Defense Counsel Journal

Department of Justice Combats Asbestos Trust Abuse

Volume 86, No. 1

February 07, 2020

Behrens_Mark_2015_sized Mark A. Behrens

Mark A. Behrens

Mark A. Behrens co-chairs Shook, Hardy & Bacon L.L.P.’s Washington, D.C.-based Public Policy Group and chairs the IADC’s Civil Justice Response Committee. Mark is active in civil justice issues on behalf of business and civil justice organizations, defendants in litigation, and insurers. He is a member of the American Law Institute.
Northrip_William William F. Northrip

William F. Northrip

William F. Northrip is Of Counsel in Shook, Hardy & Bacon L.L.P.’s Appellate Practice Group. He works in the firm’s Chicago office.

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)11 The USTP is the component of the Department of Justice that protects the integrity of the bankruptcy system by overseeing case administration and litigating to enforce the bankruptcy laws. See United States Department of Justice, About the U.S. Trustee Program, available at are taking unprecedented steps to combat a “problematic lack of transparency in the operation and oversight of asbestos trusts.”22 Letters from Hon. Jesse Panuccio, Acting Associate Attorney General of the United States, to Attorneys General of Alabama, Arizona, Arkansas, Georgia, Idaho, Kansas, Louisiana, Missouri, Montana, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, West Virginia, and Wisconsin (Sept. 13, 2018), available at‌1094021/download [hereinafter “DOJ Letters to State AGs”]. 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.”33 Letter from Attorneys General of Alabama, Arizona, Arkansas, Georgia, Idaho, Kansas, Louisiana, Missouri, Montana, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, West Virginia, and Wisconsin to Hon. Jefferson B. Sessions, III, United States Attorney General (Nov. 6, 2017), at 1 [hereinafter “State AGs’ Letter to DOJ”].

The Department and USTP are opposing the creation of new trusts that lack provisions to prevent “fraud, mismanagement, or abuse”44 Statement of Interest on Behalf of the United States of America Regarding Plans of Reorganization for Kaiser Gypsum Company, Inc. and Hanson Permanente Cement, Inc., In re Kaiser Gypsum Co., Inc., No 16-31602 (JCW), at 8 (Bankr. W.D.N.C. Sept 13, 2018), available at‌opa/press-release/file/1093916/download [hereinafter “DOJ Kaiser Gypsum Statement of Interest”]. 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.”55 Objection of the United States Trustee to the Disclosure Statement for the Prenegotiated Plan of Reorganization for Duro Dyne National Corp., In re Duro Dyne Nat’l Corp., No 18-27963 (MBK), at 3 (Bankr. D. N.J. Oct. 15, 2018) [hereinafter “USTP Objection to Duro Dyne Disclosure Statement”]. In addition, the USTP is challenging the appointment of certain future claimants’ representatives in pending bankruptcy proceedings.66 See Objection of the United States Trustee to the Debtors’ Motion for an Order Appointing Lawrence Fitzpatrick as Representative for Future Asbestos Claimants, In re Duro Dyne Nat’l Corp., No 18-27963 (MBK) (Bankr. D. N.J. Oct. 1, 2018), available at‌1096501/download [hereinafter “USTP Objection to Duro Dyne FCR Appointment”]; Notice of Appeal and Statement of Election, In re Duro Dyne Nat’l Corp., No 18-27963 (MBK) (Bankr. D. N.J. Oct. 31, 2018); Amended Objection of the United States Trustee to Debtor’s Motion for an OrderAppointing James L. Patton, Jr., as Legal Representative for Future Asbestos Claimants, In re The FairbanksCo., No. 18-41768-PWB (Bankr. N.D. Ga. Dec. 14, 2018). 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.”77 See Alex Wolf, Asbestos Trusts Come Under DOJ Civil Investigation, Law360, Oct. 5, 2018.

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.”88 Id.

I. 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.99 See Steven J. Carroll et al., Asbestos Litigation 67 (RAND Corp. 2005), available at‌MG162 .pdf. 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.1010 See S. Todd Brown, How Long Is Forever This Time? The Broken Promise of Bankruptcy Trusts, 61 Buff. L. Rev. 537, 537 (2013) (“Section 524(g) of the Bankruptcy Code authorizes the entry of an injunction that channels all of a debtor’s asbestos-related liabilities to a bankruptcy trust, which is established by the debtor to pay all valid current and future asbestos claims.”); U.S. Gov’t Accountability Office, GAO-11-819, Asbestos Injury Compensation: The Role and Administration of Asbestos Trusts, 3 (Sept. 23, 2011) ($36.8 billion in over 60 asbestos trusts as of 2011), available at‌585380.pdf. Each trust reflects a company that exited the tort system in bankruptcy.1111 See William P. Shelley et al., The Need for Further Transparency Between the Tort System and Section 524(g) Asbestos Trusts, 2014 Update – Judicial and Legislative Developments and Other Changes in the Landscape Since 2008, 23 Widener L.J. 675, 675-676 (2014) (asbestos trusts “answer for the tort liabilities of the great majority of the historically most-culpable large manufacturers that exited the tort system through bankruptcy over the past several decades”).

