ASBESTOS trusts

Trusts Busted

The seamy underside of asbestos litigation.

Wall Street Journal by KIMBERLEY A. STRASSEL  December 5, 2006

Harry Kananian died in the year 2000 of mesothelioma--a cancer almost always caused by asbestos. But the legacy that may survive him is the role he is posthumously playing in exposing evidence of asbestos litigation fraud.

In early 2000, the Ohio resident met with the law firm of Early, Ludwick, Sweeney & Strauss to see about collecting compensation from special trusts set up by companies to deal with asbestos liabilities. So the law firm filed a claim to one trust, saying Kananian had worked in a World War II shipyard and was exposed to insulation containing asbestos. It also filed a claim to another trust saying he had been a shipyard welder. A third claim, to another trust, said he'd unloaded asbestos off ships in Japan. And a fourth claim said that he'd worked with "tools of asbestos" before the war. Meanwhile, a second law firm, Brayton Purcell, submitted two more claims to two further trusts, with still different stories. The two firms swept up as much as $700,000 for Kananian and his estate from trusts and settlements.

In the legal trade, this is known as "double dipping"--the process by which lawyers file claims at many different bankruptcy trusts on behalf of a single plaintiff. Each trust is told a different story about how the client got sick, and the plaintiff collects from all of them. Of course, the lawyers collect too. This practice may well have remained unexposed had not Brayton Purcell decided to cash in on Kananian one more time. It sued Lorillard Tobacco, this time claiming its client had become sick from smoking Kent cigarettes, whose filters contained asbestos for several years in the 1950s. That suit has now exploded on Brayton, exposing one of the asbestos bar's more lucrative cash cows.

In Cleveland, Judge Harry Hanna of the Cuyahoga County Court of Common Pleas has been asked to rule on a motion to disqualify Brayton from the suit and bar it from practicing in Ohio. The firm stands accused by Lorillard of lying to the court, defrauding asbestos trust funds and obstructing discovery. Those accusations come via a raft of internal emails and documents, most if which are referred to in the court record, that tell a story of two law firms using contradictory stories to rake in money from bankruptcy trusts, then potentially trying to cover it up. All parties are under a gag order from the judge. Last week, Brayton Purcell, amazingly, requested to withdraw itself from the case.

As the tort bar piled on endless--and often bogus--asbestos claims in the 1990s, many defendant companies started looking for a way out. One solution was to go into bankruptcy, turn over a huge chunk of money to an asbestos "trust," and emerge from Chapter 11 clear of asbestos woes. These trusts are responsible for one of the largest wealth transfers in history, shifting billions from companies and insurers to plaintiffs lawyers and their largely healthy customers. A number of large trusts are due to come online over the next year alone, with assets of $30 billion.

Many trusts are run by the very lawyers who created them; that is, once the trust is created, the defendant company is no longer involved with claims, and the trial lawyers divvy up the money. These lawyers, because their contingency fees are based on the trust's payouts, have no incentive to ensure that applicants for compensation were actually harmed by that particular trust's product. While it is not illegal to file at different trusts (and some industrial workers were exposed in multiple ways), most such claims are vague or contradictory. Trust payments are also considered legal settlements and thus confidential. So while the asbestos bar may wrongly double dip, this is usually hard to prove.

Harry Kananian met with the firm Early Ludwick in February 2000. According to an Early email, he wasn't clear how he'd been exposed. He had, however, served in the Army in World War II and remembered several months on troop ships known to contain asbestos. On one such two-week trip he'd done welding. He also recalled working in a factory that was "dusty," as well as a "white powdery substance" when he was remodeling his house.

Early Ludwick then filed its multiple claims--to the 48 Insulations trust, the Eagle Picher trust, the UNR trust, the Celotex trust and others. Brayton Purcell was also retained by the plaintiff and filed claims to Johns Manville and Bethlehem Steel. The discrepancies were never questioned until Brayton sued Lorillard Tobacco, and Brayton probably never thought the prior claims would be an issue. But Lorillard suspected Kananian had already collected on the basis of his work history--and it argued the jury had a right to know. To Brayton's dismay, Judge Hanna agreed earlier this year.

When Brayton's lead counsel, Chris Andreas, started to realize in February that Judge Hanna would allow the claims as evidence, his first strategy was to sell Early Ludwick down the river. Mr. Andreas seemed to hope that, if the judge thought Early's work was erroneous, he wouldn't allow the claims into court, where they might sway a jury. Mr. Andreas said in court that the Early claims were "flat incorrect," "simply inaccurate," "absurd" and "the most misleading information that [he'd] ever seen." The judge was unmoved.

In a March 10 email, Mr. Andreas relates the bad news to his partners, and explains the problems with the original claims. To give one example: In the UNR claim (which stated Kananian had unloaded asbestos off ships), Mr. Andreas says that, in fact, Kananian only supervised Japanese workers who'd unloaded ships. Also, "there is absolutely no evidence that anyone shipped or unloaded Unibestos [a UNR product] on any of ship [sic] he was involved with during this period, least of all Mr. Kananian himself." The rest of the Early claims had similar problems, he said, admitting that in one of Brayton's own claims "we also overstate Mr. Kananian's exposure . . ." In a separate email he states, "There is no way what our client sent them matches what they put in these forms."
Mr. Andreas worries that "I am forced to try to explain them away as mistakes by clerks or [attorneys]. A jury is going to look down on this type of fabrication by lawyers and can use this information to dump plaintiffs by finding that." He then offers a choice: They can give the money back, in which case Judge Hanna won't allow the claims, or they can "go forward at trial" and try to get the jury to focus on something other than "unsworn claim forms that were just used to pry money out of a bankrupt" (my emphasis). The goal, he says in another email, is to "blame [Early] for bulls----ing the trusts."

