The Travelers/Manville case pending before the Supreme Court is only one of the asbestos Chapter 11 cases pending in federal appellate courts. This post deals with yet another such case, In Re Global Industrial Technologies, Inc. (GIT), an appeal pending in the Third Circuit; with oral argument scheduled for May 20, 2009. Like Travelers/Manville,the GIT case has generated a telling nonpartisan amicus brief, and focuses attention on fact patterns that illustrate why mass tort bankruptcy injunctions have been allowed to go too far by rulings that block effective challenges to the plan by would-be objectors. The amicus brief and opening appellate briefs from the insurers are collected here.
GIT Issues and Arguments by Hartford
GIT presents multiple significant issues raised by insurers of GIT that seek to overturn the confirmed plan. Hartford raises perhaps the most interesting issues. One is its assertions is, in essence, that asbestos claims were used as an improper excuse for the bankruptcy court to issue an unnecessary and unconstitutional section 105 injunction at the behest of plaintiff's lawyers to create an unneeded "silica trust" to pay allegedly fraudulent silica claims. Hartford argues that the lower courts rubber-stamped the silica trust and injunction as "necessary" after the lower courts held that Hartford and other insurers lacked standing to object to the plan. According to Hartford, the silica trust is in reality "a scheme to use the bankruptcy process to generate .... dubious or fraudulent silica-related claims, to hand Debtors' insurers the bill for those claims, and to deprive insurers of defenses to coverage arising from that very scheme." Hartford Brief at 1.
To support its argument, Hartford musters various proofs, three of which are compelling both individually and collectively. Hartford's points are summarized immediately below with citations to the brief. Extended quotes from the brief are set out at the bottom of this text.
First, Hartford points out that the plan only enjoins silica claims arising from alleged "exposures" prior to a certain date (the date the chapter 11 petition was filed), and thus the plan leaves GIT liable to pay all silica claims arising from later exposures. Hartford Brief at n. 7. It certainly does seem illogical to argue that it's "necessary" to resolve only some but not all of a set of potential future claims.
Second, Hartford points out that the "silica trust" is not funded by the debtor, and instead is to be funded only by monies paid out from some $ 500 million of GIT insurance policies that contain "asbestos exclusions." The asbestos exclusions render the policies unable to pay asbestos claims. Hartford Brief at 9-10. As Hartford argues, it certainly is illogical to argue in an asbestos bankruptcy that is "necessary" to resolve silica claims to be paid from insurance policies that can not be used to pay asbestos claims.
Third, Hartford contrasts silica claiming facts before the chapter 11 petition was filed to the silica claiming facts after the petition was filed. Prior to the petition, GIT had been sued in less than 200 silica cases, GIT had not paid out any money on silica claims, and its insurers had only paid out $ 312,000 for silica claims. Hartford Brief at 8. In contrast, after the petition was filed, silica claims were soon submitted in droves (over 4,500). As Hartford points out, the sudden spate of claims was a win-win for everyone but the insurers since the spate of claims gave GIT votes needed to approve its plan under section 524(g), and payments by the trust on the claims would over time generate money for claimants and their lawyers, with the claims judged by the trust under a limp "proof" standard. Hartford Brief at 9-14. Thus, everyone would be happy except the insurers called on to pay the silica claims after approval by the trust.
Lessons from GIT for Manville/Travelers
At least two points may be drawn from the facts regarding the silica trust and the use of the GIT insurance policies for silica claims but not asbestos claims. One point is that the facts of the silica trust situation should be tested against the Travelers/Manville hypothetical question posed by Justice Roberts. He asked whether an asbestos chapter 11 court could issue an injunction to resolve "traffic accident" claims if the insurer maintained that resolving the traffic accidents were "necessary" for it to agree to the resolution of the asbestos claims. Plainly the hypothetical ordinarily should be answered: "no," if bankruptcy power is to have any limits, absent a detailed and explicit record proving actual necessity, with the record having been subject to meaningful testing by an actual adversary. (Such a record does not appear to exist in Travelers/Manville.) Otherwise, the parties agreement that a deal is "necessary" will bind the hands of the bankruptcy court, and will give the debtor and friends control over the use of federal bankruptcy court power. Consider also that the injunction issued in GIT is even less defensible as "necessary" because the injunction was issued over the objection of the insurer, thus meaning that the only "necessity" arose from the debtor and the plaintiff's lawyers agreeing on a deal that cost them nothing.
The facts of GIT also prove that chapter 11 cases can be completed, and deals can and will be reached between debtors and personal injury plaintiff's lawyers, even without agreement from insurers. Thus, the deal disproves Travelers naked assertion that chapter 11 cases will be concluded only if insurer are given relief that extends far beyond claims tightly derivative of claims against the debtor. Note further that GIT was willing to leave itself exposed to some but not all potential future silica claims, thus disproving Travelers' arguments that bankruptcies can end only if there is "finality" on all tort claims.
A future post will address the amicus brief, and the response briefs from the plan proponents.
Set out below are longer quotes from Hartford's brief.
As to Hartford's point regarding the injunction being unnecessary because it only covers some but all future silica claims, Hartford's brief states the following:
"Under the plan, silica claims against A.P. Green based on exposure prior to the petition date will be channeled to the silica trust. JA119, JA892. Claims based on post-petition exposure will ride through the bankruptcy and become the responsibility of the reorganized Debtors. JA65, JA119, JA137." Hartford Brief at n.7.
