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Article: Garlock: Lifting the Veil on Asbestos Trust Claims

May 01, 2014
Business Litigation Reports

Over the past four decades the landscape of asbestos litigation has been changing, influenced in large part by many asbestos defendants filing for bankruptcy. In search of solvent defendants, plaintiffs’ attorneys expanded their roster of potential targets from the traditional “big dusties” to manufacturers of products that were never formulated to contain or be used with asbestos.

Although most “real” asbestos exposures undoubtedly came from the “big dusties,” compensation from these companies is severely curtailed because claims against those entities must be made to litigation trusts created in bankruptcy. That creates a significant incentive for plaintiffs’ attorneys to sue solvent “asbestos” defendants even if the real causative agent was the product of a bankrupt entity. A recent bankruptcy court decision, In re Garlock Sealing Tech., LLC, 504 B.R. 71 (Bankr. W.D.N.C. 2014), reveals that the trust system has created the risk of asbestos plaintiffs’ “double dipping”—bringing both tort claims against solvent defendants and trust claims against bankrupt entities without any offset.

Garlock was a gasket manufacturer that became a major target of asbestos litigation after the more traditional asbestos defendants filed for bankruptcy. Faced with thousands of pending personal injury claims arising from alleged exposure to asbestos from Garlock’s products, Garlock sought bankruptcy protection to establish a trust to resolve current and future claims. As part of that process, the United States Bankruptcy Court for the Western District of North Carolina scheduled a hearing on Garlock’s estimated asbestos liability.

In preparation, the company sought access to information submitted in asbestos-related bankruptcy claims filed in Delaware by plaintiffs who had previously settled tort cases against Garlock. In re Motions for Access of Garlock Sealing Technologies LLC, 488 B.R. 281 (D. Del. 2013). Trust claims provide powerful evidence of the true cause of many plaintiffs’ asbestos-related disease because many require sworn affidavits that the claimant was exposed to an asbestos-containing product of the bankrupt entity. Despite this materiality to pending asbestos lawsuits, this evidence is not easily obtained by asbestos defendants. Many of the more than 30 asbestos-related litigation trusts require subpoenas before they will even confirm whether an individual has filed a claim. It was thus significant when Garlock gained access to details on 15 plaintiffs who filed trust claims following settlements with Garlock.

At the estimation hearing, the trust claims-related discovery obtained in Delaware affirmed Garlock’s suspicions: After disclaiming exposures to traditional asbestos defendants’ products (like insulation) in their tort cases against Garlock, each of the 15 plaintiffs investigated went on to file trust claims alleging exposure to one or more of those insulation products after extracting large settlements from Garlock. In some instances, the plaintiffs had actively opposed listing the bankrupt asbestos defendants on the verdict forms, moved to preclude references to potential exposures to the bankrupt asbestos defendants’ products at trial, and/or purported to have no personal knowledge of exposure while they were litigating against Garlock. The court found that, on average, the 15 plaintiffs disclosed two exposures to bankrupt companies’ products, but after settling with Garlock, made claims against about 19 such companies’ trusts.

The full disclosure of potential exposure sources had a significant impact on Garlock’s trials. In a survey of cases where exposure evidence was suppressed, Garlock either paid settlements or lost verdicts ranging from $250,000 to $9 million. By contrast, in the four trials where trust claim forms were admitted into evidence, Garlock won three defense verdicts and was assigned only 2% of the liability in the fourth.

After a 17-day hearing that included 29 witnesses, the court set Garlock’s asbestos liability at $125 million—drastically lower than the plaintiffs’ requested $1.3 billion. The court found that the aggregate settlements and verdicts typically relied on to value asbestos liabilities were “infected with the impropriety of some law firms” where “certain Plaintiffs’ law firms used [their] control over the evidence to drive up the settlements demanded of Garlock.”

In an interesting twist, Garlock has since filed fraud and federal RICO claims against the four plaintiffs firms involved in the confirmed double dipping. The initial pleadings were filed under seal, and the case remains in its earliest stage.

State and federal legislators are also taking steps to address the potential for fraud. The U.S. House of Representatives passed the Furthering Asbestos Claim Transparency (FACT) Act of 2012, a bill mandating quarterly disclosure of trust claim demands and payment information from the trusts as a way to shed light on the process and permit the type of analysis that occurred in Garlock to be possible in every litigation. Ohio, Oklahoma, and Wisconsin have all recently passed similar transparency laws.