On The Case

DOJ files statement of interest in asbestos bankruptcy, escalates engagement in private cases

(Reuters) - The Justice Department filed what appears to be its first-ever statement of interest in an asbestos company’s bankruptcy on Thursday, asserting its concern that Chapter 11 reorganization plans to establish a trust for asbestos plaintiffs suing Kaiser Gypsum do not include adequate safeguards against fraud and mismanagement.

“With today’s statement of interest, the Department sends a clear message that we will not tolerate fraudulent conduct that cheats asbestos victims and the United States,” said Acting Associate AG Jesse Panuccio in a press release announcing the filing.

There is no evidence, of course, that anyone has defrauded a Kaiser Gypsum asbestos trust - for the simple reason that the trust doesn’t yet exist. Kaiser, its insurer and representatives of current and future asbestos plaintiffs filed a joint plan of reorganization in July that would channel asbestos claims into a trust. More than a hundred companies have undergone similar restructurings since 1994, when Congress amended bankruptcy laws to help asbestos defendants cabin off liability in personal injury suits.

Since then, the handling of asbestos trust claims has become a bugaboo for tort reformers, who claim plaintiffs' lawyers routinely file fraudulent and duplicative demands, looting trusts at the expense of future asbestos victims. Congressional Republicans perennially introduce legislation to impose restrictions on trust claims, though the bills have never passed. The U.S. Chamber of Commerce and its Institute of Legal Reform put out their latest report just last March, asserting that asbestos trusts – which have paid out $15 billion and still contain $25 billion – spend little money policing fraudulent claims and are likely to run out of money before all legitimate future plaintiffs get paid.

DOJ’s statement in the Kaiser Gypsum case preaches the tort reform gospel. “In recent years, both courts and researchers have noted a growing number of concerns with the operations of many of these trusts,” the statement said, citing a 2016 Chamber report and a 2010 study by the RAND Institute for Civil Justice. “The United States submits this statement to advise the court of its concern that payments to legitimate asbestos claimants could be diluted through fraud, mismanagement or abuse. The United States has a strong interest in ensuring that the processes of this court are not used to facilitate fraud and abuse in other asbestos-related proceedings.”

The Justice Department filing is also peppered with references to a 2014 ruling, In Re Garlock by the same judge who is overseeing the Kaiser Gypsum Chapter 11, U.S. Bankruptcy Judge George Hodges of Asheville, North Carolina. In the Garlock case, Judge Hodges held a full-blown evidentiary hearing as part of the process of estimating the company’s liability to asbestos plaintiffs. In the 15 previously-settled suits the judge examined, he found “a startling pattern of misrepresentation,” in which plaintiffs’ lawyers allegedly withheld evidence that their clients were exposed to asbestos products from other companies. (To be clear, the hearing in the Garlock bankruptcy didn’t involve allegedly fraudulent claims against Garlock in litigation, not against any then prospective trust.)

DOJ said in Thursday’s filing in the Kaiser Gypsum Chapter 11 that it wants to be sure Judge Hodges does not approve a reorganization plan in which the trust does not have clear guidelines for evaluating and reporting claims and for detecting fraud and mismanagement. The Justice Department said it is registering its concern now, rather than waiting to object to an approved plan of reorganization, to give Kaiser Gypsum and asbestos plaintiffs time to address DOJ’s points. In the press release accompanying the filing, the Justice Department mentioned that it just happens to have received a letter from 19 state attorneys general, raising yet more concerns about asbestos trusts.

The Justice Department seems to be anticipating a challenge to its standing to get involved in the Kaiser Gypsum bankruptcy. You may recall that DOJ filed a landmark statement of interest earlier this year in a New Jersey class action, arguing that the proposed settlement should not be approved. The class action bar read that filing as a signal that this Justice Department intends to scrutinize proposed settlements – of which it receives notice under the Class Action Fairness Act – more rigorously than previous administrations. In Chapter 11, the Office of the U.S. Trustee, which is part of the Justice Department, typically represents the interests of the government in private bankruptcy cases. But the DOJ statement in the Kaiser Gypsum bankruptcy was signed by Justice Department lawyers in Washington and Charlotte, North Carolina, not by the U.S. trustee assigned to the case.

DOJ said it has standing because the federal government is entitled to reimbursement of Medicare payments to trust claimants. “The United States has a strong interest in ensuring that the trust operates in a transparent manner and complies with its obligations under the (Medicare) statute; that claimants are informed of their potential obligation to reimburse the Medicare program; that the trust’s assets are preserved to the greatest extent possible to pay the claims of legitimate asbestos victims; and that trust assets are not dissipated through payment of fraudulent claims, excessive professional fees, or mismanagement,” the filing said. Justice cited a statute that permits any interested party to be heard in bankruptcy cases as well as a law that permits DOJ “to attend to the interests of the United States in any case pending in a federal court.”

I reached out to Kaiser Gypsum’s lawyers at Jones Day, asbestos plaintiffs’ counsel at Caplin & Drysdale and future claimants’ lawyers at Young Conaway Stargatt & Taylor to ask about the DOJ statement of interest. None got back to me.

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