Hartford's other two points are presented in the following text from pages 1, 7-14, with omissions as indicated by ellipses and stars:
In recent years, plaintiffs' lawyers have flooded the courts with dubious or
outright fraudulent claims of silica-related injury. As the district judge presiding over the silica multidistrict litigation described such claims: "[T]hese diagnoses were driven by neither health nor justice: they were manufactured for money." In re Silica Prods. Liab. Litig., 398 F. Supp. 2d 563, 635 (S.D. Tex. 2005) (Jack, J.) This case centers on a scheme to use the bankruptcy process to generate similarly dubious or fraudulent silica-related claims, to hand Debtors' insurers the bill for those claims, and to deprive insurers of defenses to coverage arising from that very scheme. Hartford Brief at 1.
Debtor A.P. Green Industries, Inc., a Missouri corporation founded in 1915,
manufactures and sells refractory products--construction materials used in high temperature environments.... Before the mid-1970s, several of the refractory products manufactured and sold by A.P. Green allegedly contained asbestos. Certain plaintiffs sued A.P. Green, claiming injury from exposure to those products. JA820. As of the bankruptcy filing in 2002, A.P. Green had paid approximately $448 million to resolve more than 200,000 asbestos-related claims, and an additional 235,000 asbestos-related claims were pending. JA820-821.
A.P. Green's experience with silica was another story entirely. As of the
bankruptcy filing, there was exactly one lawsuit pending against A.P. Green,in Texas state court, consisting of claims by 169 individuals for bodily injury caused by silica-containing products. JA106, JA1011. Including those 169 claims, Debtors identified fewer than 200 claims asserted against A.P. Green for silica related injury in the 25 years before the bankruptcy. JA106. In those 25 years, A.P. Green never paid any of its own money on account of silica claims, and its primary insurer had paid only $312,000 to resolve such claims. JA106-107. Hartford Brief at 7-8.
B. Debtors' Bankruptcy Filings And Plan
In February 2002, GIT and certain of its subsidiaries, including A.P. Green,
filed Chapter 11 bankruptcy cases. JA763-770. Debtors sought bankruptcy
protection not to address silica liability, but to address "adverse business
conditions" and "to deal with the overwhelming number of asbestos liability
lawsuits and claims pending against them." JA117; see also JA780 (Debtors filed for bankruptcy due to "the costs of asbestos litigation," a "deterioration of general business conditions," and an inability "to secure working capital financing").
In order to confirm a plan of reorganization that would resolve that
"overwhelming" asbestos liability, Debtors needed the approval of 75% of the
asbestos claimants, and thus needed to reach a deal with plaintiffs' lawyers.
See In re Congoleum Corp., 426 F.3d 675, 680 (3d Cir. 2005) (noting that "[t]he realities of securing favorable votes from thousands of claimants to meet the 75% approvalrequirement forces debtors to work closely" with plaintiffs' lawyers). In the course of negotiating that deal, Debtors determined that they had nearly $500 million in potential insurance coverage that did not cover asbestos claims (generally because of express asbestos exclusions, which became typical provisions in liability policies in the 1980s) but that, in their view, was available to cover silica claims. JA823. Accordingly, Debtors and asbestos plaintiffs' counsel (many of whom also represented persons asserting silica claims against other companies) agreed upon a plan that included not just an asbestos trust and channeling injunction, but a silica trust and channeling injunction as well. JA2891, JA2893.7 Debtors and plaintiffs' counsel also negotiated the Trust Distribution Procedures--the terms under which the silica trust would evaluate and pay claims. JA2968-3031. In addition, Debtors agreed with plaintiffs' counsel that the Trust Advisory Committee and the Future Claims Representative--that is, many of the persons in charge of operating the trust and overseeing the evaluation and payment of silica claims--would be lawyers representing the interests of alleged silica claimants. JA1332-1404. Debtors are making no contribution of their own funds to the silica trust, which will be funded entirely by insurance. JA2894-2895. The trust is to receive $35.5 million in proceeds from several insurance settlements. In addition, A.P. Green will assign to the trust its rights under its insurance policies with asbestos exclusions, including policies issued by Appellants. JA892, JA2894-2895,
After agreeing with plaintiffs' counsel to structure the plan to include the silica trust, Debtors actively sought out claimants to support the plan. Having virtually no silica claimants of their own, Debtors obtained a list of silica claimants from another company's bankruptcy and solicited votes for their plan from counsel for those claimants (many of whom were the same firms representing asbestos claimants against Debtors). JA1466-1469. Ultimately, 5,125 votes were cast on behalf of persons with alleged silica claims against Debtors. JA1412. The bulk of these votes were submitted by a handful of law firms via master ballots. JA1417. Indeed, one law firm, the Provost Umphrey Law Firm, accounted for over half the votes. JA1334. Hartford Brief at 7-11.
[Brief describes Judge Jack's Silica MDL opinion finding fraud in silica claiming, and brief describes resulting tort reform legislation] These developments, combined with a review of the supplemental submissions in this case, leave little doubt that most of the claims asserted by the 5,125 silica claimants who voted on the plan are invalid. Over half the claimants who submitted supplemental forms were diagnosed by doctors whose diagnoses were rejected as fraudulent by Judge Jack. JA2074. In addition, over half the claimants had previously filed asbestos-related claims or been diagnosed with an asbestos-related disease, JA2159--making it extremely unlikely that they also had a legitimate silica-related claim. In re Silica Prods. Liab. Litig., 398 F. Supp. 2d at 603; see also JA1431 (Decl. of David Weill) (noting the near impossibility of a Case: 08-3650 Document: 00312869189 Page: 23 Date Filed: 12/04/2008 person's contracting both an asbestos-related and a silica-related disease in a working lifetime). Fully 82% of the claims bore at least one of these markers of fraud. JA2159. Hartford Brief at 13-14.