With major American corporations sagging under the weight of billions in asbestos-related lawsuits, Congress set out in 1994 to provide a reasonable way for companies to limit their liability to asbestos victims.
The result, a special set of bankruptcy provisions designed to facilitate reorganization plans for firms with significant asbestos liability, became the only practical way to stem the tide of seemingly limitless liability. Most significant was a provision now commonly known as 524g, which provides that defendants in Chapter 11 can receive a discharge from present and future personal injury and property damage claims.
To keep costs low - a RAND study showed that less than one-third of the total amount of a settlement actually made it to the plaintiff - the trusts were organized for simple processes of filing a claim, which often includes little more than completing a form and providing a medical diagnosis.
But with billions funding bankruptcy trusts while doing little to stem the tide of lawsuits still filed in civil courts against a whole new batch of defendants not protected by the bankruptcy courts, greater attention is being paid to how the trusts work and, more importantly, how they pay claims.
At a time when interest in trusts has grown considerably -- $40 billion in assets currently held by trusts will do that - the trusts are taking even greater measures to maintain secrecy about their actions.
According to Lester Brickman, a law professor at the Benjamin N. Cardozo School of Law in New York and widely regarded as the nation's leading asbestos legal scholar, the trusts are controlled almost exclusively by plaintiffs' attorneys who profit the most from them.
"The trusts operate as private kingdoms run exclusively by plaintiffs' lawyers except for the Manville trust," Brickman said. "All of the other trusts are piggybanks owned by the plaintiffs' lawyers who can write the rules, or rewrite the rules, according to their needs."
Even the circle of those firms involved in the trusts is a much smaller subset than plaintiffs' law firms that handle asbestos cases. As of 2002, more than half of all claims filed against bankruptcy trusts were filed by 10 law firms, according to University of San Diego Professor of Economics Michelle White.
With so few handling so much money and firmly in control of the one government-established method of limiting liability, it's not hard to see why public scrutiny is not welcome, a fact made even more clear with a recent decision by the one trust, the Manville Trust, that cuts off a lone source of vital information.
The Secrecy of Trusts
Only the first trust, The Manville Trust, which set the model for all future trusts, produces public data that helps asbestos legal professionals accumulate data and information about how people get compensated for their illnesses.
As Chicago defense attorney Kirk Hartley wrote on a blog tracking global asbestos litigation, "It seems incongruous that there is no free, national database of objective data regarding asbestos litigation."
Yet in March, the Manville Trust said it would no longer release aggregate data regarding the trusts' funding and payments.
For several years, scholars like Brickman and authors Charles Bates and Charles Mullin, have reported extensively on data from the Manville Trust-data that for now, is no longer available.
"Many of us relied exclusively on Manville Trust data and, of course, it was shut down," Brickman said.
Hartley posted a letter on his blog in response to an email he sent seeking information about the decision that confirmed the change. The letter provided little explanation.
"The change has come as the Manville Trustees, working together with Trust constituencies, have reevaluated the Trust's policies regarding the release of claims filing information," wrote Jared S. Garelick, senior attorney for the trust. "During the pendency of the reevaluation, which is ongoing, the Trust has declined to make available certain information that it previously did."
Hartley noted another change in policy, one that has potentially even greater implications.
"In addition to limiting access to data, the Manville Trust also is impairing transparency by modifying its data collection activities. Specifically, as of November 2008, the Trust dropped its long-standing rule requiring claimants to provide their social security numbers," Hartley wrote.
The change, according to Hartley, will make it much harder to distinguish between those being paid, which as a result makes it "harder to detect duplicate and/or fraudulent claiming to the Manville Trust," Hartley wrote.
Mark Behrens, a Washington, D.C.-based lawyer who specializes in tort reform, said the secrecy in regards to the trusts sets the stage for abuse.
"The possibility the claimants could receive payments from multiples trusts could result in an increase in claims against the trusts if they allow for compensation of unimpaired claimants or permit recoveries by claimants with only flimsy evidence of exposure," he said.
The change in policy is just the latest move to maintain the secrecy in how asbestos trusts operate, how much the pay to individual plaintiffs is and mostly to hide the abuses inherent in a system designed and operated largely at the discretion of the plaintiffs' attorneys who will make billions from them.
Brickman said that by amending the bylaws of various trusts, plaintiffs' lawyers can keep private who gets paid-a situation ripe for a single plaintiff being paid more than once for a claim.
Should we expect "double-dipping?" Brickman was asked.
"What's beyond quintuple-dipping?" Brickman responded rhetorically, before answering his own question. "As many times as needed to collect money."
The problem, according to economics professor White, is simple supply-and-demand economics.
"Plaintiffs' law firms need a steady flow of new plaintiffs in order to maintain their incomes," she said. "Because the number of plaintiffs developing serious asbestos diseases is declining, new plaintiffs are increasingly likely to have been exposed to asbestos, but to have no disability."
New defendants with increasingly remote ties to asbestos are being sued in court, while the first round of defendants pay through the trusts.