Filing a trust claim is much easier and faster than bringing a lawsuit.1212 See John J. Hare and Daniel J. Ryan, Uncloaking Bankruptcy Trust Filings in Asbestos Litigation: Refuting the Myths About Transparency, 15 Mealey’s Asb. Bankr. Rep. 1, 3 (Apr. 2016) (“Plaintiffs’ lawyers routinely advertise their ability to file trust claims ‘quickly and easily,’ and tell potential clients that paralegals evaluate potential trust claims and undertake the filing process. The evidence also demonstrates that trust claims are paid more quickly than tort claims.”); Dionne Searcy andRob Barry, As Asbestos Claims Rise, So Do Worries About Fraud, Wall St. J., Mar. 11, 2013, at A1 (“Unlike court, where plaintiffs can be cross-examined and evidence scrutinized by a judge, trusts generally require victims or their attorneys to supply basic medical records, work histories and sign forms declaring their truthfulness. The payout is far quicker than a court proceeding and the process is less expensive for attorneys.”). 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.1313 See S. Todd Brown, Bankruptcy Trusts, Transparency and the Future of Asbestos Compensation, 23 Widener L.J. 299, 317-318 (2013). 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.1414 See Deposition of Jared Garelick, Cummings v. General Elec., No. 13-CI-006374, at 34-36 (Jefferson Ky. Cir. Ct. Dec. 14, 2015). After the offer is accepted, payments tend to be made quickly. The U.S. Government Accountability Office estimates that approximately 97-98% of trust claims are processed on an expedited review basis. See U.S. Gov’t Accountability Office, supra note 10, at 20. Only a tiny percentage of claimants seek individual review in the hopes of obtaining more compensation from the trusts. See Brown, supra note 10, 61 Buff. L. Rev. at 554; Deposition of Jared Garelick, at 37-38. Claimants commonly receive multiple trust payments, since each trust operates independently and many workers were exposed to different products.1515 See Lester Brickman, Fraud and Abuse in Mesothelioma Litigation, 88 Tul. L. Rev. 1071, 1078-1079 (2014).

Plaintiffs typically obtain compensation both “from the trusts and through a tort case.”1616 Lloyd Dixon and Geoffrey McGovern, Bankruptcy’s Effect on Product Identification in Asbestos Personal Injury Cases, iii (RAND Corp. 2015), available at In a bankruptcy proceeding involving gasket and packing manufacturer Garlock Sealing Technologies, LLC, a typical mesothelioma plaintiff’s 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.”1717 In re Garlock Sealing Techs., LLC, 504 B.R. 71, 96 (Bankr. W.D.N.C. 2014). 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.”1818 Marc C. Scarcella et al., The Philadelphia Story: Asbestos Litigation, Bankruptcy Trusts and Changes in Exposure Allegations From 1991–2010, 27 Mealey’s Litig. Rep.: Asb., Oct. 10, 2012, at 1, available at Chrysotile is “far less toxic than other forms of asbestos.” In re Garlock, 504 B.R. at 75.

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.1919 See Editorial, The Double-Dipping Legal Scam, Wall St. J., Dec. 25, 2014, at A12. Further, tort plaintiffs have alleged asbestos exposures that are inconsistent with claims later submitted to asbestos trusts.2020 See Brickman, supra note 15, 88 Tul. L. Rev. at 1088; Daniel J. Ryan and John J. Hare, Uncloaking Bankruptcy Trust Filings in Asbestos Litigation: A Survey of Solutions to the Types of Conduct Exposed in Garlock’s Bankruptcy, 15 Mealey’s Asb. Bankr. Rep. 1, 2 (Aug. 2015).

