California Court Rewrites Opinion on Asbestos Bankruptcy Trust Payments

As a result of Gordon & Rees’ amicus efforts (through California defense counsel organizations), along with those of other amici, the Court of Appeal issued an order modifying its opinion in Hernandezcueva v. E.F. Brady Co., Inc. (B251933) to delete a holding that asbestos bankruptcy trusts were subject to the “collateral source rule.” This is an important win for asbestos defendants in California.

Johns-Manville_BuildingAs we recently reported, the original version of the opinion held that asbestos bankruptcy trusts were “collateral sources,” meaning that the often substantial recoveries plaintiffs obtain from such trusts could not offset judgments against defendants. The order modifying the opinion deletes the reference to the collateral source rule entirely. It also refers to asbestos bankruptcy trusts as “joint tortfeasors” for purposes of offsetting judgments, and cites several cases holding that recoveries from asbestos bankruptcy trusts are explicitly approved as offsetting a judgment. Equally importantly, the reference to the trusts as “joint tortfeasors” confirms and continues asbestos defendants’ ability to ask juries to assign shares of liability to bankrupt manufacturers.

The other problems we noted with the opinion remain, and California Supreme Court review is still possible.

California Decision Rejects Longstanding Contractor Immunity from Strict Liability, Calls Asbestos Bankruptcy Trusts “Collateral Sources”

A recent California decision has held for the first time that a contractor may be, in at least some circumstances, subject to strict liability for products used on the project. This ruling will likely expand the pool of defendants in future asbestos cases, and will apply outside the asbestos arena as well.

Traditionally, construction contractors who use or install a product are not subject to strict product liability if it turns out the product is defective. Contractors may be liable in negligence, but that is harder for plaintiffs to prove and subject to defenses unavailable in strict liability claims.

Hernandezcueva v. E.F. Brady Co. (B251933) reversed a nonsuit and held that E.F. Brady, a drywall and plastering contractor, could be subject to strict products liability despite its status as a contractor rather than a manufacturer or distributor of any product.

Home_Construction__Romolo_Tavani_-_Fotolia_largeDefendant E.F. Brady worked as the drywall subcontractor on a large construction project in the early 1970s. E.F. Brady’s bid for the contract included both labor and materials, and evidence was presented that E.F. Brady used asbestos-containing drywall joint compounds on the jobsite. The plaintiff testified that he cleaned up dusty drywall debris created by E.F. Brady employees. The trial court granted a nonsuit on the strict liability cause of action but allowed the negligence cause of action and request for punitive damages to go to the jury, which found for the defense.

The Court of Appeal reversed the nonsuit, holding that the jury should have been allowed to determine whether E.F. Brady’s supply of the allegedly defective asbestos-containing joint compound which the plaintiff encountered caused his injury. This is distinguished from whether E.F. Brady’s conduct as a contractor caused the plaintiff’s injury, which is normally how contractors are implicated in asbestos lawsuits—for example, by allegedly failing to take precautions to protect others from asbestos exposure. The court held that under the facts of the case, E.F. Brady was not “just a contractor.” Rather, E.F. Brady played a “significant” role in the stream of commerce of the asbestos-containing joint compound, because E.F. Brady:

  1. “Always” provided materials as part of its drywall contract;
  2. Structured its time-and-materials contract to recoup the costs of materials (even “without necessarily ensuring a profit regarding those costs,” in part because the costs were “substantial, as they ordinarily constituted 25 percent of the amount of a bid”);
  3. Had a relationship with manufacturers of asbestos-containing drywall products “sufficient to command the personal attention of [their] representatives to E.F. Brady’s concerns regarding the products” that placed it “‘in a position to exert pressure on the manufacturer’ to improve product safety;” and
  4. Was a large commercial operation and so was “capable of bearing the costs of compensating for injuries due to the products.”

Notably, the evidence for relationship with manufacturers was only that manufacturer reps came on site and advised as to the suitability of their products for the applications involved. There was no evidence related to conversations about changing any product formulation.

Contractors providing services have always been considered outside the stream of commerce of products supplied incidentally to services. The “primary objective or essence of the transaction” between a customer and a contractor is the provision of services, not obtaining a product, and California courts have long recognized that this fact places contractors outside the stream of commerce of products they provide under their contracts. (E.g., Monte Vista Development Corp. v. Superior Court (1991) 226 Cal.App.3d 1681 [tiling subcontractor not strictly liable for defective soap dish]; Pierson v. Sharp Memorial Hospital, Inc. (1989) 216 Cal.App.3d 340[hospital not strictly liable for defective carpet in patient room]; Silverhart v. Mount Zion Hospital (1971) 20 Cal.App.3d 1022 [hospital not strictly liable for defective surgical needle used during operation].) But under this decision, if the acquisition of a product was a “significant” aspect of the transaction, a contractor could fall into the realm of strict liability.

