Do backers of a ballot initiative have standing to defend an enacted law when the state attorney general refuses to defend the law? That interesting legal question lurks within the issues presented to the US Supreme Court on gay marriage. Alison Frankel provides a cogent summary of the issues, with links to relevant briefs. As ballot initiatives thrive in some places on some issues, the question is not insignificant.
The Epicurean Dealmaker offers a fine passage and a few words on the propriety of "reforms."
Meanwhile, questions posed at Marginal Revolution lead to a Cass Sunstein paper on the thinking process behind "conspiracy theories," and thoughts on how governments should respond to the thinking.
Morrison, Big Tobacco and Limited Jurisdictional Thinking - An Early Example of the Need for Critical Thinking About How Societies Will Cope With Global Torts
Alison Frankel at AmLaw published today this significant story on the continuing impact of the limited thinking jurisdictional thinking embodied in the Morrison securities law decision. The article tees off from a new ruling in which a US federal judge invoked Morrison to hold that the US Justice Department cannot enforce previously won injunctive, RICO-based relief against global tort giant British American Tobacco. Ms. Frankel also notes other, similar post-Morrison rulings that defeat using US courts and laws to police global torts. Note further that the lower court judges issuing these rulings are not shy judges - Judge Kessler has coped for years with the government's massive claims against big tobacco, and another of the judges is the well-known and outspoken Judge Rakoff. Moreover, as Ms. Frankel points out, one of the similar rulings involved a RICO suit by the EU - yes, really, the EU itself - against big tobacco.
It's disturbing to watch the impacts of the limited jurisdictional thinking of Chief Justice Roberts' Court. Limited jurisdictional thinking is outmoded in this age of virtually instant, global movement of corporations, people, and capital. And, global corporate movement and gaming of laws is not just economic theory - it is reality when corporate entities define their mission almost solely around the short-term creation of money (a/k/a shareholder value), regardless of the long-term consequences and harms. Need examples of such corporate behavior? Go here and read/watch the March 27, 2011 story by Leslie Stahl of 60 Minutes on corporations creating tax dodges by moving themselves, their people and, supposedly, moving the location of IP assets. Or, read David Kocieniewski's great NYT story on GE's massive, global gaming of tax laws by a massive tax department viewed as a profit center. (Note also this blog post by tax law professor Paul Caron highlighting GE's tax strategies and its corporate service mark: Imagination at Work.) Or, read my prior post on Australian tort defendant James Hardie skipping around the world seeking shelter from tort storms it created.
Where does this all end? Hard to say. It does, however, seem plain that the world's societies need to act to create faster and better global forums for enforcement of national and international laws and treaties, and courts need to revisit their "traditional thinking" about "traditional notions" of due process, territorial reach and justice for "foreign corporations." New legal forums and rules need to evolve - quickly - due to globalization, the Internet, jet planes and other factors that make modern life so global in so many ways. Since global regulators largely do not yet exist and may never exist, new processes need to evolve to cope with global torts. For now, decisions such as Morrison are creating jurisdictional black holes that bright lawyers and some companies can and will exploit until stopped.
Ultimately, these stories highlight the truth of a thesis repeatedly argued by a brilliant friend who worked for years in global finance: Capital and companies will run wild until regulators and/or courts become exponentially smarter, faster and global.
In the long term, regulatory and jurisdictional black holes are bad for humans and other creatues because the holes allow toxin sellers to escape paying for the consequences of their actions. And, jurisdictional black holes also can be bad for corporations, at least in some settings. Why? Because corporations can be attacked by global pirates, whether using the high seas, internet hacks, or other tactics to plunder and steal. Imagine, for example, BAT's reaction if a US court refused to grant an injunction against a "foreign" entity that blatantly counterfeited cigarettes. Or, imagine GE's reaction if a US court declined to enjoin an offshore, "foreign" entity from selling medical scanners built around stolen GE technology subject to US patents.
Nicastro and Goodyear are two pending cases addressing the scope of personal jurisdiction over global manufacturers when they sell allegedly defective products. Here, Crowell & Moring provides its take on the issues and argument. For those who would like more specifics, the Scotus Blog remains great. Go here for the Nicasto oral argument in various formats, or here for the unofficial transcript from Goodyear.
It's tough to predict what this Court will do. Chief Justice Roberts' professed desire for "certainty" for business might suggest a ruling based on "bright lines." That seems, however, unwise because business methods and combinations continue to evolve. The implications for "business" also can cut multiple ways. One could say it would be foolish to provide overseas with liability avoidance techniques that disadvantage American manufacturers. Indeed, last year, the plaintiff's bar and the US Chamber of Commerce actually agreed on supporting legislation to expand jurisdiction against overseas manufacturers, as described here.
One wonders how many "facts" will be stated, assumed or predicted by the Court as to the impact of its rulings.
The "Justice Roberts court" continues to garner attention and devotion from conservatives, and to rule in favor of businesses. A new summary article by Roger Parloff is here, in Fortune
As one would expect from a Fortune writer, Mr. Parloff often writes from the perspective of business-friendly positions, and as a critic of plaintiff's lawyers, as exemplified here and here. As a lawyer and writer regarding mass tort litigation, he also understands corporate law implications for liability claims, as exemplified by this article on big tobacco's corporate machinations.
Connecting Trust Funds and Tort Systems - Madison County Defendants Ask Illinois Supreme Court for Pretrial and Trial Procedures to Force a Connection Between the Tort System and the Bankruptcy Trust Compensation System
Mass tort law today is badly flawed by the lack of connections between state court tort systems and the parallel but disconnected compensation systems that have arisen through trusts or funds that hold billions of dollars intended to pay tort claims. BP's oil rig fund is a recent, well-known example that highlights the growing importance of funds as a means for resolving massive tort claims. The new RAND study on asbestos bankruptcy trusts - at long last - highlights the importance of the $ 30 billion or so of asbestos bankruptcy trust funds created from asbestos litigation. A recent mandamus filing in the Supreme Court of Illinois illustrates the importance of forcing connections between trust fund payments and tort law claims.
In short, the defendants' papers ask the Court to require the Madison County trial court to modify asbestos docket orders to require pretrial and trial procedures that account for claims to asbestos trusts. The papers are on line here.
The gist of the problem is plain, and boils down to plaintiff's splitting causes of action. At present, asbestos tort claims can proceed ahead to settlement and trial without the claimants having to bring or account for asbestos trust claims they can and will bring. So, the claimants act economically rationally by delaying filing claims against the trusts. The result ? The tort system cases go to settlement and trial without the remaining defendants being able to obtain effective offsets or effective contribution claim rights regarding the monies that inevitably will be paid out by the asbestos trusts.
How much money are we talking about? Hundreds of thousands, or millions. Indeed, in one of the chapter 11 cases, well-known asbestos plaintiff's lawyer Peter Kraus submitted a declaration swearing to his understanding that all clients of his firm would be paid not less than $ 700,000. - by just one trust - if each could in good faith assert that they worked with a product that included asbestos sold by Thompson-Hayward. Go here to download the Kraus declaration and its exhibits. And, the record in the Illinois Supreme Court proceedings includes expert information from Bates White indicating that an "average" asbestos claimant may obtain $ 600,000 from asbestos trusts, with some obtaining much more.
Should the Supreme Court of Illinois act in order to force rational and timely economic connections between its state court system and the trust fund compensation system ? Absolutely.
Will it act? Time will tell.
Should academics be paying attention to forcing connections between the two parallel and disconnected compensation systems? Absolutely. Are they ? Not in any meaningful way that I can find.
The Supreme Court acted in unusual fashion yesterday on Chrysler, and the actions create some issues that need further thought as to their implications for underlying tort claimants and for due process. Specifically, in this order, the Court granted certiorari, but then immediately vacated the judgment and AND vacated as moot the Second Circuit's opinion that explained its reasons for affirming the district court. The Second Circuit's opinion was germane to mass tort claims and due process because of its language to the effect that future tort claimants would not be bound by the bankruptcy court rulings. See below for the exact wording of the order.
I'll readily admit that I'm not a Supreme Court scholar. That said, this all seems rather odd, and makes one wonder about the motivations and thoughts behind these actions. Are these actions unique to the odd facts and pressures of Chrysler? Are the actions related to Justice Robert's avowed interest in making a name for this Court by taking and resolving more "business issues" ? Do these actions in any way reflect hat the Court thinks it learned or held about bankruptcy court finality in its Travelers/Manville bankruptcy case ruling that remanded the Manville case back to the Second Circuit for further proceedings (which have been briefed and argued)?
I look forward to learning what others think. I think this means that everyone is now back to lower court orders which also include language suggesting that future claimants are not bound. For now, with a hat tip, here are excerpts from the commentary on LAW360, with quotes from Chrysler's counsel:
"The order makes clear the case is over," attorney Todd R. Geremia of Jones Day, which represents the Chrysler debtors, said Monday. "There's nothing for another day."
The high court's ruling vacated a 53-page ruling in the Second Circuit affirming the sale as legal under the Bankruptcy Code but declining "to delineate the scope of the bankruptcy court's authority to extinguish future claims" until a claim for injury caused by Old Chrysler could be brought under successor liability law.
While the court vacated the Second Circuit ruling, it did not necessarily disagree with it. The court invoked a precedent from a case known as United States v. Munsingwear Inc. that allows it simply to vacate and remand cases that become moot on their way up.
"Nothing in this order today reflects any disagreement with the Second Circuit," Geremia said. "It's an order that arises from the application of Munsingwear."
The Supreme Court's order states:
" IN POLICE PENSION TRUST, ET AL. V. CHRYSLER LLC, ET AL.
The motion of Washington Legal Foundation, et al. for leave
to file a brief as amici curiae is granted. The petition for a
writ of certiorari is granted. The judgment is vacated, and the
case is remanded to the United States Court of Appeals for the
Second Circuit with instructions to dismiss the appeal as moot.
See United States v. Munsingwear, Inc., 340 U.S. 36 (1950).
This post offers a brief comment arising from the now widely reported fact (see, for example, SCOTUSblog and many others) that the U. S. Supreme Court granted certiorari from the 2d Circuit's opinion in the so-called foreign-cubed (a/k/a f- cubed) Rule 10b-5 securities case titled Morrison, et al., v. National Australia Bank, et al. (08-1191), which is sometimes called the NAB case. For the uninitiated, f-cubed refers to 1) "foreign" plaintiffs suing in the US under US law regarding a 2)"foreign" issuer of securities that resulted in the buying and selling of stock in 3) "foreign" countries.
The comment is that one hopes that briefing in the Supreme Court will cover in some depth the scope of class action litigation in countries outside the US. I say that because the 2d Circuit's opinion, slip op at 14 -15, refers to arguments that seem to me both dated and incorrect as to the extent of class action remedies outside the US. On the topic of the growing availability of class actions or class like remedies outside the US, I once again commend to readers a fairly new article titled "Global Litigation Trends." The authors are Mark Behrens, Gregory Fowler and Silvia Kim, who are all Shook Hardy lawyers. The article was published at 17 Michigan State Journal of International Law 166 (2008-09). You can download it here from the TortsProf blog.
Pasted below are the 2d Circuit's statements about class actions outside the US:
"In support of their position, Appellees and amici point to a parade of horribles that they claim
would result if American courts exercised subject matter jurisdiction over such actions. They
contend that this would, among other things, undermine the competitive and effective operation of American securities markets, discourage cross-border economic activity, and cause duplicative
litigation. Their principal objection, though, is that entertaining such actions here would bring our securities laws into conflict with those of other jurisdictions. For instance, in Switzerland, no
comprehensive federal legislation governs securities fraud, and private remedies are the only ones
available. In Canada, securities class actions are recognized, but most provinces do not recognize
the fraud on the market doctrine. In various other countries, class actions are either not available
or the ability of class actions to preclude further litigation is problematic. See, e.g., David A. Skeel, Jr., Can Majority Voting Provisions Do It All?, 52 Emory L.J. 417, 423 (2003) (noting that "most other countries do not have procedural devices that are even remotely similar to the U.S. class action"); Gerhard Walter, Mass Tort Litigation in Germany and Switzerland, 11 Duke J. Comp. & 3 Int'l L. 369, 372 (2001) (observing that "class actions do not exist in Germany, Switzerland, and most other countries of the civil law system"). In essence, Appellees argue that other countries have carefully crafted their own, individual responses to securities litigation based on national policies and priorities and that opening American courts to such actions would disrupt and impair these carefully constructed local arrangements...." (emphasis added)
It's hard to say where this all will end up since the Court apparently is continuing to pursue Chief Justice Roberts' agenda to decide "business cases," and there are so many interested constituencies. For more background, note that insurance side commentary on NAB was noted in this prior post which, in turn, links to another blog with commentary and links back to the 2d Circuit opinion and briefs. In addition, as SCOTUSblog points out, note that review was granted " even though the U.S. Solicitor General had urged it to bypass the case. Even while arguing that the case was not a proper one to address the issue, Sol. Gen. Elena Kagan filed a brief extensively outlining the government's views on the question, suggesting that the key law against securities fraud should sometimes apply to international dealings. (Justice Sotomayor took no part in the order granting review; it was not immediately apparent why she was recused. She did not vote on this case while on the Second Circuit.)"
Here is an article from Japan this week that reports on finding Libby Mines vermiculite in buildings in Japan. The article claims the material was installed Zonolite. How can Judge Fitzgerald's orders in the WR Grace case bind these building owners if they were not given effective notice in a language they understand ?
Note also that the article indicates SEM (scanning electron microscopy) is now being used overseas to find fiber types.
Highly toxic asbestos found in four buildings across Japan; current testing flawed
A widely-used building material has been found to contain asbestos in Tokyo, Hokkaido and Kagawa, in the first discovery of amphibole asbestos, the rarer and more dangerous variety of the toxic mineral, in buildings in Japan.
Asbestos fibers were found in at least four buildings: three community centers, one in Hokkaido and two in Kagawa Prefecture, and the ceiling of a private building in Tokyo. The latter three all used a vermiculite-based insulation called Zonolite. Measures to prevent the asbestos from scattering have already been taken at all the four buildings.
The findings were made by the Tokyo Occupational Safety and Health Center (TOSHC). Examining vermiculite containing relatively low-toxic serpentine asbestos using scanning electron microscopes, they found amphibole asbestos at concentrations of 0.1 to 1.5 percent -- enough to designate it an asbestos-containing material.
The center also found that trace impurities of aluminum and sodium matched those of a vermiculite sample taken from a mine in Libby, Montana. A study there found that 18 percent of residents of Libby tested after complaining about various health problems were suffering from chest-lining abnormalities.
A standard method of testing for asbestos used in construction materials was introduced in June last year, which local governments and other organizations have used to conduct their own studies. However, center expert Naoki Toyama points out, "We detected (asbestos) using the ISO method. Under the standard method, however, asbestos could be overlooked."