These concerns came to the fore in Garlock’s bankruptcy.2121 See Mt. McKinley Ins. Co. v. Pittsburgh Corning Corp., 2015 WL 4773425, at *5 (W.D. Pa. Aug. 12, 2015) (“The evidence uncovered in the Garlock case arguably demonstrates that asbestos plaintiffs’ law firms acted fraudulently or at least unethically in pursuing asbestos claims in the tort system and the asbestos trust system.”). Historically, Garlock was a relatively small player in the asbestos tort system and “very successful in settling (and rarely trying)” lawsuits filed against it.2222 In re Garlock, 504 B.R. at 73. 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.2323 Id. In this new environment, Garlock faced challenges defending itself because “evidence of plaintiffs’ exposure to other asbestos products often disappeared.”2424 Id. 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).”2525 Id. at 84. The judge concluded that the missing evidence “had the effect of unfairly inflating the recoveries against Garlock.”2626 Id. at 86; see also id. at 94 (stating that the withholding of exposure evidence by asbestos plaintiffs’ lawyers was “widespread and significant”). The judge described several specific examples of plaintiffs and their attorneys withholding exposure evidence from Garlock.2727 See id. at 84-85.

Numerous reports have confirmed that “[w]e are now past the time when [the abuses described in Garlock] can be referred to as mere anomalies.”2828 Peggy L. Ableman, The Garlock Decision Should Be Required Reading for All Trial Court Judges in Asbestos Cases, 37 Am. J. Trial. Advoc. 479, 488 (2014); see also Peter Kelso and Marc Scarcella,The Waiting Game: Delay and Non-Disclosure of Asbestos Trust Claims (U.S. Chamber Inst. for Legal Reform Dec. 2015), available at https://www.instituteforlegalreform‌.com/uploads/sites/1/‌TheWaitingGame_‌Pages.pdf; Mark A. Behrens, Disconnects and Double-Dipping: The Case for Asbestos Bankruptcy Trust Transparency in Virginia (U.S. Chamber Inst. for Legal Reform 2016), available at‌uploads/sites/1/DisconnectsDoubleDipPaper_‌WebReady.pdf; Mark A. Behrens et al., Illinois Asbestos Trust Transparency: The Need to Integrate Asbestos Trust Disclosures with the Illinois Tort System (Ill. Civil Justice League 2017), available at‌Illinois-Asbestos-Trust-Transparency-Report.pdf.

For instance, a 2015 study of almost 1,850 mesothelioma lawsuits resolved by industrial product manufacturer Crane Co. from 2007 through 2011 found a “similar pattern of systematic suppression of trust disclosures [as] was documented in the Garlock bankruptcy.”2929 Peggy Ableman et al., A Look Behind the Curtain: Public Release of Garlock Bankruptcy Discovery Confirms Widespread Pattern of Evidentiary Abuse Against Crane Co., 30 Mealey’s Litig. Rep.: Asb. 1, 1 (Nov. 4, 2015), available at‌Litigation%2011.4.15.pdf. In cases where Crane Co. was a codefendant with Garlock, 80% of trust claim forms or related exposures “were not disclosed by plaintiffs or their law firms to Crane in the underlying tort proceedings.”3030 Id.

A November 2017 bankruptcy filing by Bestwall LLC, an affiliate of Georgia-Pacific, LLC, described additional instances where “asbestos plaintiffs, at a minimum, inconsistently and selectively disclosed exposure evidence to support or strengthen their cases against non-bankrupt companies.”3131 Informational Brief of Bestwall LLC, In re Bestwall LLC, 2017 WL 4988527, at 20 (Bankr. W.D.N.C. Nov. 2, 2017).

Most recently, the United States Department of Justice has said that secrecy regarding trust filings 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.”3232 DOJ Kaiser Gypsum Statement of Interest, supra note 4 at 8.

At the state level, legislatures are providing asbestos defendants with greater access to asbestos trust claim information.3333 See Mark A. Behrens, Asbestos Trust Transparency, 87 Fordham L. Rev. 107 (2018). Trust claims materials contain important exposure history information, providing defendants with a tool to identify fraudulent or exaggerated exposure claims and establish that trust-related exposures were partly or entirely responsible for a plaintiff’s harm. Fifteen states now have statutes requiring plaintiffs to file and disclose asbestos trust claims before trial.3434 See Ariz. Rev. Stat. § 12-782; Iowa Code §§ 686A.1–.9; Kan. Stat. Ann. §§ 60-4912–.4918; Mich. Code Ann. § 600.3010–.3016; Miss. Code §§ 11-67-1 to -15; N.C. Gen. Stat. §§ 1A-1, Rule 26; 8C-1, Rule 415; and 1-75.12; N.D. Cent. Code §§ 32-46.1-01 to -05; Ohio Rev. CodeAnn. §§ 2307.951–.954; Okla. Stat. tit. 76,§§ 81–89; S.D. Codified Laws §§ 21-66-1 to -11; Tenn. Code §§ 29-34-601 to -609; Tex. Civ. Prac. & Rem. Code Ann. §§ 90.051–.058; Utah Code §§ 78B-6-2001 to -2010; W. Va. Code §§ 55-7F-1 to -11; Wis. Stat. § 802.025; see also In re Mass. State Court Asbestos Litig., Amended Pre-Trial Order No. 9, ¶ XIII(C)(7)(o) (Mass. Super. Ct. Middlesex Cnty. June 27, 2012).