Take the hospital example. In Silverhart v. Mount Zion Hospital, the Court of Appeal held that a hospital was not strictly liable for an allegedly defective surgical needle used during the course of an operation performed on the plaintiff patient. In that case, the needle was “necessary” to the operation, but was still a “tool” rather than a “material.” But what if the patient wanted a pacemaker implanted? Under Hernandezcueva, perhaps the hospital could be strictly liable—a potential sea change in medical device liability law. A hospital probably “always” provides the pacemaker as part of the contract to install a pacemaker; it probably recoups the cost of the pacemaker in the contract to perform the surgery, but probably doesn’t try to make a profit; and the pacemaker manufacturer’s representatives probably visit the hospital all the time. All the requisite facts are there to impose strict liability on the hospital under Hernandezcueva—but it directly conflicts with Hector v. Cedars-Sinai Medical Center (1986) 180 Cal.App.3d 493, which held that a hospital could not be held strictly liable for defects in an implanted pacemaker.

Hernandezcueva brings within its reasoning virtually all businesses which provide products along with or “incidental to” the services they provide to customers. The court found that because E.F. Brady “derived a considerable benefit from supplying the products, as that was essential to obtaining its subcontracting work,” it was liable as a supplier of products. Every handyman who brings his own materials to a customer’s home is potentially a “seller” of those materials under this decision, as is the multinational general contractor who supplies any materials whatsoever for a subcontractor’s use, and everyone in between—as long as there is an allegation that it was “essential” to the business transaction that the materials in question be provided.

An additional possible effect of the Hernandezcueva decision is that contractors and other “non-traditional” defendants may now be considered part of the “chain of distribution” of the materials they provide incidental to their services. This means that the “single product rule” prevents these defendants from arguing that liability should be assigned elsewhere in the chain. A manufacturer, distributor, and retailer of a “single product” may not attempt to assign fault to one another under California law. If a contractor, and indeed any type of defendant who supplies an allegedly defective product along with a service, is now within the chain of distribution of those products, the several liability rule of California’s Proposition 51 will not apply and they will all be jointly and severally liable for damages stemming from the use of the product.

In a discussion of a tangential point, the Hernandezcueva court also held that payments to a plaintiff from asbestos bankruptcy trusts fall “under the collateral source rule, which bars a defendant from shielding itself from liability for injuries by identifying a source of compensation that is wholly independent of the defendant.” There are at least two potential negative effects of holding that asbestos bankruptcy trusts are “collateral sources,” like health or life insurance. One, that defendants are not entitled to offset any damages by showing payments to a plaintiff by an asbestos bankruptcy trust. Two, that bankrupt entities should no longer be placed on the verdict form for apportionment of responsibility. This is a potentially very negative ruling, because plaintiffs can often receive hundreds of thousands of dollars from bankruptcy trusts which offset eventual judgments against defendants, and defendants are presently able to shift responsibility to bankrupt entities in appropriate cases. The holding is not necessary to the decision, was on a point raised by none of the parties (but rather in response to a collateral argument made in an amicus brief), and is dicta, but it should concern all asbestos defendants nonetheless. Full disclosure: Gordon & Rees’s Don Willenburg co-authored an amicus letter brief asking the court to eliminate or modify this portion of the decision.

Because the Hernandezcueva decision appears to be in direct conflict with longstanding California law regarding both strict product liability of contractors and asbestos bankruptcy trust payments as collateral sources, depublication or California Supreme Court review are possible prospects. If the decision stands, it will significantly expand the universe of strict liability defendants, in both asbestos and non-asbestos cases, and could seriously damage asbestos defendants’ ability to reduce future judgments.

Los Angeles Asbestos Court Demands Bankruptcy Trust Transparency

As previously reported, Judge Elias in Los Angeles had indicated an intention to bring to conclusion a long standing discussion with counsel regarding the extent of disclosure regarding asbestos bankruptcy trusts that plaintiffs will be obliged to provide when responding to “General Order” discovery requests for all asbestos cases in Los Angeles.  Despite receiving supplemental papers from the plaintiff bar urging her to alter her position, Judge Elias has now issued a formal order regarding such discovery. It varies little from the proposed order Judge Elias floated previously, and might be the first order requiring a signed authorization from plaintiff for the release of claims submitted to bankruptcy trusts.


The order was entered retroactively and made applicable to all cases filed on or after February 1, 15, 2015.  Though it is to remain in force for a “trial period” of 6 months, it will stay in effect thereafter “unless amended, vacated or otherwise superseded by further order.” Therefore, as of now, the standard discovery in Los Angeles will include:

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 requires 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.         The order broadly requires 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, and requires that “Plaintiffs shall produce” all such materials.

