GEORGETOWN, Del. (Legal Newsline) – A bankruptcy attorney says opportunities and incentives for fraudulent conduct within the asbestos bankruptcy trust system are pervasive, and as a result, so is fraud.
David Christian, founder of the David Christian Attorneys law firm, said the way asbestos bankruptcy trusts are organized provides too many “relatively easy opportunities” for attorneys to play the system.
“In fact, I think it’s fair to say that it’s some parties’ business model,” he said of fraud.
He claims that because appointed trust advisors in the bankruptcy trusts are the plaintiffs’ lawyers who brought claims against the debtor prior to bankruptcy and have interests in how money is awarded, the trusts “lack criteria” and maintain insufficient gatekeeping.
“Those charged with administering trust funds have an interest in the outcome of how those trust funds are distributed,” Christian said.
“There’s a real disincentive to being too strict a policeman."
A recent example of alleged fraud within the bankruptcy trust system is the THAN Trust case, where six insurance companies suspected fraudulent activity when the trust refused to permit an audit after raising the value of future and pending claims by more than $1 billion.
The insurance companies filed their lawsuit on July 2 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 (Asbestos PI Trust).
In November 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 that required the plaintiffs to make “substantial” installment payments to PENAC depending upon payments and distributions made by the trust, which was approved by the bankruptcy court.
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.
Despite the audit protection included in the plan, the insurers allege that the defendants are instead relying on a cooperative agreement in an attempt to “materially diminish and render ineffective plaintiffs’ audit and other rights under the settlement agreement.”
As a result, the plaintiffs say 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 Future Claims Representative in the forecast it provided to the bankruptcy court at confirmation, the plaintiffs say.
In fact, the FCR predicted that the value of future and pending asbestos claims amounted to about $900 million during the bankruptcy proceeding. However, after a settlement was reached and claims were paid, the trust concluded the more appropriate value is closer to $2 billion when trust funds started to run out.
“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 insurers argue.
While increasing a debtor’s liability is allowed after a plan of reorganization has been approved and a trust has been established, Christian said it should not be common practice.
“It is and should be unusual, but it’s not unheard of,” he said.
Christian said trusts continue to lack transparency that could help curb the fraud happening in the midst of “typical opacity.”
Transparency litigation has been a hot topic recently as Wisconsin became the third state to pass transparency laws requiring disclosure of trust claim forms and the U.S. Senate currently sits on the Furthering Asbestos Claims Transparency Act, a federal transparency bill that would apply to all bankruptcy trusts.
If passed, the FACT Act would require asbestos bankruptcy trusts to release information on those seeking compensation due to asbestos exposure in public quarterly reports, including “detailed information regarding the receipt and disposition of claims for injuries on exposure to asbestos, and for other purposes.”
Christian said establishing transparency will have a positive impact on the asbestos bankruptcy trust system as it discourages fraud.
“I think that will pay real dividends for the system, for the economy and for fairness as it relates to individuals with real asbestos claims,” he said.
He added that transparency will cut out expenses as it answers questions about who is getting what from whom.
“Trust transparency would further the supposed goals of having these trust funds in the first place,” he said.
From Legal Newsline: Reach Heather Isringhausen Gvillo at email@example.com