Meanwhile, Lorillard was trying to subpoena the confidential trust claims. Brayton knew the judge would go ballistic if it tried to officially squelch this process, so instead it worked behind the scenes. When the Celotex trust informed the law firms that it had received a subpoena, and asked whether they would try to legally block the subpoena, one outside lawyer suggested they "respond to [Celotex] via phone requesting that they resist . . ." Mr. Andreas noted: "I would love if Celotex gave these a--holes a hard time."

When it became clear Lorillard would get its way, the strategy changed again. Brayton Purcell decided it would work with Early Ludwick to submit amended claims to the trusts. In Brayton's original claim to Johns Manville, for instance, the form had described Kananian as a "laborer" who had direct contact with asbestos. It also said he'd worked in "shipyard construction/repair" and listed several Manville products, by name, to which he'd been exposed. The amended claim instead listed Kananian's occupation as "other," noted that he'd only been on board a ship where Manville products were installed, removed any reference to shipyard work, and deleted any Manville products. Other trust claims were similarly purged.

But Brayton Purcell had a problem. It needed to change the forms to bolster the Lorillard suit, but it didn't want to raise alarms at the asbestos trusts. Its solution was apparently to try to make sure the trusts didn't look closely. Even as Mr. Andreas was telling his partners that the original Early claims were "fictional," he instructed those working on the new claims to tell the trusts they were only "correcting some clerical errors." Partner Al Brayton instructed his staff, according to an email, to "simply re-do the old claim form with the new answers and submit with a cover letter. Do not call them."

By spring, Judge Hanna was getting suspicious. To the firms' dismay, he took the rare step of allowing Lorillard to depose its opponents. Brayton Purcell emails show it wondering if the former office assistant who'd prepared the original Manville claim was "disgruntled." Mr. Brayton had already instructed an underling to "immediately brief all personnel preparing claim forms or efficiency responses that they are not to 'make up' information to make a claim qualify." But the firms continued to obstruct, and the judge had enough. This summer, he ordered up their emails.

Among other things, the emails show that raise questions about Mr. Andreas's candor with Judge Hanna. On March 10, Mr. Andreas told the court that he didn't know if the original Early Ludwick claims had even been submitted to the trusts, and said he would "welcome" documentation showing they had. In fact, on March 3--a week prior to Mr. Andreas's statement--a paralegal at Brayton sent an email to Early Ludwick noting that "trial attorney, Christopher Andreas, asked that I follow up with your office on the total amount of settlements your office has obtained in this case." That same day, Early Ludwick sent back an email listing the trusts and how much money had been obtained from each. As for Mr. Andreas welcoming proof from the trusts, this was about the same time he was hoping Celotex would resist.

Then there's Mr. Andreas's knowledge of the claims. On March 23, he told Judge Hanna that his firm would "stand by" its original Manville form. In fact, the firm had submitted a revised claim the night before. When Judge Hanna found out, he asked if Mr. Andreas had known. His response: "I'll just tell you right on the record and I'll repeat it under oath at any other point, I did not know about it when we argued on [March 23]. I did not know it had been prepared." However, Mr. Andreas had been sent an email with the revised form on March 22--the night before his "stand by" comment--and had replied, only two hours after receipt.
Lorillard laid most of this out in a motion requesting that the judge dismiss the case, bar Brayton Purcell from Ohio, and turn the information over to the Justice Department. Lorillard is insisting the original claims were accurate, although Harry Kananian's real history remains the great mystery here.

Brayton Purcell in November filed a 101-page document, arguing that Kananian's mesothelioma was caused by the "total dose of inhaled asbestos from all products," including Kent cigarettes. Regarding its desire to alter the claims, it said it believes the jury had a right to accurate evidence. It addressed one issue, claiming that "while it may be true" that Mr. Andreas knew about the amended claim form even as he said he "stood by" the original, his statement related to the "overall accuracy" of that original. Then, last week, it filed a motion asking to be withdrawn, although it said it was doing this to help its client, not because of the allegations. Mark Abelson, of Campagnoli, Abelson & Campagnoli, an attorney for Brayton Purcell, says: "At this point in time, we don't believe that the Brayton Purcell firm had done anything wrong. It is my belief that Lorillard is making every attempt to create tangential issues to the litigation that will delay and deflect any actual trial on the merits of their own conduct." Early Ludwick had no comment. Lorillard did not return a call.

Judge Hanna has continued to push back the trial date until the claims issue is resolved. A hearing is set for this week, and it isn't clear he'll allow Brayton to withdraw and thus escape any further scrutiny.

Whatever happens, the exposure of this trust scam is bolstering a new wave of oversight. Judges are already taking a closer look at silicosis claims and "prepackaged" bankruptcies--both cash cows for the trial bar. Just last week, a separate Ohio judge ruled that an asbestos plaintiff must turn over any prior claims to a bankruptcy trust. Similar rulings have been handed down in Virginia and California.