4.         The documents that must be produced 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 rejected those attempts. Judge Elias’ order specifically ordering the production of these may be the first discovery order to specifically mention Rule 2019 disclosures 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.

No doubt the plaintiffs’ bar is considering its possible responses.  Defense counsel in other jurisdictions in California are already seeking ways to expand upon this. In particular, the presiding asbestos judges in San Francisco and Alameda Counties will be urged to implement similar orders.

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.


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.

Wisconsin Gubernatorial Candidate Supporting Repeal of Wisconsin’s Asbestos Bankruptcy Trust Transparency Act

Wisconsin gubernatorial candidate Mary Burke has announced that, if she translates last week’s primary victory into a general election victory this fall, she will repeal Act 154, Wisconsin’s new asbestos bankruptcy trust transparency law. Burke supports the proposed Assembly bill to repeal Act 154, which was signed by Wisconsin Gov. Scott Walker in March 2014.  More than 100,000 Wisconsin veterans and various lobbyists opposed the enactment of Act 154, and apparently the fight is not yet over.

Act 154, which applies to lawsuits filed on or after March 29, 2014, requires asbestos plaintiffs to disclose all potential and pending asbestos trust claims via sworn statements, and sets guidelines for the substance and effects of the required disclosure.  The plaintiff’s sworn statement must include “the name, address, and contact information for the asbestos trust, the amount claimed by the plaintiff, the date that the plaintiff filed the claim, the disposition of the claim and whether there has been a request to defer, delay, suspend, or toll the claim against the asbestos trust.”

To enhance transparency, the Act allows this information to be used in court:  “Trust claims materials and trust governance documents are admissible in evidence.  No claims of privilege apply to trust claims materials or trust governance documents.”  The Act broadly defines “trust claims materials” as all documents and information relevant or related to a pending or potential claim against an asbestos trust. These materials include claims forms and supplementary materials, proofs of claim, affidavits, depositions and trial testimony, work history, and medical and health records.  The plaintiff is obligated to supplement the information and materials provided within 30 days after filing an additional claim or receiving additional information or documents related to any asbestos trust claim.

In addition, under the Act, the defendants may identify additional asbestos bankruptcy trusts that the defendants reasonably believe the plaintiff should file claims with, even if these trusts are not identified by the plaintiff.  Upon motion of the defendants with supporting documentation, the court may order the plaintiff to file claims against defense-identified asbestos trusts.

Further, the Act provides that trust documents may be used at trial “to support a jury finding that the plaintiff may have been exposed to products for which the trust was established to provide compensation and that such exposure may be a substantial factor in causing the plaintiff’s injury that is at issue in the action.”

The Act also governs trial verdicts and the plaintiff’s ability to collect damages.  For a verdict where the defendant is negligent, the plaintiff may not collect any amount of damages until after the plaintiff assigns to the defendant all rights and claims against asbestos trusts.

Wisconsin’s Act 154 is thus a model for increased transparency between the bankruptcy and civil systems.  That it faces possible repeal threatens that transparency, without providing any fairer compensation to injured workers.

To read more about asbestos bankruptcy trusts, see prior posts on this blog:

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?


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.

National Trends Driving Asbestos Litigation in 2013-2014 (1 of 3): Decrease in Non-Impairment Filings

First in a series. Subsequent posts will cover lung cancer filings and “target” defendants.

Generally, as a result of judicial and legislative reforms, plaintiffs’ lawyers have moved away from mass screenings and filing of claims on behalf of unimpaired or non-malignancy plaintiffs in asbestos litigation. Rather, many of these unimpaired cases are being moved through the less rigorously reviewed channels of asbestos bankruptcy trusts that provide relatively little oversight and have more than $36.8 billion in assets available.

Recently, following publicity of bankruptcy trust abuses, there is a move toward tightening those procedures and requiring disclosures of the bankruptcy claims to ensure consistency with the parallel cases pending in tort actions. Still, the number of non-malignancy filings in the tort system continues to decrease.

As most of the active cases consist of more “expensive” malignancies, it is not surprising that according to a recent report from NERA Economic Consulting, 2011 saw a 75 percent increase in average dollars per resolved claims from 2010. In comparison, the rate of increase from 2009 to 2010 was only 31 percent. NERA found that despite the 75 percent increase in payment per resolved claims, there was no similar dramatic increase in claim filings. In fact, filings have stabilized over the past five years, with approximately 52,000 new cases filed yearly. Though additional data has not yet been made available for subsequent years, it is generally acknowledged that this trend appears to be continuing.

As the backlog of non-malignancy claims clear throughout the country, increases in amounts paid on claims are expected to level out over the next two or three years. However, the total amount paid to resolve future claims is expected to increase as the number of lung cancer and mesothelioma cases continue to rise.