So, where and when are US tort and securities judgments binding on persons who live outside the US, and why should does it matter? Let's start with the latter question - why does it matter. Suppose, for example, a US bankrupcty court purports to enter a global injunction that bars future asbestos claims that anyone in the world might hold against particular entities? Is that injunction really enforceable if challenged in other nations or even here? Or, suppose global res judicata issues arise because of securities claims involing stocks sold around the world to persons from many nations?
As usual, the answers are going to emerge first in securities claims because the amounts at issue in any one case are enough that squadrons of lawyers are deployed to argue the issues. Answers are starting to arrive and indeed one could say the pot is boiling in the world of securities and D & O litigation as lawyers ponder and argue about various current lawsuits.
For example, some wonder and argue about whether the U. S. Supreme Court will or or should consider a discretionary appeal from a 2d Circuit ruling on jurisdictional issues in the context of alleged global securities fraud. This AmLaw article by Andrew Longstreth presents the issues and links to the Justice Department's brief invited by the Court in the Morrison case. The government urged the Court NOT to take the case (one wonders how that will view will sit at the Court when considered in the light of Chief Justice Robert's expressed interest in building the legacy of his court by reaching out to decide business cases).
The topic also is addressed on the excellent D & O Diary blog by Kevin LaCroix, in a recent guest post (here) from a Cozen & O'Connor lawyer, who, presumably, represents insurance companies. Another example arises from the ongoing more or less global Vivendi securities fraud trial, which is covered in general here by Mr. LaCroix, with many helpful links to source documents, with links to undelrying rulings on the global class action issues. The Vivendi class action opinion is here, and provides a helpful discussion on what courts in overseas countries might have to say about the res judicata nature of a US judgment on the securities law issues in the context of a purported class action.
Conclusion ? Concrete answers will take many years to evolve. But plainly some of the judgments entered to date will never be enforced because overseas claimants were not given anything close to adequate notice or representation.
As a result of bugging the clerk's office and the court reporter's office, the transparency-blocking 90 day veil has now been lifted from some of the General Motors bankruptcy hearing transcripts.
Here is the June 25, 2009 transcript that reflects the asbestos plaintiff's lawyers withdrawing the request for appointment of a futures representative. The withdrawal was based on the grounds that there would not be a section 524(g) injunction order entered in the case and that orders entered in the case do not bind future claimants.
So, the asbestos personal injury litigation saga no doubt will go on as to GM at least for future claims. And, just as the bankruptcy court orders do not bind future personal injury claimants, the orders also should not bind underlying case co-defendants which decide to bring in those cases a contribution or apportionment claim against the new GM entity, if it survives.
Quigley/Pfizer Asbestos Bankruptcy Trial Underway and Highlights Deep Flaws in the Chapter 11 Process as It Relates to Mass Tort Claims
This article from Bloomberg describes the start of the confirmation trial in the Pfizer/Quigley asbestos bankruptcy and reviews the case in general. The trial is to run off and on for 7 or more trial days, concluding Oct. 16.
Despite various efforts to paint the situation in other lights, Quigley essentially is a corporate shell doing nothing but running off tort claims, so the relevance/applicability of chapter 11 is not apparent. Indeed, according to Bloomberg, " Edward Weisfelner, a lawyer for asbestos victims, challenged precedents set by asbestos cases in the 1980s. said of this case, "We are allowing the Chapter 11 process to be rented out, for the benefit of the true economic party of interest," Weisfelner told Bernstein, calling the case a "sham," by Pfizer that abuses the bankruptcy code. He said the bankruptcy, which has cost $75 million over five years, was filed solely to protect Pfizer. The US Trustee's office also has raised issues on this topic, which is notable because that office has not done much in most of the asbestos-driven chapter 11 cases. In short, one key issue is the extent to which a parent company can pay money and obtain in exchange a bankruptcy court injunction to protect itself against future asbestos claims arising from its relationship to the subsidiary and/or its actions related to the subsidiary. Some procedural issues cloud what the bankruptcy court will and will not do in terms of ruling on those issues.
Also interesting will be the process of estimating the value of future claims. As I've described before here (see item 4) the chapter 11 "estimation" process used in mass tort cases was the subject of scathing criticism in the W. R. Grace asbestos bankruptcy case. The criticism took the form of a declaration by a Nobel prize winning economist, Dr. James Heckman. As he explains it, the estimation process is not even close to scientific and instead is far more about trying to predict the future claiming practices of plaintiff's lawyers based on what the lawyers did in the past. That of course brings to mind the usual investment fund disclosure that past performance is not a predictor of the future, a statement that surely is equally true for the claiming practices of plaintiff's lawyers. According to Professor Heckman, courts should not allow themselves to be used to make a ruling based on estimates built in part around the massive asbestos claiming frauds that Professor Brickman and others have described at length.
The Quigley/Pfizer case also somewhat addresses the reality that in some limited ways, some asbestos plaintiff's lawyers representing some cancer claimants are in some ways contesting the usual approach to asbestos chapter 11 cases because it gives far too much power to the lawyers representing the least sick claimants (if they are sick at all, in the every day sense of the word). This case is thus another part of the occasionally public intramural disputes between different asbestos plaintiff's lawyers, with the two basic camps composed of 1) firms that represent thousands of minimally sick claimants and 2) firms that represent relative handfuls of cancer claimants.
Another public example of those disputes occurred back when some plaintiff's lawyers went to Congress during the days of the so-called FAIR Act and testified about the deep flaws in the thousands of claims being mass-filed on behalf of persons who were at most minimally sick.
Another public indicator of the battle may be found in the chapter 11 trusts which include terms that impose "collars" (limits) on the amount of money that may be paid out in a given year to the least sick claimants.
The intramural battle between camps of plaintiff's lawyer goes on because Congress irrationally handed huge economic power to lawyers for the minimally sick when it enacted section 524(g) of the bankruptcy code. Economic power was created by including a term that requires a vote in favor of the chapter 11 plan by 75% of ALL asbestos claimants. That rule has been under some attack in this case as the lawyers for cancer claimants seek to reduce the value of the votes of the least sick claimants.
The same economic dispute between the cancer claimants and the minimally sick also applies to future personal injury claimants. However, the inherent and obvious conflict between these two subsets of future claimants is typically ignored in chapter 11 cases. How is the conflict ignored? By assigning one person the impossible task of trying to properly represent all future personal injury claimants.
Will There Soon Be Another Chapter 11 Tort Claim Trust for Chinese Drywall Claims Against an Insolvent Builder, Perhaps With Insurers Involved ?
This summer brought the Chrysler and GM chapter 11 cases in which bankruptcy courts issued wide-ranging injunctions that seek to block some or all tort claimants from pursuing some or all current and/or future tort claims against the insolvent entities and their successors and/or buyers. Now, as we move into fall, here's the latest example of the expanding use of chapter 11 injunctions and trust funds as the proposed means to resolve underlying alleged "mass tort" claims. These ongoing expansions make it even more important to scrutinize the rules to the process by which Wall Street is now able to use chapter 11 to eliminate or transfer financial responsibility for underlying mass tort claims. These ongoing expansions also make plain that there is a pressing need to pull down the veil of secrecy that blocks meaningful scrutiny of the operations of most, if not all, chapter 11 trust funds that resolve tort claims.
This latest example arises from this new motion filed in the Tousa home builder bankruptcy. The effort in Tousa parallels the approach taken in the WCI home builder chapter 11 case. The new motion in Tousa seek to continue the automatic stay to block tort and contract claims regarding buildings built with allegedly defective Chinese drywall. The motion seeks to continue to block the underlying lawsuits based on the prospect of creating a chapter 11 trust to resolve the same underlying lawsuits. Presumably the trust also would be used to resolve the claims that would arise if the court were to allow a proposed class action against Tousa by would-be drywall claimants . The proposed class action is the subject of other bankruptcy court motions.
The motion in Tousa is noteworthy for multiple reasons. For one, it asserts that the debtor will welcome the involvement of its insurers in creating the proposed trust. In contrast, in the asbestos chapter 11 cases, the debtors virtually always assert that trust are "insurance neutral," meaning that whatever happens in the bankruptcy court does not effect the rights of insurers. Based on that claimed neutrality, the debtors and plaintiff's lawyers almost always argue that the tort claim insurers lack "standing" to be involved in the bankruptcy court proceedings.
Insurers sometimes but not always disagree, depending on what view suits a particular insurer's interest in a particular chapter 11 case and its overall financial status. Usually, but not always, insurers that issued primary policies re heavily exposed to the tort claims, and so will seek to cut a deal with the debtor and the plaintiff's bar in order to achieve certainty. Other insurers that issued higher level excess policies tend to fight the debtor on the standing issue until they've created enough of a record that the debtor agrees to accept from the high-level insurer a nominal payment over time in return for a release of all obligations under the higher-level excess insurance policy.
The motion also is noteworthy for what it does not mention. For one, it makes no mention of the current or future rights of other, solvent companies that are now or will in the future end up as co-defendants in the underlying lawsuits. Co-defendant entities can be incredibly harmed by the terms of the bankruptcy trust if the terms cut off or in any way limits the right of co-defendants to bring cross-claims or equitable contribution claims against the debtor or the trust. In the chapter 11 asbestos cases, the trust terms almost always have imposed severe and unconstitutional limits on the rights of the co-defendants to bring cross-claims against the debtor or the trust. To be fair to co-defendants, bankruptcy courts can and should appoint at least one person to represent the interests of fat least future co-defendants.
Additional adverse impacts arise for co-defendants if secrecy is allowed regarding claims submitted to the trust fund and its payouts to particular claimants. Once again, the chapter 11 trust model should not be followed because in most such cases, the plan tosses a veil of secrecy over information regarding which claimants have made claims and what they have been paid. Co-defendants rightly argue that the veil of secrecy is poor public policy because court-ordered trusts should instead be transparent as a matter of public policy. Beyond pure policy issues, the veil of secrecy also is improper because it blocks the co-defendants from asserting state law rights. Secrecy also blocks legislators from understanding what really is or is not being done to compensate legitimate and illegitimate claimants.
The motion also is significant because it does not mention various other sources of conflicts between constituencies with interests in the terms of a trust created to resolve tort system claims. One source of conflicts is that persons with strong and serious claims do not want to see trust fund money frittered away on payments to spurious or marginal claimants. Once again the asbestos chapter 11 cases highlight the problem because most of the trusts have been put in place with terms that have allowed billions of dollars to be paid to claimants who are not "sick" in any meaningful way.
Here are key excerpts from the Tousa motion:
4. Among other things, the Debtors are aware of the recent plan of reorganization confirmed in the chapter 11 cases of WCI Communities, Inc. and certain of its affiliates (collectively, "WCI") in which WCI successfully managed its liability with respect to Chinese Drywall by implementing a global strategy that will address Chinese Drywall claims through the use of a trust, a channeling injunction and claims liquidation procedures. Additionally, the plan of reorganization permitted WCI to efficiently address its' claims against its insurance carriers as well as the installers and manufacturers of Chinese Drywall. While the Debtors continue to analyze their own Chinese Drywall cases and their prospects for a chapter 11 plan, the WCI approach offers one possible alternative to piecemeal litigation of Chinese Drywall claims.
5. The Debtors intend to work with their major creditor constituencies in an effort to establish a global strategy with respect to claims arising from or relating to Chinese Drywall. This global strategy will prevent a "race" to insurance proceeds by similarly situated claimants that will have the negative effect of depleting the amount of insurance available to satisfy other claims or, otherwise, impact the Debtors' ability, as a practical matter, to craft a more comprehensive resolution of the Chinese Drywall-related claims. To that end, the Debtors intend to involve the alleged holders of Chinese Drywall-related claims and the Debtors' insurance carriers in any such discussions. Based on the Debtors' desire to develop a global resolution of the Movants and similar claims, the Debtors have filed this objection.
Hat tip to LAW360 for noting the motion to continue the automatic stay.
An update seems appropriate in light of the "new" cert petition filed in early September, and comments this week from the asbestos plaintiff's bar (Joseph Rice of Motley Rice and Robert Phillips of SimmonsCooper) during a seminar panel discussion on the status of various chapter 11 cases. The bottom lines seem to be as follows as to Chrysler and GM.
1) As I've described before, the Second Circuit's August 5 opinion in Chrysler explicitly articulated caveats as to which if any tort claimants will be bound by the rulings to date. That was obviously a victory for the asbestos plaintiff's bar and they ultimately decided it was a strong enough win to make the choice not to pursue further appeals in GM or Chrysler. Instead, they will in the future fight the issues of which if any would-be future plaintiffs are bound and as to what issues.
2) The Indiana Pension Fund plaintiffs are now trying to obtain certiorari on the fundamental issue of whether section 363 asset sales can be used to sidestep the normal confirmation process. Go here for a Scotusblog summary and a link to the cert petition. As Todd Brown has described before in pointoflaw.com, and as is described in other posts collected here, the rights of future plaintiffs can be or have been sacrificed in the context of section 363 sales since that process allows the debtor to avoid many of the "rigors" (such as they may be) of the confirmation process. And, as I've pointed out, that group of future plaintiffs includes asbestos co-defendants and subrogated insurers. So, if granted, the certiorari petition would raise issues of importance to future chapter 11 cases that include mass tort claims.
Today, more on the amazing world of bankruptcy where some say bankruptcy code section 105 may be used to issue an injunction to solve pretty much any and all problems of a debtor parent,including issuing injunctions to protect solvent subsidiaries.
Courtesy of LAW360, here's the link to an amazing adversary complaint filed in the Lyondell bankruptcy. There, the debtor seeks to enjoin creditors from suing 94 affiliated entities not yet in bankruptcy regarding a paltry $ 650 million. So, rather like the Tribune seeking to give the Cubs the benefit of bankruptcy without all the annoying hassles of being bankrupt, we now see yet another debtor seeking the benefits of bankruptcy without having to undergo the hassles of bankruptcy, all on the theory that issuing an injunction would in some way help the debtor. (Actually, Lyondell has done much the same thing before - this is just a new example.) I used to be impressed by the awesome power of federal district judges, but they may be pikers next to a bankruptcy judges wielding bankruptcy code section 105 powers.
Think about how this same principle could play out in the context of product laibility or other tort claims against uninsured subsidiaries of a debtor. For example,the next case may be a debtor asking the court to enjoin inconvenient things like co-defendants in tort suits bringing cross-claims against debtor entities not in bankruptcy. Thus, Parent Co. could file for chapter 11 but not put sits ubsidiaries into chapter 11. Parent Co. could then go to bankruptcy court to ask for an injunction barring cross-claims or tort claims against subsidiaries on the grounds it could be inconvenient to Parent Co.
Bad policy? Giving debtors that kind of power surely gets rids of some of the incentives to do responsible things like buying adequate insurance, carefully manufacturing well-designed products or otherwise acting responsibly. That outcome is bad news for responsible entities left as targets in the tort system. And, how do good lawyers craft meaningful warranty and indemnification agreements for sales of products between entities if tort and contract risks and obligations can all be terminated just by filing a petition for a parent entity.
