Asbestos—the heat-resistant, naturally occurring silicate mineral—disappeared from the manufacturing marketplace over 40 years ago. In those four decades, litigation involving asbestos has been as impervious to resolution as the mineral itself is to high temperatures. When we’ve asked mass-tort litigators “what’s the next asbestos?” some have answered—not entirely in jest—”asbestos.”
The reasons for asbestos litigation’s endurance are many, but defendants, judges, and public officials have started to spotlight the role of bankruptcy trusts and plaintiffs’ lawyers’ use of them as both shield and sword. Numerous voices, including state attorneys general and Members of Congress, have called on the U.S. Department of Justice (DOJ) to investigate misconduct and potential fraud. DOJ has a number of potent oversight and enforcement options at its disposal, some of which are discussed below.
Distrust of the Trusts
Forty years of litigation drove companies that mined and sold asbestos for industrial and other uses out of business. Over 60 bankrupt businesses set up trusts meant to compensate individuals who contracted mesothelioma or other diseases from asbestos exposure. Lawyers who represent asbestos plaintiffs dominate the advisory committees of these trusts. Litigation-reform proponents justifiably complain that the trusts dole out payments on minimal proof of exposure and fail to police inconsistent claims that are made to multiple trusts.
Bankruptcy trusts operate parallel to, but independent from, the civil justice system. Plaintiffs’ lawyers can thus file claims with the trusts and also sue solvent defendants that manufactured products or component parts that contained asbestos (e.g. gaskets, brakes). In civil asbestos litigation, the source of a plaintiff’s asbestos exposure often determines the outcome. The plaintiffs’ lawyers know if their clients had additional or different exposures, but the defendants are routinely left in the dark because the lawyer-run bankruptcy trusts block access to claims information.
The “ah ha” moment for litigation-reform proponents and solvent defendants occurred during the 2013 creation of an asbestos bankruptcy trust for Garlock Sealing Technologies. Plaintiffs’ lawyers demanded the trust provide $1.3 billion to cover injury claims, but the presiding federal bankruptcy judge was skeptical. He allowed Garlock to conduct discovery on 15 settlements into which it had entered. Discovery revealed that the plaintiffs had withheld exposure evidence in all 15 settlements and also delayed filing claims with bankruptcy trusts until after resolving suits against Garlock.
The bankruptcy court released a breathtaking opinion on the Garlock matter in early 2014 that documented a “startling pattern of misrepresentation.” It concluded that Garlock’s “last ten years of its participation in the tort system was infected by the manipulation of exposure evidence by plaintiffs and their lawyers.” The court decided that Garlock should contribute $125 million, not $1.3 billion to the trust.
In re Garlock emboldened common asbestos-litigation defendants and civil-justice reformers, and its impact continues to reverberate to this day.
Possible Federal Action
In each session since 2014, the U.S. House of Representatives has passed legislation requiring asbestos bankruptcy trust reporting. The Senate has never passed its version of the bill. The lack of a viable legislative solution has inspired serious discussion about DOJ action.
One option would be for the U.S. to investigate and bring civil racketeering charges under the Racketeer Influenced and Corrupt Organization Act (RICO) against lawyers and law firms that have committed fraud in their conduct of asbestos litigation. Prior to filing an action, prosecutors could do extensive discovery through civil investigative demands (CID). RICO accords federal prosecutors nationwide service of process, as well as powerful financial and equitable remedies such as forfeiture, restitution, and disgorgement.
Several victims of the misconduct unveiled in In re Garlock have filed private RICO actions. Just prior to the January 2014 bankruptcy court’s ruling, Garlock filed a civil RICO action against some of the firms involved in the 15 settled liability actions. That suit survived a motion to dismiss in September 2015, with the court ruling that Garlock “successfully alleges that Defendants engaged in a wide-ranging, systematic, and well-concealed fraud designed to suppress evidence and inflate settlement values for mesothelioma claims.” Garlock settled the suit for $358 million, and the complaints as well as Garlock’s evidence have since been unsealed.
In June 2016, John Crane filed civil RICO actions citing evidence of a scheme to commit fraud and obstruct justice gained from the Garlock actions. A federal trial judge held that John Crane lacked jurisdiction to file the claims, a decision that the plaintiff has appealed to the U.S. Court of Appeals for the Seventh Circuit.
Federal False Claims Act
A November 6, 2017 letter from 6 state attorneys general to Attorney General Jeff Sessions urged DOJ to consider pursuing action under the False Claims Act (FCA) “to put an end to asbestos trusts’ pattern of obstructionism.” The letter explained that Utah Attorney General Sean Reyes had issued CIDs to several asbestos trusts seeking information that might support a state false claims action for failing to reimburse Medicaid. The trusts refused to comply and General Reyes asked a state court to enforce the CIDs. The court held the state lacked jurisdiction and dismissed the complaint. Utah has appealed that ruling.
In a confirmation hearing and in follow-up written questions, members of the Senate Judiciary Committee asked Civil Division Assistant Attorney General-Designee Chad Readler about the FCA and asbestos litigation. Mr. Readler acknowledged the issues and the possible use of the FCA, stating that fraud in asbestos trusts was “one of the areas I want to focus on.” As with a possible RICO action, DOJ could first investigate possible FCA violations by issuing CIDs.
Failure of the trusts to reimburse Medicare for its payment of medical care for an asbestos claimant’s alleged injuries could give rise to FCA liability. As with the RICO claims discussed above, a private legal action might show the way. Several Medicare Advantage plans, relying upon information from the Garlock matter, have filed suit under the Medicare Secondary Payer Act seeking reimbursement from law firms that secured trust disbursements for clients. Humana, United Healthcare, and Aetna assert that they covered medical expenses for those who received asbestos trust money.
The U.S. Trustee Program
As discussed in a December 2017 WLF Legal Opinion Letter, the Justice Department houses the U.S. Trustee Program, an office that protects the integrity of the U.S. bankruptcy system. In their letter to the Attorney General, the 6 state attorneys general suggested that the U.S. Trustee “could immediately move to require disclosures from the trusts.” WLF’s paper supported that conclusion.
The U.S. Trustee acknowledged to the House Judiciary Committee that without an “independent policeman,” there are “risks for abuse” in asbestos trusts. The office’s director, however, stated that the U.S. Trustee lacks “significant jurisdiction [over such trusts] post-confirmation.” Perhaps motivated by this belief, three Senators have introduced legislation that in part confirms the U.S. Trustee’s authority.
If the U.S. Trustee is hesitant to examine asbestos bankruptcy trusts in the abstract, a recent court decision may create an opportunity for a targeted action. The U.S. District Court for the District of Delaware has affirmed a federal bankruptcy judge’s decision to deny Ford and Honeywell unlimited access to exhibits from nine asbestos bankruptcy matters. If the companies appeal that outcome to the Third Circuit, the U.S. Trustee could contemplate a role in the case.
Action in the Public Interest
Asbestos litigation has grown into a multi-billion dollar industry. Though the plaintiffs’ bar clamors for oversight of every other successful American industry, it wants a hands-off approach to asbestos litigation. The reason is obvious: they’re the only ones that really profit. Americans as consumers, employees, shareholders, and pensioners lose when companies spend millions to defend themselves or go out of business. Even the asbestos litigation industry’s supposed beneficiaries—asbestos-exposure sufferers—lose when uninjured parties siphon off funds from the bankruptcy trusts.
This DOJ has been rightfully circumspect in using its broad authority. After fulling assessing the situation and its options, we’re confident that the leadership will see the public interest in its taking action.
Also published by Forbes.com on WLF’s contributor page.