Judge Renders Decision in Favor of Andrews & Kurth's Client in $400 Million Indemnity Case

ATLANTA -- A 55-page Order by U.S. Bankruptcy Judge Margaret Murphy granting Summary Judgment on liability against Weyerhaeuser Company and in favor of the bankruptcy estate of Paragon Trade Brands Inc. was entered today. The Order also denied Weyerhaeuser's motion to strike the testimony of Paragon's expert witnesses, and Weyerhaeuser's cross-motion for summary judgment. In reaching her decision, Judge Murphy concluded that Weyerhaeuser breached four contractual warranties it made to Paragon, that the warranties were enforceable, and that the Paragon estate is entitled to recover damages arising from or relating to Weyerhaeuser's breach of the warranties. Andrews & Kurth's client in the $400 million indemnity action is Randall Lambert, who was appointed the Litigation Claims Representative of the bankruptcy estate of Paragon pursuant to Paragon's confirmed plan of reorganization.

Judge Murphy's decision was announced from the Bench after the conclusion of oral argument on the cross-motions for summary judgment in June. The written Order entered today memorializes and sets forth in detail the basis for the decision. The issue before the Court was whether Weyerhaeuser breached four warranties contained in the contracts by which it transferred to Paragon the assets relating to Weyerhaeuser's private label diaper business, concurrent with Weyerhaeuser's sale of 100% of Paragon's stock to the public in a 1993 IPO. The Court concluded that Weyerhaeuser did in fact breach the four warranties, because, among other things, the intellectual property assets Weyerhaeuser transferred to Paragon were not adequate to conduct the business that Weyerhaeuser was operating at the time of the IPO. The products and patents at issue were all related to an inner leg gather (or dual cuff) disposable diaper, which was the principal product upon which the business of Paragon was based on at the time of the IPO, from which Weyerhaeuser collected $240 million.

"We are pleased with Judge Murphy's Order," said John Lee, a partner with Andrews & Kurth who represented the litigation claims representative for Paragon. "Weyerhaeuser not only knew they were infringing on the patents held by its competitors, but they continued to delay and postpone an inevitable financial disaster by continuing with the IPO," said Lee. "Judge Murphy's carefully reasoned, 55-page Order was obviously the result of her meticulous study of the entire record submitted on summary judgment, which we believe conclusively established Weyerhaeuser's liability. As Judge Murphy stated in her decision, Weyerhaeuser was neither naive nor innocent. Weyerhaeuser walked Paragon off the plank, and as a result of the infringement claims and Paragon's subsequent bankruptcy, shareholders and creditors were wiped out."

Paragon Partial Summary Judgment

The Order sets up a trial to determine the damages the Paragon estate is entitled to recover based on Weyerhaeuser's breach of the warranties. The Court held that "causation has been established given the language of the warranties at issue," and that the "promises were false, and Paragon has suffered damages. Once a breach of warranty is established, a plaintiff is entitled to damages."

Paragon seeks actual damages that may exceed $400 million in the action. According to Lee, the exact amount of damages, pre-judgment interest and attorneys' fees will be determined in a trial before Judge Murphy this fall or in early 2003. "It is at that time we expect a final judgment to be entered," said Lee. While Weyerhaeuser has stated it intends to contest liability on appeal, Lee is confident the decision will be upheld, and an appeal will only increase the total amount of the judgment. "If Weyerhaeuser decides to appeal the decision, post-judgment interest will continue to accrue. We are quite confident that the Court reached the correct conclusion and that Judge Murphy's decision will be upheld in the face of any appeal."

Lawyers representing Randall Lambert, the litigation claims representative for Paragon, were Mr. Lee and Scott Locher of Andrews & Kurth (Houston), and co-counsel Parker C. Folse, III of Susman Godfrey L.L.P. (Seattle) and Charles E. Campbell of McKenna Long and Aldridge L.L.P. (Atlanta).

Andrews & Kurth L.L.P., founded in 1902, is based in Houston, has 375 lawyers and, in addition to its Houston office has offices in Austin, Dallas, Los Angeles, London, New York and Washington D.C. The firm's practice areas include appellate, bankruptcy, business transactions, energy, environmental, corporate and securities, labor and employment, litigation, intellectual property, public law, project finance, real estate, structured finance, asset securitization, technology and tax law for U.S. and international clients.