Can you imagine the howls of "unfairness" and "bad policy" if a Chinese bankruptcy court issued such an order to protect non-bankrupt subsidiaries of a Parent Co. maker of defective cars that killed or maimed many people ?
Here's a key quote from the complaint:
NATURE OF ACTION
1. This is an adversary proceeding brought pursuant to Rules 7001 and 7003
of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules").
2. The Plaintiff-Debtors assert this complaint for a preliminary injunction
pursuant to section 105(a) of title 11 of the United States Code (the "Bankruptcy Code"), Rule
65 of the Federal Rules of Civil Procedure, and Rules 7001(7) and 7065 of the Federal Rules of
Bankruptcy Procedure (the "Bankruptcy Rules") to enjoin until at least January 31, 2010 any
attempts to enforce any rights or exercise any remedy under the $615,000,000 and
€00,000,000 8.375% senior notes due August 15, 2015 (collectively, the "2015 Notes") against
guarantors of the 2015 Notes that have not filed a petition for chapter 11 protection (the "Non-
Chrysler Opinion by 2d Circuit - Todd Brown Comments On the Sacrifice of Rights of Future Claimants and I Pile On Regarding The Scope of Future Claima
Todd Brown is a former defense-side lawyer (Wilmer Hale and Jones Day) now teaching law in Buffalo after a stint at Temple. Mr. Brown has written pretty extensively and astutely on deep flaws in asbestos bankruptcies (see my post here regarding his prior law review on section 524(g)). Mr. Brown has been guest blogging and commented here on Pointoflaw on two aspects of the 2d Circuit's Chrysler opinion. As it pertains to tort claimants, Mr Brown said the following:
" Second, the panel addressed the various arguments that the Chrysler assets could not be sold free and clear of successor liability for various personal injury type claims. Here, the panel adopted a fairly broad reading of the "interests" that can be cleansed in a Section 363 sale, reasoning that this interpretation is more consistent with the purpose of this section and the priority scheme of the Bankruptcy Code.
The panel refused to weigh in on the question of whether a Section 363 sale can cleanse future claims (such as those that might arise from asbestos exposure). This not only makes sense in the abstract; it is the right approach for future claimants. As we have seen in the 524(g) context (which requires setting aside funds to pay current and future asbestos claims, among other things), future claimants' interests are often sacrificed by those currently asserting asbestos claims against bankruptcy estates. Now that courts have started taking a harder line against these schemes, it is easy to see how the 363 sale approach might be viewed as a possible end-run around 524(g)'s limitations on front-loading recoveries. Until the "free and clear" sale's applicability to future claimants is clarified, however, such an end-run remains, at best, extremely risky for most asbestos defendants." (emphasis added).
Todd certainly is correct that the the interests of future claimants have repeatedly been been sacrificed in the asbestos chapter 11 cases. To go further, recognize that future claimants are NOT just the personal injury claimants, and instead there are multiple types of future claimants against the debtor's estate. Future claimants may be, for example, state agencies that want to recoup expenses from a debtor that caused personal injuries or created an environmental mess. Future claimants also include underlying case co-defendants which want to pursue cross-claims against former co-defendants now hiding behind chapter 11 injunctions The same applies to those insurers with subrogation and indemnity rights. against debtors.
Bankruptcy judges and plan proponents may in the future rue the day they did not 1) give due process notice to these groups of future claimants, and 2) did not cause appointment of a futures representative who actually intended to and actually did represent the interests of these other groups of "future claimants."
Today's post follows up on this August 13 post regarding asbestos plaintiff's lawyers asking the Court to order the rest of the world not give any effect to whatever the Court finds on Grace's solvency, and item 4 of this prior post of May 12 regarding Nobel prize winner James Heckman's expert report in Grace in which he and the non-asbestos creditors indicted bankruptcy court estimation proceedings as having no scientific validity.
The topic today is Grace's August 7 trial brief asserting that it is impossible for the Court to determine whether Grace is solvent or insolvent, and that instead it should just find that Grace will be solvent and viable if the plan is confirmed. Grace's brief [Docket 22732] is available through PACER or here.
Key quotes from the Grace brief are below. The gist is that estimates of its "personal injury liability" range from a low end of $ 200 million (from Grace's expert, Tom Florence) to $ 6.2 billion (plaintiff's expert Mark Peterson). In addition, its "property damage liability" is estimated by some at about $ 3-5 billion, with one calculation suggesting $ 82 billion. The facts, as argued by Grace, are set out below. The question I pose is this:
In tort cases, we say that good science must be applied. In business litigation, the general rules is that damages must be proved with reasonable certainty. Given those rules, why would it be socially useful and/or constitutional for bankruptcy courts to issue world-wide injunctive orders without making actual factual findings on key issues when the factual claims are so extremely different as they are in the Grace case, and the answer on solvency plainly could come out on either side of the solvency question?
In posing that question, I recognize that Grace and others will and do say that what we need most are deals that end litigation and that courts should accept deals. But, isn't it also fair to say that individual case settlements are much different because, unlike Grace's desired confirmation order, those other settlements do not include sweeping injunctions purporting to bar and limit the manner of future prosecution of tens or hundreds of thousands of present or future claims to be asserted by personal injury claimants, and that also will enjoin cross-claims or subrogation claims to be asserted by underlying case co-defendants and/or insurers in those same hundreds or thousands of future personal injury claims?
The Grace brief states the following, at 12-14:
"Among the most significant hurdles that the Committee and the Lenders must overcome
before they even get to the analysis under section 1129 is the requirement that they prove the Debtors are solvent. This they cannot do. The most significant component of Debtors' liabilities, the Asbestos PI Claims, has never been agreed upon or adjudicated. The estimation proceeding, which was designed specifically to estimate the value of the Asbestos PI Claims,was not completed. And there has never been an agreed upon or adjudicated resolution of Debtors' potential property damage asbestos claims. Without such adjudication, the liabilities cannot be established, and the Lenders and Committee cannot prove that the Debtors are solvent.
The incomplete estimation proceeding only highlights the fact that, absent the Plan, there is an enormously wide range of estimated values of the Debtors' asbestos liabilities. For example, the Debtors' estimation expert, Dr. Tom Florence, estimated that value of Debtors'asbestos personal injury claims ranged between $200 million and $989 million with a median value of $468 million. But Dr. Denise Martin, another one of Debtors' experts, determined that at the standard 95% confidence interval for scientific reliability, Dr. Florence's estimates could range from $4.6 million to $6.3 billion. The PI Committee's expert, Dr. Mark Peterson, could
offer no more definite estimates of Debtors' asbestos liabilities. He opined that Debtors' potential liabilities for asbestos personal injury claims were "between $4.7 and $6.2 billion and most likely between $5.4 and $6.2 billion." See Expert Report of Dr. Mark Peterson in Connection with the Asbestos Personal Injury Estimation Hearing, dated June 20, 2007 at ES-5 (Dkt. 16113, Ex. A).
Likewise, the value of the Zonolite Attic Insulation ("ZAI") claims is also highly
uncertain and disputed. While the Plan provides between $54.5 million and $58 million to ZAI (and potential additional contract payments), ZAI made substantially higher demands. For example, ZAI claimants have previously stated that ZAI could potentially be in 11 million homes5 with a value of$5,000 to $7,500 per home,6 for a total of up to $82.5 billion. Even using the claimants' lower estimates of 1 million homes7 at a value of $3,000 to $5,000 per home, the total liability would be $3 billion to $5 billion. The range of non-ZAI Propert Damage liability is also entirely uncertain. While the Plan provides $ 49.3 million for non-ZAI Property
Damage claims, the potential claim was much greater. Together, the total potential Property Damage liability, absent a Plan, reaches at least $3.149 billion to $5.149 billion and may be much greater.
B. The liability disputes foreclose any demonstration of solvency. The Plan
disposes of that liability and therefore cannot be relied on to prove solvency.
As described above, there has never been an adjudication of Debtors' asbestos liabilities, and estimates of those liabilities vary greatly. There is simply no estimation method that can accurately measure the Debtors' asbestos liabilities. Without a binding determination of Debtors' potential asbestos liabilities, there cannot be a final and binding determination that Debtors are solvent. Zily Aff. ~ 4.9
As discussed infra, the Lenders' new expert, Robert 1. Frezza, relies on estimates from the never-completed estimation hearing to attempt to "determine" Debtors' solvency. This attempt is unavailing. Indeed, the only way that Mr. Frezza can even begin to argue Debtors' solvency is by relying upon the Plan, the very one to which the Committee and the Lenders now object. Absent the Plan, there is no cap on Debtors' asbestos liabilities. As already noted, the Proposed Asbestos Settlement, which forms the basis of the Plan, does not represent an adjudication of the Debtors' asbestos liabilities. Rather, it represents a compromise that disposes
of the need to adjudicate those liabilities. Without the Plan, all that is left are potentially enormous amounts of asbestos liabilities, the adjudication of which would determine whether Debtors are solvent. In other words, the Plan does not prove solvency; it paves the way for solvency from and after the Effective Date."
Asbestos Plaintiff's Lawyers Ask W.R. Grace Bankruptcy Court to Order that Its Findings - on Solvency - Do Not Matter In any Other Forum
The W. R. Grace chapter 11 case has produced a striking motion that highlights the too often bizarre and unconstitutional nature of much that happens in mass tort chapter 11 cases. In their motion, available here [Docket # 22543], the Asbestos Creditors Committee and the Futures Representative ask the bankruptcy court, Judge Judith Fitzgerald, to issue an order that any post-trial findings she makes on the solvency of Grace are to have no effect outside of her courtroom. The motion goes on to say that Grace does not object to the motion or proposed order.
As proof that I am not making up this motion "to pay no attention to the findings," set out below are key quotes from the motion and the proposed order. The full text quotes are followed by analysis of why the motion is rather absurd, why it was filed, and why it is unfair to co-defendants who remain stuck in asbestos cases in which Grace was, is or should be a co-defendant. The short answer, in my opinion, is that the motion to pay no attention to the findings is a transparent ploy to game the state courts by having them treat Grace as if it is insolvent even though it is in fact solvent. Why? Because Grace being viewed as insolvent by state court judges will in some cases block state court proceedings from properly allocating fault and/or monetary losses to Grace, thus defeating state laws on allocating fault and loss among multiple tort defendants.
1) Key Quotes from the Motion to Pay No Attention
The following are the key portions of the motion to "pay no attention to the findings:"
"In support [of this motion], the ACC and the FCR state as follows:
1. As the Court is aware, the Bank Lenders, various unsecured creditors, and the Official Committee of Unsecured Creditors (collectively, the "Unsecured Creditors") object that the Debtors are solvent and, therefore, the Unsecured Creditors are entitled to receive post-petition interest. The Unsecured Creditors have indicated that they intend to litigate this issue at the upcoming confirmation hearing.
2. Whether the Unsecured Creditors are entitled to post-petition interest, and
if so, at what rate is, at bottom, a contractual dispute between the Debtors, on the one hand, and the Bank Lenders and other Unsecured Creditors, on the other hand. Neither the ACC nor the FCR are parties to the relevant contracts, and are not participants in that dispute. Accordingly, the ACC and the FCR are not required, and do not intend, to present evidence on these issues."
Here is the request for relief:
"WHEREFORE, the ACC and the FCR respectfully request entry of an order, in the form of the proposed order attached hereto, providing that any findings or conclusions by the Court with respect to solvency shall only be used for the purpose of determining whether the Unsecured Creditors are entitled to postpetition interest and shall not be used by any party for any other purpose, and granting such other and further relief as the Court may deem just."
Set out below is the key portion of the proposed order - note that it is NOT limited to the bankruptcy court case and instead refers to any proceedings anywhere, such as a state court asbestos law suit where Grace being solvent might make it possible for other defendants to allocate fault or liability to Grace:
IT IS HEREBY ORDERED that:
Any findings made or conclusions reached by the Court with respect to the Debtors' solvency shall be used only for the purpose of assisting the Court to resolve the question of whether Unsecured Creditors, as defined in the Motion, are entitled to postpetition interest and shall not be used by any party in any proceeding for any other purpose. (emphasis added)
IT IS SO ORDERED.
2) Analysis of the Motion to Pay No Attention to the Findings
The ACC's motion is striking for multiple reasons. To begin with, consider its premise. According to the ACC and Futures Rep, they are parties to the case with notice and a meaningful opportunity to be heard, but they say they can just sit back and not present evidence and not be bound by whatever happens. That certainly seems rather absurd when the entire chapter 11 case was driven by present and future asbestos claiming. Indeed, the ACC spent several years contending that Grace is insolvent due to an alleged $ 6 billion or more of "asbestos liabilities." But, the ACC and the Futures Representative caved in and settled the present and future asbestos claims against Grace for far less than $ 6 billion after Grace went to enormous effort and expense to prove the bogus nature of many or most asbestos claims against it. The settlement in fact is said by Grace to have a present value of less than $2.5 billion and even the plaintiff's lawyers are said in this AmLaw article to have conceded the present value is less than $ 3 billion. And, when one looks at the settlement, only $ 250 million of present cash is being paid out by Grace itself before 2019- the deal,as described before here, is:
"The trust that will pay out asbestos claims will be funded by a $250 million cash contribution from Grace (payable on the company's emergence from Chapter 11); an additional $1.55 billion from Grace paid over 15 years, beginning in 2019; Grace's asbestos insurance coverage, worth an estimated $600 million; warrants to purchase Grace shares; and more than $1.2 billion in previous settlements with companies accused of fraudulently purchasing Grace assets."
It's rather hard to imagine that $ 250 million is even close to being the tipping point for Grace between solvency and insolvency.
The motion of the ACC and the Futures Representative also is striking for what it says about bankruptcy court proceedings. If anyone can figure out whether any entity such as Grace is or is not solvent, doesn't it make sense that it might be an experienced bankruptcy judge? And, if the court does make findings on solvency, why wouldn't the findings bind parties such as the ACC who were given meaningful prior notice of the hearing and the opportunity to participate in the hearing ?
As referred to above, another question of course is: why have the ACC and the Futures Representative asked the bankruptcy court to order that its findings on solvency should not mean anything anywhere else in the world. And, why would Grace not object to the motion when it has spent several years in arguments denying the extent of its alleged "asbestos liabilities" and, thus, its insolvency ?
In my opinion, the motivation for the motion is that a bankruptcy court finding that Grace is solvent would create an inconvenient truth for asbestos plaintiffs. Why? My view is that the asbestos plaintiff's bar does not want Grace found solvent because that ruling would have an adverse impact in state court asbestos tort cases where various state law rules apply to the allocation of damages and/or fault to solvent and insolvent entities.
Specifically, so long as Grace is viewed as insolvent, the laws of some states will completely block or limit the ability of co-defendants in asbestos trials to have financial liability or fault allocated to Grace. But if Grace is deemed solvent, those joint and several liability rules may not be applied and then co-defendants could use trial to have fault or damages attributed to Grace even if Grace does not have to actually pay out any cash. For example, in some states, a trial finding that Grace is 50% or more at fault could cause other defendants to become only severally liable for economic losses equal to their allocated percentage of fault. Thus, a finding that Grace is solvent could and should cause plaintiffs in some individual cases to collect less money from co-defendants when a jury or judge finds that Grace in fact was at fault for a particular person's asbestos disease. In short, joint and several liability rules why the ACC and the Futures Representative filed their motion asking that the bankruptcy court to order the rest of the world not to pay any attention to what the bankruptcy court says about Grace's solvency.
