Defense attorney: Judges should look for asbestos claims fraud

CHARLOTTE, N.C. (Legal Newlsine) – The recent ruling in a North Carolina bankruptcy court in favor of a gasket manufacturer has sparked talk of abuse and manipulation in the asbestos bankruptcy trusts by plaintiffs’ lawyers, but one defense attorney says these corrosive actions aren’t new and should have people wondering who has jurisdiction to keep the system functioning effectively.

Asbestos defense attorney Richard Faulk, partner with Hollingsworth LLP, explained that when Judge George Hodges of the U.S Bankruptcy Court Western District of North Carolina lifted the veil of corruption in asbestos litigation by allowing Garlock Sealing Technologies to initiate full discovery into 15 selected cases and partial discovery into hundreds more, he was meticulously doing his job and acting within his power of case management.

Garlock found that plaintiffs’ lawyers withheld evidence of asbestos exposure to products other than Garlock’s gaskets and delayed filing claims with bankruptcy trusts until after obtaining settlements from and judgments against Garlock.

“It appears certain that more extensive discovery would show more extensive abuse,” Hodges said in his ruling. “But that is not necessary because the startling pattern of misrepresentation that has been shown is sufficiently persuasive.

“While it is not suppression of evidence for a plaintiff to be unable to identify exposures, it is suppression of evidence for a plaintiff to be unable to identify exposure in the tort case, but then later to be able to identify it in Trust claims. It is that practice that prejudiced Garlock in the tort system.”

Hodges ruled on Jan. 10 that the amount sufficient to satisfy the Garlock’s asbestos liability is $125 million, roughly $1 billion less than what plaintiffs’ representatives felt was proper.

Faulk wrote in a column posted on Washington Legal Foundation’s The Legal Pulse titled “Dispelling Asbestos Litigation Rumors” that Hodges’ ruling will influence asbestos litigation across the nation and described it as the “shot heard ‘round the world.”

“Defendants in pending cases will press for full disclosure of settlements made with the bankruptcy trusts of insolvent companies – and Congress and state legislators will continue their quest for reforms to ensure complete disclosure of settlements to preclude exaggerated recoveries against peripheral defendants,” Faulk wrote in his column.

Faulk explained that “losing” evidence only to have it mysteriously reappear at a more convenient time is nothing new. He adds that while bankruptcy courts have fought this issue “pretty aggressively,” they’ve always had the resources and power available to fully deal with these problems as Hodges did.

It’s a shame, Faulk said, that the asbestos world had to wait for the Garlock case to come up before a court looked into discovery and evaluating expert evidence on both sides.

“I think it’s unfortunate that we had to wait until now for a judge to decide to ask these questions,” he said.

“In asbestos litigation, too often they wait and continue to wait for the legislature to do something about it,” he continued. “There really is no reason for them to wait because they have the inherent power in their own jurisdiction to change things and make this system work.”

The legislation Faulk refers to is the Furthering Asbestos Claim Transparency Act, or the FACT Act. If passed, it would require asbestos trusts to publish claimants’ names and the nature of their claims in quarterly reports. The Act passed in the House in November 2013. It now sits in the Senate, where Faulk believes it will die due to the composition of the Senate.

“I would say, in this Congress, it will be very difficult to get it through, but that doesn’t mean it isn’t a very good idea,” he said.

Even if the FACT Act doesn’t pass, the courts could still carry out their full judicial power and disclose select bankruptcy information that has been previously “cloaked in mythical secrecy” by establishing an order requiring information on bankruptcy filings prior to litigation, he says.

“It should be a uniform rule, but it’s not,” Faulk said. “And once again, the courts could fix this problem. And yet we have to wait until this goes all the way up to the federal Congress to do something that the court has the power to do. It really doesn’t make much sense to me.”

Obtaining this information would help defendants offset their settlements or judgments, but often times they have to resort to negotiating a settlement without it.

“Without a meaningful way to offset insolvent companies’ settlements, defendants faced a ‘Hobson’s choice.’ They could accept inflated settlement values – or risk judgments inflated by their inability to obtain offsets,” Faulk wrote in his column.

A “Hobson’s choice” is when a defendant is in a position where it needs the information, doesn’t have it and can’t get it. But the defendant is in a trial and must make a choice on how to negotiate and move forward, regardless.

“Negotiations probably would have been more fruitful if the courts had required that information to be disclosed as a matter of law and order,” Faulk wrote.

What it comes down to, Faulk reiterated, is how important it is for courts to begin requiring disclosures of trust information while cases are pending in order to reach fair and just conclusions. If not, then “we will just have to wait on the government to do their job” and pass the FACT Act.

“After decades of litigation and scores of bankruptcies, there are many other ‘viable defendants’ who lie on the fringes of liability,” he wrote in his column. “Surely, they should not be forced into insolvency before they are allowed to pursue evidence that is undeniably relevant to their liability. It is time for judges and elected officials to ensure disclosure of all evidence necessary to protect parties from artificially inflated settlements and judgments. Perhaps then, at least one of the myths of asbestos litigation can finally be dispelled, and this issue can finally be ruled by the fairness to which our system of justice aspires.”

In response to the manipulation Garlock allegedly faced during prior asbestos litigations, the company filed five lawsuits against plaintiffs’ asbestos firms under seal.

Faulk explained that these cases may be sealed due to federal rules requiring confidentiality when pleading fraud specifically.

From Legal Newsline: Reach Heather Isringhausen Gvillo at asbestos@legalnewsline.com