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A Wallboard Maker That's Up Against the Wall

On the last Sunday in June, USG Corp. Chairman and CEO William C. Foote hosted a hastily arranged dinner at the Sears Tower in Chicago for the board and top management of the wallboard giant. Foote had invited his guests to the private gathering, catty-corner from USG's headquarters, to give them advance word on headlines the company would make the next morning.

Foote broke the bad news: Drowned by a tidal wave of asbestos-liability claims, USG would file for Chapter 11 bankruptcy protection for the second time in eight years. Then he led his guests in a cheer straight from a high-school gym. "Give me a 'U!'" the 50-year-old chief executive rooted. "Give me an 'S!' Give me a 'G!'"

Foote acknowledges that the rah-rah response to such a catastrophic turn of events might seem, well, strange. But the 17-year USG veteran argues that the rally embodies the heartfelt team spirit of company employees to come together in hard times. "We're going to get through this," he vows.

It won't be quick or easy, however. With personal-injury claims pouring in at the rate of 1,000 a week, USG reserved nearly $1.2 billion at the end of last year to compensate people who said they had been exposed to asbestos, a carcinogen that had been used in USG wallboard-joint compound until 1977.

To stretch its dollars, the wallboard maker also eliminated 690 jobs as well as its stock dividend. But the moves weren't enough. As other asbestos defendants shielded themselves by declaring bankruptcy -- seven other companies have filed Chapter 11 petitions in the past 18 months -- lawyers piled on USG. Moreover, the average cost of each settlement was rising. In one case alone, a Texas jury ordered USG to pay $16.6 million in damages to 22 plaintiffs in February.

USG may well survive. Many investors are sticking with the $3.8 billion company, including Warren Buffett, whose Berkshire Hathaway Inc. bought a 15% stake in USG last December. Suppliers and vendors remain loyal, too. The company has one other thing going for it: USG has done this before.

Overwhelmed by debt taken on to fend off a hostile takeover, the company declared bankruptcy in 1993, emerging two months later. This time, though, Foote thinks it could take two years. Sitting in a lounge chair outside his second-floor office, Foote, a Milwaukee native who holds an MBA from Harvard Business School, recently talked about USG's legal quagmire with BusinessWeek Correspondent Michael Arndt. Edited excerpts from the conversation follow:

Q: I would imagine it was hard to file for Chapter 11 protection, even with all of the liabilities getting heaped on you. Am I right?

A: As I've said to employees, it was repugnant to me. Chapter 11 typically is associated with failing companies. And that is not what this is. This is a healthy business with a contingent liability that was sucking the blood supply out of the company. We arrived at Chapter 11 only after looking at every other alternative. This was the best course, because a couple of things will happen. One, it immediately stopped the bleeding. Two, we're in front of one federal judge who will give us a fair hearing. Three, it will lead to a restructuring and a final resolution of the issue.

Q: Who's to blame?

A: There are several problems with tort system. The first issue is there are no medical criteria that consistently apply from state to state. In one state, there are fairly strong medical criteria: A person has got to be really sick. In other states, you don't have to show any evidence of a disease.

Two is the rules of evidence are not operative here. In property-damage cases, people have to prove it was our product. And under an electron microscope, you can determine whether it was our product or someone else's product. Whereas in bodily-injury cases, you don't have to prove it was our product. A person simply says: Look, I'm sick.

The third issue with the tort system is consolidations, where lawyers, rather than bringing one suit at a time, bring 100 suits or 1,000 suits at once. And in there might be one or two really sick people, but the others aren't sick, they are not impaired. And they leverage up the whole package by throwing in a couple of really sick people.

The fourth issue is venue shopping. There is one county in Mississippi with more plaintiffs than residents.

The fifth issue is the one that has really led to a exaggeration or huge increase in cases: joint liability. Under our legal system, if others can't pay and you're jointly liable, then you have to pay. As other companies filed Chapter 11, there were fewer and fewer people out there. We battled along. But it was like a chain reaction. The natural instinct of plaintiffs' lawyers is to go find some other sources of cash. Because of joint liability, we were basically paying everybody else's claims.

Q: So you feel you were unjustly pushed into bankruptcy?

A: The system itself is at fault. The sound bite is: We haven't failed. The system has failed us. We have said repeatedly, Yes, there are victims of this disease, and we feel responsible for those victims. They deserve appropriate compensation. But we should pay no more and no less than our own liability.

Unless we stopped it, which we did by filing Chapter 11, this would have gone on and on. Asbestos-related diseases take a long time to develop. We think we're within a couple years of the peak of filings. But it has taken 25 years to get to this peak. And there is probably another 25 years to go before this will go away. It's a 50-year phenomenon.

Q How do you see this playing out? So far, Congress hasn't acted.

A: To me, it's a marathon, not a sprint. I think slowly but surely we're starting to turn some people in Congress. We're fighting an uphill battle, but we now have some plaintiffs' lawyers representing people who are truly sick who are saying: The system is not working right. Our sense is the House is more favorably inclined to act. But with the split in the Senate, we need to make progress there first. So our focus is on the Senate.

Q: But this is something lawmakers have known about for years. You've raised these points. Others have. The Supreme Court has visited this issue a couple of times and specifically told Congress it has to do something.

A: But don't we have other issues in this country that have opposing views where we've got stalemate? To me, the system is broken. But to the other side, the system is working beautifully.

I truly believe this is a wealth transfer that is extraordinary. I don't think it's good for anybody. I don't think it's good for victims. Well, it is good for plaintiffs' lawyers who get 40 cents on the dollar. But I don't think it's good for America to have another company, to say nothing of another 10, 20, or 30 companies, go into bankruptcy. That is destroying value. What's our economic system? Capitalism. This is not good for capitalism. Therefore, this is not good for America.

Q: You probably don't want to be reminded of this, but this is the second time USG has filed for bankruptcy. Does that make it easier in way? Or is it even harder?

A: It makes it easier in the sense that some of us been through this. It makes is harder in the sense that we just can't seem to shake the things that are trying to drag down this company. But we can endure this type of challenge.

Q: You have said you've talked to your customers, suppliers, and employees. I assume you've talked to your big investors. Did you talk to Warren Buffett?

A: Sure did.

Q: What does he say?

A: I wouldn't want to be quoted specifically on it, but I will characterize our relationship. I think that Warren understands the inherent values of this company. He remains interested and supportive.

Q: Do you think someone of his stature might be able to swing some votes in Congress?

A: I think that he's an investor and not involved in this issue. If, at the end of the day, I needed a tie-breaker, I might call on him. But he'll let me handle the political needs of the company.

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