The ACC/Futures Rep. motion to "pay no attention to the findings" also indirectly highlights other absurdities and inconsistencies in the relationships between and interactions of state and federal tort trials and chapter 11 proceedings. The absurdities arise in both chapter 11 cases actually caused by mass tort claiming and in chapter 11 cases such as GM and Chrysler where the chapter 11 case was not specifically caused by a mass tort problem but the chapter 11 case injunctions have huge impacts on underlying tort cases as they purport to cut off present and future rights to bring lawsuits against debtors, insurers and others. Trying to cover all the inconsistencies would require a book, but the following provides some examples.
One example of inconsistency arises from the positions the plaintiff's bar takes regarding the role of federal supremacy. In most state court tort cases, plaintiff's lawyers bitterly oppose federal supremacy and federal preemption. Time and again, plaintiff's lawyers argue that state law should control tort issues. And, in the GM and Chrysler chapter 11 cases, the ACC and other tort claimants argued at length that state law rights could not and should not be cut off by an order and injunctions issued in a chapter 11 judge court. And, in the future, tort claimants of all kinds no doubt will say that plaintiffs were denied due process in the GM and Chrysler cases, and are not bound by those federal court orders.
In other contexts, however, the plaintiff's personal injury bar and future's representatives go to great lengths to support the power of bankruptcy courts to issue sweeping orders binding everyone in the world to whatever went on the bankruptcy court. In asbestos bankruptcies, the plaintiff's bar time and again argues that bankruptcy courts can and should deem themselves to have incredibly broad powers to create billion dollar trusts to help debtors exit chapter 11 and at the same time pay money to real - and not real - "victims." Along the road to the creation of such trusts, plaintiff's lawyers unabashedly sell the certainty created by the bankruptcy court injunctive orders under section 524(g) of the bankruptcy code. Look back at the terms of the Grace deal above - the plaintiffs bar sold certainty to Grace, to insurers, and to entities that bought assets from Grace.
Particularly worth noting is the way the plaintiff's bar sells certainty to insurers. The deal invariably is: agree to pay $ x now, $ x over ___ future years, and then you, the insurance company, can have the benefit of a federal court injunction protecting your company and its insurance policies from any more lawsuits involving asbestos or any other tort claims arising from the debtor. That certainty, it is said, will protect the insurer against "direct action" claims by plaintiffs, against contribution claims by other insurers, and against claims arising from what the insurer may or may not have hidden from the public. Indeed, being able to sell that kind of certainty was the central point of the facts related to this year's Supreme Court opinion in the Manville/Travelers case, which I've touched on before at posts such as this one. Thus, in that context, plaintiff's lawyers embrace and extol federal bankruptcy court supremacy and want bankruptcy court orders to apply in every case and every time so that the plaintiff's can sell more certainty to more entities at higher prices. Thus, that's one example of glaring inconsistency as the plaintiff's bar extols federal supremacy in that setting, but denies it in other state court settings and seeks to moot it through their motion to "pay no attention to the findings." (And by the way, the Supreme Court's oral argument questions - and its opinion - in Manville/Travelers both reflect the Court's lack of a meaningful record on or other knowledge of what actually happens in the chapter 11 mass tort cases that some of the justices characterized as "mysterious.")
The plaintiff's bar is enormously clever and creative. They have created two different compensation systems - one composed of $ 30 billion or more of asbestos trusts and the other composed of ordinary tort law suits. To better serve their clients and their own pocketbooks, the plaintiff's bar seeks to keep the two compensation systems apart so that they can have their cake and eat it too (a phrase Bates White has been the first and most public to apply to the situation). The motion to "pay no attention to the findings" is merely one of the more recent examples of how the two systems can be and are in fact being gamed. How can this happen? Because the two different systems are run by judges who have little or no detailed understanding of what is happening in the other system, and because almost all bankruptcy and state court trial court judges view their primary job as getting individual cases resolved, regardless of the consequences for others.
One final thought. Doesn't the motion bring to mind the Wizard telling Dorothy and the others to pay no attention to the man behind the curtain?
Want More on the Interplay Between Asbestos Trusts and Judicial Proceedings ? Go to the HB Asbestos Seminar in San Francisco 9/23-9/25
As posts on this blog reflect, there are in my view enormous issues out there regarding the interplay between asbestos trusts (mainly chapter 11 trusts) and the state court tort system. Happily, asbestos litigation seminars are paying an increasing amount of attention to the issues arising from the two parallel compensation systems. Two upcoming seminars offer great opportunities to learn more about the asbestos bankruptcy issues and much more.
Here are some specifics for the first of the two seminars:
1) HB Asbestos Litigation Conference Sept. 23-25 in San Francisco
The HB group took over from Mealey's and is running an upcoming 3 day asbestos litigation seminar. The program in general is excellent and is of special interest to me because of its focus on asbestos bankruptcy issues and because one of the chairs is fomer Chicagoan, Joe O'Hara, a lawyer who has tried asbestos cases for years for Owens-Illinois. Joe is now the Asssociate General Counsel for Owens-Illinois and a great lawyer I've known for more years than I want to admit. Joe and OI are very tuned in to the asbestos bankruptcy issues, and so the seminar program includes two Sept. 23 sessions focused on asbestos trusts and asbestos bankruptcy issues. In addition, numerous state court judges will be there and will end up hearing and/or saying a lot about these issues. Despite lots of other competing life events at that time, the sessions look so good to me that I'm flying out for just that day.
The specifics for the two asbestos trust and bankruptcy sessions are as follows; the speakers are quite knowledgeable:
2:30 Asbestos Claims Processing
•What bankruptcy trusts are operating and what are they paying?
• Timing of claims filing
• Best Practices - efficient methods for claim submissions
• Avoiding mistakes - areas of concern for claimant processing & payment
• W-9 forms, tax issues, 1099's to clients
• TDP's and processes within that may benefi t defendants
• Accounting for the money still in trust, the value of average mesothelioma claims & future projections on claims vs. assets and funds availability in trust
Francis McGovern, Esq., Professor of Law, Duke University School of Law
Larry Haden, President, Claims Resolution
Nicholas Vari, Esq., K&L Gates
3:45 The Surge in Bankruptcy Trust Payouts: Can You Make Everyone Happy? Maximizing Recoveries and Creating Fair Credit Allocation
• What adjustments should be made in the tort system to account for the bankruptcy payouts?
• What disclosure obligation should exist regarding pending trust claims, actual payouts, and expected future trust fi lings?
• Should the tort system encourage or leverage plaintiffs to file claims with the Trusts before the claims leave the system?
• Third party practice and the Defendants' interaction with the Trusts
Moderator: Joseph O'Hara, Jr., Esq., V.P. & Associate G.C., Owens-Illinois
Hon. Richard Aulisi, Supreme Court Justice, 4th Judicial District of New York
Hon. Ken Kawaichi, (Ret.), JAMS
Hon. James McBride, Superior Court of California
Joseph Belluck, Esq., Belluck & Fox LLP
To register, the HB home page is here. The entire asbestos agenda is here. In this tough yuear for budgets, note that inside counsel from corporations and insurers are invited to attend free of charge.
Significant mass tort bankruptcy issues are being contested as the W.R. Grace asbestos chapter 11 case moves deeper into its phased confirmation hearing. Subsequent posts will touch on some of the issues and pleadings.
Two issues are of perhaps greatest overall note. First, multiple objectors are arguing that Grace in fact is solvent, and so they argue the plan is not confirmable because the payouts called for by the plan violate, they say, various subsections of code section 1129 regarding the relative rights to payments as between creditors and equity holders. In short, they say the equity owners are being allowed to keep too much in the way of assets.
Another big picture point is that the Grace case presents an unusual and wide-ranging set of plan objectors, with most or all of the challengers having apparently uncontested standing to object to the plan. So, this chapter 11 case could end as one of the few asbestos chapter 11 cases that actually ends with rulings and judgments instead of the usual bankruptcy court deals.
As a reminder of how Grace came to this juncture, recall that on April 7, 2008, W. R. Grace announced a settlement in principle of many but not all of the asbestos injury claims related to its long-running Chapter 11 case. The settlement occurred when the case was in the midst of a hotly contested trial on "liability estimation" for personal injury claims. Grace had presented significant evidence on the flaws of the "mass screened" asbestos cases, and was slated to present further evidence intended to diminish the value of future claims. Overall, Grace was putting on evidence to prove that many or most claims against were frivolous claims. Part way through that battle, Grace and the ACC (the Asbestos Creditor's Committee) reached a deal.
The prior settlement deal is described in the excerpts set out below from this article by Alison Frankel in the online American Lawyer.
Familiar Faces Central to W.R. Grace's Settlement of Asbestos Claims
The American Lawyer
By Alison Frankel
April 09, 2008
Familiarity doesn't preclude disagreement, however. W.R. Grace, which was forced into Chapter 11 bankruptcy in 2001 by asbestos liability, estimates the settlement to be worth less than $2.5 billion in present day value. The plaintiffs lawyers say its present value is closer to $3 billion.
The trust that will pay out asbestos claims will be funded by a $250 million cash contribution from Grace (payable on the company's emergence from Chapter 11); an additional $1.55 billion from Grace paid over 15 years, beginning in 2019; Grace's asbestos insurance coverage, worth an estimated $600 million; warrants to purchase Grace shares; and more than $1.2 billion in previous settlements with companies accused of fraudulently purchasing Grace assets.
Unlike previous bankrupt companies that reached deals with asbestos claimants, W.R. Grace went to trial to challenge the plaintiffs lawyers' estimation of its liability for the more than 100,000 asbestos claims it faced. Claimants estimated that liability to be $3.5 billion to $7 billion. Grace contended it owed less than $800 million, though it set asbestos reserves at $1.7 billion.
Beginning in January, Delaware federal bankruptcy court Judge Judith Fitzgerald presided over a trial to determine both the appropriate way to estimate claims and the total value of those claims. Grace had concluded its case and plaintiffs lawyers had presented their first witness when the deal was reached.
"The real driving force was not what was happening in Judge Fitzgerald's courtroom but how long it would take to reach a conclusion through litigation," says Elihu Inselbuch of Caplin & Drysdale, who was counsel to the asbestos claimants committee. "It could easily have gone on another four years, with asbestos victims getting sick and dying the whole time."
Update of July 14 to May 7 post reposted below: The National Law Journal includes a July 13 article updating on the case below. The update is that some defendants sought interlocutor appellate review of the trial judge's order in which he "reluctantly" declined to bar a deposition transcript created under the circumstances described below. Thus far, review has been declined by California's intermediate appellate court and by the California Supreme Court. The defendants, however, will continue to press the issue through other appeals and when it arises in other cases.
May 7 post
More and more legal news outlets have picked up on some parts of the asbestos litigation gamesmanship. Walter Olson's Pointoflaw uses the humorous (for lawyers) title "Asbestos: The Texas- California Two-Step" to link back to a California blog article (from Cal Biz Lit) that links to and quotes from a California trial judge's opinion (available here in full text) sharply criticizing the Waters & Kraus plaintiff's firm for its litigation tactics. Specifically, Judge Munoz criticized the firm for at least 10 times filing cases in Texas and then refiling in California after the plaintiff has been deposed in Texas. The same opinion was picked up in Legal News Line and today by law.com via the National Law Journal, and the ABA Journal online.
Why do plaintiff's play that game? Because it helps the plaintiff avoid meaningful scrutiny in depositions. How/why is that true? Because some states, including Texas and Illinois, have rules that limit depositions to six hours. Specifically, as Judge Munoz explained in his opinion:
"Plaintiff's law firm, which is a multi-state firm, has, in at least nine other cases, filed cases in Texas which were then dismissed after the plaintiffs' deposition had been take."
The reason for this procedure is apparently because under Texas law the deposition is severely limited to six hours per side. Additionally, under Texas law the failure to mention the defendant's product is a basis for summary judgment. The law in this state is to the contrary."
"It is the court's opinion that the filing of the Texas action was deliberately done to prevent the defendants from having adequate discovery and to prevent the filing of motions for summary judgment because of the California rule requiring specific questions about product identification."
Judge Munoz is correct that the tactic can and often does prevent a meaningful defense. Why is that - shouldn't six hours be enough? No, not even close in many cases. Why? Because in many cases, the plaintiff sues dozens of defendants and makes claims involving alleged "exposure" at dozens or hundreds of job sites. For example, the plaintiffs often are tradesmen (say an electrician or a pipefitter) who worked for a business that serviced dozens of businesses large and small (for example, stand alone power plants and power generating facilities at factories or refineries). That person may well have worked at dozen or more facilities a year, and may well claim that he was "exposed" to asbestos at each such site. In that situation, the defense lawyers need to carefully depose the witness to prove that in fact there was no actual inhalation of fibers from a specific job site. That proof is gathered by asking about the specifics of the work at the job site.
For example, in a typical deposition, the defense lawyer may be given a job site list from the plaintiff. The lead lawyer taking the deposition will then say: "I see you have listed the Acme Manufacturing Plant as a job site at which you claim you were exposed to asbestos. Please tell me about why you think you were exposed there?
The plaintiff may well respond: "I think I was exposed at the XYZ company because I brought in electric lines to a circuit breaker, and there were big pumps about 30 feet away from me. I assume the pumps contained gaskets that contained asbestos, and I assume the pipes leading in and out of the pumps were insulated with asbestos."
Once that testimony is on the record, then the defense lawyer for the gasket company needs to question witness in detail to find out the specifics of the pumps (who made them, what he knows about them) and then needs to take testimony to prove that in fact there was no actual "exposure" because, for example, 1) the plaintiff never touched the pump, and 2) the gaskets, if any are inside the pump, and the pumps were operating at the time of the plaintiff's work, so that fluid was flowing through the pumps and therefore any gaskets were wet and incapable of releasing a respirable asbestos fiber. Doing that takes time, but it has to be done if the company wants to obtain summary judgment when that "exposure" (or a few like that) are the only basis for potential liability. So, for a plaintiff with a long job site history, the deposition process may take literally several days if the testimony is to be taken well so that defense lawyers can make a record that proves up a solid defense for trial for each defendant in the position of the gaskety company. The plaintiff's lawyers, however, seek to limit the depositions to six hours to avoid the strong defenses, and of course will say it's their job to zealously represent their clients.
