Department of Justice Combats Asbestos Trust Abuse.

• Author: Behrens, Mark A.

The following article is a companion to John J. Hare and Daniel J. Ryan, Jr., The More Things Change: Bankruptcy Trust Reform and the Status Quo in Asbestos Litigation, published in the October 2018 edition of the Defense Counsel Journal. That article addressed inconsistent claiming behavior by asbestos plaintiffs and their attorneys and how various state legislatures are addressing the disconnect that exists between the tort and asbestos trust systems. This article describes recent actions by the United States Department of Justice to promote transparency in the trust system, address fraud, mismanagement or abuse in newly-formed trusts and investigate improper conduct related to asbestos trusts.

THE United States Department of Justice and its United States Trustee Program (USTP) 1 are taking unprecedented steps to combat a "problematic lack of transparency in the operation and oversight of asbestos trusts." 2 The actions follow a November 2017 letter to the United States Attorney General by twenty state attorneys general describing problems with the asbestos trust system and requesting federal engagement to "ensure that no fraud is being committed." 3

The Department and USTP are opposing the creation of new trusts that lack provisions to prevent "fraud, mismanagement, or abuse" 4 and appear to "contain many of the same attorney-friendly provisions and weak safeguards that have enabled fraud and abuse in past asbestos bankruptcy cases." 5 In addition, the USTP is challenging the appointment of certain future claimants' representatives in pending bankruptcy proceedings. 6 The USTP argues that the lawyers are too conflicted to serve as independent fiduciaries. Further, the Department sent civil investigative demands to asbestos trusts to investigate "whether the Medicare Program has been reimbursed in accordance with the Medicare Secondary Payer Act."7

The Department "welcomes" the reporting of any "information on asbestos trust fraud or mismanagement" so that it can "investigate conduct related to asbestos trusts that is illegal under federal law."8

1. Background

   Originally, and for many years, the primary defendants in asbestos cases were companies that mined asbestos or manufactured friable, amphibole-containing thermal insulation. Mass claims pressured "most of the lead defendants and scores of other companies" into bankruptcy, including virtually all manufacturers of asbestos-containing thermal insulation, such as Johns-Manville Corp. 9 In bankruptcy, these companies created scores of trusts that collectively hold billions of dollars to pay asbestos claimants with injuries as a result of exposure to their products. 10 Each trust reflects a company that exited the tort system in bankruptcy.11

   Filing a trust claim is much easier and faster than bringing a lawsuit. 12 To recover from an asbestos trust, a claimant files a short claim form with documentation evidencing asbestos exposure attributable to the trust's predecessor and medical records for the disease being claimed. 13 If a trust determines that a claim meets the criteria required for payment, the trust will make an offer based on a percentage of the "scheduled value" for the alleged injury, as set forth on a grid. A trust can make an offer to resolve the claim within days after submission. 14 Claimants commonly receive multiple trust payments, since each trust operates independently and many workers were exposed to different products. 15

   Plaintiffs typically obtain compensation both "from the trusts and through a tort case." 16 In a bankruptcy proceeding involving gasket and packing manufacturer Garlock Sealing Technologies, LLC, a typical mesothelioma plaintiffs recovery was estimated to be $1-1.5 million, "including an average of $560,000 in tort recoveries and about $600,000 from 22 trusts." 17 Many of the today's asbestos defendants are formerly peripheral or new defendants associated with chrysotile-containing products "such as gaskets, pumps, automotive friction products, and residential construction products."18

   By delaying the filing of trust claims until after an asbestos-related personal injury case settles or is tried to a verdict, plaintiffs can suppress evidence of trust-related exposures and thwart efforts by solvent defendants to apportion fault to bankrupt entities or obtain set-offs, resulting in "double dipping" by plaintiffs. 19 Further, tort plaintiffs have alleged asbestos exposures that are inconsistent with claims later submitted to asbestos trusts.

   20

   These concerns came to the fore in Garlock's bankruptcy. 21 Historically, Garlock was a relatively small player in the asbestos tort system and "very successful in settling (and rarely trying)" lawsuits filed against it 22 After virtually all asbestos-containing thermal insulation defendants exited the tort system by the early 2000s, Garlock and other formerly peripheral defendants became a "focus of plaintiffs' attention" because the companies were still solvent. 23 In this new environment, Garlock faced challenges defending itself because "evidence of plaintiffs' exposure to other asbestos products often disappeared." 24 The judge in Garlock said that this was the result of "the effort by some plaintiffs and their lawyers to withhold evidence of exposure to other asbestos products and to delay filing claims against bankrupt defendants' asbestos trusts until after obtaining recoveries from Garlock (and other viable defendants)." 25 The judge concluded that the missing evidence "had the effect of unfairly inflating the recoveries against Garlock." 26 The judge described...