II. State AGs Urge DOJ to Act

In November 2017, twenty state Attorneys General wrote the United States Attorney General to express their concern with “the potential abuse and mismanagement of asbestos bankruptcy trusts.”3535 State AGs’ Letter to DOJ, supra note 3, at 1. They noted that the Director of the USTP testified before Congress that the lack of an “independent policeman” for asbestos trusts creates a “risk of abuse.”3636 Id They also mentioned the Garlock bankruptcy court judge’s finding of a “startling pattern of misrepresentation” in asbestos claims.3737 Id. (quoting In re Garlock, 504 B.R. at 86). The state   Attorneys General said that they had “repeatedly attempted to obtain documents from the trusts” to investigate the “potential for fraud and abuse,” but were stonewalled.3838 Id. at 2. The Attorneys General asked the Department of Justice to commit federal resources to “ensure that no fraud is being committed.”3939 Id. at 1.

The Washington Legal Foundation, among others, also called on the Department to act.4040 See Glenn G. Lammi, Cleaning Up the Asbestos Litigation Mess: A Role for the Department of Justice?,, Apr. 2, 2018.

III. The Department Responds

On September 13, 2018, the Department wrote the state Attorneys General and told them that it “agrees that the United States would be well served by a commitment of Department resources” to address “potential fraud, abuse, and mismanagement in asbestos trusts.”4141 DOJ Letters to State AGs, supra note 2, at 1.

The Department said, “henceforth the United States will object to plans for asbestos trusts that fail to include critical information on how asbestos claims will be evaluated, paid, and reported or that lack sufficient safeguards to prevent fraud and abuse and to ensure that the interests of the United States will be protected.”4242 Id. at 2.

In addition, the Department will “investigate conduct related to asbestos trusts that is illegal under federal law.”4343 Id.

IV. Statement of Interest Filed

The same day the Department wrote the state attorneys general, it filed perhaps its first ever Statement of Interest in an asbestos-related bankruptcy proceeding.4444 DOJ Kaiser Gypsum Statement of Interest, supra note 4. The Department told a North Carolina federal bankruptcy court that plans for creation of a trust to resolve the asbestos-related liabilities of Kaiser Gypsum Company and Hanson Permanente Cement, Inc. are “lack[ing] sufficient safeguards to prevent fraud, abuse, or mismanagement and to ensure that the interests of the United States will be protected."4545 Id. at 2. The Department said that it was filing the Statement to allow the parties to work to avoid “the need for the filing of objections.”4646 Id.

A. Medicare-Related Provisions and Disclosure

The Department said that trust procedures “should clearly identify who will be responsible for [Medicare Secondary Payer Statute (MSP)] reporting as well as ensure that those parties have access to information sufficient to accurately report payments to [the Centers for Medicare and Medicaid Services (CMS)].”4747 Id. at 12. The Department noted the “strong interest” of the United States in “ensuring that the provisions of the Trust are consistent with the parties’ reporting and reimbursement obligations under the MSP statute.”4848 Id. at 5. To ensure this, the trust should have procedures to educate claimants of their potential reimbursement obligations.4949 Id. at 13.

B. Addressing Fraud and Abuse

The Department added that, “because Medicare will only be reimbursed if trust funds remain available to pay legitimate asbestos claimants, the United States has a strong interest” in ensuring that any trust that emerges from the bankruptcy should include “adequate safeguards so that it does not become depleted through fraud and mismanagement.”5050 Id. at 5. The Department detailed several concerns, which are discussed below.

1. Claim Transparency

The Department said it may object to “any proposed Trust procedures that would permit claimants to file claims and receive payments in complete anonymity and in a manner that may prevent any meaningful audit of the trust claims and payments.”5151 Id. at 12. The Department said that trust claim filings should be public, “as would be the case if those claims were pursued in a state court or litigated through the bankruptcy claims process.”5252 Id. at 13.