Meanwhile, reform proposals are beginning to emerge. One idea is for the trusts to release data about claimants, so that other trusts and defense attorneys can review existing claims. Some lawyers are requesting that active litigation be put on hold until companies can see who claimed from trusts. That this hasn't already happened is the fault of bankruptcy judges, who have been unresponsive to requests for more oversight of the trusts they help create.

A cleaner system would help true victims. Some lawyers for mesothelioma victims feel the need to file many claims because trusts are drying up--making it difficult to get decent compensation. The feeding frenzy by plaintiffs lawyers who cash in repeatedly, often on behalf of plaintiffs who are entirely healthy, often leaves little for those who are truly ill. It isn't justice: It's fraud.
Ms. Strassel is a member of The Wall Street Journal's editorial board, based in Washington.
http://www.opinionjournal.com/columnists/kstrassel/?id=110009343

Trust Bars Reports of Unreliable Doctors

The Manville Trust, the largest trust set up to compensate claims for asbestos exposure, has barred payments on claims relying on reports by nine doctors and three X-ray screening companies.  The New York Times reports that the named doctors are responsible for tens of thousands of submitted claims to the trust, which has paid out $3.3 billion to resolve 655,096 claims since it was created in 1988.  This is yet another example of a changing landscape in asbestos litigation.

The report indicates that general counsel for Claims Resolution Management, Jodye Marvin, said the claims supported by documents from the nine doctors "simply were not reliable." She added that by publicizing their names, she hoped both to deter other doctors from assisting in filing questionable claims and to prevent payment of any pending claims based on these doctors' work. The Manville Trust posted the memorandum listing the doctors on its website, www.claimsres.com.

One doctor is highly familiar to controversy: Ray Harron of Bridgeport, W.Va. Dr. Harron submitted documents to the Manville Trust supporting 53,724 of the 691,910 claims that the trust has received - nearly 8 percent - more than any other doctor, according to the trust.  Other noted doctors include Barry Levy (Sherborn, MA) and Kevin Cooper (Pascagoula, Miss). 

The list was born, in part, from a February hearing in Corpus Christi, dealing with silica claims.  There, several doctors testified that they diagnosed silicosis in patients they had never met or interviewed. Some of the same doctors conducting separate examinations of the same claimants found only silicosis in one examination and only asbestos-related diseases in the other.

Posted by Eric Genau on November 06, 2006
http://asbestoslitigation.typepad.com/newyork/2006/11/trust_bars_repo.html

Welcome to the New Asbestos Scandal

For a quarter-century, companies have struggled with asbestos liability. Now, thanks to the very lawyers who are suing them, they've found a new tool--one that sticks it to their insurance companies and the genuinely sick.

By Roger Parloff  & Christopher Tkaczyk  September 6, 2004

(FORTUNE Magazine) – Joe Rice is smokestack industry's new best friend. That's an unaccustomed role for Rice, since he is the co-leader of Motley Rice (formerly Ness Motley), the most feared asbestos/tobacco/mass-torts plaintiffs law firm in the country. Over the years his firm has represented more than 96,000 asbestos plaintiffs against hundreds of corporations. Rice and his more famous partner, trial lawyer Ron Motley--actor Bruce McGill played Motley in the 1999 film The Insider--are also the ones who helped engineer the great tobacco industry takedown of 1998, which will ultimately divert about $246 billion in tobacco revenues into state treasuries and another $2 billion to $3 billion (yes, billion) to Motley Rice.

That resume notwithstanding, Rice is now the guy corporate executives want to see when their company needs to get out from under asbestos liabilities. He can get them something they need very badly, something Congress still hasn't seen fit to give them, and something even the courts can't secure for them--at least not without Rice's consent: total and final asbestos absolution. Rice can exorcise from a corporation, once and for all, the ghosts of asbestos liability past, present, and future. He can save its employees from layoffs and turn its stock back into the investment-grade security it once was. And if a company is good and follows his instructions to the letter, he might even let its shareholders keep their stock. That way they'll get rich when it skyrockets in value after Rice lifts the asbestos "overhang."

Rice's panacea is called a prepackaged asbestos bankruptcy--or "prepack." The executive summary goes like this: Your company (or a subsidiary) will have to dip into Chapter 11 bankruptcy, but just briefly. Rice will make the experience as painless as possible. Instead of languishing in Chapter 11 for years, you might be able to blaze through it in months--theoretically in as little as 30 to 45 days. You'll go in, wash off all your asbestos liability for surprisingly little money, and then re-emerge clean and healthy. Your company does fine, the plaintiffs lawyers do great, and most of the asbestos claimants do well enough. The only ones who may get hurt are the usual big losers in asbestos litigation: the insurance companies--some of which may go belly-up paying for the liabilities you and Rice are going to agree that they owe--and the tiny minority of asbestos claimants who are severely sick and may get paid less than they need and deserve. Nobody said life would be fair.

THE SCANDAL INSIDE THE SCANDAL
When this magazine last addressed the asbestos litigation crisis, in March 2002 (see "The $200 Billion Miscarriage of Justice" on fortune.com), we described the 25-year evolution of a national scandal. That article chronicled the transformation of asbestos litigation from a means of enabling injured and dying asbestos workers to gain compensation from corporations that had grievously wronged them into a means of transferring the shareholder wealth of thousands of companies--whose blame is so marginal as to be a legal construct--to a handful of plaintiffs law firms and hundreds of thousands of people who aren't sick. The situation had become so disgraceful that plaintiffs firms specializing in representing the truly sick had broken ranks with the rest of the plaintiffs bar and aligned themselves with the defendant corporations and insurance companies in seeking reform.