Isn't this all silly - shouldn't the plaintiff refrain from putting at issue job sites and alleged "exposures" where realistic lawyers who know their science also know that there was no actual inhalation at all of asbestos fibers or no meaningful inhalation? Yes, but that's not what happening in the tort system. Instead, the problem is that some but not all plaintiff's lawyers are pursing the "any fiber fiber counts" theory, supported by a small cadre of experts who will testify to their opinion that "any and all fibers add to the risk. "' Some courts have rejected that theory, but others let it go to the jury and others do not yet have concrete appellate case law. For much more detail on the "any fiber" or "every fiber" theory, the experts, and the case law, look to Mark Behren's very recent article "What's New in Asbestos Litigation" at pages 528-531.
The deposition time problem is made worse by the plaintiff's who claims that the pump maker should be held liable for failing to warn the plaintiff about the insulation that someone else installed over the pipes that connect to the pump . That legal theory also is popular in asbestos litigation today - for more specifics on the theory and the rulings to date, once again see Mark's article, but this time at pages 542-545. Here, though, the point is not to debate the merit of the legal theory. The point instead is to explain that because of that theory, the pump maker's lawyer needs to spend time questioning the witness about the insulation in some detail. E.g. does he know the age of the insulation (in the US, it won't have asbestos if it ws installed after about 1973, absent unusual facts), does he "know" if it contained asbestos (the answer should be no), was the insulation ripped or torn (properly jacketed insulation does not release fibers) , was anyone working on the insulation (could release fibers), did he touch the insulation (he probably did not but that's needed for the summary judgment motion). The result is that a six hour time limit often times denies a defendant its due process right to a meaningful opportunity to gather evidence and have a meaningful trial.
Some but not all plaintiff's lawyers typically will respond in at least two ways. First, they will say that some defendants send to depositions some ill-prepared defense lawyers who ask stupid questions because some insurers and some clients are too short-sighted to pay for well-trained lawyers who know their facts and science. That complaint is sometimes valid. Indeed, I've seen it happen. But that's NOT the fault of the well-prepared gasket company lawyer who must be accorded the due process chance to gather meaningful evidence to protect her client. The remedy instead is for the plaintiff's lawyer to bring a motion for protective order specific to that lawyer or defendant.
Second, plaintiff's lawyers will complain that some defendants play their own asbestos litigation games, such as removing cases to federal court just before trial of a dying mesothelioma victim, with the result being the loss of the trial date and the plaintiff's death before the trial is rescheduled. I'm told that has in fact occurred. But, once again, that's not the fault of all defendants and it's not relevant to the question of deposition time limits.
Finally, some will say that the problem is that the plaintiff came in and hired counsel just before death and there is not enough time. That can happen, but it's getting harder and harder to justify or believe that excuse in this age of non-stop mesothelioma ads online and on tv. And, in any event, when counsel was hired does not control the number of hours needed for deposition.
What steps would help to end this game. There is no one answer. One step would be an asbestos case-management order that automatically grants an extension of the deposition time in any case involving more than 5 defendants and 10 job sites. Another good step would be to have an activist trial judge who understands the science and the law, and who will take calls from depositions to block time-wasting by anyone, and who will ensure that each defendant receives a meaningful opportunity to prepare its defense.
Chicago Cubs to Follow GM and Chrysler in Using Chapter 11 - Just Another Tool for Managing/Ending Liabilities ?
The following item from Crain's Chicago Business speaks for itself as to today's use of chapter 11 to manage/resolve risks and "liabilities." In some instances, though, the table is being set for constitutional law battles ahead on just how much a bankruptcy judge can do to alter rights arising under state law or the law of other nations.
Cubs may file for bankruptcy protection to speed sale: report
By: Todd J. Behme July 13, 2009
(Crain's) -- Tribune Co. may file for Chapter 11 bankruptcy protection for the Chicago Cubs to smooth the sale of the team, according to a report.
A short bankruptcy would be a legal move to prevent the Cubs from having any liability related to the bankruptcy case of Tribune, which filed for Chapter 11 protection in December, Bloomberg News said, citing four unnamed sources familiar with the matter.
Spokesman for Tribune, Major League Baseball and Tom Ricketts declined to comment to Bloomberg. The Ricketts family reportedly has reached a deal with Tribune to buy the team.
It's possible the team could be sold without a bankruptcy protection filing, the sources told Bloomberg.
A Chapter 11 filing could ensure that the team isn't tangled up with Tribune's creditors, Michael J. Cramer, an assistant professor of sports management at New York University and who formerly was president of the Texas Rangers, told Bloomberg.
"This would make sense for Major League Baseball," he told the news service. "They would like to see that asset be stand-alone, very clean, not tied up in other issues."
A filing by the Cubs would be meant to provide for quick selling of the team assets, the sources told Bloomberg.
Filing for bankruptcy protection would not mean that the Cubs are having financial problems, Gregory A. Cross, head of the bankruptcy practice at law firm Venable LLP, told Bloomberg.
"You do not have to be insolvent to be in bankruptcy," Mr. Cross, who is not involved in the matter, told Bloomberg. "All you need is a legitimate business reason."
$ 700,000 + per Claimant Expected Payouts for Certain Claimants to An Expected Chapter 11 Asbestos Trust
Updated: Nothing is simple. Some links below are not working to see the underlying documents were uploaded as "pdf packages" instead of simple .pdf files. So, while the link provider figures why a package is a problem at least on some browsers, you may find it easier to see the papers on the free THAN website, which is here. See docket numbers 453 (objection of Waters & Kraus), 454 (Kraus Declaration), 455 (Debtor's response), 456 (Bae declaration), and 457 (Kozen declaration). My apologies for the hassle.
How much money are asbestos claimants obtaining from asbestos bankruptcy trusts ? Unfortunately, different people will give you different answers, and they can sometimes get away with it because most if not all of the asbestos trusts fail to act in a transparent manner. However, some concrete facts about payouts from one trust in formation have now surfaced in papers filed in the Thompson-Hayward asbestos-driven chapter 11 case (commonly known as the THAN case). The papers are especially significant because they include facts about asbestos payments that are set out in a declaration from a credible source - highly successful plaintiff's lawyer Peter Kraus. And, his declaration is backed by confirming emails and spreadsheets. The bottom line, further explained below, is that his declaration and supporting spreadsheets prove significant tort system payments by THAN to Waters + Kraus clients, and that his law firm expects equally large payments for the firm's clients when the THAN trust starts operation. How much? Over $ 700,000, per Waters + Kraus claimant.
How has this information surfaced ? Claimants represented by the Waters + Kraus firm filed with the bankruptcy court late last month a last minute and technically untimely objection to plan confirmation ( I say technically untimely because bankruptcy court deadlines are often absurdly short, and one could very well make that argument here.) The facts about present and expected payments are set out in the Waters + Kraus objection and related papers. The objection already has been denied by Bankruptcy Judge Gerber (yes, the same Bankruptcy Judge Gerber who is hearing the GM case). But, denial of the objection does not change the facts stated in the papers. Meanwhile, Waters + Kraus has filed an appeal to the district court.
What do the papers show about tort system payments? The papers show that the THAN-related entities and Waters + Kraus agree that there was an average tort system payment of at least $ 710,000 per claimant to about 65 mesothelioma claimants represented by the Waters + Krause firm. Why so much ? Mr. Kraus' declaration attributes the average to his firm's zealous investigation of and ability to prove up THAN's history as a seller of asbestos fibers (fyi, THAN also was a maker of Agent Orange). Mr. Kraus' declaration includes supporting spreadsheets listing the claimants represented by his firm by name, along with the 4 digits of their social security numbers. His declaration also includes an interesting form of agreement with respect to solicitation of votes for the prepack.
What do the papers say about payouts from the upcoming THAN trust? read it for yourself, but to me the essence of Mr. Kraus' declaration is the assertion that the Waters + Kraus lawyers agreed to recommend that their asbestos clients vote in favor of the THAN plan based on prepack negotiations in which lawyers for THAN and related entities assured Mr. Kraus that the trust would be created so that payouts to clients of his firm would be on average at least as ample as the tort system payouts.
What are the exact numbers? The papers, indicate a slight disagreement as to the average amount of tort system payments to the 65 claimants. Mr. Kraus asserts that the average payment in the tort system for Waters + Kraus claimants was $ 721,000 per claimant. But, as Mr. Kraus acknowledges, counsel (Mr. Kozen) for an entity known as PENAC (a Phillips Electronics entity) had asserted $ 710,000 as the average, with this modest disagreement apparently never brought to a close.
What other testimony is in the record? Lawyers for THAN (Mr. John Bae) and PENAC (Mr. Michael Kozen) submitted declarations to counter Mr. Kraus' testimony as to exactly how the deal was negotiated and expressed. I commend reading the papers to make your own decision about whether they actually assert a meaningful distinction from the statements of Mr. Kraus. But, plainly their testimony does not take issue with Mr. Kraus' fundamental assertion that he ended the negotiations understanding that the trust is expected to make payments to Waters + Kraus claimants that are consistent with the tort system payments of well more than $ 700,000 per Waters + Kraus claimant. Under the "forthright negotiator" line of reasoning, what he and they knew about the negotiations are relevant facts.
Where are the papers? At least for now, all the papers are available on the free THAN website, which is here, or of course are available through PACER. In addition, copies of some of the papers I thought relevant have been posted to a hopefully permanent spot on the web. Mr. Kraus' Declaration (with exhibits) is here. Briefs and other motion papers are here. And here are the declarations from Messrs. Bae and Rozen.
A future post will provide more on why these numbers are so important in underlying tort cases, and why the numbers and papers provide yet another example of why it is poor policy to allow most if not all of the chapter 11 trusts to operate, as they do now, with virtually no automatic transparency at the claimant by claimant level and with layers of hoops and burdens "baked in to" trust distribution procedures to thwart, delay and increase the expense and difficulty of obtaining meaningful information from the trusts. As always, please bear in mind my continuing disclosure about my work and history to the extent anyone wishes to say they color or inform my statements.
GM - Denial of Stay of Asset Sale and Denial of 2d Circuit Direct Appeal - "Equitable Mootness" to Follow and Defeat Appeals ?
Judge Gerber denied a stay of the asset sale and denied a direct appeal to the 2d Circuit; the order is here (Docket No. 3046). Basic news articles are here (WSJ) and here (NYT).
What the news articles do not mention is a bankruptcy appeal doctrine known as the "equitable mootness" doctrine. Under that doctrine, appeals are sometimes dismissed as moot after the relevant bankruptcy event has happened. Here, the relevant event would be the consummation of the upcoming asset sale that Judge Gerber has refised to stay.
For a recent, cogent and free law review article explaining the "equitable mootness" doctrine and why some say it is unconstitutional, go here for a Santa Clara Law Review article by a law student, Katelyn Knight.
There is irony to the current events in GM. Why? Because in various asbestos chapter 11 cases, counsel for asbestos claimants and counsel for futures representatives have argued and used the equitable mootness doctrine as a leverage point to try to shield chapter 11 plans they approved when many, many millions were being set aside for asbestos claimants. Now the equitable mootness doctrine may hit them as a sword. So goes life in litigation where much time is spent trying to dance on both sides of a sharp edge.
An AmLaw blog article here reports some GM bondholders are not appealing because they lack funds to fight after Judge Gerber refused to appoint an official committee for which legal fees would be paid by the estate. The article includes a helpful link back to a prior article regarding the refusal to allow an official committee.
According to the article:
"Second, and perhaps most interesting for bankruptcy gurus, Richman argues that the sale of GM under §363 of the bankruptcy code stretches §363 to a place it wasn't supposed to go. Here's his direct quote: "Our position on appeal would have been that in enacting section 363 as part of Chapter 11, Congress intended that it would only be used for legitimate sales to commercial purchasers, and not for a government-sponsored rescue where the government is the only purchaser."
Asbestos Claimants Appeal in GM and Seek Appeal to the Second Circuit, as Do Individual Accident Victims
The Ad Hoc Committee of Asbestos Claimants notice of appeal in GM is here but says only that an appeal is taken(Docket No. 2988). The appeal lists as counsel both Stutzman, Bromberg, Esserman + Plifka, as well as the Caplin + Drysdale firm. Like the other product liability claimants, the Ad Hoc Asbestos Claimants also have moved for a direct appeal to the Second Circuit. The Ad Hoc Committee also has moved for a stay of the sale approval order entered on Sunday night the 5th of July.
The core of the Ad Hoc Committee's substantive argument is as follows:
"12. Congress has proscribed the very conduct that the Debtors seek to accomplish through their improper Section 363 Sale--i.e., the transfer of substantially all of their assets to a "new" entity that will simply continue operating free from the liabilities of the old entity--in two parallel provisions of the Bankruptcy Code: Sections 1141(d)(3) and 727(a)(1). The Second Circuit has held that claims--and specifically successor liability claims--are not discharged by a corporate iquidation in bankruptcy. In re Goodman, 873F.2d 598, 602 (2d Cir. 1989). The Bankruptcy Court's erroneous interpretation of Section 363(f) effectively nullifies Sections 1141(d)(3) and 727(a)(1) by improperly allowing the Debtors to circumvent these Code provisions under the guise of a Section 363 sale.
13. Furthermore, the Sale Order purports to allow the Debtors to sell substantially all of their assets free and clear of "claims." However, successor liability is not a "claim," but rather is a status a purchaser has under applicable state law. Thus, Section 363 cannot apply to strip a purchaser of that status."
The Goodman case is a chapter 7 case, not a chapter 11 case, so GM presumably will argue it does not apply. Goodman, however, is a fairly compelling case for the product liability claimants. In Goodman, a businessman and his wife cover a period of years created a series of three businesses to do essentially the same work. The first company was party to labor contracts the later companies did not want to honor the prior labor obligations that had become inconvenient and expensive, and the first company had tried to discharge the obligations through chapter 7.
The Second Circuit held that the bankruptcy court order could not oust the jurisdiction of the NLRB to determine if the later entities were in fact successors to the old business regardless of the corporate niceties that purported to create differences between the different entities. So, in GM, the argument for the claimants runs that just as the bankruptcy court in Goodman could not deprive the NLRB of its power to consider whether the new entities should suffer successor liability under labor laws, the bankruptcy court in GM can not oust state courts of their traditional jurisdiction to decide whether and when to impose state law tort liability on alleged successor entities. The issues could be decided as matters of statutory construction grounds or constitutional law grounds (due process, 5th amendment takings , and maybe even equal protection under Bush v. Gore), but standard legal rules urge courts to resolve issues as a matter of statutory construction before reaching constitutional issues.
(Ironically, by the way, the Goodman case was argued and lost by Mr. Bruce Zirinsky while at Weil, Gotschal. Today, Mr. Zirinsky is with Greenberg Traurig and is the lead lawyer for the debtor in the Thompson -Hayward Chemical Co. asbestos chapter 11 case for which a chapter 11 plan was recently approved by the same Judge Gerber. Thompson-Hayward is a former manufacturer of Agent Orange and seller of asbestos fibers that is using chapter 11 to end its asbestos litigation issues and to settle out hundreds of millions of dollars of insurance policies that might otherwise be available to future claimants who could file direct actions against insurers.)
