Amend the Federal Rules of Bankruptcy Procedure to Combat Fraudulent Asbestos Claims

Reading today's "ABI Daily Headlines Delivered" email, I see another disclosure of fraudulent submissions in relation to asbestos claims against a manufacturer forced into bankruptcy by such claims.

The email links, after you get through the ABI paywall, to a Reuters story about the Garlock Sealing Technologies bankruptcy, presided over by USBJ George Hodges, who has done the country a great service by respecting the debtor's allegations of fraud and allowing them to be investigated, when many other judges prefer to see the parties reach a deal of any kind so that the pendency of the case does not forestall the receipt of compensation by the truly injured.

As the District Court to which his court is appended wrote last year, 

"After hearing evidence from fifteen settled cases, Judge Hodges found that Garlock’s [pre-petition] settlements were not a reliable predictor of liability because misrepresentation had infected them:

"'[T]he fact that each and every one of them contains such demonstrable misrepresentation is surprising and persuasive. More important is the fact that the pattern exposed in those cases appears to have been sufficiently widespread to have a significant impact on Garlock’s settlement practices and results.

Judge Hodges went on to describe the plaintiffs’ lawyers’ conduct in these cases as forming a 'startling pattern of misrepresentation.'”

Those quotes come from the published order and opinion estimating the debtor's liability on asbestos claims at $125 million, roughly 10% of the amount the plaintiffs' representatives contended, based on extrapolation of pre-petition settlement.  Judge Hodges's ruling is found at 504 BR 71 and online here, at the website of Bates White, the consulting firm hired by the debtor who crunched the data to support the debtor's case.  The findings of misconduct run from paragraphs 55-71, beginning with the remarkable finding that the "fifteen settled cases" referred to in the opinion as tainted by misrepresentation were the entire sample the debtor examined - i.e., every settlement in the sample was tainted by misrepresentations by the plaintiffs about their exposure claims.

Notwithstanding his contribution to justice, Judge Hodges is not perfect, and these disclosures only come about now because, in July 2013, he sealed his courtroom and excluded the press from coverage of the hearing at which the debtor's asbestos liability was estimated.

The sealing of proceedings, however, was appealed by a news organization, Legal Newsline, who contended that the public had a right of access, joined by numerous other parties -- insurers and co-defendants among them -- with litigation-defense and other economic reasons for access to the information being aired in the trial, which per Judge Hodges' estimation ruling, lasted 17 trial days, entailed 29 witnesses and hundreds of exhibits.  It should be noted that the debtor also urged Judge Hodges to make the hearing and related information publicly available.

In July of 2014, the District Court agreed with Legal Newsline that Judge Hodges had not fulfilled the federal courts' "gatekeeper role" on behalf of the public's right of access, reversed the sealing orders, and remanded for a more careful scrutiny of the litigants' claims for confidentiality.  It also withdrew the reference of the debtor's common law and RICO suits against the law firms alleged to have engaged in the fraudulent conduct.  U.S.District Court, W.D.N.C. Docket No. 3:13-cv-00464-MOC. The remanded issues apparently unfolded over the ensuing months and now the documents are beginning to come to light.

The purpose of this post is not to revisit the misconduct allegations in detail but to advocate a particular path of action towards federalizing the lessons learned in Garlock in order to eliminate the scandal of fraudulent pursuit of asbestos claims from all federal bankruptcy proceedings, including asbestos trusts established under confirmed "524G plans". 

For decades, defendants and other potential payors of asbestos liability have tried to get Congress to pass legislation to address this issue, but such legislation always fails; the reason usually given is the political pull of the plaintiffs' bar. When the late Fred Baron, a Dallas-area lawyer who made millions off being an early mover in representing asbestos plaintiffs beginning in the 1970s, was accused by the Wall Street Journal in 2002 of having "all but bought the U.S. Senate" with his campaign contributions, he objected to the accusation, "Particularly the 'all but'."  But also there is the general reluctance of politicians to pass laws that might lead to campaign ads being run showing gravely ill people and claiming they are being denied compensation because of the politician's vote in favor of a bill that benefits big business.  Even Elizabeth Warren was subject to attacks of that nature, absurdly enough, given her long advocacy of prioritizing tort claims in business bankruptcies.

There have been individual efforts at the state level, e.g., Wisconsin recently, implementing disclosure reform, but those efforts would not likely have any effect in federal bankruptcy proceedings

But our government has a channel in which justice is not so subject to shabby electoral calculations, and that of course is the judiciary, as exemplified by Judge Hodges.  But Garlock is only one case and Judge Hodges only one judge, so a case-by-case approach runs the risk of inconsistent results, and as well, very likely entails recurring huge expenses -- the Garlock battle has already generated over $40 million just in fees and expenses of the bankruptcy lawyers for the asbestos plaintiffs (in the relatively low-cost forum of Charlotte).  In addition to those expenses, as this article recounts, Garlock itself had to initiate collateral discovery proceedings in 12 other cases besides its own bankruptcy, and prosecute appeals of adverse rulings in them, to obtain documentary evidence of misconduct.

So the best approach is for the judiciary to formulate a national rule for review of claims in all asbestos bankruptcy cases, and the way to do that is to amend the Federal Rules of Bankruptcy Procedure to add a rule that adopts the lessons learned in the Garlock case for all pending and future asbestos claims in bankruptcy cases. 

The Advisory Committee on the Federal Rules of Bankruptcy Procedure, which is headed by Judge Sandra S Ikuta, of the Ninth Circuit (thanks to reader Gary Streeting for his comment below informing me of this), advises ultimately the Judicial Conference of the United States on advisable changes to the Federal Rules of Bankruptcy Procedure.  Many of its recent proposals have dealt with claims procedures.  

The Advisory Committee receives submissions from interested parties proposing, opposing or simply commenting on the topic. This link explains how to make those submissions.  Then, often in subcommittees, the Advisory Committee analyzes the proposals.  Once or twice a year, it holds an open session at which the topics under consideration receive a public hearing.  Ultimately, the Committee may craft its own recommendation; it is not limited to simply approving or rejecting the proposals submitted to it.  

What an intelligent proposal on asbestos claim disclosure should contain is a topic I am not going to write fully on at this time, but the general thrust should be to generate the kind of information reviewed by Judge Hodges in the estimation procedures: What other claims has the claimant made? Against whom, when and in what forum?  Plaintiffs should be obligated to turn over copies of the claims, pleadings and testimony, if any in support of all prior or pending claims. And what recovery has the plaintiff received on those claims?  Then too, it should be provided that, if any evidence of misrepresentation or nondisclosure of the required information comes to light after a claim is allowed against an estate or trust, the allowance is void.  Last, the rule should endorse the disregard of settlement evidence in calculating the debtor's aggregate liability, unless examination of a sufficiently large random sample of settlements by application of these methods shown them to have been untainted.  I would expect the judges on the Advisory Committee to treat with the utmost seriousness the issue of fraudulent claims being systematically presented in federal proceedings and the trusts set up by federal courts in those proceedings.