At that time we hailed a Senate bill that would have imposed stiff, nationwide medical criteria for asbestos suits. But that bill, like every other effort to address the asbestos crisis through congressional legislation over the past quarter-century, failed.
With the bill's failure, asbestos defendants turned to a new solution offered not by Congress but by the plaintiffs lawyers themselves: the prepack. Shook & Fletcher's was announced in February 2002, insulation contractor AC&S followed suit two months later, and Houston contractor J.T. Thorpe came next, in June. Combustion Engineering unveiled its own version in November 2002, as did Congoleum in January 2003.

Prepacks were not invented by the plaintiffs bar. Outside the asbestos context, they are a common, respected means whereby debtors and creditors settle most of their differences prior to a bankruptcy filing--thus minimizing the costs of bankruptcy. But asbestos prepacks are nearly always characterized by a unique feature: They call for the debtor company, a few months before the filing, to turn over a huge chunk of its assets to a subgroup of privileged asbestos claimants, to be divvied up outside the scrutiny of a bankruptcy judge. One veteran bankruptcy lawyer refers to this distinctive feature of prepacks as their "great train robbery" aspect.

The perils posed by these unusual agreements are further complicated by the lawyers involved, who often play multiple roles--roles that critics claim constitute conflicts of interest. In the ABB/Combustion Engineering matter, for instance, Rice simultaneously represented asbestos claimants and the parent of the company that they were suing. ("I had ethical consultants all along," says Rice. "I get paid a fee for a business transaction, and the claimants get paid because I was able to put together that transaction. My interests are 100% aligned with my clients'.")

This article, then, is about the new asbestos scandal--the scandal within the scandal. Because asbestos prepacks are such a recent phenomenon, few of them have wended their way through the courts, and some, like Congoleum's, have not yet even cleared the first hurdle--approval by a bankruptcy judge. Accordingly, no one knows precisely what is and isn't legal in this context. We will begin getting guidance when the federal appeals court in Philadelphia rules on the legality of the ABB/Combustion Engineering prepack--a ruling expected any day. …

THE CHANNEL TO THE HOLY GRAIL
The Holy Grail for an asbestos defendant is something called a channeling injunction. It's a court order that channels all of a company's current and future asbestos liabilities away from the company and into a trust, which is a fund that's set up for the sole purpose of paying off the company's asbestos liabilities from that point forward. (Future liabilities are an enormous concern for asbestos defendants because of the long latency periods of asbestos-related diseases.) A company can get a channeling injunction only by going into bankruptcy.

The first channeling injunction was imposed in the Johns-Manville bankruptcy in the late 1980s. Johns-Manville put about $2 billion in cash and other assets into a trust, including 80% of the stock of what was to be the reorganized company, called Manville. The idea was that the reorganized company, when freed of asbestos liability, would thrive again. Once it thrived, its stock would rise in value and throw off dividends that would benefit the trust. The trust, in turn, would then be able to pay Johns-Manville's asbestos claimants as they came down with diseases in the future. By contrast, if Johns-Manville had kept its liabilities and had been forced to liquidate, its future asbestos claimants would have had no Manville-related entity to recover from.

The channeling injunction was a great idea, but no one was sure if it was legal, since the judge had improvised it. In the early 1990s, when the trust wanted to sell its Manville stock and diversify its investments, it found no buyers; investors feared they might be buying Johns-Manville's asbestos liabilities if the channeling injunction was later found to have been beyond the judge's power to impose.

So the Manville Trust went to Congress and, in 1994, got an amendment to the bankruptcy code that retroactively ratified what the judge had done. (Warren Buffett then bought Manville's stock from the trust.) But the amendment also set up a procedure for issuing channeling injunctions in future asbestos bankruptcies.

The forward-looking provision, known as Section 524(g), did some highly unusual things, we now realize. Most important, it specified that the bankruptcy judge could not issue the precious channeling injunction to a company unless 75% of the current asbestos claimants voted to approve the company's bankruptcy reorganization plan.

Providing asbestos claimants with a voice on the company's reorganization plan was not in itself unusual, since creditor classes always get to vote on whether to approve a Chapter 11 debtor's plan. But the bankruptcy judge always retains the ultimate power to override a creditor class's veto if he feels that the plan is "fair and equitable." The bankruptcy judge can, in the evocative legal phrase, "cram down" the plan on dissenting creditors. The judge's cram-down power acts as a check on creditor greed, encourages compromise, and promotes consensual plans.

But the 75% approval required for a 524(g) channeling injunction is not subject to a cram-down. The omission has astounding consequences for the dynamics of an asbestos bankruptcy. Since bankruptcy is worthless to an asbestos defendant if the company can't get a channeling injunction, the asbestos claimants--or to be more precise, the plaintiffs lawyers who control 75% of them--effectively have more power than the bankruptcy judge!

"[Section] 524(g) creates an unlevel playing field and gives the asbestos claimants virtually an absolute veto over a consensual plan," says former U.S. district judge Alfred Wolin. Wolin presided over five large Delaware asbestos bankruptcies from late 2001 until this spring. "You could have 99 other issues to deal with," Wolin continues, "but ultimately it's going to boil down to, Can the debtor get a 524(g)? And if the debtor can't get a 524(g), everything else is for naught." (Wolin can speak freely now, because in May a federal appeals court disqualified him from three of his asbestos cases for the appearance of pro-plaintiff bias. Wolin, 71, then stepped down after 17 years on the federal bench. But that's another story.)