Meanwhile, the Individual Accident Litigants in GM also have sought a direct appeal to the 2d Circuit; the papers are here (Docket No. 2990). The accident litigants point out that the 2d Circuit still has not issued an opinion in Chrysler to explain the reasoning behind its judgment to approve the 363 asset sale. The accident litigants argue that this appeal in GM may also inform the Chrysler opinion the 2d Circuit said it would issue in due course, thus sharpening the issues for ultimate appeals to the Supreme Court in both Chrysler and GM.
The Individual Accident Victims further frame the issue in broad societal terms, arguing that society has a real stake in whether Code section 363 can be used to indestructible asset sales followed by de facto liquidations, a technique Wall Street can and does use to cause the bankruptcy code to cause immediate distributions of remaining assets before long tail tort claims emerge and are compensable. The Accident Victims frame the 363 issue as follows:
Indeed, this issue is one of the most important issues facing bankruptcy practitioners and distressed debtors generally.Satisfactory uniform resolution of the scope of Section 363 is critical for the entire nation, particularly since, as Professors Baird and Rasmussen wrote in The End of Bankruptcy, 55 Stan. L. Rev. 751, 752 (2003):
"Corporate reorganizations have all but disappeared. Giant corporations make head-lines when they file for Chapter 11, but they are no longer using it to rescue a firm from imminent failure. Many use Chapter 11 merely to sell their assets and divide up the proceeds.... Rarely is Chapter 11 a forum where the various stakeholders in a publicly held firm negotiate among each other over the firm's destiny"
GM Asset Sale Plan Approved by Judge Gerber; Some Individual Car Crash Victims Already Have Appealed
The General Motors chapter 11 asset sale was approved on Sunday night in an opinion that is 50 pages, plus appendices. The opinion is here. A first read of the opinion indicates that Judge Gerber agreed with GM on all material issues regarding freeing GM from liability for tort claims except to the extent "New GM" agreed to assume financial responsibility for some but not all future claims. More later wth additional specifics.
A notice of appeal was filed this morning by individual auto accident victims, and is here.
GM Court Denies Relief Sought By Asbestos Claimants for Futures Representative and No Decision on Separate Committee for Asbestos Claimants
In the GM bankruptcy, Judge Gerber has entered today his order [Docket No. 2857] denying the asbestos claimant's motion for appointment of a futures representative for asbestos claimants. He also adjourned to another day the motion requesting appointment of a separate official committee to represent asbestos claimants against GM. The latter motion may be put back on for hearing on three day notice. One wonders what negotiations are ongoing and what evidence is being gathered. The order is here.
Efforts to Resolve GM Product Liability Claims Through Negotation with the Obama Administration - Will They Do Better Than the Asbestos Bankruptcies?
Non litigation alternatives are indeed being pursued in GM to try to settle pending and future product liability claims, as is evidenced by a Friday's June 26 Wall Street Journal article my Mike Spector and Jeffrey McCracken regarding state attorney generals trying to negotiate with the Obama administration over the treatment of product liability claims in GM. The article does not provide any specifics on where the money would come from, but my bet is still on the concept of asking the government to turn over some of its ownership rights in "new GM" to a product liability trust created to pay claims.
The article does not mention multiple key issues that would have to be addressed if a trust is created. One would be: how will someone decide whether or when future product liability payments would be made. Would the claims be made be made through a trust with money set aside to pay claims? Would claims be processed administratively without a trial ? Would the bankruptcy court delegate to state courts the job of trying cases to resolve claims through actual trials ?
Beyond those direct issues, consider also the important rights and interests of the myriad other entities who are routinely sucked into product liability cases with GM when cars are in crashes. Let's assume a trust is set up to pay future product liability claims from a financial base comprised of some cash and stock, as is typically done in asbestos bankruptcy trusts. If a trust is created, then multiple issues arise.
One issue when and how the trust coordinates with state court tort system claims and the rights of other tort system defendants. Suppose, for example, that a car crash victim driving a GM car claims that he is a quadriplegic because a seat malfunctioned. Assume also that the claimant cannot sue GM due to the bankruptcy court having issued an injunction purporting to prohibit future product liability claims against New GM, and old GM has no money. Suppose the quadriplegic does not sue either Old or New GM and instead files a state court lawsuit that names as defendants the entity that manufactured and sold the car seat system to GM, the manufacturer of a component of the seat, and the car dealer that sold the GM car.
In that state court lawsuit, can those defendants do what they would normally do in the state court tort system, which is to bring a contribution or indemnity claim against GM (or the trust) if GM designed and specified the car seat system and/or the characteristics of the component? What are the rights of the car dealer who argues that she should not have to pay any money because all she did is sell the car? Can her company obtain indemnity from that trust or GM ? Can the plaintiff file a claim against the trust and keep it a secret from the parties to the state court litigation on the grounds that processing a trust claim is "a settlement?" Can the plaintiff take the state court case to trial, win money and then later obtain additional money from the trust?
All of these issues are very real, and exemplify problems that have been dealt with badly in asbestos bankruptcy cases where the rights of co defendants have been given at best nominal treatment, and trusts have frequently failed to honor the rights of co defendants. The problems are exacerbated by the reality that many but not all members of the plaintiff"s bar have been gaming the overall compensation system by bringing a state court claims for asbestos injuries, but trying terribly hard to keep the state court defendants from learning anything about claims submitted to any of the many asbestos trusts that collectively hold something in the vicinity of $30 billion. The problems also are made worse by terms in many of the asbestos bankruptcy trusts that purport to allow the plaintiff's lawyers and their clients to resolve the state court claim in full and to then later bring claims against the trusts, thereby obtaining compensation twice in some but not all cases.
Why have these lousy situations emerged in asbestos bankruptcies ? There are a variety of answers and factors, including the plaintiff's bar and debtors trying to keep co defendants and insurers from being allowed to exert any rights in bankruptcy. Another problem is that the bankruptcy court lawyers and judges in general have little or no understanding of the intricacies of product liability claims. Yet another problem is that the bankruptcy code was not designed in terms of its intersection with product liability claims, in part because product liability as we know it today did not really take off and become a major issue until the 1970s. And, when an asbestos bankruptcy code section was added in 1994, the section was very poorly done and bears much of the blame for the asbestos bankruptcies. Yet another problem is that insurance that might be used to pay such claims is often compromised through "an insurance policy buyout" in which an insurance company agrees to pay a fixed amount of money in return for the insured company releasing all of its rights under the product liability insurance. To the dismay of product liability claimants, the money generated by such buyouts typically is not put into a trust and instead of the money may be used for any other purpose, including trying to stave off bankruptcy by paying fees to lawyers and/or investment bankers, or may be be used to pay off secured creditors, leaving no source of funds for product liability victims. And, cynics have said that bankruptcy courts are out of control and so pro-debtor that they will do anything to get a debtor out of chapter 11, including trampling the due process rights of co defendants and tort victims.
One hopes that a much better solution will be created for the GM and Chrysler bankruptcies. One hopes that a better solutions will then be implemented for past and future asbestos bankruptcy trusts. Some but not all of the existing asbestos trusts have failed to respect the rights of tort system of co defendants, and have left the remaining manufacturers to beat he financial burdens created by the bankruptcies of other defendants. This would be a great time to start fixing some of the myriad problems created by the intersection of "long tail liability" claims and chapter 11 cases.
Here are a key excerpts from the Wall Street Journal article:
"The case law is unclear and ambiguous on the issue of future product-liability claims. So when the case law is all over the map, a lot of times it makes sense for both sides to settle," said one administration official."
Last year, GM set aside $921 million for product-liability litigation, and in 2007 it had $1.1 billion available.
"Everyone agrees there has to be some access to the courts," said Maryland Attorney General Douglas Gansler, a Democrat who co-chaired Mr. Obama's presidential campaign in the state.
The auto task force has been caught off guard by the recent outcry from attorneys general and consumer groups. The task force modeled GM's bankruptcy plan after Chrysler's, without giving much weight to the potential fallout from leaving product-liability claims behind, said people familiar with the matter."
"In opposing GM's product-liability plan, state attorneys general are raising a number of complex legal issues, ranging from the power of federal bankruptcy courts to supercede state law to constitutional due-process rights of Americans to sue GM if they're injured by the auto maker's vehicles in the months and years ahead."
An article here provides a quick comment from Elizabeth Warren and mentions law students who helped Prof. Isacharoff.
A Law360 article here includes the following quotes:
"Gary Svirsky, a partner in O'Melveny & Myers LLP's securities litigation practice who has been observing the case, said in an e-mail that the Supreme Court "opted to rule on the narrowest of grounds." The court may have opted to keep its decision narrow "so as not to unduly limit the court's flexibility in addressing complex problems that might be raised in future bankruptcies," such as the recently filed bankruptcies of U.S. automakers, Svirsky said."While beyond the scope of this report, the issues posed by nonderivative claims remain open and alive after this decision in our opinion," he said.
The court "seems to have gone out of its way to not adjudicate the actual merits of the dispute and just say that it has to progress in an orderly fashion from the bankruptcy court," said Samuel Issacharoff, a New York University law professor who represented asbestos claimants in the case before the Supreme Court.serving the case, said in an e-mail that the Supreme Court "opted to rule on the narrowest of grounds."
An Am Law blog article by Alison Frankel reminds readers of prior exuberant comments by Travelers' counsel, Mr. Ostrager, and quotes him as follows:
Ostrager told the Litigation Daily by e-mail that the Supreme Court ruling is "100 percent in our favor." He added: "Every aspect of the Second Circuit's substantive legal reasoning was rejected (either expressly or by implication). It is, therefore, a complete and total victory."
Chinese drywall claims are emerging as a would-be class action issues in the WCI Communities chapter 11 case pending in Delaware. Would be class representatives filed papers seeking permission to present a class proof of claim. WCI has now responded with a brief opposing the class. The opposition is routine in the sense that it follows all the now-standard tactics for seeking to block a class action regarding conditions in buildings. More interesting is the way this debtor wants to treat tort claims individually, in contrast to other "mass tort" cases in bankruptcy in which aggregation is said to be the answer. WCI's opposition brief is here.
WCI explains the issue as follows:
"By her Motions, Goldstein seeks permission to file a claim on behalf of a group of
individuals who have allegedly suffered damages from defective drywall originating from China ("Chinese Drywall") installed in homes by WCI built in Florida. In order to file a class proof of claim, Goldstein also requests that this Court certify a class for purposes of pursuing claims on theories of negligence, strict liability, breach of warranty, and negligent misrepresentation."
Unlike debtors in some other mass tort cases, the debtors here provided individual mailed notice on a broad scope to potential tort claimants. Specifically, the brief says that notice was sent to all who purchased WCI Homes in the last 10 years:
"6. All individuals or entities that purchased a home built by the Debtors in
the last ten years (the "Home Purchasers") received notice of the commencement of the Chapter 11 Cases and separate actual and constructive notice that February 2, 2009 at 4:00 p.m."
According to the brief, the number of claims filed is small ("over 70"), and so one one sees why the debtor opposes a class action that would increase claims. Also interesting is the Debtor's argument that bankruptcy court can and should individually resolve thousands of tort claims, an argument not heard when debtors and other plan proponents seek to "estimate" claim values.
" 22. Here, just as in Grace and Daigle, joinder is practicable. Despite Goldstein's assumptions, the number of homeowners potentially affected by the Chinese Drywall attributable to WCI is more likely to number in the hundreds, rather than the thousands. To date, over 70 homeowners have filed proofs of claim related to the use of Chinese Drywall in their homes. The media coverage devoted to problems with Chinese Drywall has been extensive. Request for Judicial Notice in Support of the Debtors' Objection to Motion of the Sound at Waterlefe, a Condominium, for Entry of an Order Requiring Debtors to Identify and Notify all Potential Defective Chinese Drywall Claimants of a Potential Defective Chinese Drywall Claim and to Enlarge Time to File Claims Arising from Defective Chinese Drywall ("Request for Judicial Notice") [Docket No. 1786].
I've been through the opinion and dissent (here) a couple of times. Travelers won, sort of, and the Second Circuit was reversed, sort of. While reading, I wondered how much the opinion was or was not shaped by the efforts to stay the order on the asset sale in Chrysler, and the now pending efforts to obtain certiorari. We may know that answer some day, but who knows.
Further reading and reflection is in order, but some immediate reactions are as follows, bearing in mind that my reaction is influenced by recency. Specifically, this past Monday, I listened to a talk by Professor Jeffrey Rosen to the Chicago Lawyers Club regarding the Supreme Court. He spent some time focusing on his interview of Chief Justice Roberts and the Chief Justice's hope to use "business cases" to produce unanimous narrow rulings to enhance the authority of the Court. (BTW, lots of people have lots of things to say about Professor Rosen and shifting views, e.g. here, so I am not holding him out as "the expert.") Today's Manville/Travelers ruling is not unanimous due to the two dissents but certainly does fit the "narrow" criteria.
For Chapter 11 cases that involve material amounts of product liability claims, including Chrysler, GM and "asbestos bankruptcies," the Manville/Travelers decision today is so narrow that all sides likely will claim to take some comfort from the ruling. Realistically, no one can claim to have won a clear victory through today's opinion, except that Travelers is happier today than it would have been if Justice Steven's dissent were the Court's ruling. In fact, today's ruling is so narrow that the case is sent back to the 2d Circuit for more proceedings as to which entities are or may be bound by the prior rulings. The opinion thus highlights the importance of the 2d Circuit's conclusions and reasoning in 1) the direct appeal in Chrysler and 2) its opinion on remand in this case.
The opinion can be read to suggest that it is safer to challenge bankruptcy court rulings on direct appeal instead of through rulings in other, later legal proceedings, such as future product liability cases against the debtor or an alleged or actual successor entity, such as New Chrysler. That message will not be lost on 1) debtors that sold mass produced products, 2) product liability claimants, and 3) all other parties to state court product liability cases that involve a product made or sold by a debtor, including component suppliers and other co-defendants in the state court tort suits. Insurers also no doubt will take note too. Certainly today's ruling puts more focus on the presently pending direct appeal papers now in front of the Supreme Court in the Chrysler case.
No doubt others will have comments over the next few days; I will try to collect comments into one post.
The stay was lifted in a two page order available here. The experts at Scotus blog offered some interesting views on how much this order does or does not mean and noted in commentary that one appeal for certiorari has been filed with the Court. As to the issues for future product liability claimants, it seems fair to assume that collateral changes will arise in the future, as was successfully done in the later stages of the Agent Orange litigation by future claimants whose interests were not properly represented in the original Agent Orange proceedings. See Stephenson v. Dow Chemical, 273 F.3d 279 (2d Cir. 2001). Here, it seems difficult to realistically argue that future product liability claimants could be or were given meaningful or timely notice of the Chrysler proceedings, and there was no designated futures representative, much less an adequate future representative or a meaningful hearing on the issues specific to the future claimants. Time will tell what happens on direct appeal or later collateral attacks. But the Manville/Travelers opinion should be out withing the next three weeks and perhaps will include relevant rulings or clues.