2. Administrative Costs and Attorneys’ Fees

The interests of the United States may be impaired if excessive administrative costs or excessive contingency fees reduce the amount paid to claimants, thus diluting the value of potential Medicare reimbursements. The Department may object if claimants’ attorneys are able to charge the same contingency fee to file uncontested trust claims that they receive in tort cases.5353 See id. at 14.

3. Trust Governance

The Department is seeking disclosure of any fiduciaries who will administer the trust post-confirmation. The Department believes that fiduciaries should be subject to “vigorous conflicts review and disinterestedness standards,” because trust operations “tainted by conflicts of interest can result in dilution of funds flowing to claimants and under-reimbursement to the Medicare Trust Fund.”5454 Id. at 14-15.

RAND has reported that individuals and law firms that play a lead role in multiple trust advisory committees (TAC) also represent claimants against the trusts.5555 Lloyd Dixon et al., Asbestos Bankruptcy Trusts: An Overview of Trust Structure and Activity with Detailed Reports on the Largest Trusts xvi (Rand Corp. 2010), available at‌rand/pubs/technical_reports/2010/RAND_‌TR872.pdf. RAND explains the importance of these TACs:

Trusts are governed by trustees, who operate the trust for the benefit of claimants. Because trusts often have hundreds of thousands of beneficiaries who cannot directly control the trustees, committees are set up to represent the interests of current and future claimants. Trustees are required to obtain the consent of the trust advisory committee (TAC) (representing current claimants) and the future claimants’ representative (FCR) (representing future claimants) before major actions by the trust can be taken (such as revising trust distribution procedures, or TDPs).5656 Id.; see also Marc C. Scarcella and Peter R. Kelso,Asbestos Bankruptcy Trusts: A 2013 Overview of Trust Assets, Compensation & Governance, 12 Mealey’s Asb. Bankr. Rep. 33, 43 (December 11, 2013) (“Subsequent to the establishment of the trust following plan confirmation, it is often the representatives of asbestos claimants who assume the leadership roles in advising the management of trust assets and distribution of claim payments over time.”).

4. Payment of Non-Meritorious Claims

The Department seeks to ensure that trust assets are not dissipated through payments to persons making fraudulent claims or who otherwise would not have had viable claims if the debtor had remained in the tort system.5757 See DOJ Kaiser Gypsum Statement of Interest, supra note 4, at 15.

The Department may object to any trust provision that “proposes to make distributions to claimants who cannot credibly demonstrate significant exposure to the Debtors’ products.”5858 Id.

The Department also may object to trust provisions that “appear to shelter claimants from the consequences of misconduct in other proceedings.”5959 Id. at 16.

Many trust distribution procedures include language that “expressly authorizes claimants to assert exposure histories that are inconsistent with representations made in the tort system.”6060 Brown, supra note 10, 61 Buff. L. Rev. at 562.   For example, Owens Corning/ Fibreboard TDP ¶ 5.7(b)(3) states that evidence submitted in support of trust claims “is for the sole benefit of the PI Trust, not third parties or defendants in the tort system.”6161 Owens Corning/Fibreboard Asbestos Personal Injury Trust Distribution Procedures, Revised Dec. 2, 2015, available at http://www.ocfbasbestostrust‌.com/wp-content/uploads/2015/12/OC-FB.-Amended-TDP.12.2.2015-C0463534x9DB18.pdf. Owens Corning/ Fibreboard TDP ¶ 5.7(b)(3) further states:

The PI Trust has no need for, and therefore claimants are not required to furnish the PI Trust with evidence of, exposure to specific asbestos products other than those for which OC or Fibreboard has legal responsibility…. Similarly, failure to identify OC or Fibreboard products in the claimant’s underlying tort action, or to other bankruptcy trusts, does not preclude the claimant from recovering from the PI Trust, provided the claimant otherwise satisfies the medical and exposure requirements of this TDP.6262 Id. (emphasis added).

Cardozo Law School Professor Lester Brickman has explained that this language “vitiates any consequences of failing to identify product exposures in responses to interrogatories, depositions, and trial testimony in tort cases.”6363 Brickman, supra note 15, 88 Tul. L. Rev. at 1106; see also Marc C. Scarcella and Peter R. Kelso, A Reorganized Mess: The Current State of the Asbestos Bankruptcy Trust System, 14 Mealey’s Asb. Bankr. Rep. 1, 14 (Feb. 2015) (“the trusts do not seem to be concerned with inconsistent allegations that may be made in the underlying tort case as evident by inclusion of ‘Sole Benefit’ clauses in many TDPs”).