AVOIDING FREE FALLS AND NANNIES
Tanned and fit, with a full head of tousled hair, Joe Rice, 50, has star power. In a courtroom full of workaday bankruptcy and insurance lawyers, Rice looks like George Clooney at a Rotary luncheon. Though Rice's law firm is based in Mount Pleasant, S.C., rather than in Chicago or New York City, nobody in the room mistakes him for a country rube. Rice doesn't handle slip-and-falls. His forte is big-picture wheeling and dealing, and his practice has come to resemble a species of investment banking.

Rice is in a unique position to corral the 75% vote that companies need, because his firm has long maintained a network of consulting and co-counsel arrangements with scores of other asbestos plaintiffs firms around the country. Historically a local firm would work up the particulars of a case while engaging Ness Motley to handle recurring liability issues common to every asbestos suit. Rice's stature in the field now enables him to craft global settlement deals that both he and the defendants know will very likely gain acceptance from most of the asbestos plaintiffs bar.

Rice understands that a conventional bankruptcy--or "free fall" bankruptcy, as he pejoratively calls it--would be devastating to a company with asbestos liability. Free-fall bankruptcies take too long--they average around six years in asbestos cases--and they are money barbecues, costing as much as $15 million a month. It's hard for a company to stay competitive under the drag of Chapter 11, and some companies don't make it.

THE 90-DAY LOOPHOLE
While the prebankruptcy settlement will take care of most of the current claimants, there will always be a few left over. Some of them may not qualify for the settlement for various technical reasons, and others won't like the settlement's terms. The latter group will typically be composed of severely injured claimants, who often find global settlements too cheap. In either case, under the grand design of the prepack those leftover "currents" will be tossed in with the futures, who are then relegated to seeking their recoveries from a separate pool of assets--the bankruptcy trust that will be set up after the Chapter 11 petition is filed.

As a rule of thumb, the bankruptcy trust will pay less, and pay later, than the prebankruptcy settlement. Because many of the assets set aside for the bankruptcy trust will be illiquid and risky--like notes or stock--they may not be there at all by the time a future mesothelioma victim finally arrives to make a claim upon it several years from now. The bankruptcy trusts in the Combustion Engineering and Congoleum cases are funded heavily with disputed insurance proceeds that may or may not exist, depending on whether the debtor ultimately wins contested coverage litigation against its insurers.

Some attorneys reading this story may want to interrupt here with a technical question: If a company forks over a huge treasure chest of its most liquid assets to a privileged subgroup of creditors right before filing for bankruptcy, isn't that a classic "preferential transfer" that can be reversed by the bankruptcy judge? The answer is yes. That's why Rice will have the company count off at least 90 days between the time it funds the prebankruptcy settlement and the time it files for Chapter 11 protection. Legally, that 90-day buffer makes it tough for a judge to void the prebankruptcy settlement. (And as a practical matter no judge is going to try to force thousands of asbestos claimants to return settlement money after they've received it.)

The company will also use that 90-day waiting period to unveil the upcoming bankruptcy reorganization plan and seek the all-important 75% approval needed for the channeling injunction. This pre-bankruptcy vote is the defining feature of a prepack. It is precisely because all necessary creditor classes will have approved the plan before filing for bankruptcy that the company can then sail through Chapter 11. …
http://money.cnn.com/magazines/fortune/fortune_archive/2004/09/06/380311/index.htm

USG SETTLEMENT REFLECTS SORRY STATE OF ASBESTOS BANKRUPTCIES

By Mark D. Taylor and Brandi A. Richardson

On January 30, 2006, USG announced a settlement with its asbestos claimants that will now pave the way for its exit from Chapter 11.1 Pursuant to the settlement, USG will fund a section 524(g) asbestos trust,2 assuming the reorganization plan including these settlement terms is confirmed, with an initial payment of $900 million in cash. If Congress fails to enact federal asbestos legislation, the FAIRAct,  by the close of this year’s legislative session, USG will contribute an additional $3.05 billion note.

USG’s existing equity will pass through the bankruptcy, but will become available to the asbestos trust if USG defaults on its obligations under the note. Wall Street initially greeted the news of the settlement with the “irrational exuberance” that has greeted virtually any positive announcement about asbestos legislation or asbestos-related debtors over the last five years. The stock price spiked by 20% in the two days after the announcement.4 USG’s stock price has since pulled back from the levels it reached after the announcement of the settlement. As the market has digested the details of the settlement, there has been an increasing sense that then settlement is not necessarily good news.

Why? In short, because of how things have progressed over the last six years during the current wave of asbestos bankruptcies, and more particularly, because of USG’s role in that progression.

There have been numerous smaller asbestos bankruptcies, including pre-packaged bankruptcies, such as J.T. Thorp.11 These bankruptcies have been characterized by the unparalleled influence of the unimpaired asbestos claimants, who, because they comprise up to ninety percent of the total asbestos claims pool, hold a blocking vote under the seventy-five percent requirement of section 524(g) of the Bankruptcy Code.

