On The Case

DOJ intensifies attack on asbestos trusts, files opposition in prepackaged Duro Dyne bankruptcy

(Reuters) - Jeffrey Prol of Lowenstein Sandler spent two years negotiating a deal to get his client, the sheet metal manufacturer Duro Dyne, in and out of Chapter 11 bankruptcy as quickly as possible. The company has exposure to about 1,000 asbestos plaintiffs, Prol said, but is otherwise healthy. So Prol began talks with Caplin & Drysdale, which represents an ad hoc committee of plaintiffs’ firms with asbestos claims against Duro Dyne, about establishing a trust to cabin off asbestos liability.

The company and the committee recognized they’d also have to account for the interests of people who may yet file asbestos claims so they brought in Lawrence Fitzpatrick, a highly-credentialed lawyer who has represented future claimants in an array of asbestos bankruptcies.

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Between them, the lawyers reached an agreement to establish an asbestos trust funded with at least $10.5 million in cash, a $13.5 million note and rights to Duro Dyne’s asbestos insurance coverage. On Sept. 11, Duro Dyne filed its prepackaged Chapter 11 in federal bankruptcy court in New Jersey. “We wanted to get in and get out,” Prol said.

The U.S. Justice Department had other plans.

On Wednesday, the DOJ, acting through the U.S. trustee’s office, filed an objection to Duro Dyne’s motion to appoint Fitzpatrick as the official representative of future asbestos claimants. In its press release announcing the filing – a first of its kind – the Justice Department said it was concerned about Fitzpatrick’s “apparent conflicts of interest and close connections with lawyers representing current claimants,” even though it was the company that moved for his appointment.

DOJ’s brief elaborated the argument: “The debtors would have the court quickly approve the selection of (a future claims representative) who was vetted and selected by the very parties he will supposedly be negotiating against,” the brief said. “Although Mr. Fitzpatrick undoubtedly has significant experience in asbestos cases, those very same past and current engagements give rise to numerous connections and potential conflicts that have neither been fully disclosed nor investigated.”

The DOJ brief called for U.S. Bankruptcy Court Judge Michael Kaplan of Trenton to investigate Fitzpatrick’s involvement in the negotiations preceding the Chapter 11 filing, his relationships with plaintiffs’ lawyers and his financial interest in serving the trust that will be created in the proposed plan of reorganization. The tone of the brief, quite frankly, is accusatory. DOJ contends that the burden lies with Duro Dyne to prove Fitzpatrick is not conflicted and is capable of serving as an independent fiduciary.

The filing is more evidence that this Justice Department has asbestos trusts in its sites. Earlier this month, you’ll recall, the Justice Department filed what is apparently its first-ever statement of interest in the Chapter 11 bankruptcy of a company proposing the establishment of a trust for asbestos claimants.

In that case, Kaiser Gypsum, DOJ argued that the company and a committee of asbestos plaintiffs didn’t build in sufficient safeguards to prevent fraudulent claims against the trust. Its brief echoed years of tort reform allegations that asbestos trusts – which have already doled out about $15 billion to purported victims and still contain $25 billion, according to a March 2018 report by the U.S. Chamber of Commerce’s Institute for Legal Reform – are rife with abuse and end up funneling unwarranted compensation to plaintiffs’ lawyers, at the expense of current and future legitimate victims.

DOJ’s brief in the Duro Dyne case is a different vehicle but travels the same terrain. Lawrence Fitzpatrick, the proposed future claimants representative whose appointment DOJ opposes, declined to comment on the filing and asbestos claimants; committee counsel James Wehner of Caplin & Drysdale didn’t respond to a phone message. But Duro Dyne counsel Prol told me that DOJ’s targeting sends the wrong message. The company and its asbestos creditors, he said, brought Fitzpatrick into negotiations because of his impeccable record and deep experience with asbestos trusts like the one Duro has proposed. DOJ claims that very experience should provoke an inquiry into the lawyer’s conflicts. “Follow that logic and that means a future claims rep can only do the job once,” Prol said. “I hear their concerns, but attacking the futures rep, I don’t think is the answer.”

Prol said DOJ warned the company about its new determination to police asbestos trusts. But he contends that discouraging repeat players will hurt companies trying to negotiate pre-packaged bankruptcies to minimize the disruption to their businesses. It’s notable, he said, that the U.S. trustee’s office has never previously objected to a future claims representative selected by a bankrupt company and asbestos claimants. (Debtors’ insurers have occasionally raised objections, Prol said, but courts have overruled them.)

Prol also said it’s not clear from the DOJ brief exactly what process or standards the Justice Department wants to impose for the selections of future claims representatives. And that uncertainty, he said, could add time and expense to the corporate bankruptcy process.

DOJ’s new engagement with asbestos trusts is exactly what the business lobby has been demanding for years. But sometimes, as the old saying goes, you have to be careful what you wish for.