The Department’s position is that a claimant should not be permitted to deny exposure to a debtor’s products in tort litigation then take a different position in a trust claim.6464 See DOJ Kaiser Gypsum Statement of Interest, supra note 4, at 16. Further, claimants should be “advised of the effect of prior inconsistent statements made in other asbestos proceedings and any previous denial of any exposure to products for which the Debtors are legally liable.”6565 Id.

In addition, the Department may object to trust provisions “which unreasonably restrict the Trust from cooperating in discovery or which permit claimants to strategically withdraw and refile Trust claims.”6666 Id.

Many TDPs have been modified post-confirmation to include a “confidentiality” provision.6767 See Asbestos Claims Legislation, Hearing Before the Subcommittee on Courts, Commercialand Administrative Law of the Committee on the Judiciary, House of Representatives, 112th Cong. (May 10, 2012) (statement of Leigh Ann Schell), available at 2012 WLNR 9840045. For example, the Owens Corning/Fibreboard Asbestos TDP requires a “valid subpoena . . . issued by the Bankruptcy Court” for the trust to produce claims information.6868 Owens Corning/Fibreboard Asbestos Personal Injury Trust Distribution Procedures, supra note 61. Further, the trustee is ordered to “take all necessary and appropriate steps” to fight the subpoena.6969 Id. TDP “confidentiality” provisions are contrary to the majority rule in the civil courts, where trust claim submissions are routinely held to be discoverable.

TDP provisions that allow the withdrawal and refiling of trust claims appear “intended to suppress evidence of plaintiffs’ exposures to the products of reorganized companies so as to inflate the value of tort claims….”7070 Furthering Asbestos Claim Transparency Act, Hearing Before the Subcommittee on Regulatory Reform, Commercial and Antitrust Law of the Committee on the Judiciary, House of Representatives, 114th Cong. (Feb. 4, 2015) (statement of Prof. Lester Brickman), available at 2015 WLNR 3578295.

As Professor Brickman has explained:

Most TDPs have a three-year statute of limitations requiring that trust claims be filed within three years of diagnosis of an asbestos-related disease or, if later, within three years after the ‘initial claims filing date’ or the date of the asbestos-related death. This allows plaintiffs to file and resolve many tort actions before filing trust claims. In the event that plaintiffs are unable to resolve their tort claims within the allowed time period, most TDPs . . . allow a claimant to file a trust claim to meet the applicable statute of limitations first and then to withdraw the claim ‘at any time . . . and file another claim subsequently without affecting the status of the claim for statute of limitations purposes.’”7171 Id.

Further, trust TDPS often permit a claimant to ask the trust to defer processing a claim for up to three years without affecting the status of the claim for statute of limitations purposes.7272 See id.

The impact of these provisions is that “a plaintiff suing in the tort system can have filed trust claims, then withdrawn or deferred them, completed the tort suits during which they testified that they had not filed any trust claims, and then immediately refile or revive the trust claims asserting product exposures that controvert the plaintiff’s testimony in the tort action.”7373 Id.

Lastly, the Department asserts that the trusts “should not be permitted to make payment to claimants whose claims would be time barred in the tort system.”7474 DOJ Kaiser Gypsum Statement of Interest, supra n. 4, at 16-17.

V. Objections to FCR Appointments

On September 26, 2018, the USTP filed its first-ever objection to the usually routine appointment of a future claimants’ representative (FCR) in an asbestos-related bankruptcy proceeding.7575 See U.S. Dept. of Justice, Press Release 18-1256, 2018 WL 4613912, U.S. Trustee Program Files Objection to the Appointment of the Debtor’s Proposed Future Claimants’ Representative for Future Asbestos Claimants in Duro Dyne National Corp., No. 18-27963 (Bankr. D.N.J.) (Sept. 26, 2018); Alison Frankel, DOJ Intensifies Attack on Asbestos Trusts, Files Opposition in Prepackaged Duro Dyne Bankruptcy, 40 No. 26 Westlaw J. Asbestos 5 (Oct. 12, 2018). The USTP noted that the proposed FCR (Lawrence Fitzpatrick, a longtime FCR in asbestos bankruptcy proceedings) in Duro Dyne National Corp.’s bankruptcy had been selected by the debtors and an ad hoc committee of certain current asbestos plaintiffs: “the very parties that he will be required to negotiate with or litigate against and who retained and compensated him prior to bankruptcy.”7676 USTP Objection to Duro Dyne FCR Appointment, supra note 6, at 2.

