Jessica Karmasek Feb. 4, 2016, 3:33pm


WASHINGTON (Legal Newsline) - Members of a U.S. Senate panel heard testimony this week from both supporters and critics of a bill that targets the country’s current asbestos injury compensation system.

Last month, the Republican-controlled House passed H.R. 1927, or the Fairness in Class Action Litigation Act and the Furthering Asbestos Claim Transparency Act.

The class action portion of the bill was introduced in April and merged last month with the FACT Act, which first passed the House in 2013 and whose sponsor is U.S. Rep. Blake Farenthold, R-Texas.

The Senate Judiciary Committee took up the asbestos trust portion of the Senate’s version of the bill, S. 357, at a hearing Wednesday.

Committee Chairman Chuck Grassley, R-Iowa, expressed his concerns over funds being depleted through fraud and abuse, saying future victims “will feel the impact.”

“We have to take a close look at how these trusts are being administered,” he said in his opening statement.

Grassley explained that the U.S. Department of Justice only plays a limited role because after a bankruptcy plan is finalized, there is no longer a “live case” for the U.S. trustee to oversee. Courts, too, have limited jurisdiction after confirmation, he noted.

In addition, there is no inspector general or other “watchdog” to protect against fraud and abuse, he said.

“As a result, we have a situation where these trusts have assets in excess of $18 billion, but are without any meaningful independent oversight,” he said. “So, it’s not hard to understand why we’re witnessing reports of fraud and abuse in the system.”

And the fraud and abuse are not limited to “occasional errors,” as have some have claimed, the chairman said.

“Fraud and abuse in the trusts doesn’t impact the company that established the trust, because after it is finalized, they are no longer involved and any outstanding litigation is ‘channeled’ to the trust,” Grassley noted. “Fraud and abuse doesn’t impact the lawyers who handle these claims. They’re going to collect their fees -- reportedly as high as 40 percent -- regardless of whether funds are unfairly or improperly drained from the trusts.

“But if funds in the trusts are depleted with fraudulent claims, it is future victims who will pay the price, as compensation for illnesses will be reduced. We owe it to those victims to gather the facts and examine the integrity of the asbestos trust system.”

The FACT Act would increase transparency in the asbestos trust system, in which about 100 companies that were targeted frequently by asbestos lawsuits declared bankruptcy to establish trusts to compensate victims.

Ranking member Patrick Leahy was critical of the bill.

“I am concerned that it will needlessly violate the privacy of asbestos victims while requiring no transparency on the part of companies that have produced or exposed others to this deadly product,” the Vermont Democrat said in his opening statement.

The bill would require quarterly reports on claims made to the trusts while taking measures to protect claimants’ personal information.

It also would require trusts to respond to information sought from them by defendants in asbestos lawsuits. Defendants in those lawsuits want to ensure that plaintiffs’ attorneys aren’t fully blaming their products while also blaming the products of companies that established trusts.

It is a practice that was brought to light in Garlock Sealing Technologies’ bankruptcy proceeding. In January 2014, U.S. Bankruptcy Judge George Hodges ruled in a landmark decision that plaintiffs’ attorneys had been withholding evidence that could have been submitted to trusts while pursuing lawsuits against Garlock.

They did so in order to maximize recovery in both systems, he ruled.

Garlock had been permitted full discovery into the claims of 15 individuals and eventually filed racketeering lawsuits against the law firms that represented them.

“It appears certain that more extensive discovery would show more extensive abuse,” Hodges wrote. “But that is not necessary because the startling pattern of misrepresentation that has been shown is sufficiently persuasive.”

Ultimately, Hodges ordered Garlock to put $125 million in its trust -- more than $1 billion less than plaintiffs attorneys had requested. Hodges ruled that Garlock’s past record of verdicts and settlements was not an indicator of future liabilities because of the actions of plaintiffs’ attorneys.

Garlock eventually agreed to put more than $350 million in its trust.

But Leahy said the bill’s reporting requirements have him “deeply concerned” about claimants’ privacy.

“The FACT Act would require trusts to publicly disclose in quarterly reports a claimant’s name, address, date of birth, the last four digits of their Social Security number, and detailed information about their medical history,” he said. “Releasing this sensitive information poses enormous privacy risks for victims and their families, leaving them more vulnerable to identity theft and potentially other scams.

