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

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

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

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

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

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

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

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

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

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

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

 

To Spoil or Not to Spoil? Why Speculation Carried the Day for the Defense Against Plaintiff’s Spoliation Claims

This holiday season has been good to the asbestos defense bar.  On December 16, 2014, the Illinois Fourth District Appellate Court decided a case which emphasizes the need for a plaintiff to properly prove causation by non-speculative evidence.  In the process, the court rejected a “sham” spoliation of evidence claim, finding that defendant’s spoliation of evidence was immaterial in light of the witness testimony presented by the plaintiff.  This is the first published decision in this State pertaining to spoliation.

In Holloway v. Sprinkmann Sons Corp., 2014 IL App (4th) 131118, plaintiff Carol Holloway brought a negligence action against defendant Sprinkmann, an alleged asbestos insulation supplier, alleging that  defendant delivered and installed asbestos-containing insulation at plaintiff’s jobsite  while she worked as at the Eureka vacuum cleaner factory in Bloomington, IL.  As an alternative theory, plaintiff argued that Sprinkmann wrongfully destroyed evidence that plaintiff needed to prove her case.  Plaintiff specifically alleged that Sprinkmann destroyed records indicating the types of insulation it sold and to whom the insulation was sold.  Destroying this evidence, plaintiff argued, prevented her from demonstrating which specific asbestos-containing products were sold and delivered by Sprinkmann to her jobsites.

At trial, plaintiff called Arthur B. Kremers, Sprinkmann’s former owner.  When Kremers began working for Sprinkmann in 1969, old records dating back to the 1950s were kept in the basement of the company’s Peoria office.  These records showed the brand and manufacturer of each product defendant had sold and delivered, as well as which employees had installed each product.  Apparently, as early as 1957, Sprinkmann employees began making claims for asbestos-related disease, relying on the basement records to show which brands of insulation the employees had installed.Sometime in the 1980s, however, Kremers shipped the basement records to a recycling center because “defendant was running out of space.”  The destruction of the records, according to Kremers, was consistent with Sprinkmann’s document retention policy, under which sales contracts and invoices were to be retained for only three years.

Crying foul over the alleged “spoliation” of evidence, plaintiff called co-worker witness Ellis Carlton and read into evidence an affidavit of another deceased witness, Wesley Klein.  This evidence was uncontroverted, and – as the documents themselves would have done – established that asbestos-containing insulation supplied by defendant Sprinkmann was present at plaintiff’s jobsite and installed by it.

The jury nonetheless returned a general verdict in defendant’s favor, prompting plaintiff to file a motion for a new trial, which was denied by the trial court.  On appeal, plaintiff argued that the jury might have found for plaintiff if it had had the benefit of reviewing the destroyed records establishing that the products were present at plaintiff’s worksite.

The appellate court affirmed the trial court’s judgment.  In doing so, it focused on the fact that the uncontradicted evidence of Klein and Carlton already established that the products were present at the facility.  To the extent that the “spoliated” records would have done nothing more than supply the same information, the jury could have reasonably concluded that the destroyed records would have made no difference in plaintiff’s case.   Thus, the “spoliated” records were no consequence.  For this reason, the court found that plaintiff failed to meet her burden of proving that, but for the destruction of the records, she would have had a reasonable probability of prevailing. The court then expressly addressed the key issue in this case:  that “the real problem in plaintiff’s case was causation, which the records would not have addressed.”  Indeed, the court hammered home the fact that “all plaintiff offered in the trial was speculation that her asbestosis resulted from repair work on the pipe-covering insulation in the Eureka plan, although she never saw any repair work being done on the insulation and there was no other evidence placing her near any such repair work.”

Plaintiff attempted to substantiate her exposure using the testimony medical expert Dr. Arthur Frank in conjunction with her own testimony that she was “in all the different parts of the plant for one reason or another.”   Dr. Frank espoused the “re-entrainment” theory, testifying  that individuals who had never worked hands-on with an asbestos-containing product could still be exposed to asbestos fibers because these fibers drifted around the factory and could be carried a long way by air currents.  According to Dr. Frank, all asbestos-containing products, including steam pipe insulation, released such fibers.  In fact, simply the “passage of time” would release these fibers.  On the other hand, Frank also conceded that a person needed to cross a threshold of a certain amount of exposure before getting asbestosis; Frank could not clarify what the threshold was, though he insisted that, for someone with asbestosis, “each and every exposure to any asbestos product had to be regarded as a cause.”