The issue of whether unimpaired claims holder hold “claims” under section 101 of the Bankruptcy Code,12 or “demands” under section 524(g),13 is a matter of significant practical and policy concern. Holders of claims are entitled to vote on section 524(g) plans; holders of demands are not. The Bankruptcy and District Courts overseeing these cases have done little to clarify the issue. Notwithstanding the unstoppable momentum of unimpaired claims, USG, along with W.R. Grace and G-1, have stood firmly against any settlement with the unimpaired claimants. Babcock & Wilcox initially led the charge against payment of unimpaired claims, but eventually gave up the fight, settled, and emerged from Chapter 11 on February 22, 2006.

Early reported decisions that sought to limit the influence of unimpaired claimants, such as the Sealed Air decision15 (involving fraudulent conveyances) and the USG decision16 (involving unimpaired claims), gave little hope to asbestos debtors like USG. However, recent Third Circuit opinions involving Combustion Engineering17 and Congoleum18 have signaled a return to a balanced approach to asbestos bankruptcies, in which asbestos plaintiffs would actually have to comply with the Bankruptcy Code. Wall Street and the legal community looked with anticipation upon the upcoming USG litigation, which sought a substantive estimation of its asbestos liability based on an analysis of 2000 asbestos claims.

Thus, on the verge of what many expected to be a stunning victory, USG seemingly gave up the fight. Further, it settled for what many believed was more than twice its actual liability. Paying a settlement premium is not uncommon when taking into consideration the certainty that a settlement brings and the savings of administrative costs, but few would argue that a $2 billion premium is a reasonable settlement premium. Why did USG elect to settle, rather than fight? The answer apparently relates to USG’s evaluation of its business prospects and of the prospects for enactment of the FAIR legislation in this Congress.

First, the amount of the USG settlement is significantly higher than the Wall Street estimate of USG’s asbestos liability. When judged from a market share standpoint, against Owens Corning’s court estimated $7.0 billion asbestos liability,19 many believed that the USG liability would be in the $1.5 to $2.5 billion range. Further, the substantive estimation trial mentioned above was widely regarded as a significant opportunity to restore the proper balance to these bankruptcy cases. Observers hoped the estimation trial would provide solid, and much needed, guidance regarding the allowability of nonmalignant asbestos claims. Those who follow this closely were of the view that USG would prevail.

USG was considered poised to obtain a significant victory in its Chapter 11; Wall Street investors were banking on it. Second, many of the biggest asbestos debtors have delayed emergence from Chapter 11, because of the significant dividend available to the biggest debtors in the asbestos trust to be created by the FAIR Act. For example, the USG settlement “exposes the multi-billion dollar windfall” that major companies, such as USG, could receive from the FAIR Act.20 This major company dividend comes at the expense of smaller businesses.

Further, it should give rise to grave concern that the proposed national asbestos trust may be significantly underfunded. A recent report by respected asbestos estimator Charles Bates of Bates White, LLC suggests that the fund might be underfunded by as much as $500 billion. The fact that USG has now moved forward likely indicates its view that the FAIR Act will not pass.

Thus, while, on its face, the settlement seems far too rich, after five years in Chapter 11 USG was prepared to move on. The business is profitable and from the standpoint of equity values, not likely to get too much better. Further, even though USG paid a premium, it has protected itself not only from the legislative risk, but it has also preserved equity, an uncommon feat in asbestos bankruptcy.

From the asbestos plaintiffs’ perspective, USG gave them an offer they could not refuse. Serious doubts exist regarding whether the asbestos claimants could have obtained this result through the substantive estimation procedure. Further, although the FAIR Act is in doubt, the willingness of courts to scrutinize asbestos claims is not. As state legislative efforts have begun to take hold, perhaps the end of the apparently abusive practices of asbestos claims is nearing an end. If so, we may look back on the USG settlement, not with dismay, but as a watershed moment.

1 In re USG Corp., Ch. 11 Case No. 01-2094 (Bankr. D. Del. 2006).

2 11. U.S.C. § 524 (g).

3 Fairness in Asbestos Injury Resolution Act of 2005 or the FAIR Act of 2005, S. 852

4 Stock increased $15.93 to $95.78. Alexandra Twin, Choppy day ahead of Fed (Jan. 20, 2006) at
http://cnnmoney.com.Copyright 8 2006 Washington Legal Foundation 2 ISBN 1056 3059 current wave of asbestos bankruptcies has included such mega-cases as G-1 Holdings,

5 Federal Mogul,Babcock & Wilcox, Armstrong World,8 Owens Corning, W.R. Grace, and of course, USG. In re G-I Holdings, Inc., Ch. 11 Case No. 01-30135 (Bankr. D.N.J.).

6 In re Federal Mogul Global, Inc., Ch. 11 Case No. 01-10578 (Bankr. D. Del.).

7 In re Babcock & Wilcox Co., Ch. 11 Case No. 00-10992 (Bankr. E.D. La.)

8 In re Armstrong World Indus., Inc., Ch. 11 Case No. 00-04471 (Bankr. D. Del.).
9In re Owens Corning, Ch. 11 Case No. (Bankr. D. Del.).

10 In re W.R. Grace & Co.), Ch. 11 Case No. 01-1139 (Bankr. D. Del.).

11 In re J T Thorpe Co., Ch. 11 Case No. 02-41487 (Bankr. S.D. Tex.).

12 11 U.S.C. § 101(5). Section 101(5) defines “claim” as:
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment,whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

13 11 U.S.C. § 524(g)(5). Section 524(g)(5) defines “demand” as:. . . a demand for payment, present or future, that—(A) was not a claim during the proceedings leading to the confirmation of a plan of reorganization;(B) arises out of the same or similar conduct or events that gave rise to the claims addressed by the injunction issued under paragraph (1); and (C) pursuant to the plan, is to be paid by a trust described in paragraph (2)(B)(i).