“This reporting requirement will also be a significant draw on asbestos trusts’ already strained resources, leading to further delayed payouts for victims who may be extremely sick or terminally ill and in immediate need of compensation.”

Elihu Inselbuch, a member of New York law firm Caplin & Drysdale, agreed. He testified that the FACT Act is an attempt by asbestos defendants to reduce and “ultimately extinguish” their liability to victims.

“The bill is predicated on a fundamental misunderstanding of why asbestos trusts were created, how they work, and the false belief that there is significant fraud in the trust system,” said Inselbuch, who has spent years representing victims’ rights in asbestos bankruptcy proceedings.

“And the people this bill harms are the same ones harmed by the asbestos companies -- the victims of asbestos disease. It is their privacy that is compromised and their personal information that would be disclosed pursuant to the FACT Act.”

Not so, attorney Mark Behrens testified.

Behrens, an attorney at Washington, D.C., law firm Shook Hardy & Bacon LLP, represents corporate defendants in product liability and complex tort litigation.

The FACT Act, he told lawmakers, provides a “sound solution” to the need for greater asbestos bankruptcy trust transparency.

“The FACT Act simply requires asbestos trusts to file quarterly reports that will be available on the bankruptcy court’s public docket,” said Behrens, who spends a considerable amount of time examining and writing about asbestos litigation trends and issues. “The reports would describe ‘each demand the trust received from, including the name and exposure history of, a claimant and the basis for any payment from the trust made to such claimant.’”

To protect claimant privacy, “any confidential medical record or the claimant’s full Social Security number” is to be excluded from the report, he noted.

The FACT Act does not cap or otherwise reduce claimant recoveries. It does not even address this issue, he pointed out.

“The present legislation deals only with access to the information,” Behrens said. “The reporting requirements in the FACT Act would not impose an unreasonable burden on the asbestos trusts.”

Opponents of the bill may argue that because trust claims submissions are routinely required to be produced in asbestos tort actions, the legislation is unnecessary.

But Behrens pointed out that it is a “regular practice” by many plaintiffs’ firms to delay filing trust claims for their clients so that remaining tort system defendants do not have that information.

“Plaintiffs’ attorneys have acknowledged this strategy,” he testified, noting that the bill simply provides an “additional check” on the tort system discovery process.

Robert McKenna, a former Washington State attorney general and now a partner at the Seattle office of Orrick Herrington & Sutcliffe, also shot down critics’ arguments that the bill would mean the release of personal information.

“The FACT Act explicitly protects asbestos trust claimants’ medical records and full Social Security Numbers, ensuring that such information will never be included in public reports,” he testified. “Trusts’ disclosures will also be subject to all of the privacy protections afforded by bankruptcy law and rules.

“As a result, the bill and existing bankruptcy rules and statutes ensure that personally identifiable information will not become publicly available, even while ensuring that asbestos trusts will report enough information to deter fraud as they protect individuals’ privacy.”

The trusts’ reports will be subject to the bankruptcy code’s existing privacy protections, McKenna said.

“Section 107 of the code, for example, allows courts to protect any information that would present an undue risk of identity theft or injury to a claimant if disclosed,” he told lawmakers.

Rule 9037 of the Federal Rules of Bankruptcy Procedure, “Privacy Protections for Filings Made with the Court,” also would apply to the trusts’ public reports, allowing courts to require redactions of personal and private information, he said.

“Bankruptcy is an equitable process designed to protect the interests of all of a bankrupt’s creditors. Openness gives creditors and the public confidence that assets are being distributed fairly,” McKenna said. “The FACT Act simply restores this usual openness to asbestos bankruptcy trusts.

“And this openness is crucial if the well-documented and widespread problems of misrepresentations to and outright fraud committed upon America’s asbestos trusts are to be successfully curtailed, thereby protecting the ability of future claimants to be fairly compensated by the trusts.”

To watch the entire hearing and read additional witness testimony, click here.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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Shook Hardy & Bacon LLP
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United States Senate Committee on the Judiciary

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Orrick Herrington & Sutcliffe
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