The court, however, was unpersuaded by plaintiff’s interpretation of her own testimony.  Specifically, the court noted that saying that plaintiff was “in all the different parts of the plant for one reason or another” is not quite the same as saying she “worked all over the plant.”  For argument’s sake, the court assumed that Dr. Frank’s theories were correct, that when asbestos-containing insulation had to be repaired, it created asbestos dust, and that such dust stayed around for a long time and wafted through the air.  However, the court concluded that Frank’s testimony was ultimately irrelevant, as there was no evidence that the buildings in the Eureka plant shared the same air, nor was there any evidence presented suggesting that the buildings in the plant shared a common ventilation system.  Plaintiff could therefore not clearly connect the allegedlyomnipresent “asbestos dust”  to her own inhalation.  Even if she had, the court pointed out problems with the testimony of plaintiff’s “expert,” noting that Frank’s testimony provided no solid, non-speculative evidence that the amount of asbestos dust breathed in by plaintiff under such circumstances would be sufficient to cause asbestosis.

Holloway v. Sprinkmann places great importance on a plaintiff’s burden to show causation with non-speculative evidence.  For plaintiffs like Holloway, certain expert testimony may seem like a home run (eg., the “re-entrainment” theory), but, at the very heart of the matter, such evidence is nothing more than conjecture. In rejecting plaintiff’s spoliation argument, the Sprinkmann court further demonstrated that it will not permit “red herring” issues to distract the court from a lack of admissible evidence of causal links.  This decision from the Illinois appellate court provides further support for defendants seeking to attack speculative evidence, without fear that extrinsic issues that have no bearing on their ultimate liability will alter the result.

Ten, Twenty, Thirty, Forty Years: The Implications of Senate Bill 2221 on Asbestos Litigation and the Construction Statute of Repose

Although recent years have seen many states, including Texas, enact tort reforms to substantially limit asbestos liabilities, the Illinois House of Representatives has just taken Illinois’ first steps in the opposite direction.  On December 3, 2014, the House passed Senate Bill 2221, eliminating a long-standing and critical defense for asbestos defendants enshrined in Illinois’ construction statute of repose, 735 ILCS 5/13-214 through legislative amendment.  The House’s amendment adds a new subsection (f), which exempts actions from the statute which are based on “personal injury, disability, disease, or death resulting from the discharge into the environment of any pollutant, including any waste, hazardous substance, irritant, or contaminant (including, but not limited to, smoke, vapor, soot, fumes, acids, alkalis, asbestos, toxic or corrosive chemicals, radioactive waste, or mine tailings).”

The construction statute of repose currently provides a strong defense for many asbestos litigants, and bars legal actions brought more than 10 years after an act or omission arising from the “design, planning, supervision, observation or management of construction, or construction of an improvement to real property.”  735 ILCS 5/13-214(b); Witham v. Whiting Corp., 975 F.2d 1342, 1344 (7th Cir. 1992).  The statute of repose can not only improve a defendant’s chances at dismissal, but it can also enhance that party’s effective bargaining power.

While it is not clear that the bill will actually become law, the implications of passage are enormous and far-reaching.  Opponents of the bill argue that broadly eliminating the ten year statute for asbestos claims unreasonably expands liability and encourages an anti-business mentality.[1]  Indeed, the bill may create nearly unlimited liability given that exposures to asbestos frequently date back as many as fifty or sixty years. This will not only increase the potential liabilities of current Illinois asbestos defendants, but will doubtlessly draw previously untouchable parties – many of whom have not been in business for decades – into the litigation.

Illinois Republicans are united in their opposition to the bill, and it would likely face a veto by Republican Governor Bruce Rauner should it pass the Senate.  However, with the number of Democrats in the legislature, there is a strong change of overriding any veto.  Illinois may therefore be just a few votes away from earning the dubious “honor” of being the preferred jurisdiction to litigate stale asbestos claims.

[1] “Illinois House OKs more time for asbestos lawsuits.”  The Associated Press, Dec. 2, 2014.