Akin Gump's SCOTUS blog provides expert Supreme Court commentary that includes a post explaining why why the stay issued by Justice Ginsberg may not have much substantive meaning. The so-called "consumer groups' " request for a stay is here. The papers cogently cite some of the caselaw recognizing the constitutional issue inherent in enjoining future claims. The stay request filed by Ms. Pascale, the asbestos claimant, may be found here.
The Chrysler brief is noteworthy in two ways for tort issues. Overall, the message of the brief is a disturbing one for tort claimants because the basic premise is that Chrysler is so badly off and so mismanaged that there is not enough money left to pay tort claimants, and the remaining money should instead go to secured creditors without delay.
The general argument includes two parts. First, Chrysler argues that the tort victims lack are simply out of luck because there is, they say, no money left for them and so the claimants will not be harmed if the sale goes through. This argument is false because it ignores the relief the claimants seek - to limit the scope of the order of the bankruptcy court so that there is an open door to invoke state law to try to recover from the Buyer entity. Chrysler's argument is as follows:
"The unfortunate but unavoidable fact is that future tort claimants who will have claims against the Debtors based on vehicles manufactured by Chrysler simply have no value to be protected.
Accordingly, just as with the Funds, because the price paid by New CarCo Acquisition for the Fiat Sale exceeds Chrysler's liquidation value, creditors stand to gain more from the Fiat Sale than any other viable alternative. For both past and future tort claimants, their claims are valueless under either scenario. Accordingly, the "irreparable harm" that they claim will ensue in the absence of a stay is entirely the product of the economic collapse of Chrysler. It has nothing to do with the Fiat Sale or the Bankruptcy Court order approving it. The tort claimants' application for a stay should therefore be denied."
Second, Chrysler argues that an enormous bond must be posted in order to prosecute an appeal. The argument creates for the would-be appellants/objectors a problem reminiscent of the problems faced by oil companies and tobacco companies hit with large verdicts they sought to appeal. Specifically, the Chrysler brief argues:
"While the Funds' application for a stay should be denied for all of the reasons set forth above, even assuming that a stay were to be entered here it should thus be conditioned on the Funds posting a bond in at least the amount of $1.2 billion to protect Chrysler against damages that would be caused by a stay. See In re Calpine Corp., No. 05-60200, 2008 WL 207841, at * 6-7 (Bankr. S.D.N.Y. Jan. 24, 2008) (requiring bond of $900 million to cover "aggregate additional interest expense the Debtors could suffer if they were unable to close their existing exit financing"); ACC Bondholder Group v. Adelphia Commc'ns Corp. (In re Adelphia Commc'ns Corp.), 361 B.R. 337, 347 (S.D.N.Y 2007) (requiring supersedeas bond of $1.3 billion). (footnote omitted)
Requests for a Stay in Chrysler Reach Supreme Court - Timely Reminders of Why the Travelers/Manville Asbestos Case is So Key
This weekend, the Supreme Court has received stay motions regarding Chrysler that provide concrete examples of the importance of the issues the Court faces in the Manville/Travelers case regarding how far a bankruptcy court can go in issuing injunctive orders that limit the rights of third-parties, including so-called "future claimants." Indeed, some of the concerns raised this weekend illustrate the importance of due process issues raised in an amicus brief filed Manville/Travelers by a far-sighted group of bankruptcy law professors.
Specifically, the Court has received petitions seeking stays of the orders by Judge Gonzalez and by the 2d Circuit. The briefs are nicely collected and in general analyzed on the Scotus blog.
The current product liability claimants, and self-declared representatives of future product liability claimants, are of course complaining that their rights have been trampled by Chrsyler since no mony is being left behind to pay their claims, and the bankruptcy court has issued an order purporting to preclude claims against New Chrsyler. The latter of course takes away from the claiamnts their state law rights based on state law rules that would or may allow "successor liability" claims against New Chrsyler. At page 4 of their brief, they explain the rulings to data as follows:
"On June 1, 2009, the Bankruptcy Court for the Southern District of New York, Judge Arthur J. Gonzalez presiding, issued an opinion granting the relief sought in the sale motion. The opinion stated that tort claims and any potential successor liability claims are "interests in such property" that can be extinguished by § 363(f). Bankr. Op. at 42-43. The Court also held that the sale did not violate future claimants' due process rights because "notice of the proposed sale was published in newspapers with very wide circulation," id. at 43., citing Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 317 (1950), for the proposition that "publication of notice in such newspapers provides sufficient notice to claimants 'whose interests or whereabouts could not with due diligence be ascertained.'" In addition, the court stated that the interests of future tort claimants had been presented to the Court. Bankr. Op. at 43. The order signed by Judge Gonzalez authorized the sale of substantially all of Chrysler's assets free and clear of all liens, claims, interests, and encumbrances, "whether arising before or after the Petition date," "including all claims or rights based on any successor or transferee liability." Sale Order at 2-3; see also id. at 40, ¶ 35 (stating that New Chrysler "shall not have any successor, derivative or vicarious liabilities of any kind or character for any Claims, including, but not limited to, on any theory of successor or transferee liability, . . . whether known or unknown as of the Closing, now existing or
hereafter arising . . . .").
An article in The Hill reports that product liability claimants are not happy with the developments in the Chrsyler and GM chapter 11 cases, so they are taking the issue to new fora - the Senate and the media. A similar article is in the WSJ blog known as Deal Journal. Specifically, they are upset that money is not being set aside to pay damages for pending product liability claims. Set out below is the relevant text from the article. The claims are said to be worth over $ 1 billion. One assumes the asbestos claimants are happy to let the car wreck claimants lead the charge on this issue. One also wonders who purports to speak for product liability claimants who have not yet been hurt, but inevitably will be hurt.
Lawyers cry foul over GM
By Ian Swanson
Posted: 06/02/09 08:19 PM [ET]
Consumer groups and trial lawyers are crying foul over the Obama administration's bankruptcy plans for General Motors and Chrysler.
Those plans would extinguish all ongoing auto accident claims that blame a death or serious injury on a defective GM or Chrysler vehicle.
"It's a raw deal for consumers," said Clarence Ditlow, executive director of the Center for Auto Safety.
Ditlow said the plans are unusual in that they would prevent anyone from bringing a future liability claim against GM or Chrysler if a car already purchased from either company is defective and results in an accident causing death or serious injury.
He and others said it was also unusual for no money to be set aside for liability claims. When companies producing asbestos went bankrupt, some funds were set aside for such claims, Ditlow said.
Pam Gilbert, of Cuneo Gilbert and LaDuca LLP in Washington, said Obama's auto task force should have looked out more for consumers and those with liability cases as it negotiated the complicated bankruptcy plans for both companies.
She notes that the administration is guaranteeing warranties issued by GM during its bankruptcy, meaning someone could get a broken exhaust pipe found to be defective fixed even while GM is in bankruptcy.
This means "they will fix the car, but if someone with a car suffers a serious injury or death because of a defection, we won't fix the person," Gilbert said.
Although a committee representing consumers and those with cases against the companies was involved in negotiations over Chrysler's and GM's bankruptcies, the group has received less attention compared to unions and those holding company debt.
That may change on Wednesday, when victims and families of victims with claims against the companies hold a press conference outside a Senate Commerce Committee hearing on GM's bankruptcy.
Those set to attend include the family of an ABC cameraman killed when the roof of his GM Suburban caved in during an accident, as well as the families of several children who suffered broken necks and blame faulty seatbelts, according to the Center for Justice and Democracy, a New York-based consumer group.
Three hundred plaintiffs seeking $1.25 billion in damages are affected, another attorney told The Wall Street Journal's 'Deal Journal' blog.
General Motors says claimants will have the opportunity to submit their claims and have them resolved "as provided by the Bankruptcy Code and other applicable law, both as to amount and priority."
"We won't discuss specific claims or the possible outcomes, as that will be determined by the court," it said in a statement.
But those claims must be made against the old GM company after bankruptcy, meaning people with the claims will need to stand in line with other unsecured creditors to seek compensation from the old company's remains, Gilbert said.
The new GM that arises out of bankruptcy will not be liable for those claims.
Ditlow blamed Obama's auto task force for the situation, which he said would ultimately add to other problems.
He cited the case of a young girl in New York left a quadriplegic from a car accident who has $500,000 in annual medical costs. That victim is likely to become a ward of the state, he said.
The new opinion in Skinner is good news for opponents of the manner in which asbestos bankruptcies are currently conducted. Judge M. Bruce McCullough, a bankruptcy judge in the Western District of Pennsylvania, has issued a May 26, 2009, opinion finding the Skinner asbestos bankruptcy collusive and in bad faith. The order goes on to put the estate under the control of a court-appointed trustee, and converts the case to a Chapter 7 liquidation. The opinion is here.
The opinion is noteworthy for multiple reasons. For one, the opinion uses relatively harsh words regarding the lack of good faith in settlement of the underlying asbestos claims. Second, the Court concluded that the Chapter 11 plan and the underlying asbestos settlements were not in good faith. The Court pointed to various factors for this conclusion, and the opinion treats one of them as particularly telling. Specifically, the plan called for the debtor to receive 20% of insurance proceeds paid out to settle underlying claims, thus leaving the debtor with an incentive to settle claims instead of defending them, to the detriment of the insurers. The following text is taken directly from the opinion, but footnotes are omitted:
"The Asbestos Claims Settlement is not reasonable for several reasons. First, it is indisputable that no payment has ever been made by any of the Insurers on behalf of the Debtor to any of the Asbestos Claimants vis-a-vis the Asbestos Claims, notwithstanding that such claims have existed for roughly twenty (20) years. Such fact is strong evidence as to the futility of such claims, and it makes little, indeed no, sense to settle claims that have thus far been so overwhelmingly unsuccessful. Second, most, if not practically all, of the Asbestos Claims were administratively dismissed pre-petition by the U.S. District Court for the Eastern District of Pennsylvania, which court presides over such claims given that they were filed on such court's Asbestos Products Liability Multi-District Litigation (MDL) docket. Such fact also serves to substantiate that such claims are not very strong, so that, once again, it makes little, if not any, sense for such claims to be settled. Finally, there is really no valid reason for the Debtor to even care if the Asbestos Claims get settled given that (a) the Debtor is defunct (i.e., out of business), (b) the Debtor will never again engage in business, (c) the Debtor is in bankruptcy, (d) no funds practically exist in the Debtor's bankruptcy estate in any event to pay on any judgment that the Asbestos Claimants might obtain in excess of the Debtor's insurance (hereafter referred to as an "excess judgment"), and (e) any excess judgment obtained would, therefore, be practically worthless. In light of the foregoing undisputed facts, it makes absolutely no sense for the Debtor to settle any of the Asbestos Claims absent the consent of the Insurers, and settlement without such consent (as is the case with respect to the Asbestos Claims Settlement), the Court holds, is thus per se unreasonable."
An article on the BBC and an article on Scotsman.com report that trial has started on the insurance indsutry challenge to Scotland's recent legislation reallowing lawsuits seeking compensation for pleural plaques. According to the articles, trial is expected to end by June 12.
Meanwhile, London still has not announced a decision on pleural plauqes but campaigning about asbestos medical research continues to grow. A May 25 article reports that 22,000 Brits signed a petition to Downing Street to request a central medical authority to lead research efforts regarding mesothelioma, and yet another article reports on two lawyers and another person embarking on a 1,200 mile bike marathon aimed at encouraging medical research, with the journey to be chronicled on a blog.
Article Attacks Congress' Costly Asbestos Mistake: The Bankruptcy Code Section That Gives Plaintiff's Lawyers Veto Power Over Asbestos Bankruptcies
S. Todd Brown of Temple University has written an insightful law review article desribing in detail Congress' incredibly costly error in creating the bankruptcy code section (524(g)) with terms that have turned out to give a very small number of plaintiff's law firms "veto power" over asbestos-related chapter 11 plans. Strengths of the article include crisp writing, a great collection and distillation of relevant facts not well known to outsiders, cogent legal cites, and a logical organizational sequence that adds to the article's persuasive impact. The article is titled: Section 524 (g) Without Compromise: Voting Rights and the Asbestos Bankruptcy Paradox (Colum. Bus. L. Rev. (forthcoming 2008). The article is available on SSRN. Apparently the article is being published at 2008 Colum. Bus. L. Rev. # 3, at 841 but that link only takes you to an image of the cover of the law review.
I'm trying to figure out why the article has not been more widely publicized to date. Indeed, I found the article by accident while looking at results from a Google search for the cite for another article on section 524(g). When I Googled the article, all I found it mentioned in were mundane collections of lists of law review articles, and a slightly more extensive post on the Mass Tort Litigation Blog, with the post showing the article title and the abstract.
Various quotes and points from the article will soon show up here, but don't wait - go get and read the article if you are involved in asbestos litigation in particular or mass tort claiming in general.
Response to Question Regarding Whether the Chrysler Bankruptcy Causes a Stay of Underlying Tort Cases as to All Defendants
A comment/question was posed under yesterday's post about the asbestos issues bubbling up in the Chrsyler case. The question is whether the Chrsyler bankruptcy would cause a stay of all underlying asbestos cases as against all defendants. The question is interesting and again underscores the importance of what the US Supreme Court has to say in Travelers/Manville about the scope of bankruptcy court jurisdiction. The short answer is that the bankruptcy code's automatic stay provisions do not stay cases against co-defendants, and adverse existing precedent would have to be overcome to obtain a stay for all defendants based on "related to" jurisdiction in the bankruptcy court.
The "related to" precedent arises from Federal-Mogul's chapter 11 petition filed October 1, 2001. Soon thereafter, some car makers sought to use the FM proceedings as the forum to hold a global Daubert hearing on whether friction products can cause asbestos-related disease. Among other things, there were arguments that the bankruptcy court could exert "related to" jurisdiction based on express or implied indemnity claims that might be asserted against FM by other entities involved with friction products, and various arguments about the inter-related nature of the friction product claims. The asbestos plaintiff's bar vigorously opposed that approach.
Judge Wolin denied the effort, concluding that he lacked jurisdiction. The 3rd Circuit declined to reverse him based on issues regarding its appellate jurisdiction. For a complete synopsis of the issues and rulings from the Crowell & Moring lawyers who have for years represented insurers in asbestos bankrutcies, go here. The 3rd Circuit's opinion, In re Federal-Mogul Global, Inc., 300 F.3d 368 (3rd Cir. 2002) provides the following brief synopsis:
" In re Federal-Mogul Global, Inc., No. 01-10587, 2002 Bankr.LEXIS 105, *4-5 (Bankr.D.Del. Feb. 8, 2002) (hereinafter, Feb. 8 Order). The District Court's written opinion supplementing the order was issued on February 15, 2002. In re Federal-Mogul Global, Inc., No. 01-10578 et al., slip op. (Bankr.D.Del. Feb. 15, 2002) (hereinafter, Feb. 15 Op.).