14 News Release, McDermott International Inc., The Babcock & Wilcox Company Exits Chapter 11 Bankruptcy; A Transformational Event for McDermott and B&W, (Feb. 22, 2006) (on file with author). Copyright 8 2006 Washington Legal Foundation 3 ISBN 1056 3059

15 Official Comm. of Asbestos Pers. Injury Claimants v. Sealed Air Corp. (In re W.R. Grace & Co.), 285 B.R. 148 (Bankr. D. Del. 2002) (authorizing claimants committee to pursue fraudulent conveyance action despite contrary intervening authority).

16 In re USG Corp., 290 B.R. 223 (Bankr. D. Del. 2003) (refusing to conduct merit-based estimation of claims ongrounds that debtors was insolvent even without disputed claims). The judge was unwilling to review unimpaired claims on the ground the mesothelioma claims against USG rendered it insolvent anyway. USG has turned out to be solvent after all. Further, the notion that the “mesos” swamp debtors is a pernicious notion that has never been conclusively established. By allowing this fallacious notion to persist, courts have not given any scrutiny to unimpaired claims.

17 In re Combustion Eng’g, Inc., 391 F.3d 190 (3rd Cir. 2004) (overturning confirmation of debtor’s pre-packaged plan).

18 Century Indem. Co .v. Congoleum Corp. (In re Congoleum Corp.), 426 F.3d 675 (3rd Cir. 2005) (disqualifying debtor’s special insurance counsel and order disgorgement of $13 million in fees).

19 Company News; Owens Corning’s Asbestos Liability is Set at $7 Billion, Apr. 5, 2005, at http://query.nytimes.com/gst/fullpage.html?res=9900E4DB1F3FF936A35757C0A9639C8B63.
Copyright 8 2006 Washington Legal Foundation 4 ISBN 1056 3059

Double-Dippers

Daniel Fisher   September 4, 2006

Aided by their lawyers and secrecy oaths, asbestos victims are finding bankruptcy trusts easy pickings.

Amid all the disputed facts swirling around the death of Harry Kananian, one thing is certain: On June 24, 2000 the former Broadview Heights, Ohio resident died of mesothelioma, a cancer almost certainly caused by asbestos.

How Kananian was exposed is a mystery he took to his grave. Was it as a teenager working in dusty factories in Cleveland? Or was it when he slept in the top bunk of a World War II troopship that had asbestos-clad pipes rattling 2 feet above his head? Or was it from smoking Kent cigarettes that were made with asbestos-containing filters for a few years in the early 1950s?

Kananian's lawyers have made all these claims and more in lawsuits they began filing just weeks after his cancer was diagnosed in February 2000. But like a Hollywood movie with continuity issues, his stories don't mesh. Was he a shipyard worker in World War II, as he told the Johns Manville bankruptcy trust? Or was he a U.S. Army rifleman who passed through a San Francisco shipyard on his way to Japan, as he said in a deposition?

Kananian's conflicting stories illustrate a dirty little secret of the asbestos-litigation industry: Even as states crack down on frivolous lawsuits by people with no symptoms at all, trusts established by bankrupt asbestos manufacturers are paying tens of thousands of claims each year based on inflated or downright false stories of how people were exposed to their products.

Most of the trusts are overseen by plaintiff lawyers--lawyers with Dallas plaintiff firm Baron & Budd sit on nine bankruptcy trusts, and New York firm Weitz & Luxenberg are involved in seven. Can they be counted on to weed out double- dipping and false claims?

"This is pervasive; this permeates the entire business," says Lester Brickman, a professor of legal ethics at Cardozo School of Law in New York, "Bankruptcy judges should be ashamed of themselves for, in effect, going along with this fraud."

With an estimated $17 billion in assets so far and $5 billion to $10 billion more on the way, the trusts represent a huge pool of cash for potential asbestos claimants to tap. There's nothing wrong with suing more than one company or trust for the same injury (and most sue several trusts). People were often exposed to asbestos at different locations, made by different manufacturers. Who's to say which exposure caused the injury?

But in the Kananian case and other lawsuits scattered around the country, defendants are uncovering a more troubling trend. One common example: A plaintiff sues manufacturers of asbestos-containing brake pads without disclosing that he has already collected tens or hundreds of thousands of dollars from trusts representing bankrupt producers of construction products on the theory that he was exposed to asbestos on construction sites.

Secrecy keeps this game going. Trust payments, like most legal settlements, are considered confidential and generally can't be used as evidence in subsequent trials. That's convenient because it allows plaintiffs to hide conflicting versions of how they got sick.

Plaintiff lawyers who set up the trusts and sit on the advisory boards that oversee them have fought efforts to share detailed claims information "because they don't want the other trusts knowing what exposures they have claimed," says Robin Carroll, who for eight years was controller of the $750 million Celotex trust.

In a case that could crack open bankruptcy-trust records for most California defendants, an appeals court in May allowed lawyers for Volkswagen to obtain settlement records from Buddy Rusk Sr., who sued Volkswagen and 67 other companies for asbestos-related illness in 2003. Rusk, 67, a former machinist and painter who admitted on a 1992 medical exam to drinking a six-pack of beer a day and occasionally using "amphetamine and IV crank," blamed his shortness of breath on brake pads even though he worked part-time as a car mechanic and started smoking in 1951. The court said details of his filings with trusts are "plainly relevant" to his case.

