Shifting Tort Expenses

Now it’s west (from Chicago) to Australia, asbestos and the public company fiber cement business commonly known as James Hardie.

 The short story is that James Hardie and its officers and directors have been through a wringer as several were convicted of securities violations in connection with information disseminated regarding ”asbestos liabilities” and a foundation set up by various former Hardie entities to manage and pay asbestos claims.   The convictions are on appeal. For more specifics on the past, look to the left for prior posts indexed under the topic ”James Hardie.” 

Rapid Global Movement Makes Local Policy Hard to Enforce:   Hardies actions are noteworthy for multiple reasons other than the securities convictions. For one, note that Hardie’s recent global corporate “citizenship”  translocations from Australia to The Netherlands and now Ireland, all in just 9 years. The point? Money and ownership will move to wherever financial engineering offers a material opportunity to avoid taxes, achieve tax benefits, or avoid or limit liabilities. This point needs to be understood by policy makers, tort claimants, tort case co-defendants and insurers because of its implications for tort claiming and risk spreading.  Simply put, parochial local  approaches to tort law may be politically attractive at times (e.g. take action to save local jobs) but one should expect the tort system will be gamed just as some financiers play games with states in the US for financial incentives to relocate –  for a few years -  the corporate headquarters or a manufacturing facility. The wills of state legislatures, the long term abstractions of tort law professors, and the opinions of slow moving appellate courts are all much less relevant when, as now, ownership, the corporate ”home” and money, can all be moved in a matter of  months.  (One wonders when an enterprising tropical island will enact legislation favorable to companies facing long tail tort claims. One might look to the precedent set in the  UK with FSA legislation that helped the “the names” and the Lloyds insurance market run away from their insurance obligations. Or, one might also consider states that set up rules considered unduly favorable to one side or another - some might say that West Virginia, Texas, New York, South Dakota, and Delaware all provide classic examples of this approach  … )

Private Tort Claim Foundation as an Alternative to Chapter 11 ?  By any reasonable standard, current and former Hardie entities  Hardie entities face claims for  at least a billion or two of claims, and maybe much more, depending on how one defines claims (do overseas claims count; what about property damages claims). In the US, the now-defined answer would be to file one or two subsidiaries file a Chapter 11 case in Delaware or New York. Then, via the parent company chipping in some money and/or rights related to some “shared insurance,” the parent and all subsidiaries likely would end up with an injunction  purporting to protect them against a future claim anywhere in the world. Thanks to the rampant lack of due process and the resulting lack of objectors in chapter 11 cases (highlighted most recently by GM and Chrysler), most such plans succeed, at least in the sense that confirmation is obtained.

Hardie, however, did not pursue that path and instead set up a private foundation to manage and pay claims, backed by some conditional promises of future cash flow from Hardie entities. The foundation has now been in place for almost a decade. Future posts will explore some specific aspects of the Hardie foundation. For now, for 213 pages of Hardie facts and history as narrated by KPMG as advisors, go here and read/skim through a 2006 liability estimate.

While reading, note, among other things, that Hardie entities have been selling asbestos products since the early 1900s, owned a chryotile asbestos mine in Australia, sold products internationally, participated in various international joint ventures, and sold a wide range of asbestos-containing products. Sales included a asbestos-cement building materials, pipe insulation, and friction products, as well as sales of raw chrysotile asbestos fiber. Note also that some of Hardie’s cement and insulation products included one or both of  two types of the highly lethal amphibole fibers, which are crocidolite (apparently mined in Australia at Wittenoom) and amosite from Cape or others in South Africa (amosite being a sort of a contraction for “asbestos from the mines of  South Africa”).

The tort litigation industry is seeing new battles emerge at the micro and macro level regarding the techniques and rules used on Wall Street, in tort trials, and by government to shift financial responsibility for payments for expenses arising from legitimate and illegitimate tort claimants. The battles are ongoing at both the micro and macro level, and will take years to resolve. Over time, billions and ultimately trillions of dollars are at stake when one considers direct and indirect payments, plus stock price changes, legal fees, and other associated costs and expenses of tort litigation and ancillary litigation. Posts over the next few weeks will present examples of the battles and their consequences. Throughout, one key is to look for whether, when and how one person/entity (or a group) are allowed to make deals that increase or decrease the risks and financial obligations for others involved in the same tort.

Today’s example is a micro battle being fought in Illinois in a case arising from falling scaffolding killing Mr. Ready during a construction project at a power plant. One issue is whether fault can be apportioned at trial against defendants that settled before trial. Why does that matter? Because the plaintiff and one or more defendants can and may agree to a settlement contract because the settlement monies paid 1) will give plaintiff some level of financial certainty and 2) will shift to the remaining defendants the risk and financial obligation for the plaintiff’s losses as determined at trial because the settlement, if approved, will by statute block the remaining defendants from suing the settling defendants for “contribution,” and may block the trial defendants from asking the jury to apportion a percentage of fault to the settling parties. Further, the settlement also may influence whether the remaining defendants can offer trial proof of the actions of the settled defendant even if even if the jury is not allowed to apportion a percentage of fault to the settled defendants.

So, the most basic macro issue is whether and when this private settlement contract between three private parties will become the operative event that will enable the government (the courts) to take pre-existing claims and legal rights of the other defendants. In this instance, the defendants are Mr. Ready’s employer, the general contractor and a subcontractor. In teh case, the employer and the general contractor settled, leaving the subsontractor exposed to a trial, which it lost. And, of course, lurking in the background are the insurers for those entities. But, for the macro level, bear in mind that some companies are self-insured, and some companies were insured but that insurance is or may be gone because the insurer actually is insolvent or may be trying to run away from “incurred but not reported” losses (that is, future losses) by ceasing its business operations and/or invoking a dissolution process specific to insurers. And, the issues arise in the context of events during a trial held during a period of time for which a “tort reform statute was said to be applicable.

In short, the Illinois Supreme Court held, under the statute, that the jury could not apportion fault against the settled defendants. Thus, the private settlement was converted into a government enforced agreement with legal consequences for the remaining defendant, which had not objected to the settlement. Left open by the Supreme Court was whether the jury should have been allowed to hear evidence about the actions (or inaction) of the settled parties. On remand, the appellate court held that the trial court should have allowed the jury to hear evidence of the actions of the settled defendants. The case may now be headed back to the Supreme Court of Illinois.

The Illinois Supreme Court’s opinion from late 2008 is here (for now, but will move later when the opinion is archived.) Here is the June 30, 2009 opinion of the appellate court on remand. Here is a press article updating the case history, and explaining that the case is perhaps headed back to the Illinois Supreme Court. Here prior commentary by a large law law firm that represents corporate defendants.