Greater Transparency re: Asbestos trust claims soon to be ordered in Los Angeles

The Superior Court for the County of Los Angeles for many years now has handled a busy asbestos docket with numerous cases proceeding through trial and many more resolved before a verdict is rendered.  The court handles cases brought by many prominent plaintiff firms with national presences.  It is therefore interesting to see this court follow the lead of other courts and various legislative bodies in preparing to mandate greater transparency regarding claims made to bankruptcy trusts.

The asbestos docket in Los Angeles is managed by Judge Emilie Elias.  Judge Elias has conducted a series of meetings/hearings regarding the proper scope of discovery regarding claims made to bankruptcy trusts with argument and briefing submitted on behalf of many defendants and several prominent plaintiff firms. The court recently issued an order regarding its tentative decision regarding these issues.

Attached is a copy of that recent order.  The court has requested comments to this proposal on or before March 20, 2015.  In general, this order is extremely favorable to Defendants. The proposed order makes the following significant additions to the discovery requirements in all cases in the Los Angeles asbestos docket:

    1. An authorization from plaintiff for release of claimant information submitted to an asbestos bankruptcy trust;
    2. Additional interrogatories included within the “standard” discovery.  The existing discovery included 4 questions regarding claims to bankruptcy trusts.  These are now augmented by 6 more questions requiring extensive information regarding exposure to the products of, or on the premises of, dozens of identified trusts.  Further the new order will require that such responses be updated not later than 5 days before trial, regardless of whether a claim has been made or will be made to such bankrupt entity.
    3. Broad orders requiring the disclosure of claims and any other communications with all trusts. In particular the court finds “all documents sent to, received from, shown to, exchanged with, or otherwise disclosed to any established or pending asbestos trust funds — for any purpose” to be discoverable. The order indicates that “Plaintiffs shall produce” all such materials;
    4. The production of documents ordered by the court further includes “ballots, questionnaires, submitted or filed forms, summaries, claims, ‘placeholder’ claims, request for extensions, requests for deferrals, all supporting documentation, all related communications, and all documents filed … pursuant to Rule 2019 of the Federal Rules of Bankruptcy Procedure.”   This order is meant to require production of some of the required and verified disclosures that must be made by any “groups, committees and entities” that represent “multiple creditors” in a Ch.  9 or 11 proceeding. In past asbestos-related bankruptcies, these filings were not generally accessible to the public as they would be in a normal bankruptcy.  Garlock had made attempts to obtain such documents, but the bankruptcy courts had  rejected those attempts. (Therefore Judge Elias’ order specifically ordering the production of these may be the first discovery order to specifically mention them in this context.)
    5. The court also requires production of signed affidavits or declarations that “have been circulated to someone other than plaintiff and plaintiff’s counsel” as they are not privileged.  Thus any declaration sent to a trust must be disclosed.

The court has indicated that these changes, if finalized, will be applicable to all cases filed after Feb. 1, 2015 and will be applicable for only a 6 month trial period, but the expiration of the trial period will not sunset the order unless further modified.  Defendants have filed a brief seeking clarification of this limited period of application, and perhaps other components of the order.  The plaintiffs’ bar has consistently shown a great deal of interest in this order and it is likely that they will file additional papers and perhaps even seek appellate review. However, in the meantime, this prospective order is good news for the defense seeking further transparency on this issue.

Record of Garlock Settlement History to be Unsealed

On October 16, 2014, U.S. Bankruptcy Judge George Hodges ordered the unsealing of an extensive record relating to past settlements of Garlock Sealing Technologies.  One report of this ruling can be found here, although as of October 22, the formal order has not been posted online.  Documents unsealed as a result of this order are expected to be available around the week of November 24, 2014.  The ruling was made in response to numerous motions to seal certain information, filed by claimants and by Garlock in In re Garlock Sealing Technologies.

