On The Case

In latest attack on asbestos trusts, DOJ tries (again) to block lawyer for future claimants

(Reuters) - James Patton, the chairman of Young Conaway Stargatt & Taylor, has spent the past 30 years working on asbestos bankruptcies and restructurings. In particular, Patton and his firm specialize in representing the interests of future asbestos victims – people who will someday develop asbestos-related illness but don’t yet know it – when companies establish special trusts to cabin off their ongoing exposure to asbestos claims. Young Conaway has served either as the future claims representative or as counsel to the future claim representative in the Chapter 11 restructurings of more than two dozen companies with asbestos liability in the past 20 years.

The Justice Department smells a rat in that record.

On Monday, DOJ announced that it had filed an objection to a motion by the Fairbanks Company to appoint Patton to represent future claimants in a Chapter 11 case in federal bankruptcy court in Rome, Georgia. The DOJ filing – the latest Justice Department maneuver in its recent campaign against alleged abuse in the administration of megabillion-dollar asbestos trusts – argued that Patton and his law firm have a long record of participation in the creation of asbestos trusts that failed to include “anti-fraud protections and safeguards against mismanagement and inflated professional fees.”

Want more On the Case? Listen to the On the Case podcast.

The government’s filing posited that Patton and Young Conaway are part of a “closed network of professionals who administer asbestos cases and recycle many of the same trust terms that omit important anti-fraud provisions and cost controls that the United States Trustee Program deems essential.” DOJ’s press release elaborated on that theme, quoting Principal Deputy Associate Attorney General Jesse Panuccio on the dangers of repeat players in asbestos bankruptcies. “In recent years, there have been credible allegations — and at least one court has found evidence — of misrepresentation, mismanagement and abuse in the asbestos trust system,” Panuccio said. “A significant contributing factor is the failure of courts to appoint independent future claimants’ representatives who are free from conflicts of interest, including conflicts caused by their involvement in other asbestos trusts.”

DOJ wants U.S. Bankruptcy Judge Paul Bonapfel of Rome, Georgia, to open up the appointment process to allow candidates without previous connections to any of the parties to apply to represent the future claimants. At the very least, Justice said, Judge Bonapfel should require Patton to disclose all of his and Young Conaway’s entanglements with other lawyers and professionals involved in asbestos trust administration, including plaintiffs’ lawyers who represent current asbestos claimants. The judge must not appoint Patton, according to the government, unless he can explain why he is not conflicted as a result of Young Conaway’s work for other asbestos trusts.

“Because the funding of most trusts is fixed, conflicts may arise when the same present claimants file claims with multiple trusts; in this scenario, the various future claimants would have conflicting interests regarding how liability for the present claimants’ injuries should be allocated among the various trusts,” the DOJ filing said. “Absent an explanation of why this inherent conflict would not prevent Mr. Patton from acting as a fiduciary for (Fairbank’s) future claimants, Mr. Patton’s appointment should not be approved.”

If this all sounds vaguely familiar, that’s because just three months ago, the Justice Department filed its opposition to Duro Dyne’s motion to appoint a future claims representative in its pre-negotiated, asbestos-related Chapter 11 bankruptcy in New Jersey federal court. As I explained at the time, Duro Dyne and plaintiffs' lawyers brought in the extremely experienced future claims representative Lawrence Fitzpatrick to advocate for prospective asbestos victims as they negotiated the terms of Duro Dyne’s asbestos trust. After the company entered Chapter 11, Duro Dyne moved for Fitzpatrick’s official appointment as the future claimants’ representative, hoping to win quick approval of the company’s pre-negotiated restructuring plan. DOJ disrupted those plans with its objection to Fitzpatrick’s appointment. (Of note: Fairbanks originally moved for Fitzpatrick to be appointed to represent future claimants in its Chapter 11 case but Fitzpatrick asked for the motion to be withdrawn after DOJ objected to his appointment in the Duro Dyne case.)

In that previous attempt to block a debtor-proposed future claimants’ representative, the Justice Department homed in on Fitzpatrick’s purported financial dependence on the plaintiffs’ lawyers who routinely serve on asbestos creditors’ committees and negotiate the establishment of trusts with companies exposed to asbestos liability. DOJ demanded disclosures and deposition testimony from Fitzpatrick. U.S. Bankruptcy Judge Michael Kaplan of Trenton authorized limited discovery, including testimony about Fitzpatrick’s role in the prefiling negotiations.

Ultimately, DOJ’s gambit backfired. At an Oct. 16 hearing, Judge Kaplan granted Duro Dyne’s motion to appoint Fitzpatrick, holding that the government failed to show Fitzpatrick was conflicted or motivated by improper financial interests. More broadly, the judge cast doubt on the entire DOJ theory.

“This court questions whether an inquiry into a proposed representative or professional’s ability to be effective is appropriate at all,” he said. “Demanding proof of effectiveness can become a dangerous and slippery slope for all professionals in a bankruptcy proceeding. This court is not anxious to go down that road.”

Judge Kaplan called DOJ arguments that Fitzpatrick is beholden to the parties that brought him into the case “nonsensical and a nonstarter,” since his retention in the Duro Dyne Chapter 11 parallels that of every other professional engaged in a Chapter 11.

He also said that DOJ’s objection could imperil pre-negotiated Chapter 11 bankruptcies for companies facing asbestos liability – even though Congress expressly enacted provisions in the Bankruptcy Code to enable these restructurings. “This court has serious concerns that implementing the standards and employing the disqualifying criteria espoused by the U.S. Trustee … would for all practical purposes render a pre-negotiated plan impossible,” he said. “The prepetition selection of, negotiations with and payment to any prepetition FCR is critical for a successful prenegotiated asbestos case … This Court is not prepared to second-guess Congress in its implementation or the 3rd Circuit in its positive assessment of the process.”

For good measure, Judge Kaplan subsequently approved Young Conaway to act as Fitzpatrick’s counsel in his role as the representative of future claimants.

The Justice Department, in its objection to Patton’s appointment in the Fairbanks Chapter 11, said Judge Kaplan’s approach in the Duro Dyne case “creates a powerful incentive for debtors and present claimants to nominate FCR candidates who are unlikely to litigate vigorously against them (and) has had generally poor results for the future claimants.” But Fairbanks’ counsel from Reed Smith, in a response filed Wednesday, emphasized Judge Kaplan’s adherence to the long-accepted procedures for engaging future claims representatives before and during Chapter 11 proceedings.

For companies that want to restructure their asbestos liability so they can return to running their otherwise successful businesses, the Fairbanks brief said, it’s crucial to engage an experienced representative for future claimants. The open-ended process DOJ is advocating would only eat up “precious time and resources … that this Chapter 11 case cannot support.”

The Justice Department is to be determined to disrupt business as usual in asbestos litigation and bankruptcy. But it seems to have selected a problematic tool to accomplish that goal.The Justice Department is to be determined to disrupt business as usual in asbestos litigation and bankruptcy. But it seems to have selected a problematic tool to accomplish that goal.

A DOJ spokesperson emailed me a response to my query on the Duro Dyne and Fairbanks protests, noting that the department has appealed Judge Kaplan’s ruling in Duro Dyne: “We are disappointed with the court’s ruling in Duro Dyne that the candidate selected by the very parties that he will be required to negotiate or litigate against and who retained and compensated him prior to the bankruptcy can exercise the independence needed to protect future claimants and the integrity of the judicial system.”

I left a phone message for Young Conaway’s Patton but didn’t hear back.

This article has been updated to include comment from the Justice Department.