Product identification fraud and asbestos bankruptcy trusts: Lessons from In Re Garlock

By on March 25, 2015

The April 13, 2015 issue of Forbes magazine features a detailed article about the role product identification fraud played in the Garlock bankruptcy, In re Garlock Sealing Techs., LLC, 504 B.R. 71 (Bankr. W.D.N.C. 2014).  At the heart of the litigation is how these fraudulent claims affected the proposed value of the trust.  Certainly, in asbestos litigation in particular, the value placed on a single case by the plaintiff and defense bars will vary wildly.   The Garlock litigation demonstrated that the gulf is even wider when the value of all future cases is at stake.  However, the Garlock court made one thing very clear: product identification fraud is never a good basis to establish trust value.

After exhausting its insurance as a result of thirty years of asbestos litigation and settlements, Garlock, a producer of asbestos gaskets, filed a Chapter 11 petition in June 2010.  In approving Garlock’s reorganization plan  Judge Hodges wrestled with whether the plaintiffs’ attorneys’ estimate of Garlock’s present and future asbestos liability  ($1.0 – 1.3 billion) was a “reasonable and reliable” determination.  After a seventeen-day hearing that included testimony from twenty-nine witnesses and hundreds of exhibits, Judge Hodges sided with the defense and set Garlock’s liability for present and future mesothelioma claims at no more than $125 million.  In doing so, Judge Hodges rejected many of plaintiffs’ arguments suggesting a higher value.

The difference in estimates was attributed to each side’s distinct approaches to estimation in asbestos liability cases; Garlock offered a “legal liability” approach which considered the merits of the claims in the aggregate, while the plaintiffs utilized a “settlement” approach based upon an extrapolation of Garlock’s history of resolving mesothelioma cases.

Ultimately, the court sided with Garlock, finding that while the “settlement” approach may be used in some contexts, its application was not appropriate for Garlock for two reasons.  First, the information from Garlock’s settlement history did not “accurately reflect fair settlements” because exposure evidence was withheld.  Evidence presented to the court showed that plaintiffs in Garlock’s asbestos cases would engage in widespread withholding of evidence of exposure to other asbestos products “to delay filing claims against bankrupt defendants’ asbestos trusts until after obtaining recoveries from Garlock.”  This practice effectively “rendered that data [based on historical settlements paid by Garlock]  useless for fairly estimating Garlock’s liability to present and future claimants.”

Garlock’s settlement data – along with detailed supporting expert witness testimony and analysis –  showed that cost avoidance, not potential liability, was the motivating factor in civil settlement values.  Indeed,  the court noted that Garlock’s expense of litigating an asbestos injury case “far exceeded” the $75,000 average settlement paid to claimants; specifically, Garlock overwhelmingly settled cases in groups without regard to liability and virtually entirely to avoid the costs of litigation. “Thus, even where the likelihood of an adverse verdict was small, the prospect of a huge verdict and the great expense of defending a trial drove Garlock to settle cases regardless of its actual liability.”

One of the most interesting aspects of the decision was Judge Hodges’ delineation of principles to decide the proper method of liability estimation:

  1. Fair Estimates.
    Judge Hodges recognized the need for a delicate balance between compensating harmed individuals and the possibility that a once viable company will become extinct.
  1. Type of Asbestos Products.
    There is a great variety in the history of asbestos litigation, as some cases involve low-dose producers and disputed causation, while others include high doses of asbestos.  All aspects of such litigation are considered.  The low exposure of Garlock’s products warranted a “de minimis” liability.
  1. Use of Debtor’s Claims Resolution History.
    Judge Hodge noted  that “no court has held that analysis of a debtor’s claims resolution history is the exclusive means to estimate liability.”  While some courts analyze the merits of claims, others conclude that the bankruptcy court has discretion to determine the appropriate method in light of the particular circumstances of the bankruptcy case before them.

These principles, along with the specific data produced by Garlock of its “legal liability,” persuaded the bankruptcy court to cap Garlock’s aggregate liability for present and future mesothelioma claims at $125 million.

Notably, plaintiffs’ attorneys argued for the “cost of settlement” approach, an approach employed in the establishment of other trusts, but the court rejected this based largely on the withholding of evidence in the underlying cases.  In a statement following the decision, a Garlock spokeswoman noted that it was the “first time in more than 80 asbestos bankruptcies that the court didn’t accept the plaintiffs’ estimate of future claims.”  In fact, before Garlock, there was little public evidence to support Garlock and other defendants’ claims that asbestos plaintiffs manipulated or influenced evidence of exposure.  While the courts had routinely allowed discovery of bankruptcy trust claims, the expansive allegations of fraud in the Garlock case sparked a redoubling of efforts to obtain trust information.  For instance, in Sweredoski v. Alfa Laval, Inc., 2014 R.I. Super. LEXIS 14 (R.I. Super. Ct. 2014), the court upheld the right of Crane Co. to obtain discovery of these claim forms, as forms may contain inconsistent statements which would “go directly to the credibility of [the decedent’s] allegations that exposure to Crane’s products caused his injuries.”