The USTP described the appointment of an FCR as “one of the most consequential orders”7777 Id. that is entered by a court in an asbestos-related bankruptcy. The FCR’s role is “to protect the rights of absent parties.”7878 Id. at 5.

For that reason, the USTP told a New Jersey federal bankruptcy court that “the FCR’s appointment and selection should be transparent, he should be free from conflict, and he should be held to the highest possible standard of independence.”7979 Id.

The USTP said, “it is unclear whether [Mr. Fitzpatrick] actually acted as an independent fiduciary” in the “pre-negotiated” Duro Dyne chapter 11 cases or “is capable of acting as an independent fiduciary during these cases.”8080 See USTP Objection to Duro Dyne Disclosure Statement, supra note 5, at 2 n.3.

Without an effective FCR, the USTP explained, a debtor and present claimants may reach a settlement that pays inflated compensation to selected present claimants in return for a lower overall contribution by the debtor into a trust. As trust assets are depleted, future claimants receive smaller payments. The USTP said that this “appears to have happened in various asbestos plans negotiated without the full participation of an effective FCR.”8181 USTP Objection to Duro Dyne FCR Appointment, supra note 6, at 9.

Over the USTP’s objection, the bankruptcy court approved the appointment of Mr. Fitzpatrick as FCR in a minute order issued in October  2018.8282 Judge Rejects U.S. Trustee’s Objections, Names Future Claimants’ Representative, 18 Mealey’s Asb. Bankr. Rep. 10 (Oct. 17, 2018); Alex Wolf, Asbestos Trust Rep Beats DOJ Objection in Duro Dyne Ch. 11, Law360, Oct. 16, 2018. The USTP is appealing.8383 SeeU.S. Trustee Appeals Appointment of FCR for Duro Dyne Chapter 11, 2018-4762 Mealey’s Daily News Update 8 (Nov. 5, 2018); Notice of Appeal and Statementof Election, In re Duro Dyne Nat’l Corp., No 18-27963 (MBK) (Bankr. D.N.J. Oct. 31, 2018).

On December 14, 2018, the USTP filed a similar objection in a Georgia federal bankruptcy court, challenging another veteran claimants’ representative and asbestos trust trustee, James L. Patton, Jr.8484 See Amended Objection of the United States Trustee to Debtor’s Motion for an Order Appointing James L. Patton, Jr., as Legal Representative for Future Asbestos Claimants, In re The Fairbanks Co., No. 18-41768-PWB (Bankr. N.D. Ga. Dec. 14, 2018). The UTSP argues that Mr. Patton’s “role as an asbestos trust fiduciary, coupled with the law firm’s frequent representation of fiduciaries in asbestos cases, illustrates the closed network of professionals who administer asbestos cases and recycle many of the same trust terms that omit important anti-fraud provisions and cost controls that the [USTP] deems essential….”8585 Id. at 3 n. 3. The USPT asked the court to deny Mr. Patton’s appointment as FCR, defer naming an FCR for at least thirty days, and authorize additional candidates to apply to the court for the position or be nominated by interested parties for the court’s consideration. Alternatively, if the court considers the request to appoint Mr. Patton, the USTP argues, further disclosures should be required with respect to the circumstances of Mr. Patton’s selection.

VI. Objection to Disclosure Statement

In October 2018, the USTP challenged another aspect of the Duro Dyne chapter 11 cases, filing an objection to the disclosure statement for the “pre-negotiated” plan of reorganization.8686 See USTP Objection to Duro Dyne Disclosure Statement, supra note 5. The USTP argued that the disclosure statement could not be approved because it “does not disclose or explain the Plan’s lack of safeguards against fraud or abuse, nor does it explain or justify the fact that, under the Plan, numerous claims may be paid that would not have been viable and that have not historically been paid in the tort system—thereby subjecting all other claimants to a risk that their claims will be diluted.”8787 Id. at 3-4. The USTP also argued that the Plan described in the disclosure statement is not confirmable because “it fails to include adequate safeguards against fraud and abuse.”8888 Id. at 4.

The USTP raised many of the same objections to the proposed plan that the Department raised in its Statement of Interest in the Kaiser Gypsum bankruptcy proceeding.

A. Claim Secrecy

The plan in the Duro Dyne chapter 11 cases contains “sole benefit” and “confidentiality” provisions that “appear to prohibit the Trust from disclosing whether any particular individual has filed a claim, the factual allegations on which the claim was based, and whether the claim was paid.”8989 Id. at 9. The USTP said these “far-reaching secrecy provisions” allow claimants to continue the “very gamesmanship and discovery abuse criticized by the court in Garlock.”9090 Id.

