exposed to a bigger share of damages for the automotive industry’s asbestos liabilities than they think is fair. Federal-Mogul’s Cooper deal “can fairly be seen as a Chapter 11 debtor’s effort to sell bankruptcy code protection,” lawyers for DaimlerChrysler and Volkswagen wrote in court papers filed with the U.S. Bankruptcy Court, according to AP.
The lawyers contend that since Cooper is not bankrupt, it should not receive the kind of protection companies receive when they’re in Chapter 11, the wire service reported. Federal-Mogul’s confirmation hearing is scheduled for June 18. It filed for bankruptcy six years ago.
The company’s lawyers have asserted in the past that Federal-Mogul’s reorganization plan is flexible enough to enable the company to emerge from bankruptcy even if the Cooper plan is ruled illegal, AP noted. Under what’s called “Plan A,” Cooper and Pneumo Abex—the brake business in question—would put $256 million in cash into Federal-Mogul’s trust. Cooper would also put up a $500 million note, which would pay off $20 million a year if Federal-Mogul’s trust runs out of money.
Asbestos claimants like Plan A because there would be fewer companies to sue and more money in one place to collect against, according to AP. Under the alternative “Plan B,” which would reportedly take effect if the court rejects Plan A, however, Federal-Mogul would pay Cooper and Pneumo Abex $140 million, ending Federal-Mogul’s asbestos-related liability to Cooper. That would expose Cooper and Pneumo Abex to potential asbestos lawsuits, according to the report.
In any case, once a reorganization plan is approved, billionaire hedge-fund activist Carl Icahn will likely wind up with control of Federal-Mogul. According to the AP, asbestos claimants have agreed to sell their half of the company to Icahn, and he owns enough of the company’s debt to control most of the rest.