After months of contentious discovery, Hodges previously had conducted a 23-day trial concerning the basis for the plaintiffs’ claims related to Garlock’s gasket and sealing products. Hodges found, among other things, that the liability evidence against Garlock reportedly showed that Garlock’s nonfriable products had little or no contribution to asbestos-related diseases.  Hodges also found that by concealing evidence and delaying filing of claims against entities that manufactured more friable products, plaintiffs were able to obtain higher judgments and extract inflated settlements from Garlock.

Hodges  overruled the objections of the claimants, who argued that the disclosure of this information violated their privacy.  While all parties agreed to protect some confidentiality, it was reported that once a claimant chose to file a public lawsuit, their identities in relation to those claims were not entitled to protection.  Similarly, settlement information Garlock submitted in the estimation trial was no longer entitled to protection from public scrutiny, because Garlock submitted this information voluntarily, thereby waiving work product or attorney-client privileges.

These documents will likely provide a rare behind-the-scenes view into common settlement practices used to resolve massive volumes of claims.  Hodges’ detailed ruling has shown how the litigation of individual cases can be used for financial gain unrelated to legal liability or fault. It remains to be seen whether our legal system can introduce sufficient transparency between the asbestos trust system and the civil litigation to prevent these abuses from spreading.

Transparency Still Needed to Resolve Asbestos Claims on the Merits

Gordon & Rees Philadelphia partners William Shelley, Jacob Cohn, and Joseph Arnold recently wrote a follow-up article, “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 (2014).  The new article looks over the history of discovery of information arising from asbestos trust claims since their initial article in 2008.  Based on what has been uncovered in the last seven years, the authors explain the continuing need for complete disclosure of exposure and setoff information in asbestos cases, even though it would seem the issue should have been resolved.

In “The Need for Transparency Between the Tort System and Section 524(g) Asbestos Trusts,” 17 Norton J. of Bankr. L. & Practice 257 (2008), Shelley, Cohn, and Arnold described the need for increased transparency between the tort system and the asbestos bankruptcy system.  The 2008 article addressed how defendants in the tort system were facing increased claims and increased settlement demands following the bankruptcy of major players in the asbestos manufacturing business, even though the goal of bankruptcy was that trusts would be formed to continue to compensate claimants on behalf of these entities.  However, back in 2008 there were signs of manipulation of this system for financial gain, as illustrated by the case of Kananian v. Lorillard Tobacco Co.  In the Kananian case, the trial judge found persistent manipulation of evidence between civil cases and trust claims, which resulted in the revocation of pro hac vice privileges and findings of intentional and deceptive manipulation of the trust and discovery processes.  Based on this case, the authors urged for the implementation of procedures to ensure full discovery to avoid further such cases.

The 2014 trial findings by the Garlock court, seven years later, have shown that Shelley, Cohn, and Arnold were seeing the beginning, not the end, of this trend of manipulation.  Kananian was not an isolated instance.  After a three-month trial, Bankruptcy Judge George Hodges concluded that gasket manufacturer Garlock was resolving claims to avoid transaction costs, which were inflated by widespread concealment of facts by plaintiffs’ attorneys.  This concealment caused Garlock to resolve cases at settlement values far out of proportion to the connection, if any, between Garlock’s gaskets and disease causation.

Shelley et al.’s new article documents many other instances around the country in addition to the findings of the Garlock court, where evidence of similar practices have come to light.  Other trial judges have seen similar instances of concealment of evidence supporting bankruptcy claims in cases pending in their courtrooms.  See Peggy Abelman, “A Case Study from a Judicial Perspective: How Fairness & Integrity in Asbestos Tort Litigation Can Be Undermined by Lack of Access to Bankruptcy Trust Claims,” 88 Tul. L. Rev. 1185 (2014).

The article also outlines attempts by the trusts to block discovery by insurers, who have requested disclosure of information to ensure the hundreds of millions of dollars placed into trusts for asbestos claimants are actually paid to legitimate claimants.  Finally, the article outlines the failure of arguments by the trusts that their status as creations of the federal bankruptcy courts somehow shields them from the discovery process.

The fundamental premise laid down in Volkswagen of America v. Superior Court remains unchanged.  These claims, and all information that would support these claims, is discoverable.  Unfortunately, recent history has shown that asbestos plaintiffs have not disclosed this information fully and fairly.

