Insurers suspect fraud in the THAN asbestos bankruptcy trust, call for audit

By Heather Isringhausen Gvillo | Jul 8, 2014

GEORGETOWN, Del. (Legal Newsline) - Six insurance companies suspect fraudulent activity in the THAN asbestos personal injury trust based on the trust's refusal to permit an audit after raising the value of future and pending claims by more than $1 billion.

The Future Claims Representative predicted that the value of future and pending asbestos claims amounted to about $900 million during the bankruptcy proceeding. However, the trust concluded the more appropriate value is closer to $2 billion.

"The substantial difference between the tort forecast provided by the FCR's expert and the $2 billion estimate by the trust confirms that the trust is paying claims that were not expected to be compensated in the tort system," the plaintiffs argue.

The insurance companies filed their lawsuit on Wednesday in the Court of Chancery for the State of Delaware against defendants Phillips Electronics North America Corporation (PENAC), T.H. Agriculture & Nutrition LLC (THAN) and the T.H. Agriculture & Nutrition LLC Asbestos Personal Injury Trust.

Plaintiffs AIU Insurance Company, American Home Assurance Company, Birmingham Fire Insurance Company of Pennsylvania, Granite State Insurance Company, Lexington Insurance Company and National Union Fire Insurance Company of Pittsburgh seek to enforce their audit rights, among others, under the Settlement Agreement and Mutual Release entered between the plaintiffs and defendants in 2009.

They allege the defendants breached their contract under the settlement agreement by refusing to allow them to conduct a commercially reasonable audit of payments and distributions made by the trust.

The dispute arose from the insurance coverage lawsuit titled T.H. Agriculture & Nutrition, LLC v ACE Property and Cas. Co., et al, which was litigated in the Circuit Court of Cook County's Chancery Division in Chicago.

Then on Nov. 24, 2008, THAN began reorganization proceedings in the United States Bankruptcy Court for the Southern District of New York under Chapter 11 of the Bankruptcy Code, in which it sought to confirm a prepackaged plan of reorganization to resolve all current and future asbestos claims by setting up the Asbestos PI Trust.

By April 2009, the defendants reached a settlement agreement, which required the plaintiffs to make "substantial" installment payments to PENAC depending upon payments and distributions made by the trust. The agreement was approved by the bankruptcy court on May 6, 2009.

Additionally, the settlement agreement gives the plaintiffs audit rights, which were bargained for by plaintiffs. The audit rights "represent valuable and material consideration" in return for the insurance companies entering into the agreement, it is alleged.

The settlement agreement gives the insurance companies the freedom to examine payments made by the trust to asbestos claimants to check for miscalculations and fraudulent claims based on intentionally false information, it is alleged.

On May 11, 2009, the debtor filed a Notice of Filing Plan and Plan Supplement, which included a draft of an asbestos records cooperation agreement. However, the debtor failed to serve the notice to the insurance companies and their counsel, leaving the insurance companies out of the additional agreement. The plan was approved on May 29, 2009.

The newly approved plan prohibited any attempt by the defendants to use the cooperation agreement to limit the insurance companies' rights to audit the trust, it is alleged.

Despite the audit protection included in the plan, the plaintiffs allege that the defendants are now relying on the cooperative agreement in an attempt to "materially diminish and render ineffective plaintiffs' audit and other rights under the settlement agreement."

The insurance companies added that the cooperative agreement is not binding for them and cannot alter or limit their rights under the settlement agreement.

By May 7, 2013, the insurance companies informed the defendants that they planned to perform an audit of payments and distributions made by the trust, requesting basic information necessary for the audit, including claimants' names, partial social security numbers and payment amounts.

However, the defendants allegedly asserted that the cooperative agreement controlled the plaintiffs' right to audit payments and distributions by the trust, the complaint states.

Then on Sept. 25, the plaintiffs again requested access to records for about 100 claimants who received payments from the trust, agreeing to comply with confidentiality agreements.

The plaintiffs provided their own version of the confidentiality agreement, removing certain sections of the defendant's version. However, the trust rejected the proposed changes, refusing to recognize the insurance companies' audit rights and asserting that the rights given by the settlement agreement were subject to the terms of the cooperation agreement.

The defendants concluded that the agreement does not govern the insurance companies' rights, saying neither have ever suggested that the plaintiffs are bound by the agreement. They added that the agreement only controls the relationship between them and the trust.

"Nevertheless, the trust maintained: 'We are not agreeing to a more extensive audit than that approved by the court as between [THAN] and the [Asbestos PI] Trust ... If [Plaintiffs] want more extensive rights than that provided by the [Cooperation Agreement] then that is a problem. If they are willing to live within the terms of the [Cooperation Agreement] then we should be able to figure something out - but that is a big IF,'" the complaint states.

On May 27, a hearing was held on the issue where the plaintiffs sought to exercise their audit rights under the agreement, not the audit rights PENAC may have under the cooperation agreement.

The insurance companies further contend that there are no limitations on the number of claims audited nor on the information and documentation provided to carry out the audits.

"Under recognized audit standards, in order to be meaningful and credible, at a minimum an audit must maintain independence and must obtain sufficient and appropriate audit evidence to afford a reasonable basis for an opinion," the complaint states.

However, the insurance companies argue that the limitations the defendants are attempting to impose on their audit rights would preclude the plaintiffs from conducting reasonable audits consistent with recognized audit standards.

The plaintiffs also argue that the cooperation agreement improperly restricts the scope of documents that can be reviewed, requiring redactions from proof of claim forms and proof of payment as well as exposure and medical evidence. As a result, the audit samples cannot be crosschecked for consistency and accuracy.

"[A]llowing the trust to redact any information from disclosure at its sole discretion would enable the trust to prevent the auditor from discovering any information that is inconsistent with the records under audit," the complaint states. "Allowing the entity subject to review to redact information violates both the basic concept of independence and the completeness of the information under review."

"Giving the trust the ability to choose which records and information can be audited violates the basic concept of independence that is paramount to an audit," it continued. "The auditor is supposed to select the records that will be reviewed."

The insurance companies added that without much of the redacted information, it would be impossible for the auditors to determine whether the trust made the alleged payments to the claimants as set forth in the quarterly reports.

"The redaction of the information prevents an auditor from assessing whether the quarterly reports contain duplicate claims and from cross-checking the accuracy of the underlying data against third party information," the complaint states.

As a result of the defendants' secrecy, the plaintiffs claim they suspect fraudulent claims have been submitted to and paid by the trust.

The trust has paid "substantially" more claims than were projected by the FCR in the forecast it provided to the bankruptcy court at confirmation

"Because there has been no contemporaneous increase in the number of claims in the tort system generally," the complaint states, "the additional claims not accounted for in the FCR forecast may not have been compensable in the tort system, and may be based on factually incorrect pretenses."

The insurance companies explained that the trust originally paid Qualified Asbestos Personal Injury Voting Claims at 100 percent prior to accepting any submissions for future claims, then the trust reduced the payment percentage to 30 percent.

They add that if the trust set the initial payment percentage at 45 percent rather than 100 percent, payments would have been $200 million less. As a result, the plaintiffs may have paid roughly $12 million more than if the payments "had been set at a percentage that would assure substantially similar treatment for future claimants."

"If the deviation from claims forecasted by the FCR's expert is attributable to fraud, then the plaintiffs may have paid $25 million dollars less to date," they state.

"A thorough and credible audit of the payments and distributions made by the trust, as expressly provided for in the agreement, is essential to determining whether the larger number of claims processed may be caused to any extent by fraud," the plaintiffs added.

From Legal Newsline: Reach Heather Isringhausen Gvillo at

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