The District Court held that it lacked subject-matter jurisdiction because the claims against the Friction Product Defendants were not "related to" the Federal-Mogul bankruptcy proceedings. The court found it unlikely that "Congress ... intended that the bankruptcy of a single player [in a multi-player industry] would have automatic, nation-wide impact in which every manufacturer and distributor and all tens of thousands of injured parties are concentrated in a single reorganization proceeding." Feb. 15 Op. at 16. Specifically, the District Court found that under this court's influential decision in Pacor, Inc. v. Higgins (In re Pacor), 743 F.2d 984 (3d Cir.1984), "related-to bankruptcy jurisdiction [does] not extend to a dispute between non-debtors unless that dispute, by itself, creates at least the logical possibility that the estate will be affected." Id. at 17.
The District Court noted that Pacor made clear that there is no "related to" jurisdiction over a personal injury claim *376 against a non-debtor "without the filing and adjudication of a separate claim for indemnification" against the debtor. Id. at 18. Further, the District Court observed that "cases since Pacor have failed to endorse the proposition that any contract of indemnification will support an extension of related-to jurisdiction." Id. at 22 (emphasis in original)."
Update: Yet another article mentions asbestos and provides some big picture facts and thinking. In states, among other things:
"The 60 days projected by the President at an April 30 press conference announcing the automaker's bankruptcy only applies to a sale of Chrysler's best assets to a new entity, said the official, who can't be identified because the matter is confidential. Afterward, creditors would fight over unwanted factories and other assets to recover money, lawyers said.
"The unsold assets and liabilities may take years to sort out due to the complexities of resolving thousands of commercial, tort, future asbestos, dealership and employee claims," said Dewey & LeBoeuf LLP partner Martin Bienenstock, who has advised General Motors Corp. and Chrysler Financial on restructuring.
The bulk of assets left in the old Chrysler will be eight factories, valued by Chrysler at $2.3 billion. Those with claims against them include the U.S. government, provider of a $4.5 billion bankruptcy loan, and lenders with an unpaid balance of $4.9 billion on a secured loan."
Popular press articles are now starting to mention the reality that the bankruptcy court at some point will have to sort out Chrysler's legacy liability issues, including asbestos claims. A prior post here pointed out that the asbestos plaintiff's bar has a seat on the unsecured creditors' committee and that plaintiff's firm SimmonsCooper filed an appearance in the case early on to protect the interests of its asbestos clients. One would assume that before the May 20 hearing, the unsecured creditor's committee will have something to say about the distribution of the asset sale proceeds and the scope of the order and injunctive terms related to the sale. For example, will the final order regarding the sale include language purporting to immunize Chrysler and Fiat from facing future claims that the asset sale is a conveyance intended to impair collection of claims by unsecured creditors, including tort claimants with non-asbestos claims and those holding asbestos claims ?
Chrysler's legacy liability issues illustrate the importance of the issues presently pending before the US Supreme Court in the Travelers/Manville case. There, the Court has been asked to decide just how far a bankruptcy court can go in enjoining current and future claims, a topic mentioned in this prior post.
The importance of the Manville/Travelers scope of jurisdiction issues will be going up if Chrysler proceeds with the expected Chapter 11 petition.
During oral argument, Justice Roberts asked, hypothetically, if the bankruptcy court could enjoin car accident claims against Travelers if such a deal were made as part of settlement of insurance coverage issues. Other justices raised questions about whether claimants would be entitled to notice before their claims are enjoined. In Chrysler, scope of injunction and notice issues could be significant, especially if assets are quickly sold off, leaving a theoretically finite set of assets to pay whatever future claims may be brought against Chrysler. It's too early to spend much time on the all the possibilities, but here are a couple of examples:
May the bankruptcy court enjoin state law tort or contract claims against Chrysler entities not in bankruptcy, if there are any? Would it matter if the injunction is part of a settlement of claims between Chrysler entities?
May the bankruptcy court enjoin state law tort claims against suppliers to Chrysler of allegedly defective products ? What about an injunction in favor of insurers of parts suppliers to Chrysler?
To which current or potential future claimants should notice be given regarding the bankruptcy or the apparently impending asset sale ?
Here is the link to the full text of the first ruling in the insurer's lawsuit seeking a declaration to invalidate to the Scottish pleural plaques legislation.
In the opinion, the trial judge (Lord Glennie) exercised his discretion not to grant the insurer's motion to stop the legislation from taking effect. In reaching that decision, the court considered various factors and somewhat assessed the merit of the insurers' two overall challenges. First, the insurers argue that the law is outside the "legislative competence of the Scottish Parliament on the grounds of its incompatibility with certain Convention rights. They rely in particular upon Article 6 of the European Convention on Human Rights (Right to a fair trial) and Article 1 of the First Protocol thereto (Protection of property). The petitioners also mount a challenge to the Act on grounds of irrationality, or Wednesbury unreasonableness, and arbitrariness."
In weighing the merits, the trial judge offered the following preliminary and summary assessment of the insurers' arguments:
"It is sufficient that I say that, in my opinion, the petitioners have demonstrated a prima facie case that both Articles 6 and Article 1 of the First Protocol are engaged in that the Act does appear to me to remove from the courts and determine in a manner adverse to the petitioners a critical question arising in all pleural plaque cases, namely whether the claimants in any such case have suffered damage so as to make the negligent exposure to asbestos actionable. Unless and until the Act comes into force, each of the cases currently sisted, at least insofar as it is based upon the existence of pleural plaques and not on other injury or damage, will fail, because at common law negligence is not actionable without proof of damage. If and when the Act comes into force, that line of defence will be removed. The pursuers in such cases will still, of course, have to prove other aspects of their case, such as negligent exposure to asbestos and quantum, but they will no longer have to prove, or attempt to prove, that the pleural plaques themselves constitute damage so as to make the negligence actionable. Mr Dewar submitted that it was always within the competence of the Scottish Parliament to alter the Scottish law of delict. I accept this. Insofar as the Act has prospective effect, this is a powerful point. But in so far as it has retrospective effect, the force of that submission is much reduced, since the Act retrospectively removes from the defenders in existing cases, and in new cases based upon exposure before the Act comes into force, a line of defence upon which they could legitimately expect to succeed. That brings Article 6 into play, or at least arguably so. Mr Dewar also argued, under reference to Article 1 of the First Protocol, that an immunity to a claim could not be a "possession"; however, it seems to me that if a certain claim is a possession (see Maurice v. France (2006) 42 EHRR 885 at paras.63-66), there is at least a good arguable case that a certain defence must fall into the same category.
 I have more difficulty with the petitioners' contention that the policy of the Act does not reflect any legitimate public or general interest. It is well-established that the courts will afford the legislature a wide margin of appreciation or, as it is put in the domestic context, will concede to the legislature a discretionary area of judgment in determining what is in the public or general interest: see e.g. Adams v. Scottish Ministers 2004 SC 665 at para., per the Lord Justice-Clerk (Gill). The issue will always involve a detailed examination of the facts. I was initially attracted to the simple proposition underlying the Dean of Faculty's submissions, which emphasised the fact that the Act sought to compensate, at enormous expense to insurers, a narrowly defined class of persons who, although having been exposed to asbestos, had as yet suffered no illness or injury meriting compensation. But Mr Dewar explained that the Act seeks to compensate those in respect of whom it can be established, because of the presence of pleural plaques, that asbestos fibres has penetrated the lungs and the pleura. This seems to me to carry some conviction. While it appears to be true, on the available evidence, that such persons have suffered no physical injury or incapacity, they are more likely than others to suffer from anxiety that their exposure to asbestos dust, having caused penetration of asbestos fibres to the lungs and pleura (as evidenced by the existence of the plaques), will go on to cause an asbestos-related disease; and there is a risk, in such cases, that the penetration of asbestos fibres to the lungs and pleura will in fact cause such a disease. In those circumstances, the Scottish Parliament has taken the view that they ought to be entitled to claim compensation, if not for any present physical disability, then at least for that anxiety and the risk of the condition worsening. The arguments will no doubt be more fully developed at the first hearing. Whilst on a fact sensitive issue of this sort I cannot dismiss the petitioners' case as unarguable, and I therefore must hold that they have demonstrated a prima facie case, it does not seem to me on the arguments advanced so far that it is a prima facie case which should be regarded as particularly strong."
19 States File Amicus Brief to Oppose Broad Preemptive Orders Issued By Asbestos Bankruptcy Courts - GIT Case
This post follows up on the amicus brief mentioned in yesterday's post regarding the GIT asbestos chapter 11 case that is set for oral argument on May 20 in the Third Circuit.
19 state AGs filed an amicus brief in the GIT case to urge the 3rd Circuit to block the efforts of the debtor and the asbestos and silica plaintiff's bar to use bankruptcy court preemption powers to give asbestos and silica claimants exclusive access to GIT's insurance policies. The AG's brief explains that the 19 states are concerned because their states may be claimants in environmental cases seeking damages from GIT. In their view, bankruptcy court orders should not preclude states from seeking monies from GIT insurance policies that otherwise should be available to pay damages. the states might win. In other words, the tiny number of silica claims described in yesterday's post, plus asbestos claims, should not be be used to ordinary preempt state law and should not leave the asbestos and silica personal injury claimants with exclusive access to insurance policy proceeds generated from GIT insurance policies.
The amicus brief explains in detail why that result is bad policy, and join with the insurers in attacking the broad preemption powers that the bankruptcy court purported to exercise under bankruptcy code section 1123. According to the amici, the conclusion of the lower courts is "extremely dangerous" because it allows bankruptcy court to become a "haven for wrongdoers."
The amicus brief is well worth reading in its entirety, and is available at the end of the compilation of GIT briefs available here. The following sets out some full text from the amicus brief, at 2-4, in order to provide a taste of intensity of the 19 states that disagree with the broad preemption result sought by the debtor and the asbestos and silica claimants:
"The conclusion of the bankruptcy and the district courts herein - that the opening phrase in Section 1123(a), "Notwithstanding any otherwise applicable nonbankruptcy law to the contrary," does impose such a broad preemptive effect -is deeply flawed in that it reads that language without any historical context, and without any attempt to harmonize that language with the rest of the Bankruptcy Code. And, by reaching that conclusion, the lower courts have created a situation by which an entity can use bankruptcy to escape from all regulatory authority if it can convince a bankruptcy court that doing so would allow it to implement its plan.
Such a result would fly in the face of the oft-repeated axiom that bankruptcy is not meant to be a "haven for wrongdoers." 1 Collier Bankruptcy Man. P 362.04 at 362-23 (4th ed. 1980); 2 Collier on Bankruptcy P 362.04 at 362-36 (15th ed. 1980) as cited by Securities and Exchange Commission v. First Financial Group of Texas, 645 F.2d 429, 439 fn. 16 (5th Cir. 1981) and numerous other circuit courts thereafter. It is certainly the case that many valid laws create operating difficulties for those who do not wish to follow their strictures. The Code, though, does not allow a debtor to flout those requirements during the case. Sections 362(b)(1) and (4), for example, except governmental criminal and civil regulatory actions from the automatic stay; 28 U.S.C. 959(b) requires debtors to obey the laws of the states with respect to the property of the estate during the case; and 28 U.S.C. 1452(a) bars debtors from removing regulatory actions to bankruptcy court from the state courts in which they are pending. Yet, under the interpretation espoused below, those constraints disappear as soon as the debtor proposes a plan under which it asserts that it needs to avoid the restrictions in order to successfully reorganize.
Such a reading of this language would destroy the Amici States' ability to preserve their regulatory authority in the face of a bankruptcy filing. It could allow a debtor to propose and confirm a plan with terms that provide for anything from ignoring the limits on charitable conversions, to barring enforcement of clean-up obligations for contaminated property that it retains post-petition, to denying state consumer protection agencies the ability to bar the debtor from continuing methods of operations that are unfair and deceptive and violate state law. The Amici States do not believe that any such result could possibly have been contemplated by Congress in adding this language to Section 1123 in 1984 as a "technical amendment." (see discussion below, pp. 15-17). They file this brief to urge this court to reverse the decisions below and find that the appropriate scope of preemption under Section 1123 is far narrower than that stated in the decisions at issue and, properly read, does not bar appellants from raising their substantive arguments. The Amici States are not concerned with the final outcome of that substantive litigation, and take no position on the merits of the insurers' antiassignment defense; their only concern is with the extremely dangerous consequences of the means by which the lower courts arrived at the conclusion that insurers are barred from even raising those issues. (footnotes omitted)."
More on Manville/Travelers and Another Asbestos Bankruptcy Appeal - The GIT Case in the Third Circuit Set for Oral Argument in May
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.
The oral argument transcript is availble here.
Mass Tort Bankruptcies - Key Issues Raised Today in SCOTUS in the Travelers/Manville Asbestos Bankruptcy
Updated: An April 6 blog entry by Alison Frankel includes a letter from Cozen O'Conner responding to Mr. Ostrager.
Today's oral argument date in the Supreme Court for the Travelers/Manville case has drawn some massive hyperbole in a blog article. The article quotes Travelers' counsel, Barry Ostrager, as saying that the case is very important, but that one of his opponents, Chubb Insurance Company, has received the worst legal advice "ever" in arguing its position. It's true the case may have a massive impact on the use of bankruptcy court as a means to resolve "mass tort" litigation. As for the quality of the legal advice provided to Chubb by Jack Cohn, consider that an estimable group of bankruptcy and constitutional law professors disagree with Mr. Ostrager, and explained why in an excellent amicus brief that is available here for no cost through the SCOTUS wiki and the ABA's efforts to put SCOTUS briefs online.
The Travelers issue boils down to whether a bankruptcy court can issue a national (global?) injunction that bars any and all future claims against an insurer of the debtor after the insurer has paid money to settle coverage claims brought by the debtor. In my view, the correct answer is: no, for a variety of reasons. The main reason? Such a sweeping injunctive order is improper for a variety of reasons. The principal flaw is that government action that improperly takes away property rights (legal claims against the insurer) of third parties, and takes the claims away without providing a meaningful prior hearing or payment of just compensation, thereby violating the 5th amendment rights of the persons whose claims are extinguished.
I argued many of the same issues last year in the Federal-Mogul asbestos bankruptcy. The bankruptcy court judge, Judith Fitzgerald, has heard many of the asbestos bankruptcies pursuant to an appoint met order by the Third Circuit. She did not reach all the issues but did apply the "derivative" standard that is at issue in the Travelers/Manville case. There, in a September 30. 2008 opinion, Judge Fitzgerald blocked an effort to expand bankruptcy court jurisdiction. See In re Federal-Mogul Global, Inc, 2008 Bankr. LEXIS 3517. I've frequently disagreed with Judge Fitzgerald, but she ruled correctly in this instance and her ruling also supports Chubb/Jack Cohn. And, for what it's worth, I also agree with Chubb and Jack Cohn.
As always, please bear in mind my standard disclosure: I have in the past and do now represent non-insurer parties opposed to certain terms of asbestos bankruptcies, and also have represented and do represent entities that are defendants in or financially tied to asbestos litigation through indemnity obligations or shared insurance. Further specifics are available on my bio at my law firm's website (http://www.butlerrubin.com/) or feel free to email me at work if you need further information. .