DOJ raises flag in Kaiser Gypsum bankruptcy; Says it will investigate illegal conduct in trusts

By Ann Maher | Sep 13, 2018

CHARLOTTE, N.C. (Legal Newsline) - The Department of Justice has stepped into Kaiser Gypsum's Chapter 11 bankruptcy pending in the Western District of North Carolina over concerns that its reorganization plan lacks sufficient safeguards to prevent fraud.

A statement of interest filed in the case on Thursday notes the DOJ's "strong interest" in ensuring the trust is operating transparently, complying with requirements to reimburse Medicare, preserving assets to pay legitimate claims and that it is not dissipating assets "through payment of fraudulent claims excessive professional fees, or mismanagement."

"With today’s Statement of Interest, the Department sends a clear message that we will not tolerate fraudulent conduct that cheats asbestos victims and the United States," said acting associate attorney general Jesse Panuccio in a press release.

The DOJ also sent a serious message pertaining to any asbestos bankruptcy trust, indicating it will investigate "conduct related to asbestos trusts that is illegal under federal law."

"If anyone has information on asbestos trust fraud or mismanagement, the Department welcomes the reporting of that information so that it may pursue all appropriate means under federal law to ensure that asbestos trusts operate lawfully and responsibly," the release states.

Kaiser Gypsum sunk into bankruptcy under the weight of 13,967 asbestos suits in October 2018. The company ceased to make anything or employ anyone years ago, persisting only as distributor of cash for asbestos settlements and verdicts.  

Prior to bankruptcy, it resolved about 32,000 asbestos suits.

The DOJ's statement of interest says that courts and researchers, such as RAND Corp. in 2010, have noted a "growing number of concerns" with asbestos trusts, "particularly as they relate to fraudulent claims filed both within and outside the bankruptcy system."

The statement points to the Garlock Sealing Technologies bankruptcy, where in 2014 Judge George Hodges - in the same court as Kaiser Gypsum's Chapter 11 - found a pervasive pattern of misrepresentation and suppression of evidence on the part of asbestos plaintiffs and their attorneys.

"The court found that, in a sample of 15 civil asbestos cases, in each and every case key evidence about asbestos exposure had been improperly misrepresented or withheld," the release states. "In three instances, plaintiffs made claims against defendants to whose products they had previously represented they had never been exposed. Similarly, several studies have demonstrated problems caused by the lack of oversight. One study found that, in the study period, people without malignant asbestos injury accounted for 86 percent of all claims made to the trusts and 37 percent of all trust payments. Another found that many of the claim forms submitted by the same claimants and law firms to different trusts contradicted each other.  

"The secrecy with which many trust claims are submitted, allowed, and paid has made it nearly impossible to detect when plaintiffs are seeking a recovery based on misrepresentations."

The reason for filing the statement of interest was to address and forestall "objectionable provisions relating to the Trust."

"Although the parties have had nearly two years in which to formulate plans, the Debtors’ plan is missing exhibits that will control critical terms of the reorganization, including how asbestos claims will be evaluated, paid, and reported," the statement says.

"The United States is submitting this statement of interest now to provide greater time for the parties to address these concerns, including prior to the Debtors’ filing a disclosure statement, and to avoid the need for the filing of objections."

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U.S. Bankruptcy Court for the Western District of North Carolina Statesville Division U.S. Department of Justice, Civil Division

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