Judge Hodge’s opinion paints a vivid picture of the discovery abuses that happen in asbestos cases where there is a lack of transparency and control over the scientific evidence supporting a claim – and the impact that those abuses may have in the establishment of a trust.  The issues raised in Judge Hodge’s decision (presently on appeal) are guaranteed to have lasting impact on future bankruptcies and claims, and to cause skepticism of a plaintiff’s counsel’s estimate on ultimate value.

 

Filed under Asbestos Bankruptcy Trust, Bankruptcy, Fraud, Garlock, Garlock Asbestos Bankruptcy Court Order

The New York City Asbestos Litigation Just Became More Complicated

By on April 14, 2014

Pursuant to the Decision and Order of the Hon. Sherry Klein Heitler, dated April 8, 2014, asbestos plaintiffs for the first time since 1996 may seek permission from the New York City trial judges to charge the jury on the issue of punitive damages. Until Judge Heitler’s ruling, the New York City Asbestos Litigation (“NYCAL”) Case Management Order, as amended May 26, 2011 (“CMO”), provided that counts for punitive damages were to be “deferred” until such time as the Court deemed otherwise, upon notice and hearing. Therefore, punitive damages still could be sought, but only after a hearing to determine if it was appropriate to award them.

The importance of Justice Heitler’s ruling cannot be understated. As she notes, “tens of thousands of complex, time-consuming asbestos personal injury actions have been filed in New York County Supreme Court alone.” Her ruling is likely to have an impact on the thousands of future or presently pending cases.

Justice Helen E. Freedman, who oversaw the creation of the CMO in 1988, which governs all NYCAL cases, explained in a well-reasoned Southwestern Law Review article published in 2012, why she added the provision in 1996 that punitive damages claims should be deferred. According to Justice Freedman:

1. Punitive damages have little or no place in asbestos litigation. To charge companies with punitive damages for wrongs committed twenty or thirty or more years before, serves no correct purpose. In many cases, the wrong was committed by a predecessor company, not even the company now charged, and the responsible individuals are long gone;

2. Punitive damages only deplete financial resources that are better used to compensate injured parties;

3. Since some states do not permit punitive damages, and the federal MDL, precludes them, disparate treatment among plaintiffs would result if permitted in New York City; and

4. No company should be punished repeatedly for the same wrong.

Justice Freedman’s rationale is as valid today as it was in 1996. The only thing that has changed is that multiple bankruptcies, oftentimes involving companies whose only wrongdoing was to acquire the stock of another entity with some asbestos involvement, continue to corrode the fiber of American industry and plaintiffs have look farther and farther afield to find “fresh” defendants, many of whom have only de minimis relationship to asbestos.

Although Justice Heitler contends that the defendants, in opposing the motion, failed to provide empirical proof that punitive damages awards have contributed to bankruptcies, she overlooks the reality that defendants make oversized settlements based upon their potential exposure and that the threat of punitive damages increases that exposure calculus exponentially. One only need read the Garlock decision written by the Hon. George R. Hodges, United States Bankruptcy Judge for the Western District of North Carolina, to appreciate how settlement negotiation leverage in asbestos litigation can contribute to corporate insolvency.

Justice Heitler bases her ruling on constitutional equal protection grounds. And yet, paradoxically, she seeks to minimize the potential repercussions of her ruling (and reassure defendants) by demonstrating how other New York asbestos courts have been restrained in awarding punitive damages due to both New York’s “heavy burden” for seeking punitives and federal due process standards. If the award of punitives in New York courts outside NYCAL’s jurisdiction is so difficult to obtain, where is the loss of equal protection by requiring the filing of a notice and conducting a hearing in NYCAL?

Justice Heitler was reassured by the plaintiff asbestos lawyers that, if punitives were to be permitted, they would not abuse this long sought after opportunity and only seek punitives in the most egregious cases. However, after giving the foxes the keys to the hen house, what leverage did she retain to ensure restraint? The Decision and Order seems to suggest that these particular foxes would be content to take one plump hen and be content. She writes:

“While Plaintiffs have evinced their intention not to abuse this opportunity, it is appropriate for the court to caution the plaintiffs’ bar not to overstep this permission by attempting to seek punitive damages indiscriminately. Punitive damages should only be sought in the most serious cases to correct for the most egregious conduct, and must present a valid reference to corrective action.”

Every plaintiff lawyer has a duty to maximize his client’s recovery in a personal injury action, particularly when the client is suffering from a horrific illness like mesothelioma. If the lawyer believes he can elicit a more attractive offer from a defendant by threatening to seek punitive damages, how could he not do so within the bounds of ethical conduct? Justice Heitler notes that the use of asbestos peaked in the 1960’s and 1970’s when asbestos was used in the more than 3,000 industrial applications. Today, there are probably none. If that is the case, how can a plaintiff make a “valid reference to corrective action” in any demand for punitive damages?
 