Asbestos trusts pay billions of dollars each year in settlement of asbestos claimants.  When cases settle without full disclosure of facts, the legal system produces inconsistent results.  Cases are resolved based on avoidance of legal costs, rather than factual or legal liability.  The resolution of claims to avoid transaction costs out of proportion with actual fault violates the fundamental principle of our legal system that defendants should pay only when they are actually responsible.  Payments to avoid legal transaction costs do not serve the same goals as when claims are resolved to compensate for actual liability.

Unless we take these historical lessons to heart, allowing unchecked discovery abuse may lead to future bankruptcies of otherwise solvent companies.  The civil tort system should approximate the outcome the parties would reach in the absence of transaction costs; that is, payment only on a showing of actual liability, based on full disclosure.  The historical facts that caused exposures are known to plaintiffs and their lawyers, and all such facts should be part of required disclosures early in any asbestos case.  Further, there must be penalties for late disclosure.  Efficient and full discovery in the tort system of all sources of exposure is the only way to ensure that claims filed in the tort system reflect fair compensation, and preserve assets for future claimants.

An Enticement to Double Recovery?

CALIFORNIA COURT REFUSES TO ALLOW POST-VERDICT SETOFFS OF POTENTIAL BANKRUPTCY TRUST CLAIMS

Evidence of claims by plaintiffs to asbestos bankruptcy trusts is critical to the defense of any asbestos case. In California, for example, Volkswagen of America Inc. v. Superior Court (Rusk) (2006) 139 Cal.App.4th 1481, highlighted the importance of the discovery of such claims for purposes of setoffs and establishing a defendant’s proportional share of damages.

Volkswagen held that “[s]ince each party who shares responsibility for any asbestos-related disease from which a claimant suffers is liable only for its proportionate share of noneconomic damages, each will understandably be concerned to determine whether the claimant has overstated its share of responsibility.  . . . The number of days and the conditions under which a claimant was exposed to the asbestos-containing materials of one responsible party bears directly upon the extent of the liability of the others. Each therefore will have very good reason to compare what a claimant has said in this regard in supporting a claim against another responsible party.”

Perhaps recognizing the uphill battle they face in protecting such claims from disclosure in discovery, plaintiffs in the litigation have modified their tactics. Instead of making claims to the asbestos bankruptcy trusts prior to or during litigation, many plaintiffs now wait until after their civil case has settled or gone to trial to make these claims. The purpose is deception and double recovery. If no claims have been made, there is nothing to discover, and therefore nothing to offset against a plaintiff’s verdict. So what is a defendant to do?

Paulus v. Crane Co., No. B246505 (2/21/14) considered an appeal that presented two issues, one of which was whether the trial court erred in not reducing the damages awarded against defendant Crane Co. to account for settlements plaintiffs could obtain from asbestos bankruptcy trusts, but had not at the time of trial. The trial court’s decision was affirmed.

Crane argued that California Code of Civil Procedure section 877 and the court’s broad equitable powers gave it the authority to offset potential claims. In just a single page of analysis in the 15-page decision, Paulus focused on the language of 877 restricting setoffs to settlements given “before verdict or judgment,” and further found that the court’s equitable powers did not give it the power to modify a judgment for a settlement that “may or may not be sought.”

Of particular concern was the court’s rejection of Crane’s argument that refusing a setoff in this case was tantamount to permitting a double recovery, finding that “[i]f a later settlement subsequently allows plaintiff a double recovery, that does not retroactively make the instant judgment improper.” (emphasis in original) Paulus also rejected Crane’s argument that plaintiff’s failure to obtain available settlements constituted failure to mitigate damages, holding that the duty to mitigate is a matter to be decided by the fact finder at trial, and “not something to be raised on new evidence after judgment.”

A step backward from Volkswagen?