White pointed out that defendants named in asbestos cases now include companies with the slightest connection, companies like Campbell's Soup that may have had asbestos insulation in their plant for example.
"With such long list of defendants, settlements add up," White wrote.
Defense attorneys say this situation has the potential of simply doubling the amount of money paid to claimants when all is said and done.
"Defendants assert that plaintiffs will fully collect twice for the same liability if they are allowed to first collect the tort liability then from tort defendants and then collect again from the trusts," Bates said.
In essence, the solvent defendants are left holding the bag in the courts, for money already allocated through the trusts.
Brickman said this is again a method plaintiffs' lawyers can manipulate the trusts to their advantage.
"Lawyers now are holding off filing with the trusts until they finish with the tort system," he said. "Then and only then they are filing with the trusts. At that point they can say whatever they want because nobody checks."
Secrecy promotes abuses
Something as basic as how much money is paid on average to someone suffering from mesothelioma, the deadliest of asbestos-related disease, remains a source of constant tension between asbestos researchers and the plaintiffs' lawyers who control the trusts.
At a recent asbestos conference in March, Bates explained the problem the lack of information creates.
"No one has the data to directly calculate the national average mesothelioma tort recovery," Bates told the audience of leading asbestos professionals gathered in Beverly Hills, Calif.
Bates said partners at a leading plaintiff firm told him, "they have data that confirms a $6 million total mesothelioma recovery per claimant, but they are not going to let me see their data," he said.
Bates' own research estimated the figure to be closer to $1 million per plaintiff. The difference is significant. With roughly $30 to $40 billion in trust funding, the trusts have enough money to pay "most if not all of the tort liability of the 30,000 pending and future mesothelioma and other asbestos claims," Bates said. "At $6 million per mesothelioma claimant, not even close."
The practical policy matter is payments from the trusts should be reduced to the extent the trusts can pay out, Bates said. But the greater implication is that solvent defendants are now paying more as liability transfers to them from those companies protected by bankruptcy.
The relative secrecy of the asbestos trusts has been the greatest ally for plaintiff's lawyers. One Chicago defense attorney said the trusts have been operating this way for more than a decade and now the process is firmly established.
"It's just simpler this way," he said. "They've done it this way in the last 60 bankruptcies when nobody was paying attention and that's just how it was."
A Washington, D.C. bankruptcy attorney who specializes in asbestos cases says there are many abuses to the trusts, but those abuses rarely garner much attention because of the complicated nature of bankruptcy laws.
He said some companies that have been destroyed by bankruptcy should not be in the reorganization process. On the other side of the coin, some companies that are in no danger of bankruptcy are using the bankruptcy courts to mitigate their liability, ease concern from stockholders, which then drive stock prices back up, effectively paying off the money paid into the bankruptcy trust.
Both types of abuses muddy the waters and the effectiveness of the trusts to work for those companies that truly cannot continue to operate without the ability to limit future liability.
The Chicago defense attorney, who did not wish to be named for this article, said, "About a decade ago or so, Wall Street figured out the value of bankruptcy. When you could start shedding pension liability and get rid of these things, all of sudden your business is no longer laboring over these legacy costs, and could become a brand new company."
Halliburton became the poster child for this shrewd use of bankruptcy protection related to its pending asbestos litigation. In little more than a year the company went through the bankruptcy process, paid roughly $3 billion into the trust and emerged, much to the pleasure of investors who promptly sent the company's stock skyrocketing.
"The plaintiffs bar got the whole three billion and we got screwed," the Chicago defense attorney said. "The next day their stock jumped so high they effectively made the money back."
Untying these potential for abuses, particularly with so little public data, may prove to be impossible, legal experts interviewed for this story said. Previous attempts by Congress and the courts to either fix or disband the asbestos trusts have failed. As one attorney said, "What are they going to do with all that money in the trusts? Just give it back and start over?"
Public scrutiny increased in late March when the United States Supreme Court heard a case that caused the justices to question the practical working applications of asbestos bankruptcy law.
As such, the Court will have the next word on the topic following its March hearing of a case regarding the Manville Trust. During the hearing the justices probed attorneys about the practices and intentions of the trusts, and whether they continued to do what they were intended.
Though the decision by the High Court to hear the case surprised many, leaving open the possibility the court intends to issue a sweeping legal ruling that could fundamentally change the way the trusts do business, most believe the Court's decision will be less dramatic.
"The concern, I think it's fair to say, is that the Supreme Court might reach out and limit 524(g)s generally, or even perhaps declare it unconstitutional," the D.C. bankruptcy attorney said. "That would be a far stretch for the court, but that's the underlying fear. Maybe it's just a matter of interest to them, or maybe they have some grand designs."
Either way, the more public it gets, the less the plaintiffs' attorneys will approve.
Legal experts in other countries have observed the way asbestos cases have continued virtually unabated for decades, hoping to learn from mistakes. An English columnist recently wrote about the necessity of avoiding "the American result."
An increasingly difficult part of that "result" is new roadblocks to the only potential road for companies to limit the seemingly endless liability in asbestos litigation.