The More Things Change: Bankruptcy Trust Reform and the Status Quo in Asbestos Litigation.

• Author: Hare, John J.

IT IS well-known that asbestos plaintiffs' lawyers routinely pursue full compensation from each of two sources--bankruptcy trusts and tort litigation--for the same harm. The success of this practice, which Forbes has called "one of the longest-running and most lucrative schemes in the American litigation business," (1) requires the concealment of trust exposure allegations and payments from disclosure in civil litigation. (2) This method of securing double compensation for the same harm drew particular scrutiny in the wake of the 2010 bankruptcy filing of a gasket and packing manufacturer, Garlock Sealing Technologies, LLC. In Garlock, U.S. Bankruptcy Judge George Hodges reviewed voluminous trust filings and uncovered a "startling pattern of misrepresentation" so pervasive that it helped to drive Garlock into Chapter 11 bankruptcy. (3)

Although the problem was widely known before Garlock, Judge Hodges' remarkable findings shed new light on the disconnect between the asbestos trust and tort systems. Across the country, courts, commentators, and other interested parties took note. (4) Most recently, on September 13, 2018, the United States Department of Justice took the extraordinary step of filing a Statement of Interest in an asbestos manufacturer's bankruptcy proceeding. In urging the court to create a fair and transparent trust for the bankrupt manufacturer, the Department stated:

In recent years, both courts and researchers have noted a growing number of concerns with the operations of many of these trusts, particularly as they relate to fraudulent claims filed both within and outside the bankruptcy system. Although the Garlock decision directly addressed only the issue of whether the debtors' historic liability in the state tort system was tainted by fraud, its findings also raise troubling concerns about the lack of oversight and operation of the trusts themselves. A common factor in many of these abuses has been the secrecy with which many trust claims are submitted, allowed, and paid, which has made it nearly impossible to detect when plaintiffs are seeking recovery based on factual representations that may be incompatible with other representations previously made in other litigation or before other trusts. (5) In a public announcement regarding the Statement of Interest, the Justice Department said that it seeks "to increase the transparency and accountability of asbestos trusts" and will "investigate conduct related to asbestos trusts that is illegal under federal law." (6) DOJ explained that these steps are necessary because "alarming evidence has emerged of fraud and mismanagement" regarding asbestos trusts. (7)

The abuses noted by the DOJ and many others have spawned reforms. In the past five years, fifteen states have enacted trust transparency laws. (8) With some variations, these measures require an asbestos plaintiff to file all viable trust claims and disclose the exposure allegations and trust payments before a civil action may proceed to trial. Some courts have adopted reforms through case management orders. These reforms help to ensure that jurors receive appropriate information about the entirety of a plaintiff's claimed exposures and compensation as they determine the true causes of the alleged harm and apportion fault accordingly.

In response to the reform effort, plaintiffs' lawyers first denied that any problem existed, dismissing the experiences of Garlock and other asbestos defendants as anecdotal and unrepresentative. As the evidence mounted, plaintiffs' attorneys changed their strategy and developed more targeted and nuanced opposition to reform. Primary among the opposition talking points has been that mandating trust disclosures before a civil trial begins delays compensation to needy plaintiffs and gives defendants too much control over the pace and extent of compensation. (9) To dramatize their concerns about delay, plaintiffs' lawyers have highlighted the plight of living mesothelioma plaintiffs, who are most urgently in need of compensation prior to death. (10)

This article tests the accuracy of claims that trust transparency reforms delay litigation and divest plaintiffs of control over the trust and tort systems. With these reforms now several years old in many jurisdictions, there is sufficient information available to assess their impact. The data reveals that trust disclosures do not delay civil litigation and that defendants have not wrested...