The abbreviated discussion of the bankruptcy trust issue in Paulus masks the significance of its holding, which is effectively that so long as a plaintiff waits to make a bankruptcy trust claim, he may double recover at will.  Although Paulus may be technically correct that California Code of Civil Procedure 877 says “before judgment,” it gives short shrift to the court’s broad equitable powers, giving a ruling that is effectively form over substance and frustrates the Volkswagen court’s policy aims of ensuring that plaintiffs are not permitted double recovery.

Lessons from Paulus

After Paulus, a defendant would be well advised to look carefully at a plaintiff’s work history in a pending action, and proffer appropriate evidence to the trier of fact relating to claims that could be made but were not.

This is not the first time courts of appeal have failed to award offsets to defendants in asbestos cases, where defendants have not had evidence about future settlements in asbestos cases. See Garcia v. Duro-Dyne 156 Cal.App.4th 92 (2007). Recent efforts by defendants have shown that pursuit of discovery about exposure to bankrupt entities’ products during the case has led to inconsistent claiming patterns.

Defendants can and should make efforts to obtain their own affirmative evidence, rather than rely on the “goodwill” of the court on what might happen. This evidence can support affirmative defenses such as mitigation of damages, or affirmatively support claims for offset, and make it harder for trial courts and courts of appeal to turn a blind eye to these practices.

More Fallout From Garlock Ruling Finding That Asbestos Plaintiff Counsel Withhold and “Change” Evidence

ASBESTOS TRUSTS FIND “PATTERN” OF SUBMITTING UNRELIABLE EVIDENCE TO SUPPORT TRUST CLAIMS

Audits of several asbestos bankruptcy trusts have revealed that a plaintiffs’ attorney “has submitted unreliable evidence to each of the Trusts and … has done so in a pattern.” Case 2:12-ap-02182-BB; Doc. 198 at pp.17-18. Through his counsel, attorney Michael Mandelbrot stipulated to sanctions including that he may file no new claims with any of the trusts, that he must cease activity on pending claims and must substitute out as attorney, and that he receive no “payments from any of these trusts for any reason.” He has since claimed that he stipulated under duress, including threat of criminal liability by (as well as incompetence of) his own counsel, and that he has discovered “evidence of criminal conduct” by other plaintiff counsel serving as trustees of asbestos bankruptcy trusts.

This audit finding, the “it’s not just me it’s others” defense, and the possibility of sanctions comes fresh on the heels of the ruling in In re Garlock Sealing Technologies that found widespread differences between what several different asbestos plaintiffs’ counsel represented to bankruptcy trusts and what they represented in civil court proceedings. The Thorpe and Western Asbestos audits and anticipated ruling may, and should, spur further efforts for greater transparency in the asbestos bankruptcy trust process.

The audits covered some 5,900 claims. The specifics of the “pattern” of “unreliable evidence” are unclear, because the bulk of the trusts’ evidence was submitted under seal. In Garlock, exposure evidence relevant to claims against bankrupt entities with trusts was suppressed in each and every one of the 15 asbestos injury lawsuits in which post-verdict investigation was conducted. In Garlock too, much of the underlying evidence was filed under seal. The press and several defendants have moved to unseal the evidence in Garlock, and a similar move seems likely  in Thorpe.

These rulings contradict pronouncements by asbestos plaintiffs’ counsel that the system is working fine and does not need greater transparency, such as this statement recently presented by plaintiffs’ attorney Elihu Inselbuch (who represents many plaintiff committees in asbestos bankruptcies) to Congress: “[D]espite trying to find instances of widespread fraud and abuse, there is none. Defendants have no evidence to support their assertions of fraud by plaintiffs. The Kananian case, on which they so heavily rely, was an isolated incident, remedied by a state court.” Not so “isolated” as all that – as the Garlock and now Thorpe cases demonstrate.

Similarly, on the day Congress passed Federal legislation to mandate transparency in the trust claiming process, one plaintiffs’ attorney posted the following statement: “Multiple independent studies prove any fraud is negligible.”  No citations to these “independent studies” are provided.

It is no longer a question of whether there is fraud in the asbestos trust system, which is beset with other problems as well. Now the question is how widespread it is, and what to do about it, on both a case-by-case and systemic basis.