B. Illusory Evidentiary Requirements

The USTP also said that the plan contains illusory evidentiary requirements that will facilitate payments to claimants without actual asbestos illness.9191 Id. at 11-12. Furthermore claimants will be paid even if their injuries appear to be mostly the fault of others.9292 See id. at 11.

As a consequence of the plan’s “extremely relaxed criteria,”9393 Id. at 11. the USTP argued, the trust “will be flooded with claims far out of proportion to the Debtors’ historic asbestos liability, which the [t]rust may be obligated to pay notwithstanding the fact that many of those claims would not have been compensable on the tort system.”9494 Id. at 12.

C. Facilitation of Litigation Misconduct

The USTP said the plan “reward[s] dishonesty” to the detriment of deserving claimants.9595 Id. at 13. The USTP highlighted a TDP provision that allows payment to claimants who fail to identify exposure to the debtors’ products in underlying tort litigation.

The USTP also mentioned a provision in the plan that allows claimants to withdraw and refile claims without giving rise to any statute of limitations defense. The USTP said the provision can “easily be exploited by a dishonest attorney, who could strategically withdraw and refile a [t]rust claim in order to avoid disclosing the existence of that claim in discovery in non-[t]rust proceedings.”9696 Id. at 13-14.

D. Excessive Attorney Fees and Administrative Costs

The USTP objected to the TDP’s lack of any cap on attorneys’ fees for trust claims processed under an expedited review process.9797 See id. at 14.

Without a cap, the USTP said, many claimants’ attorneys “will presumably receive the same contingency fee in these uncontested matters that they would have received from a contested verdict in a civil trial, which may unfairly dilute the actual compensation being paid to asbestos victims.”9898 Id.

E. Failure to Identify TAC Members

The USTP objected to plan’s failure to identify TAC members and the apparent lack of any requirement that any of these fiduciaries will be subject to the “vigorous conflicts review and disclosure that govern the selection of estate fiduciaries during a bankruptcy case.”9999 Id. at 15.

F. Absence of Independent Audit Requirement

Finally, the USTP said it is “concerning” that the Trust Agreement and TDPs do not provide for a “mandatory, independent audit of the Trust and the Trust fiduciaries.”100100 Id. at 16.

G. Future Objections

In November 2018, the bankruptcy court judge approved an amended disclosure statement and set a February 8, 2019, deadline for any objections to confirmation of the plan of reorganization or proposed modifications to the plan.101101 See Amended Order (I) Approving Second Amended Disclosure Statement as Providing Adequate Information Within the Meaning of Section 1125(A) of the Bankruptcy Code; (II) Establishing Procedures for Solicitation and Tabulation of Votes on Amended Plan of Reorganization; (III) Approving the Form of Ballots; (IV) Scheduling a Hearing on Confirmation of the Plan; (V) Approving the Form, Manner and Scope of Mailed and Published Notices of the Time Fixed to (A) Vote on the Amended Plan, and (B) File Objections to Confirmation of the Amended Plan; and (VI) Granting Related Relief, In re Duro Dyne Nat’l Corp., No 18-27963 (MBK) (Bankr. D.N.J. Nov. 20, 2018); see also Duro Dyne’s Disclosure Statement Approved by Bankruptcy Judge, 2018-4785 Mealey’s Daily News Update 8 (Nov. 21, 2018).

VII.  CIDs Sent to Trusts

In the fall of 2018, the Department of Justice also sent civil investigative demands to asbestos trusts to investigate “whether the Medicare Program has been reimbursed in accordance with the Medicare Secondary Payer Act.”102102 See Alex Wolf, Asbestos Trusts Come Under DOJ Civil Investigation, Law360, Oct. 5, 2018.

VIII. Conclusion

The Department of Justice and its USTP are taking unprecedented steps to “increase the transparency of asbestos trusts and protect the interests of legitimate claimants and the United States.”103103 U.S. Dept. of Justice, Press Release 18-1187, Justice Department Files Statement of Interest in New Asbestos Trust Proposal, at 2 (Sept. 13, 2018) available at The Department and USTP have challenged the creation of trusts that lack provisions to safeguard against fraud and abuse. The USTP is challenging the appointments of certain future claimants’ representatives as too conflicted to exercise independence. In addition, the Department sent civil investigative demand letters to asbestos trusts to investigate potential False Claims Act violations regarding Medicare reimbursement issues. These actions are a welcome development and signal that, at least under the present Administration, the Department will likely take a larger and more active role in the asbestos trust system.

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