Asbestos Liability Fight Brewing In Garrett Motion Ch. 11

By Vince Sullivan
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Law360 (September 21, 2020, 10:49 AM EDT) -- The Chapter 11 case of auto parts maker Garrett Motion Inc. got off to a rocky start Monday in New York when former parent company Honeywell International Inc. alleged the bankruptcy proceeding was filed as a way for the debtor to escape more than $1 billion in asbestos liability.

During a virtual first-day hearing, Honeywell attorney Nicole L. Greenblatt of Kirkland & Ellis LLP took exception to the filing of the Chapter 11 case, saying it is designed to escape the contractual indemnity obligations of a Garrett Motion subsidiary owed to Honeywell as part of the 2018 spinoff that made Garrett an independent company.

Greenblatt said the debtor's explanation for its bankruptcy — a debt load that is too cumbersome and the impact of the COVID-19 pandemic — are cover for its desire to shed the asbestos indemnity payments owed to Honeywell.

"This bankruptcy filing is disappointing and entirely of Garrett's making," Greenblatt argued. "It is not the result of its capital structure or the COVID-19 pandemic."

Garrett Motion filed for Chapter 11 protection Sunday, claiming in initial filings that it had been searching for a strategic alternative that would refinance its $1.4 billion in existing senior secured debt or result in a sale transaction that could retire that debt. Chief Financial Officer Sean Deason said in a first-day declaration that when Garrett Motion was spun off from Honeywell in October 2018, it was saddled with the $1.5 billion in asbestos indemnity obligations owed to Honeywell. That asbestos liability arises from the manufacture and sale of brake linings by Honeywell predecessor Bendix, and Honeywell retained those liabilities in the spinoff.

But the spinoff also included the contractual indemnification obligations requiring Garrett Motion to make annual payments to Honeywell on account of those asbestos liabilities, despite Garrett Motion never being involved in the brake linings business, the debtor said.

Garrett Motion filed suit in New York state court in December 2019 over the spinoff's terms, saying in its complaint that Honeywell left the company with a 30-year weight around its neck that it can't escape from.

Greenblatt's arguments Monday were triggered by the debtor's request for interim approval of a $250 million debtor-in-possession financing package from a Citigroup-led lending team with swift milestones she said created an unnecessary sense of urgency.

"There is no urgency to these cases. This is not a house on fire," Greenblatt said. "This is not a situation of severe financial distress."

Debtor attorney Andrew G. Dietderich of Sullivan & Cromwell LLP said the company needs financing despite its $400 million in cash on hand as of the bankruptcy filing so that its operations could continue uninterrupted.

In light of a competing DIP proposal from Oak Tree Capital and Centerbridge Partners submitted just before the hearing, Dietderich said Garrett Motion would be willing to operate solely with cash collateral for a few days to allow a reasonable amount of time to review the new offer.

"We want access to cash collateral," Dietderich said. "This is a fundamentally healthy business from an operating level and it has liquidity and it needs access to that liquidity."

U.S. Bankruptcy Judge Michael E. Wiles said he would approve a cash collateral order when submitted and set a Sept. 29 hearing for the debtor to present a motion for interim approval of a DIP loan.

Other first-day motions will be heard Wednesday before Judge Wiles.

The debtor entered bankruptcy with a stalking horse offer from KPS Capital Partners, which pledged to buy the company's assets for $2.1 billion in a transaction that would pay most of Garrett Motion's secured debt while preserving the jobs of its 6,500 employees, according to court filings.

Switzerland-based Garrett Motion was founded in 1954 and focuses on developing turbochargers, electric boosting products and connected vehicle software, according to its website. Formerly known as Transportation Systems, the company made $3.4 billion in sales in 2018.

Garrett Motion is represented by Andrew G. Dietderich, Brian D. Glueckstein, Benjamin S. Beller and Noam R. Weiss of Sullivan & Cromwell LLP.

Honeywell is represented by Nicole L. Greenblatt, Mark McKane, Anthony R. Grossi, Craig S. Primis, and Ronald K. Anguas Jr. of Kirkland & Ellis LLP.

The case is In re: Garrett Motion Inc., case number 20-12212, in the U.S. Bankruptcy Court for the Southern District of New York.

--Additional reporting by Mike Curley. Editing by Marygrace Murphy.

Update: This story has been updated with information from a first-day hearing.

For a reprint of this article, please contact reprints@law360.com.

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