Judge backs OC in ruling on creditors

10/7/2004

Owens Corning scored a key victory this week when a judge agreed with the firm's position that all its creditors should be treated equally and that banks aren't entitled to special consideration under provisions of loan agreements.

Judge John Fullam, of U.S. District Court in Philadelphia, ruled that the company and its subsidiaries should be treated as one and not as separate entities.

The ruling was significant because, had the judge decided differently, the banks would have been allowed to lay claim to assets of foreign units and other OC subsidiaries not in Chapter 11.

The banks argued that they had the right to do so because of cross-guarantees for debt repayment provided by the subsidiaries in 1997 loan agreements.

A favorable ruling would have strengthened the banks' negotiating position and allowed them to demand more than the 38.5 cents for each dollar owed that the firm's bankruptcy-exit proposal allots to most creditors.

Stephen Krull, OC chief legal counsel , said the decision removes a major "log jam" in the bankruptcy, which the building materials manufacturer initiated four years ago to escape multibillion-dollar asbestos-injury liability.

"We see this as a positive development," he said. "It is a victory for Owens Corning because it will encourage the parties to get together and have productive settlement discussions."

A lawyer for bank creditors, who are led by Credit Suisse First Boston, declined comment. It is unclear if the banks, who are owed $1.5 billion, will appeal.

In his ruling, Judge Fullam, who is overseeing the case with Delaware bankruptcy Judge Judith Fitzgerald, ordered the company and its feuding creditors to "promptly and repeatedly if necessary" meet to try to reach a voluntary settlement of the case.

He asked for a report in 30 days on the progress of talks.

The decision wasn't a total loss for the banks. While rejecting their main argument, Judge Fullam said that the parties may decide that the cross-guarantees make the bank claims partially superior to those of other creditors.

"The interests of all parties would best be served by the prompt achievement of a reasonably acceptable plan of reorganization," he wrote.

"Litigating every conceivable issue to finality would be unduly expensive [so] the parties would be well advised to settle their differences."

All creditor groups except the banks and a group of dissident bond holders support the firm's Chapter 11-exit proposal, which would cancel existing stock and turn over controlling interest in OC to a trust fund set up to pay asbestos victims.

parties would be well advised to settle their differences."

All creditor groups except the banks and a group of dissident bond holders support the firm's Chapter 11-exit proposal, which would cancel existing stock and turn over controlling interest in OC to a trust fund set up to pay asbestos victims.

Although the proposal could be put into effect over the banks' objection in a process known as "cram-down," the banks retain many avenues for delaying the firm's emergence from bankruptcy, including lawsuits and appeal.

A spokesman for a law firm representing bond holders praised the decision in comments to Reuters news service.

"The bottom line is that the banks don't get first crack at the assets," said Andrew Sprung.

"The bond holders won, the banks lost."

Contact Gary Pakulski at:

gpakulski@theblade.com

or 419-724-6082.