Rusk's lawyers are with the prominent Novato, Calif. firm of Brayton Purcell, which also represents Kananian's heirs. They call the inconsistencies in Kananian's filings "clerical errors" and say that all the products, including Kent cigarettes, contributed to his cancer. Brayton Purcell, which has won asbestos verdicts of more than $10 million, takes an assembly-line approach to litigation: Lawyers there once filed 5,000 claims in a single day. They filed a typical volley of lawsuits for Kananian after he was diagnosed, including one against Lorillard Tobacco (a unit of Loews Corp.) that is starting to haunt them.  Lorillard argues it's unlikely Kananian got sick from smoking asbestos-tipped Kents, since the company marketed them mostly to women. (A more popular version of the brand, sans asbestos, was launched in the late 1950s.)

In early August Ohio Judge Harry Hanna ordered the release of lawyer e-mails and asbestos-trust filings by Kananian and his lawyers. They don't look good for the plaintiff.

Brayton Purcell, which objected vociferously to Hanna's order, tried to blame lawyers at another law firm, Early Ludwick & Sweeney in New Haven, Conn., for any errors. … Brayton in a Mar. 22 e-mail told Andreas to "immediately brief all personnel … that they are not to 'make up' information to make a claim qualify." Guess they don't make that clear in law school.

Kananian and his heirs won at least $150,000 from the trusts, according to the e-mails, possibly as much as $700,000. His lawyers began submitting "amended" forms, which corrected the errors, after Hanna indicated he would let Lorillard see the originals.

Hanna ruled the conflicting claims could be admitted into evidence in the Lorillard case. He gave the lawyers a choice: Either "you give the money back to the bankruptcy court and tell them, 'Gee, somebody made a mistake here,'" the judge said at a March hearing, or "the jury hears about it." Early Ludwick partner James Early says his firm has never filed an "intentionally false" document.

There is a quick solution for discovering conflicting work histories, which some, like Brickman and Carroll, have proposed: Match up Social Security numbers of claimants across all the trusts. It was just such a matching exercise that uncovered a brewing scandal in Mississippi and Texas, where plaintiff lawyers filed thousands of lawsuits claiming silicosis in workers who had previously sued over asbestosis. Experts say the two diseases almost never occur in the same person.

There are strong financial reasons for keeping the system as it is. The bankruptcy trusts are created by plaintiff lawyers, who negotiate prepackaged bankruptcy deals that relieve companies of their asbestos liabilities while creating a streamlined process for paying claims. The Manville trust has paid out $3.3 billion to settle 660,000 claims so far and still has $1.7 billion in assets to distribute. It got 18,200 new claims last year, up from 14,400 in 2004.

The trusts can be lucrative for the people running them, too. Claims-processing firms charge $5 million a year or more at large trusts. In 2003 a Delaware judge ordered Kenesis Group to disgorge $2.4 million in fees in part because it outsourced claims-processing work to a firm owned by a sometime paralegal with asbestos plaintiff firm Motley Rice.
Legal fees run to hundreds of thousands of dollars a year at big trusts, while trustees and advisers--many of them plaintiff lawyers--can earn $60,000 a year plus $2,000 a day for meetings.

Brickman acknowledges the harm manufacturers did to hundreds of thousands of workers. Plaintiff lawyers "did a good job of running down the conspiracy," he says. "But then the genie escaped from the bottle and they launched into an entrepreneurial scheme."
http://www.forbes.com/forbes/2006/0904/136_print.html

TOLEDO BLADE 

Friday, November 17, 2006

Editorial Letter

Legal setting dictated OC bankruptcy

Your recent editorial regarding Owens Corning's emergence from bankruptcy is partially on point but also ignores the realities of the asbestos litigation.

On one hand, you are correct to point out that OC should not gloat too much about emerging from bankruptcy given the suffering it caused. And Owens Corning hastened its own demise at times. Certainly, the decision to purchase Fibreboard on the assumption that its reserves for its own asbestos litigation would be sufficient was mind-boggling. The one thing everyone knew by the time of that purchase was that every estimate of asbestos liabilities that had ever been made had been underestimated.

I can also tell you as someone who worked for OC's law department through 1992 that internal management of the litigation was characterized by inconsistent decision making at high levels, backstabbing, and poor morale.

However, you are wrong in surmising that bankruptcy might not have been necessary had OC handled the litigation more "forthrightly." In order to handle the massive numbers of cases facing the legal system, many courts altered the usual rules that the legal system plays by. Every time a jurisdiction instituted a novel means of pushing cases through the system, it was at the defendants' expense. Plaintiff attorneys filed thousands and thousands of cases in the courts that treated the plaintiffs most favorably, such as Kanawha County, West Virginia, Madison County, Illinois, Beaumont, Texas, and others.

Given the legal environment, Owens Corning's eventual bankruptcy was inevitable. Only the timing was at issue. The one thing that could have saved the company would have been federal legislation to end the litigation, and Congress simply never cared enough to do anything. If the companies going bankrupt had a higher profile, I suspect legislation would have been enacted.

ROBERT McOMBER
Bowling Green

http://toledoblade.com/apps/pbcs.dll/article?AID=/20061117/OPINION03/611170326/-1/OPINION