Filed under Asbestos, Case Management Order, City, CMO, fox in the hen house, Garlock, Hon. Sherry Klein Heitler, Justice Helen E. Freedman, Litigation, NYCAL, Punitive Damages, Voluntariness, York Tagged with

U.S. Bankruptcy Court Exposes Plaintiff Scheme To Suppress Asbestos Exposure Evidence

By on March 3, 2014

On January 10, 2014, the Hon. George R. Hodges, United States Bankruptcy Court for the Western District of North Carolina, handed down a decision that promises to be a “game changer” for asbestos manufacturers facing potentially crushing mesothelioma death claims. Top Bloomberg BNA Toxics Law reporter, Perry Cooper, discussed the decision and its potential ramifications in her recent article titled, “Sides Fiercely Divided Over Impact of Garlock Asbestos Bankruptcy Court Order” (2/26/14).

The issue before the Bankruptcy Court was how to determine a reasonable and reliable estimate of Garlock Sealing Technologies, LLC’s (“Garlock”) liability for present and future mesothelioma claims. The court rejected the asbestos claimants’ $1.3 billion liability estimate in favor of Garlock’s $125 million estimate, an order of magnitude less.  Why did it do so?

The court initially determined that Garlock’s products resulted in a relatively low exposure to asbestos to only a limited population and that its legal responsibility for causing mesothelioma was relatively de minimis. During the early phase of the asbestos litigation in the 1980’s – when Garlock was generally named in complaints naming 20-50 more defendants – Garlock was very successful in settling its cases.

However, things changed for the worse by the early 2000’s, by which time large thermal insulation defendants had filed for bankruptcy and were no longer participants in the tort system. As the focus of plaintiffs’ attention turned to Garlock, as one of the remaining solvent defendants, evidence of plaintiffs’ exposure to other asbestos products often disappeared. As a result, plaintiffs’ law firms used their control over the evidence to drive up the settlements demanded of Garlock.

The crux of the court’s determination was that plaintiffs routinely denied exposure to other [bankrupt] companies’ asbestos products in pre-trial discovery and at trial, while often shortly thereafter filing multiple claims under oath with asbestos bankruptcy trusts. The “double-dipping” described by Judge Hodges where, for example, a plaintiff denies any exposure to insulation products, but after the case is settled, files 23 Trust claims, appears to be a widespread practice.

This conduct violates court rules and should be severely sanctioned if and when it comes to light. This decision shines a bright light on unethical practices in the plaintiff asbestos bar that may be a game changer particularly for manufacturers whose legal responsibility for causing mesothelioma, like Garlock, is relatively de minimis. It is the small players who are being pummeled by the lack of disclosure provided in these cases who should be seeking relief.

Garlock was able to demonstrate that in cases where it was able to obtain evidence of filed Trust claims and use them at trial, it generally had a successful trial result. In contrast, the thermal insulation defendants’ exodus from the tort system and the subsequent “disappearance” of evidence of exposure to their products, necessitated a sea change in Garlock’s negotiating and trial strategy.

Garlock demonstrated that the availability of comprehensive asbestos exposure information was often the difference between winning and losing at trial. If plaintiffs’ suppression of exposure evidence occurred in litigation against other defendants besides Garlock, it has likely resulted in higher asbestos settlements and judgments by as much as several hundred millions of dollars. At the same time, the contingency fees harvested by plaintiff lawyers in the asbestos litigation are staggering. But we should not assume that every plaintiff law firm improperly withholds exposure evidence. Cases should be examined on a case-by-case basis.

However, asbestos manufacturers are likely to bring increasing pressure on asbestos courts to compel plaintiffs to produce comprehensive evidence of asbestos exposure. The cookie-cutter management of large asbestos dockets often sweeps the legitimate concerns of asbestos defendants, particularly the smaller players, under the rug.

Trial courts should be encouraged to come up with creative means of ensuring judicial fairness. Depending upon the jurisdiction, this may involve having the trial court retain jurisdiction to reduce a verdict or settlement to account for post-verdict claims brought against other entities, who were not identified in the trial court. Alternatively, plaintiffs should be required to file Trust claims forms before trial or be judicially estopped from doing so after settlement.

RICO claims have been successfully brought against plaintiff law firms for fraud in the past. Judge Hodges’ decision, and the underlying evidence upon which it is based, provides Garlock with strong ammunition to pursue RICO claims. Additionally, the law firms identified by Judge Hodges may be subject to increasing scrutiny by the asbestos courts in the jurisdictions where they practice. Like the asbestos defendants of yesteryear, these well-heeled plaintiff law firms make for deep-pocketed defendants.
 

Filed under Asbestos, Asbestos Bankruptcy Trust, asbestos fraud, Bloomberg BNA Toxics Law Reporter, Cooper', exposure', Garlock, Garlock Asbestos Bankruptcy Court Order, Hon. George R. Hodges, Mesothelioma, RICO Tagged with